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

Fringe benefits tax - improving access for small business

Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to provide a fringe benefits tax (FBT) exemption to cover the engagement of a relocation consultant to assist in the relocation of an employee.

Schedule 1 also extends the list of work-related items eligible for a FBT exemption and removes the requirement that the provision of remote area housing benefits be 'customary' in an industry to qualify for a FBT exemption.

Date of effect: The amendments will apply in respect of the FBT year following the FBT year in which this Bill receives Royal Assent and in respect of all later FBT years.

Proposal announced: This measure was announced in the 2004-05 Budget and in the Treasurer and Minister for Small Business's joint Press Release No. 36 of 11 May 2004.

Financial impact: The financial impact is unquantifiable but expected to be insignificant.

Compliance cost impact: These amendments will not impose any additional compliance costs.

Effective life of assets declining in value

Under the current capital allowances system, the Commissioner of Taxation (Commissioner) is progressively reviewing and updating the 'safeharbour' effective lives that taxpayers may choose to use in working out the decline in value of assets. The recent Commissioner's Determination, Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2004 (No. 4), provides a significant increase in the 'safeharbour' effective lives of buses, light commercial vehicles, trucks and truck trailers.

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to introduce statutory 'caps' that will be the effective life used to calculate the decline in value of those assets if:

•

the taxpayer chooses to adopt the effective life determined by the Commissioner for a particular asset; and

•

the cap (if any) that applies to that asset is shorter than the effective life determined by the Commissioner.

Date of effect: This measure will apply to an asset if its start time is on or after 1 January 2005. In practice, the statutory 'caps' will apply in relation to revised Commissioner determined 'safeharbour' effective lives that have effect from 1 January 2005.

Proposal announced: This measure was announced by the Minister for Revenue and Assistant Treasurer in Press Release No. 003 of 12 August 2004 and reaffirmed in Press Release No. 021 of 15 December 2004.

Financial impact: The effect of this measure is to limit the revenue gain arising from the revised Commissioner's Determination to $1 million for the financial year 2004-05, $10 million for 2005-06, $31 million for 2006-07 and $52 million for 2007-08. If these statutory 'caps' were not introduced, taxpayers could be expected to pay an extra $3 million for the year 2004-05, $30 million for 2005-06, $95 million for 2006-07 and $156 million for 2007-08. This is because the statutory 'caps' provide significantly shorter effective lives than the Commissioner's Determination. The proposed statutory effective life 'caps' will provide a tax benefit to affected taxpayers of $2 million for 2004-05, $20 million for 2005-06, $64 million for 2006-07 and $104 million for 2007-08.

Compliance cost impact: Taxpayers will not incur additional compliance costs where a capped life applies to an asset.

Supplies of rights or options offshore

Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that the goods and services tax applies to transactions involving non-residents who supply options or rights to things which are connected with Australia.

Date of effect: On or after the date of introduction of this Bill to Parliament.

Proposal announced: This proposal has not been announced.

Financial impact: This measure is expected to result in a gain to revenue as follows:

Compliance cost impact: The amendments are not expected to impact significantly on compliance costs of Australian enterprises.

Mature age worker tax offset

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to introduce a tax offset for workers aged 55 years and over. Eligibility for the offset will be based on age and net income from working, with a maximum annual tax offset of $500.

Date of effect: These amendments will apply to assessments for income years commencing on or after 1 July 2004.

Proposal announced: This measure was announced by the Government in its election statement Mature Age Worker Tax Offset on 9 September 2004.

Financial impact: This measure will cost the revenue $460 million in 2005-06, $490 million in 2006-07 and $490 million in 2007-08.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Chapter 1 - Fringe benefits tax - improving access for small business

Outline of chapter

1.1 Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to:

•

provide a fringe benefits tax (FBT) exemption to cover the engagement of a relocation consultant to assist in the relocation of an employee;

•

broaden the FBT exemption for eligible work-related items to include personal digital assistants and portable printers designed for use with portable computers; and

•

broaden the FBT exemption for remote area housing to cover employers in industries where employer-provided housing is not customary.

Context of amendments

1.2 Currently certain expenses associated with the relocation of an employee - such as the removal or storage of an employee's household effects as a result of relocation of the employee's employment - may be FBT exempt. Exempt benefits may also arise on the sale or acquisition of a dwelling as a result of relocation, on the connection or reconnection of the telephone service, gas or electricity and for certain benefits in respect of relocation transport. The costs of engaging a relocation consultant to assist with the relocation of employees are not included in these exemptions.

1.3 The existing FBT exemption for work-related items such as laptop computers is extended to include personal digital assistants and portable printers designed for use with portable computers. These amendments will ensure that the taxation laws do not inhibit the uptake of new technology.

