House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Amendments relating to Medicare levy

This bill amends:

•

the MLA 1986to:

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increase the Medicare levy low income thresholds for individuals, married couples and sole parents. The dependent child/student component of the family threshold will also be increased. The increases are in line with movements in the CPI;

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increase the Medicare levy low income threshold for pensioners below age pension age so that they do not have a Medicare levy liability where they do not have an income tax liability; and

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to allow a family income threshold to apply to a taxpayer where the taxpayer is entitled to a child-housekeeper rebate or a housekeeper rebate;

•

the MLS-FB 1999 to:

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increase the Medicare levy surcharge low income threshold in line with movements in the CPI; and

•

the ITAA 1936 to:

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make a technical amendment to correct references to the provisions of the VEA 1986.

Date of effect: The increased Medicare levy and Medicare levy surcharge low income thresholds will apply from the 2001-2002 year of income and later years of income.

The technical amendment to the Medicare levy family income threshold applies to assessments for the 2000-2001 year of income and later years of income.

The technical amendment of the ITAA 1936 to the definition of prescribed persons for Medicare levy purposes applies to assessments for the 1997-1998 year of income and later years of income.

Proposal announced: The measure was announced in the 2002-2003 Federal Budget.

Financial impact: The measure will cost revenue $42.8 million in 2002-2003, $21.4 million in 2003-2004, $21.4 million in 2004-2005 and $21.4 million in 2005-2006.

Compliance cost impact: Compliance costs will be negligible.

Chapter 1 - Amendments relating to Medicare levy

Outline of chapter

1.1 This bill amends the MLA 1986 and the MLS-FB 1999 to increase the Medicare levy low income threshold amounts (threshold amounts) for individuals, married couples, sole parents and pensioners below age pension age. It also increases the phase-in limits as a result of the increased threshold amounts. There are also 2 minor technical amendments.

Context of amendments

Medicare levy low income thresholds

1.2 The MLA 1986 provides that no Medicare levy is payable for low income individuals and families where taxable income or family income does not exceed stated threshold amounts. For couples and single parents, the family income threshold increases by a set amount per child. The Medicare levy shades in at a rate of 20 cents in the dollar where the taxable income or family income exceeds the threshold amounts.

Medicare levy surcharge low income threshold

1.3 A Medicare levy surcharge (the surcharge) of 1% applies on taxable income in certain cases where taxpayers do not have private patient hospital cover (sections 8B to 8G of the MLA 1986). The surcharge of 1% also applies to reportable fringe benefits in certain cases where taxpayers do not have private patient hospital cover (sections 12 to 16 of the MLS-FB 1999). However, a married person who would otherwise be liable for the surcharge is not required to pay the surcharge where the total of the persons taxable income and reportable fringe benefits do not exceed the individual low income threshold amount. Unlike the Medicare levy, there is no shading in of the surcharge above the threshold amount.

Minor technical amendments

1.4 The wording of section 8 of the MLA 1986 is being amended to allow a family income threshold to those who are entitled to a child-housekeeperrebate or a housekeeper rebate.

1.5 Section 251U of the ITAA 1936 refers to provisions of the VEA 1986 which have been repealed and replaced by new provisions. The ITAA 1936 is being amended to reflect references to the new provisions of the VEA 1986.

Summary of new law

1.6 This measure amends:

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subsections 3(1) and 8(5) to 8(7) of the MLA 1986 to raise the threshold amounts and phase-in limits for individuals, married couples, sole parents and pensioners who are under age pension age;

•

paragraphs 8D(3)(c) and 8G(2)(c) and subparagraphs 8D(4)(a)(ii) and 8G(3)(a)(ii) of the MLA 1986 to raise the threshold below which a family member is not required to pay the surcharge on taxable income;

•

paragraphs 15(1)(c) and 16(2)(c) of the MLS-FB 1999 to raise the threshold below which a family member is not required to pay the surcharge on reportable fringe benefits;

•

paragraphs 8(1)(b) and 8(2)(b) of the MLA 1986 to ensure that where a taxpayer is entitled to a child-housekeeper rebate, the taxpayer is allowed a family income threshold;

•

paragraphs 8(1)(d) and 8(2)(d) of the MLA 1986 to ensure that where a taxpayer is entitled to a housekeeper rebate, the taxpayer is allowed a family income threshold; and

•

paragraphs 251U(1)(cb) and 251U(1)(cc) of the ITAA 1936 to correct references to the VEA 1986.

Detailed explanation of new law

Medicare levy low income thresholds

1.7 This bill proposes to increase the low income thresholds for individuals, married couples and sole parents for the 2001-2002 year of income and subsequent years of income. The increases are in line with movements in the CPI.

1.8 Section 7 of the MLA 1986 states that no levy is payable where a taxpayer has a taxable income at or below the applicable threshold amount as specified in subsection 3(1) of the MLA 1986.

1.9 The individual threshold amount specified in paragraph (c) of the definition of the threshold amount in subsection 3(1) of the MLA 1986 is to be increased from $13,807 to $14,539. [Schedule 1, item 6]

1.10 The level of the family income threshold referred to in subsections 8(5) to 8(7) of the MLA 1986 is increased from $23,299 to $24,534 [Schedule 1, items 7, 9 and 10] . The family income threshold is increased by a further $2,253 instead of the previous figure of $2,140 for each dependent child or student [Schedule 1, item 8] .

