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 - reducing regulatory burdens on business

Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to:

•

increase the minor benefits exemption threshold from less than $100 to less than $300;

•

increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000;

•

increase, from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits); and

•

extend the definition of 'remote', for the purposes of the fringe benefits tax (FBT) concessions, where the shortest practicable route involves travel by water.

Date of effect: These amendments apply in respect of the FBT year starting on 1 April 2007 and all later FBT years.

Proposal announced: The increase in the minor benefits exemption and the reportable fringe benefits amount thresholds were announced in the Treasurer and the Prime Minister's joint Press Release No. 019 of 7 April 2006 as part of the Government's response to the Report of the Taskforce on Reducing the Regulatory Burdens on Business - Rethinking Regulation, and in the 2006-07 Budget. The increase in the reduction of taxable value applying to eligible fringe benefits and the extension of the definition of remote were announced in the 2006-07 Budget and in Attachment B of the Treasurer's Press Release No. 039 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: These amendments are expected to reduce compliance costs for employers and consequently reduce regulatory burdens on business.

GST car and pharmaceutical concessions

Schedule 2 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) so that supplies of drugs, medicines and other pharmaceutical items are GST-free when supplied as pharmaceutical benefits under the Military Rehabilitation and Compensation Act 2004.

This Schedule also amends the GST Act to extend the GST-free car concession to people who have served in the Defence Force or in any other armed force of Her Majesty and as a result of that service, receive, or are eligible to receive, a Special Rate Disability Pension under Part 6 of Chapter 4 of the Military Rehabilitation and Compensation Act 2004.

Date of effect: These amendments apply to net amounts for tax periods starting on or after 1 July 2004.

Proposal announced: The amendments regarding supplies of drugs, medicines and other pharmaceutical items have not previously been announced.

The amendments to extend the GST-free car concession were announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. C042/04 of 11 May 2004.

Financial impact: Negligible.

Compliance cost impact: Negligible.

Removing the part-year tax-free threshold for taxpayers who have ceased to be full-time students

Schedule 3 to this Bill amends the Income Tax Rates Act 1986 to remove the part-year tax-free threshold for taxpayers who cease to be engaged in full-time education for the first time. These amendments extend the standard tax-free threshold of $6,000 to students who cease full-time education for the first time in the same way that it applies to other resident taxpayers.

Date of effect: These amendments apply to assessments for the 2006-07 year of income and later years of income.

Proposal announced: This measure was announced in the 2006-07 Budget and the Treasurer's Press Release No. 39 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: The removal of the part-year tax-free threshold reduces compliance costs for taxpayers who have finished full-time education for the first time.

Chapter 1 Fringe benefits tax - reducing regulatory burdens on business

Outline of chapter

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

•

increase the minor benefits exemption threshold from less than $100 to less than $300;

•

increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000;

•

increase, from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits); and

•

extend the definition of 'remote', for the purposes of the fringe benefits tax (FBT) concessions, where the shortest practicable route involves travel by water.

Context of amendments

1.2 In October 2005, the Prime Minister and the Treasurer announced the establishment of a taskforce to identify actions to address areas of Australian Government regulation that are unnecessarily burdensome, complex, redundant or that duplicate regulations in other jurisdictions.

1.3 As part of the Report of the Taskforce on Reducing the Regulatory Burdens on Business - Rethinking Regulation, it was recommended that the Australian Government increase the minor benefits exemption threshold from less than $100 to less than $300, and increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000. On 7 April 2006, the Prime Minister and the Treasurer announced that these recommendations had been accepted.

1.4 Increasing the minor benefits exemption threshold will reduce compliance and record-keeping costs for employers who provide minor benefits to employees.

1.5 Increasing the reportable fringe benefits amount threshold to more than $2,000 will enable employers to reduce their compliance and record-keeping costs by not having to report fringe benefits for employees who receive no more than $2,000 worth of fringe benefits in the FBT year.

1.6 In the 2006-07 Budget the Government announced that it will increase, from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits).

1.7 The Government also announced in the 2006-07 Budget that it will extend the definition of remote for the purposes of the FBT concessions. This will ensure that the FBT remote area concessions recognise the special circumstances of employees who work in locations isolated from populated areas by a body of water, as it is generally more difficult and inconvenient to travel by water than to travel by land.

Summary of new law

1.8 Paragraph 58P(1)(e) of the FBTAA 1986 is amended to increase the minor benefits exemption threshold from less than $100 to less than $300.