1.4 Employer-provided housing in remote areas is presently exempt from FBT if it meets the conditions in subsection 58ZC(2) of the FBTAA 1986. Paragraph 58ZC(2)(c) requires that it be customary for employers in an industry to provide their employees with remote area housing benefits for the FBT exemption to apply.

Summary of new law

1.5 These amendments will ensure that:

•

if a relocation consultant is used to assist with the relocation of an employee, the employer may be eligible to access a FBT exemption for costs associated with the engagement of the relocation consultant;

•

when an employer provides an employee with a personal digital assistant or portable printer in respect of the employee's employment, the employer is eligible for a FBT exemption; and

•

through the removal of the 'customary' rule in paragraph 58C(2)(c), employers in industries where employer-provided remote housing is not customary have access to the remote area housing FBT exemption.

Comparison of key features of new law and current law

Detailed explanation of new law

Fringe benefits tax exemption for the engagement of a relocation consultant

1.6 New section 58AA of the FBTAA 1986 will extend the availability to the FBT exemptions for relocated employees to cover costs incurred in the engagement of a relocation consultant if certain criteria are met. A relocation consultant is a person who assists an employee, or his or her family member, move and settle into a new location. In order for a benefit, consisting of the engagement of a relocation consultant, to qualify as a FBT exempt benefit, a number of conditions must be satisfied.

1.7 The benefit provided must be an expense payment benefit or residual benefit. It is also necessary that this benefit be provided in respect of the employment of an employee. [Schedule 1, item 1, paragraph 58AA(1)(a)]

1.8 This exemption applies to costs incurred for the engagement of a relocation consultant solely for the purposes provided in paragraph 58AA(1)(c). These purposes include when a relocation consultant is engaged to assist with an employee's relocation if:

•

the employee is required to live away from home in order to fulfil his or her employment duties;

•

the employee returns to their usual place of residence, having previously been relocated from their usual place of residence, in order to fulfil his or her employment;

•

the employee, having previously been relocated from their usual place of residence, returns to their usual place of residence because the employee ceases to perform the employment duties he or she had previously been relocated for; or

•

in order to fulfil his or her duties of employment, the employee moves from his or her usual place of residence.

[Schedule 1, item 1, paragraph 58AA(1)(c)]

1.9 If an employee is required to relocate from their usual place of residence to be able to fulfil their employment duties and a relocation consultant is engaged to assist a family member (including the employee) move or settle at or near a location where the employee performs the new employment, this expense will be FBT exempt. Further, if the employee is required to return to their usual place of residence:

•

because the employee ceases to perform the duties he or she was originally required to relocate for; or

•

in order to continue to fulfil their employment duties,

and a relocation consultant is engaged to assist a family member of the employee to move or settle at or near a location where the employee performs the new employment duties, this expense will also be exempt from FBT [Schedule 1, item 1, paragraph 58AA(1)(d)]. However, any expenses that a relocation consultant pays on the behalf of the family member (including the employee) in order to relocate will not be exempt from FBT [Schedule 1, item 1, subsection 58AA(2)].

1.10 To be eligible for the FBT exemption for a benefit under new section 58AA a relocation consultant must be engaged [Schedule 1, item 1, paragraph 58AA(1)(b)]. The common services a relocation consultant can provide to assist an employee (or his or her family member) relocate includes, but is not limited to:

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obtaining removalist quotes;

•

finding accommodation, including temporary accommodation;

•

lease negotiation;

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providing information about transportation to the new location; and

•

providing information about education and community services at the new location.

[Schedule 1, item 1, subsection 58AA(2)]

Example 1.1

Jenny-Lee is an employee of Zig & Co Mining in Lightning Ridge. She is required to move from Lightning Ridge to Kalgoorlie in order to perform her duties as a geologist. Her employer engages a relocation consultant to assist in Jenny-Lee's relocation.

The relocation consultant provides:

•

accommodation quotes;

•

transportation quotes;

•

arranges and pays for six months of furniture rental; and

•

information about medical facilities at Kalgoorlie.

Zig & Co Mining is eligible for a FBT exemption for the costs involved in engaging the relocation consultant to provide information about, as well as arranging for, Jenny-Lee's relocation to Kalgoorlie. However, Zig & Co Mining is not eligible for an FBT exemption for an expense, being the six month furniture rental, paid by the relocation consultant on Jenny-Lee's behalf.