1.11 This bill also proposes to increase the threshold amount for pensioners below age pension age for the 2001-2002 year of income and subsequent years of income. The increase ensures that such pensioners do not have a Medicare levy liability where there is no income tax liability.

1.12 The threshold amount for pensioners who are under age pension age specified in paragraph (b) of the definition of the threshold amount in subsection 3(1) of the MLA 1986 is to be increased from $15,970 to $16,570. [Schedule 1, item 5]

Phase-in limit

1.13 Section 7 of the MLA 1986 also provides that the levy applies at a reduced rate to taxpayers with taxable incomes above the threshold amount but not more than the phase-in limit specified in subsection 3(1) of the MLA 1986. The rate of levy payable in these circumstances is limited to 20% of the excess over the threshold amount that is relevant to the particular person.

1.14 The phase-in limit for individuals contained in paragraph (c) of the definition of phase-in limit in subsection 3(1) of the MLA 1986 is increased from $14,926 to $15,717. [Schedule 1, item 4]

1.15 The phase-in limit for pensioners who are under age pension age specified in paragraph (b) of the definition of phase-in limit in subsection 3(1) of the MLA 1986 is increased from $17,264 to $17,913. [Schedule 1, item 3]

1.16 There is no phase-in limit stated in the MLA 1986 for families as the figure changes with the number of dependants. Instead, subsection 8(2) of the MLA 1986 contains a formula that limits the levy payable by persons with families to 20% of the amount of family income that exceeds their family income threshold. This range is increased for dependants as indicated in Table 1.1.

1.17 The increased Medicare levy low income threshold amounts and phase-in ranges for the 2001-2002 year of income and subsequent years of income is as shown in Table 1.1.

Table 1.1: 2001-2002 Medicare levy low income threshold amounts and shading-in ranges

*

The figures applicable to married taxpayers also apply to taxpayers who are entitled (or would have been entitled had the laws applicable to rebates not been amended with effect from 1 July 2000) to a sole parent, child-housekeeper or housekeeper rebate.

**

Where there are more than 6 dependent children or students, add $2,253 for each extra child or student.

***

Where there are more than 6 dependent children or students, add $2,435 for each extra child or student.

Medicare levy surcharge low income threshold

1.18 References to the individual low income threshold amount of $13,807 in the Medicare levy surcharge provisions (in sections 8D and 8G of the MLA 1986) in respect of surcharge on taxable income are also being increased to $14,539. [Schedule 1, items 11 to 14]

1.19 References to the individual low income threshold amount of $13,807 in the Medicare levy surcharge provisions (in sections 15 and 16 of the MLS-FB 1999) in respect of surcharge on reportable fringe benefits are also being increased to $14,539. [Schedule 1, items 1 and 2]

Application provisions

1.20 The amendments to subsections 3(1), 8(5) to 8(7), 8D and 8G of the MLA 1986 and the amendments to sections 15 and 16 of the MLS-FB 1999 are to apply for the 2001-2002 year of income and later years of income. [Schedule 1, item 15]

Minor technical amendments - MLA 1986

1.21Section 8 of the MLA 1986 refers to situations where a person is entitled to a family income threshold. Paragraphs 8(1)(b), 8(1)(d), 8(2)(b) and 8(2)(d) are being amended so that where a taxpayer is actually entitled to a child-housekeeper or housekeeper rebate, the taxpayer is allowed a family income threshold for the purposes of calculating Medicare levy liability. [Schedule 2, items 4 to 7]

1.22 The A New Tax System (Family Assistance) (Consequential and Related Measures) Act (No. 1) 1999 amended the eligibility for a family income threshold. Taxpayers are generally denied a child-housekeeper rebate, a sole parent rebate or a housekeeper rebate due to the introduction of the FTB. The amendment overlooked that a limited number of persons are still entitled to a child-housekeeper rebate or a housekeeper rebate.

1.23 The amendment will ensure that where a person is entitled to a child-housekeeper rebate or a housekeeper rebate, that person will be able to use a family income threshold when determining their Medicare levy liability.

Application provisions

1.24 The amendments to subsections 8(1) and 8(2) of the MLA 1986 are to apply retrospectively from the 2000-2001 year of income and later years of income. [Schedule 2, item 8]

Minor technical amendments - ITAA 1936

1.25 A minor technical amendment is being made to section 251U of the ITAA 1936 to correct references to the VEA 1986 as a result of the references being repealed in 1997 when new Schedule 6 to the VEA 1986 was created. The amendment will ensure that the classes of taxpayers that were previously prescribed persons in respect of Medicare levy will continue to be prescribed persons. [Schedule 2, items 1 and 2]

1.26 This amendment is purely technical in nature and is designed to correct a cross-referencing error which has occurred as a result of the 1997 amendment to the VEA 1986. The method used for calculating the pension rate has not changed and this amendment merely corrects references to the VEA 1986 (as amended). This amendment will not have any detrimental effect.

Application provisions

1.27 The amendments to section 251U of the ITAA 1936 are to apply retrospectively from the 1997-1998 year of income and later years of income. [Schedule 2, item 3]