1.9 Subsections 135P(1) and 135Q(2) are amended to increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000.

1.10 Paragraphs 62(1)(a) and (b) of the FBTAA 1986 are amended to increase, from $500 to $1,000, the reduction of taxable value that applies to the aggregate of the taxable values of eligible fringe benefits provided to an employee in a year of tax.

1.11 Section 140 of the FBTAA 1986 is amended so that where the shortest practicable surface route between a tested location and an eligible urban area includes a route by water, the total kilometres of the surface route that are by water are doubled for the purposes of determining whether a location is remote.

Comparison of key features of new law and current law

Detailed explanation of new law

1.12 Currently, the minor benefits exemption applies to certain benefits provided to an employee (or their associate) with a notional taxable value of less than $100, and, having regard to several factors described in paragraph 58P(1)(f) of the FBTAA 1986, it would be unreasonable to tax the benefit.

1.13 Paragraph 58P(1)(e) of the FBTAA 1986 is amended so that a minor benefit will qualify for the exemption if the notional taxable value of the benefit is less than $300, where the other conditions in section 58P of the FBTAA 1986 are satisfied. [ Schedule 1, item 1, paragraph 58P(1)(e )]

1.14 Currently, employers are required to record and report the grossed-up taxable value of fringe benefits provided in respect of an employee's employment on their payment summary when the taxable value of those benefits is more than $1,000. The reporting of fringe benefits places employees with access to fringe benefits on a more even footing with employees whose remuneration consists entirely of salary or wages.

1.15 Subsections 135P(1) and 135Q(2) of the FBTAA 1986 are amended to increase the reportable fringe benefits amount threshold for a year of income in respect of an employee's employment to more than $2,000. [ Schedule 1, items 3 and 5, subsections 135P(1 ) and 135Q(2 )]

1.16 An amendment is also made to examples 1 and 2 in subsection 135P(1) of the FBTAA 1986 to reflect the increase to the reportable fringe benefits amount threshold to more than $2,000. [ Schedule 1, item 4, examples 1 and 2 in subsection 135P(1 )]

1.17 An eligible fringe benefit for the purposes of section 62 of the FBTAA 1986 is an in-house fringe benefit or an airline transport fringe benefit. Broadly, an in-house fringe benefit is a good or service provided to an employee that is identical or similar to those that the employer supplies to the public in the ordinary course of the employer's business. An airline transport fringe benefit arises where an employee (or their associate) of an airline or a travel agent is provided with free or discounted air travel that is subject to the stand-by restrictions customarily applying to employees in the airline industry. Currently, the aggregate of the taxable values of eligible fringe benefits provided to an employee (or their associate) in a year of tax, are reduced by $500.

1.18 Paragraphs 62(1)(a) and (b) of the FBTAA 1986 are amended to provide for a $1,000 reduction in taxable value of eligible fringe benefits provided to an employee (or their associate) in a year of tax. [ Schedule 1, item 2, paragraphs 62(1)(a ) and ( b )]

1.19 There are a number of concessions for fringe benefits provided to employees in 'remote' locations. These concessions include an exemption for certain remote area housing benefits and reductions in the taxable value of certain benefits arising from housing assistance and residential fuel.

1.20 Section 140 of the FBTAA 1986 includes a definition of 'eligible urban area'. A 'remote' location is a location that is not in, or adjacent to, an eligible urban area. Section 140 of the FBTAA 1986 also outlines the method for measuring the distance by the shortest practicable surface route between an eligible urban area and a location that is being tested as remote.

1.21 Currently, a location is remote where it is situated at least 40 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a 1981 census population of less than 130,000 (but greater than 14,000), and is situated at least 100 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a 1981 census population of at least 130,000. Currently, in testing whether a location is remote, there are no special rules for travel by water.

1.22 Schedule 1 introduces a new formula for calculating the distance between a tested location and an eligible urban area, where the shortest practicable surface route between the two locations includes a route by water. Where the shortest practicable surface route between the tested location and the eligible urban area includes a route by water, the total number of kilometres of the surface route that are by water are doubled:

•

If the shortest practicable surface route is entirely by water, the total number of kilometres is doubled.

•

If the shortest practicable surface route includes travel by land and water, the total number of kilometres by water are doubled and added to the total number of kilometres by land.

[ Schedule 1, item 6, subsection 140(2A )]

1.23 The distance calculated using the formula in new subsection 140(2A) is then used to determine whether a location is remote.