1.11 In order to obtain a FBT exemption it is necessary that the benefit be provided under an arm's length arrangement. Also, documentary evidence is required if the benefit is an expense payment benefit. This documentary evidence must be provided to the employer before the declaration date in order for the employer to be able to access the FBT exemption. [Schedule 1, item 1, paragraphs 58AA(1)(e) and (f)]

1.12 Relocation advice provided incidental to the provision of another good or service - for example, by real estate agents - would not qualify for the relocation consultants' exemption (but may qualify under other relocation exemptions already provide in the FBTAA 1986).

Fringe benefits tax exemption for work-related items

1.13 Section 58X of the FBTAA 1986 provides an exemption from FBT for certain work-related items provided by an employer to an employee. An amendment is made to extend the FBT exemption available for electronic diaries or similar items to include 'a personal digital assistant'. A personal digital assistant is a hand held wireless device designed for use as a personal organiser which may or may not have other computing capabilities. [Schedule 1, item 2, paragraph 58X(2)(g)]

1.14 Also, an amendment is made to include 'portable printer' to the list of work-related items for which an employer may be eligible to a FBT exemption. The exemption is provided for a portable printer that is designed for use with a notebook computer, a laptop computer or a similar portable computer. A portable printer is unlike a conventional printer which may be portable yet is not designed specifically to have the purpose of being used with a portable computer. [Schedule 1, item 3, paragraph 58X(2)(i)]

Fringe benefits tax exemption for remote area housing

1.15 Section 58ZC of the FBTAA 1986 provides an exemption from FBT for remote area housing if certain criteria are met. An amendment is made to paragraph 58ZC(2)(c) to omit the requirement for the provision of remote area housing by an employer to be customary in that particular industry. Generally a benefit is considered customary where it is normal or common for employees with that class of job description in that industry to be provided with the same or similar benefits. As a consequence, if all other criteria of section 58ZC are met, the employer will be eligible for a FBT exemption. This amendment will facilitate access to the remote area housing FBT exemption by employers in industries where employer-provided remote area housing is not customary. [Schedule 1, item 4, paragraph 58ZC(2)(c)]

Application and transitional provisions

1.16 These amendments will apply in respect of the FBT year following the FBT year in which this Bill receives Royal Assent and in respect of all later FBT years. [Schedule 1, item 5]

Chapter 2 - Effective life of assets declining in value

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to insert statutory caps for the decline in value of transport assets such as buses, light commercial vehicles, trucks and truck trailers. These caps will be the effective lives for those assets where certain conditions are met.

Context of amendments

2.2 The capital allowances provisions in the income tax law allow a taxpayer a deduction equal to the decline in value of an asset during an income year. That decline in value is worked out with reference to the 'effective life' of the asset. Broadly, the effective life of an asset is the length of time over which an entity could reasonably be expected to use the particular asset for taxable purposes or for the purpose of producing exempt income. A taxpayer may choose to use a 'safeharbour' effective life determined by the Commissioner of Taxation (Commissioner) for an asset (where there is one in force). Where a taxpayer chooses not to use a 'safeharbour' effective life, or there is none in force, the taxpayer must self assess the effective life of the asset.

2.3 Under the current capital allowances system, the Commissioner progressively reviews, and makes updated determinations under section 40-100 of the ITAA 1997 of the 'safeharbour' effective lives used to calculate deductions for the decline in value of assets. The Commissioner's determinations must be based on an estimate of the period the asset can be used by any entity for a taxable purpose or for the purpose of producing exempt income. The Commissioner is not able to take into account national economic implications and the impact on affected industries.

2.4 A taxpayer who chooses to use the Commissioner's determined effective life must work out whether a capped life applies to that asset. If there is a capped life and it is shorter than the Commissioner's determined effective life, the effective life of the asset will be the capped life. Where there is no capped life, or the capped life is greater than the Commissioner's determined effective life, the taxpayer will use the Commissioner's determined effective life.

Summary of new law

2.5 The new law inserts statutory caps for buses, light commercial vehicles, trucks and truck trailers to the table of assets that currently attract a capped effective life.

Comparison of key features of new law and current law

Detailed explanation of new law

2.6 The effective life of buses, light commercial vehicles, trucks and truck trailers are as follows:

2.7 Table 2.1 above is added to the existing table for the capped life of certain depreciating assets in subsection 40-102(4). [Schedule 2, item 1, subsection 40-102(4)]

2.8 The caps in Table 2.1 coincide with the Commissioner's Determination that applies to these assets and that commenced on 1 January 2005. The Commissioner's Determination includes a 10 year effective life for garbage compactor trucks and a 15 year effective life for other trucks with a gross vehicle mass of over 3.5 tonnes. As garbage compactor trucks exceed 3.5 tonnes they are included in the 7.5 year effective life cap.

2.9 Table 2.1 excludes trucks used in mining operations because these trucks are excluded from the above mentioned determination. They are covered under a separate Commissioner's determination.

Application and transitional provisions

2.10 The amendments apply to an asset described above if the start time for the asset occurs on or after 1 January 2005. [Schedule 2, item 3]

Consequential amendment

2.11 A definition for 'gross vehicle mass' is inserted into the Dictionary definitions in subsection 995-1(1) of the ITAA 1997. Gross vehicle mass is defined as the road weight specified by the manufacturer of the vehicle as the maximum design weight capacity of the vehicle. If there is no such specification, the 'gross vehicle mass' is the sum of the weight of the vehicle and the weight of the maximum load for which the vehicle was designed including, if applicable, the weight of the driver and a full tank of fuel. [Schedule 2, item 2, subsection 995-1(1), definition of 'gross vehicle mass']

Chapter 3 - Supplies of rights or options offshore

Outline of chapter

3.1 Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that the GST Act applies to the offshore supply of options or rights to goods, services and other things, where the goods, services and other things are connected with Australia.

Context of amendments

3.2 The policy intent of the goods and services tax (GST) legislation broadly is to tax private consumption of most goods, services and other things in Australia, including imports. However, a deficiency has been identified in the GST Act under which certain rights or options provided offshore are not subject to the GST, even when they are for goods, services and other things that will be consumed in Australia.

3.3 Where a resident entity supplies a right or option to goods, services or other things that are for consumption in Australia, the underlying supply will generally be subject to the GST. However, where the same supply is made overseas by a non-resident, no GST applies. This is because the supply is not 'connected with Australia'.

3.4 This outcome results in a competitive advantage for certain non-resident entities compared to their Australian counterparts. It is also inconsistent with the broad policy intent of the GST legislation, which is to tax private consumption of most goods, services and other things in Australia.

3.5 The main group of non-residents that are able to make supplies in these circumstances are non-resident tour operators. Typically, these operators acquire Australian package holidays from resident tour wholesalers and then on-supply them to tourists. If these supplies constitute supplies of rights or options to acquire things to be consumed in Australia they will not be connected with Australia as required under the GST Act. This is contrary to the policy intent that GST should be paid on supplies of Australian package holidays to both Australian residents and non-residents.

Summary of new law

3.6 Under the amendment, a supply that is made offshore will be 'connected with Australia' if it is a supply of a right or option to acquire something, the supply of which would be connected with Australia.

3.7 Amendments will also be made to the 'reverse charge' rules in Divisions 83 and 84 of the GST Act to ensure that their existing operation is maintained.

Comparison of key features of new law and current law

Detailed explanation of new law

3.8 The meaning of 'connected with Australia' in subsection 9-25(5) of the GST Act is broadened to include supplies of rights or options to acquire something, the supply of which would be connected with Australia [Schedule 3, items 1 and 2, paragraph 9-25(5)(c)]. This amendment will ensure the supply of such rights or options will be subject to the GST if the other requirements of section 9-5 of the GST Act are met.

Example 3.1

Smart Travel is a non-resident tour operator based in Canada that is registered for the GST in Australia. Smart Travel acquires Australian package holidays on a GST inclusive basis from Oz Travel, a resident tour wholesaler in Sydney. The Australian package holidays are on-sold by Smart Travel to tourists wishing to travel to Australia as rights or options to acquire goods, services and other things in Australia. The supply of Australian holiday packages by Smart Travel to tourists are treated as connected with Australia under the GST Act even though Smart Travel issues or grants these rights or options in Canada. Smart Travel is registered for the GST in Australia and all other requirements of 'taxable supply' are satisfied under section 9-5 of the GST Act. Therefore, Smart Travel is making taxable supplies when it on-sells the Australian holiday packages to tourists and must remit GST in respect of the supply. However, it can also claim an input tax credit on the GST paid when the holiday packages are acquired from Oz Travel.

3.9 The amendment also operates to ensure that if a non-resident entity supplies the rights or options to another non-resident, then the second non-resident will also be subject to the GST on its subsequent sale of the rights or options if it meets the other requirements of section 9-5 of the GST Act.

Example 3.2

Assume the same facts as for Example 3.1 and that Smart Travel (Canada) on-supplies the Australian package holidays on a GST inclusive basis to Smart Travel (UK). This entity on-sells the rights or options to tourists wishing to travel to Australia. The supply of the holiday packages is connected with Australia under the GST Act. Assuming that Smart Travel (UK) is registered or required to be registered for the GST in Australia and all other requirements of 'taxable supply' are satisfied under section 9-5 of the GST Act, Smart Travel (UK) is making taxable supplies when it on-sells the Australian holiday packages to tourists. It must remit the GST in respect of the supply, however it also can claim an input tax credit on the GST paid when the holiday packages were acquired from Smart Travel (Canada).