Example 1.1

Wong Island is 80 kilometres, by the shortest practicable surface route, from the centre point of an inland eligible urban area with a population of 140,000. The shortest practicable surface route to the island involves 40 kilometres of travel by road and 40 kilometres of travel by sea.

Wong Island is also situated 45 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a population of 20,000.

Previously, Wong Island would not have been considered 'remote' for the purposes of FBT as it is less than 100 kilometres away from an eligible urban area with a population of at least 130,000. However, under the amendment, Wong Island would be 'remote' as it would be considered to be 120 kilometres - ie, 40 kilometres by land + (2 x 40 kilometres by water) - from the eligible urban area by the shortest practicable surface route.

Application and transitional provisions

1.24 These amendments will apply in respect of the FBT year starting on 1 April 2007 and all later FBT years. [ Schedule 1, item 7 ]

1.25 While the increase in the reportable fringe benefits amount threshold will apply from the FBT year starting 1 April 2007 and all later FBT years, the increase in threshold will first appear in the payment summaries of employees for the year of income ending 30 June 2008. The payment summaries of employees for the year of income ending 30 June 2007 will contain the reportable fringe benefits amount of employees for the FBT year ending 31 March 2007, notwithstanding the threshold was increased on 1 April 2007.

Chapter 2 GST car and pharmaceutical concessions

Outline of chapter

2.1 Schedule 2 to this Bill makes two amendments to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) following the establishment of the military specific compensation scheme under the Military Rehabilitation and Compensation Act 2004.

2.2 The first amendment makes supplies of drugs, medicines and other pharmaceutical items GST-free when supplied as pharmaceutical benefits under the compensation scheme.

2.3 The second amendment extends the GST-free car concession to people who have served in the Defence Force or in any other armed force of Her Majesty and as a result of that service, receive, or are eligible to receive, a Special Rate Disability Pension under Part 6 of Chapter 4 of the Military Rehabilitation and Compensation Act 2004.

Context of amendments

2.4 The Military Rehabilitation and Compensation Act 2004 established a military specific compensation scheme to meet the special circumstances of service in the Australian Defence Force. The scheme represents the Government's response to the findings of the inquiry into the Black Hawk disaster of June 1996 and the recommendations of The Review of the Military Compensation Scheme (Tanzer Report) of March 1999.

2.5 This Schedule makes amendments to the GST Act that flow from the establishment of the scheme. They seek to provide similar goods and services tax (GST) concessions to those that currently exist in the GST Act for certain claimants under the Veterans' Entitlements Act 1986.

Summary of new law

2.6 The first amendment in this Schedule amends section 38-50 of the GST Act to make the supply of a drug, medicine or other pharmaceutical item GST-free when supplied on prescription and as a pharmaceutical benefit under the Military Rehabilitation and Compensation Act 2004.

2.7 The second amendment in this Schedule amends section 38-505 of the GST Act to make the supply of a car GST-free when supplied to an individual who has served in the Defence Force or in any other armed force of Her Majesty and as a result of that service, receives, or is eligible to receive, a Special Rate Disability Pension under the Military Rehabilitation and Compensation Act 2004.

Comparison of key features of new law and current law

Detailed explanation of new law

Drugs, medicines and other pharmaceutical items

2.8 Under section 38-50 of the GST Act, supplies of certain drugs, medicines, medicinal preparations and other pharmaceutical items are GST-free when supplied in certain circumstances. Subsection 38-50(4) makes supplies of drugs, medicines and other pharmaceutical items GST-free when supplied:

•

on prescription;

•

as a pharmaceutical benefit within the meaning of section 91 of the Veterans' Entitlements Act 1986; and

•

under an approved scheme within the meaning of section 91 of the Veterans' Entitlements Act 1986.

2.9 Most supplies of drugs, medicines and other pharmaceutical items will be GST-free because of other provisions within the GST Act. However, some drugs, medicines and other pharmaceutical items supplied as pharmaceutical benefits under the Veterans' Entitlements Act 1986 or the Military Rehabilitation and Compensation Act 2004 will not fall within these provisions and thus not otherwise qualify for GST-free treatment.

2.10 The Government intends that supplies of drugs, medicines and other pharmaceutical items supplied as pharmaceutical benefits under the Military Rehabilitation and Compensation Act 2004 qualify for the same GST-free treatment as supplies of drugs, medicines and other pharmaceutical items supplied as pharmaceutical benefits under the Veterans' Entitlements Act 1986.