Intangible supplies from offshore - reverse charge

3.10 Division 84 makes certain offshore supplies of things (other than goods or real property) taxable supplies, even though the supplies are not connected with Australia. If a supply is taxable, the GST liability is reverse charged to the recipient and the supplier does not have any GST liability.

3.11 The policy intent of this Division is to ensure that there will be GST imposed on supplies of things, other than goods or real property, that could be made from outside Australia if the thing is going to be used in Australia other than solely for a creditable purpose. That is, if the thing is going to be used, solely or partly, for a private purpose or for making input taxed supplies. The reverse charge mechanism overcomes the difficulties that may arise in seeking to collect the GST from an offshore supplier.

3.12 Because Division 84 requires that the supplies must not be connected with Australia, any broadening in the meaning of 'connected with Australia' for supplies of things, other than goods or real property, could potentially result in Division 84 having a correspondingly narrower operation. This is not desirable because it would reduce the circumstances in which supplies are reversed charged under the GST Act.

3.13 To prevent this outcome, this Bill will replace subsection 84-5(1) so that supplies connected with Australia because of paragraph 9-25(5)(c) will continue to be reverse charged. [Schedule 3, items 7 and 8, subsections 84-5(1) and (2)]

3.14 Ordinarily, the GST on a supply that is a taxable supply under section 9-5 is payable by the entity making the supply. In contrast, the GST is payable by the recipient of a supply where the supply is taxable under section 84-5. However, there may be cases where a supply is a taxable supply under section 9-5 as a result of the amendment to the meaning of 'connected with Australia', and also under section 84-5. New subsection 84-10(3) removes any doubt in these cases that the GST is payable by the recipient of the supply and not by the supplier of the supply. [Schedule 3, item 9, subsection 84-10(3)]

3.15 The Guide Material to Division 84 is replaced so that it more accurately reflects the operation of the Division. [Schedule 3, item 5]

Supplies by non-residents that are connected with Australia - voluntary agreements

3.16 Division 83 allows a non-resident supplier and their registered (or required to be registered) recipient to enter into a voluntary agreement whereby the recipient can account for the GST that would otherwise be payable by the non-resident supplier. This Division resolves some practical compliance issues for non-residents with no presence in Australia.

3.17 Division 83 only applies to a supply that is 'connected with Australia'. As the amendment to subsection 9-25(5) will widen the meaning of 'connected with Australia', it may potentially broaden the operation of Division 83. A number of these supplies will continue to be reverse charged under the expanded Division 84 and would have otherwise been eligible to be also reverse charged under Division 83. However, Division 83 is not intended to apply where Division 84 imposes a reverse charge.

3.18 To prevent this outcome, this Bill amends Division 83 to ensure that where Division 84 applies, Division 83 will not have application. [Schedule 3, item 4, paragraph 83-5(2)(a)]

3.19 Paragraph 83-5(1)(c) is also amended to ensure that Division 83 only applies to recipient entities that carry on an enterprise in Australia. The amendment reflects that enterprises should also be carrying on an enterprise in Australia and therefore have an Australian presence before entering into voluntary reverse charge agreements. [Schedule 3, item 3, paragraph 83-5(1)(c)]

Consequential amendments

3.20 The definition of 'full input tax credit' is also amended to reflect that a supply may be taxable under both sections 9-5 and 84-5 of the GST Act. [Schedule 3, items 10 to 16, subsection 84-13(1) - paragraph (a) of the definition of 'full input tax credit', section 129-70 - paragraph (b) of the definition of 'full input tax credit', section 129-75 - paragraph (b) of the definition of 'full input tax credit', subsection 132-5(2) - paragraph (b) of the definition of 'full input tax credit']

Application and transitional provisions

3.21 These amendments apply to supplies made on or after the day on which this Bill is introduced into the Parliament. [Schedule 3, item 17]

Chapter 4 - Mature age worker tax offset

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide a tax offset for workers aged 55 years and over, in order to encourage and reward participation in the workforce by mature age Australians.

Context of amendments

4.2 In the 2004 election policy statement Mature Age Worker Tax Offset, the Government announced that a new tax offset would be introduced to reward and encourage mature age workers who choose to stay in the workforce. The Government has stated that this measure is part of its strategy to deal with the demographic challenge posed by the ageing of Australia's population, through boosting economic growth by increasing productivity and improving labour force participation.

Summary of new law

4.3 The ITAA 1997 will be amended to introduce a new tax offset which will provide a maximum offset of $500 on the income tax liability of workers aged 55 years and over.

4.4 Eligibility for the offset will be based on age and net income from working (basically, income that is mainly a reward for the taxpayer's personal effort or skills or income from a business that the taxpayer carries on, less any relevant deductions).

Comparison of key features of new law and current law

Detailed explanation of new law

4.5 Subdivision 61-K is to be inserted into the ITAA 1997 to allow a maximum tax offset of $500 on the income tax liability of mature age workers.

4.6 Australian resident individuals who are aged 55 or over by 30 June of the relevant income year may be entitled to the mature age worker tax offset. However, they will not be entitled to any tax offset if their amount of net income from working is nil, or if their net income from working exceeds $63,000 (or exceeds $58,000 for the 2004-05 income year). If a taxpayer would have been eligible for the offset but dies before the normal end of their income year, the offset can be claimed in their 'date of death' return. [Schedule 4, item 2, sections 61-560 and 61-565]

4.7 The Government's 2004 election policy statement Mature Age Worker Tax Offset stated that eligibility for the offset would be on the basis of 'earned income'. For clarity, the term 'net income from working' has been used in the legislation instead of earned income.

Net income from working

4.8 Net income from working is defined as the sum of (excluding certain amounts, which are discussed in paragraphs 4.14 to 4.18):

•

personal services income (i.e. income that is mainly a reward for the taxpayer's personal effort or skills) that is included in the taxpayer's assessable income for the income year;

•

income from a business that the taxpayer carries on that is included in their assessable income for the income year;

•

the taxpayer's assessable farm management withdrawal amounts; and

•

the taxpayer's reportable fringe benefits total for the year,

less the sum of any expenses that the taxpayer can deduct for the income year, to the extent that they are related to their assessable personal services income or assessable income from a business that the taxpayer carries on. [Schedule 4, item 2, subsection 61-570(1); item 3, subsection 995-1(1), definition of 'net income from working']

Personal services income

4.9 Personal services income is included in net income from working. This is income that is mainly a reward for the taxpayer's personal efforts or skills (or would mainly be such a reward if it was the taxpayer's income).

4.10 Although personal services income is often thought about in the context of contractors and consultants, the term also includes many types of income from employment, such as salary and wages. Personal services income includes (but not exclusively):

•

salary or wages;

•

income of a professional person practising on his or her own account without professional assistance - for example, a medical practitioner in a sole practice;

•

income payable under a contract which is wholly or principally for the labour or services of a person;

•

income derived by consultants, for example, computer consultants or engineers from the exercise of personal expertise;

•

income derived by a professional sports person or entertainer from the exercise of his or her own skills (not including income from endorsement by the person of a sponsor's products); and

•

other income from working, such as commissions, bonuses and fees paid to directors or office holders.

4.11 Personal services income does not include any amounts which are not a reward for a taxpayer's personal effort or skills - for example, social security payments, veterans' affairs payments and superannuation pensions and annuities would not be included. [Schedule 4, item 2, subparagraph 61-570(1)(a)(i)]

Example 4.1

Sue is aged 57 and works as an employee of a direct marketing company, engaging in door-to-door sales of cosmetics. In 2004-05 she earns a salary of $36,000, receives commissions totalling $14,000 and is given a Christmas bonus of $1,000. All of these amounts will be included when calculating Sue's net income from working for 2004-05.

Example 4.2

Xavier is aged 66 and occasionally provides electrician services as a contractor. Income received from this activity will be included when calculating Xavier's net income from working. Xavier also receives a part pension from the Government. This will not be included when calculating Xavier's net income from working.

Example 4.3

Jade is aged 55 and operates through a trust as an architect. The income from this activity is mainly a reward for Jade's personal efforts or skills and is attributed to her as personal services income. This income will be included when calculating Jade's net income from working.

Business income

4.12 Assessable income that a taxpayer receives from a business that he or she carries on is also included in their income from working (except where the income is passive income; see paragraphs 4.17 and 4.18). Business is defined in subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

4.13 The assessable income must be received from a business that the taxpayer themself carries on (i.e. that 'you' carry on). This includes a business that a taxpayer carries on as a sole trader or in partnership. If the business is carried on through another entity, such as a company or a trust, then it will not be a business that the taxpayer themself carries on. However, income that a taxpayer receives through a company or trust will still be included in their net income from working if it has been attributed to them as personal services income (see paragraphs 4.9 to 4.11). [Schedule 4, item 2, subparagraph 61-570(1)(a)(ii)]

Example 4.4

Christopher is aged 55 and runs a local corner store in partnership with his wife, Catherine, who is aged 53. They each receive a percentage of the partnership's net income. The income received by Christopher from the partnership will be included when calculating his net income from working for the purposes of the offset. As Catherine is under the age of 55, she has no entitlement to the offset.

Example 4.5

Tim is aged 60 and is one of the directors of a large consultancy company. He receives $40,000 in director's fees. Tim also receives $30,000 in business income from a trust distribution from a family trust, controlled by his son, which is not attributed to him as personal services income. Only the $40,000 in director's fees will be included when calculating Tim's net income from working.

Amounts specifically excluded from net income from working

4.14 Certain amounts of income are specifically excluded from the definition of 'net income from working'. These amounts relate to eligible termination payments; payments received on retirement or termination of employment in lieu of long service leave and annual leave; and passive income. [Schedule 4, item 2, subsection 61-570(2)]

4.15 Eligible termination payments are not included when calculating a taxpayer's net income from working. Eligible termination payments include certain payments made in consequence of the termination of a taxpayer's employment, and certain payments made by superannuation funds to members.

4.16 Payments to which sections 26AC and 26AD of the Income Tax Assessment Act 1936 (ITAA 1936) apply are also not included when calculating a taxpayer's net income from working. These sections cover certain amounts which are received on retirement or termination of employment in lieu of annual leave and long service leave.

4.17 For the purpose of clarity, the legislation specifically excludes 'passive income' (as defined in subsection 160AEA(1) of the ITAA 1936) from the calculation of a taxpayer's net income from working. This applies regardless of whether the taxpayer receives this income directly or indirectly through a business they carry on or through a trust distribution.

4.18 Passive income includes dividends, unit trust dividends and certain other amounts which are taken to be dividends under the taxation law. Annuities, interest income, rental income, royalties, amounts received from the assignment of intellectual property, profits of a capital nature (capital gains) and passive commodity gains are also included in the definition of 'passive income'. Other amounts included in passive income relate to certain attributable income of trust estates, certain amounts in relation to controlled foreign companies and certain amounts in relation to foreign investment funds.

Example 4.6

Margaret is aged 63 and receives a superannuation pension of $40,000 per annum. She also receives a small amount of interest income and some dividend income from her shareholding in public-listed companies. Margaret owns an investment property and receives rental income of $10,000. She also engages in part-time work as a nurse, for which she receives a wage of $12,000. Only the $12,000 which Margaret receives from her work as a nurse will be included when calculating her net income from working.

4.19 Personal services income and business income are only included in a taxpayer's net income from working to the extent that they are assessable; any income which is exempt from taxation or non-assessable is not included.

Net income

4.20 To calculate net income from working, any amounts that a taxpayer can deduct for the income year are subtracted, to the extent that they are related to the taxpayer's assessable personal services income or assessable income from a business that he or she carries on.

Example 4.7

Sue, the door-to-door cosmetics seller in Example 4.1, incurs $500 of work-related expenses that she can deduct in 2004-05. Sue's net income from working for 2004-05 would be calculated as follows:

Net income from working =

$36,000 + $14,000 + $1,000 - $500


= $50,500

If Sue had other deductions that were not related to her assessable personal services income - for example, if she had deductions relating to a rental property that she owned - these would not be included when calculating her net income from working.

Fringe benefits and farm management deposits

4.21 If a taxpayer has reportable fringe benefits, their reportable fringe benefits total will also be included when calculating their net income from working. Essentially, a taxpayer's reportable fringe benefits total is the sum of their reportable fringe benefits amounts from each of their employers (which are recorded on each of the taxpayer's payment summaries). Reportable fringe benefits are included in the calculation of net income from working to recognise that employees can receive some of their remuneration in the form of non-cash benefits. [Schedule 4, item 2, paragraph 61-570(1)(b); item 4, subsection 995-1(1), definition of 'reportable fringe benefits total']

4.22 If a taxpayer has a farm management deposit (FMD), special rules apply as to how amounts relating to the FMD are included in the taxpayer's net income from working. FMDs allow primary producers to shift before-tax income from years when they need it least, to years when they need it most. For taxation purposes, income that is deposited into an FMD is generally allowable as a deduction in the year that the deposit is made, except to the extent that the amount deposited exceeds the taxpayer's taxable primary production income for the year. The income is then assessable in the year that the deposit is repaid (the income is withdrawn), to the extent that it was previously deductible. A taxpayer's net income from working will include any assessable income which they receive as a result of the repayment of an FMD. [Schedule 4, item 2, subparagraph 61-570(1)(a)(iii)]

Example 4.8

Glen is a primary producer aged 59 who operates an FMD. In 2004-05, Glen has taxable primary production income of $50,000 and makes a $30,000 deposit into the FMD, which is fully tax deductible in that income year and is not included when calculating Glen's net income from working. In 2005-06, Glen withdraws $10,000 from the FMD, which is assessable in that income year. The assessable income of $10,000 will be included when calculating Glen's net income from working for 2005-06.

Example 4.9

Amanda is a primary producer aged 57 who operates an FMD. In 2003-04, Amanda has taxable primary production income of $25,000 and makes a $30,000 deposit into the FMD, of which $25,000 is tax deductible in that income year and is not included when calculating Amanda's net income from working. In 2006-07, Amanda withdraws $30,000 from the FMD, of which $25,000 is assessable in that income year. The assessable income of $25,000 will be included when calculating Amanda's net income from working for 2006-07.

Calculation of the tax offset

4.23 In order to be entitled to the mature age worker tax offset, a taxpayer must have some net income from working. If a taxpayer has no net income from working - for example, if they only have income from sources such as superannuation, social security pensions, interest or dividends - then the taxpayer will not be entitled to any offset. Also, if a taxpayer's net income from working exceeds a certain amount then they will not be entitled to any offset.

4.24 For those taxpayers with net income from working below a threshold ($48,000 in 2004-05 and $53,000 in 2005-06 and later years) the amount of offset is calculated as five per cent of the taxpayer's net income from working, up to a maximum of $500. This means that the offset phases in over net income from working from $1 to $10,000, so that the full $500 offset is achieved when net income from working equals $10,000. In 2004-05, this full $500 offset will be available for taxpayers who have net income from working between $10,000 and $48,000. In 2005-06 and beyond, the full offset will be available for taxpayers who have net income from working between $10,000 and $53,000. [Schedule 4, item 2, subsections 61-565(1) and (3)]

4.25 In 2004-05, the offset will phase out at five per cent for net income from working over the threshold amount of $48,000. This means that taxpayers with net income from working of $58,000 or more will not receive any offset. In 2005-06 and beyond, the offset will phase out at five per cent for net income from working over the threshold amount of $53,000, so that taxpayers with net income from working of $63,000 or more will not receive any offset. [Schedule 4, item 2, subsections 61-565(2) and (3)]

4.26 The chart below shows the amount of offset that a taxpayer aged 55 years or over will be eligible to receive in 2004-05 and in 2005-06 and beyond, based on their amount of net income from working.

4.27 Only net income from working will affect a taxpayer's entitlement to the offset; any other income which they receive will not be included when calculating their offset entitlement.

[Graph unavailable.]

Example 4.10

Sue, the door-to-door cosmetics seller in Examples 4.1 and 4.7, has net income from working in 2004-05 of $50,500. She is above the $48,000 threshold for the maximum offset amount for the 2004-05 year, and so her entitlement to the mature age worker tax offset is calculated as follows:

Tax offset =

$500 - [5% * ($50,500 - $48,000)]


= $375

If Sue had $50,500 of net income from working in 2005-06 or a subsequent year, she would be below the $53,000 threshold which applies for these years. Hence her entitlement to the mature age worker tax offset would be calculated as follows:

Tax offset

= lesser of 5% * $50,500 or $500

= lesser of $2,525 or $500

= $500

4.28 Although the offset is calculated on the basis of net income from working, it will act to reduce the taxpayer's tax liability on their total taxable income.

Example 4.11

Cynthia is aged 59 and in 2005-06 she has net income from working of $10,500, and so is entitled to a mature age worker tax offset of $500. She also has other sources of income, and her total taxable income for the year is $50,000. The tax on her taxable income is $11,172. Cynthia's mature age worker tax offset will be subtracted from the tax on her taxable income when calculating the tax payable by Cynthia for the year.

4.29 The offset is non-refundable. That is, it cannot reduce a taxpayer's basic income tax liability below zero.

Application and transitional provisions

4.30 These amendments will apply to assessments for income years commencing on or after 1 July 2004. [Schedule 4, item 5]

Consequential amendments

4.31 The list of tax offsets in section 13 of the ITAA 1997 is amended to include a reference to the mature age worker tax offset. [Schedule 4, item 1]

4.32 Two additional definitions have been added to the Dictionary. [Schedule 4, items 3 and 4, subsection 995-1(1), definitions of 'net income from working' and 'reportable fringe benefits total']

Index

Schedule 1: Fringe benefits tax exemptions

Schedule 2: Effective life of assets declining in value

Schedule 3: Supplies of rights or options offshore

Schedule 4: Mature age worker tax offset