2.11 The amendment to section 38-50 of the GST Act will make supplies of drugs, medicines and other pharmaceutical items GST-free when supplied:

•

on prescription;

•

as a pharmaceutical benefit within the meaning of section 5 of the Military Rehabilitation and Compensation Act 2004; and

•

in accordance with a determination made under paragraph 286(1)(c) of the Military Rehabilitation and Compensation Act 2004.

[ Schedule 2, item 1, subsection 38-50(4A )]

Cars

2.12 Under section 38-505 of the GST Act, the supply of a car is GST-free when supplied to an individual who has served in the Defence Force or in any other armed force of Her Majesty, and as a result of that service:

•

has lost a leg or both arms; or

•

has had a leg, or both arms, rendered permanently and completely useless; or

•

is a veteran to whom section 24 of the Veterans' Entitlements Act 1986 applies and receives a pension under Part II of that Act; and

•

intends to use the car in his or her personal transportation during all of the 'Subdivision 38-P period'.

2.13 The GST Act defines the Subdivision 38-P period as the period starting when the person acquires the car and ending at the earliest of:

•

the end of two years after the acquisition;

•

the time when the car is no longer reasonably capable of being used for the purpose for which cars of that kind are ordinarily used; or

•

a time that the Commissioner of Taxation considers to be appropriate in special circumstances.

2.14 The amendment to section 38-505 will extend the criteria under paragraph 38-505(1)(b) to include individuals who are receiving the Special Rate Disability Pension under Part 6 of Chapter 4 of the Military Rehabilitation and Compensation Act 2004, or who satisfy the eligibility criteria under section 199 of that Act. [ Schedule 2, items 2 and 3, subparagraph 38-505(1)(b)(iv )]

2.15 Not all people who receive, or are eligible to receive, the Special Rate Disability Pension under the Military Rehabilitation and Compensation Act 2004 will be eligible to acquire cars GST-free. The Government intends that only those people who meet the other requirements of section 38-50 qualify. That is, the individual must have served in the Defence Force or in any other armed force of Her Majesty and as a result of that service, receive, or is eligible to receive, the Special Rate Disability Pension. These amendments are not intended to alter the meaning given to the phrase 'served in the Defence Force or in any other armed force of Her Majesty' that appears in paragraph 38-505(1)(a) of the GST Act.

2.16 Similarly, such people will also be subject to the requirement that they intend to use the car in their personal transportation during all of the Subdivision 38-P period.

Application and transitional provisions

2.17 The amendments made by this Schedule apply to net amounts for tax periods starting, or that started, on or after 1 July 2004.

2.18 The amendments are retrospective to ensure they align with the commencement of the military compensation scheme established by the Military Rehabilitation and Compensation Act 2004.

Chapter 3 Removing the part-year tax-free threshold for taxpayers who have ceased to be full-time students

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Rates Act 1986 to remove the part-year tax-free threshold for taxpayers who cease to be engaged in full-time education for the first time.

Context of amendments

3.2 In the 2006-07 Budget the Government announced that it would remove the part-year tax-free threshold for taxpayers ceasing full-time education for the first time, with effect from the 2006-07 income year.

3.3 Under the current law, taxpayers who cease full-time education for the first time are not eligible for the full tax-free threshold of $6,000.

3.4 The reduced tax-free threshold for taxpayers who cease to be full-time students is calculated by multiplying the number of months in the income year that the taxpayer was not studying full-time by the monthly equivalent of the tax-free threshold ($500). If the taxpayer derives income during the year which is attributable to the period of full-time education, the adjusted threshold is increased by that amount up to the standard tax-free threshold (currently $6,000).

3.5 The removal of the part-year tax-free threshold reduces compliance costs for taxpayers who have finished full-time education for the first time. The part-year tax-free threshold is complex and has limited application since many students undertake part-time work while studying and are therefore often entitled to the full tax-free threshold.

Summary of new law

3.6 These amendments extend the standard tax-free threshold of $6,000 to students who cease full-time education for the first time in the same way that it applies to other resident taxpayers.

Comparison of key features of new law and current law

Detailed explanation of new law

3.7 These amendments remove the part-year tax-free threshold for taxpayers ceasing full-time education. This means that students who cease full-time education for the first time are entitled to the standard tax-free threshold of $6,000 that applies to all resident taxpayers. [ Schedule 3, items 1 to 8 ]

Example 3.1

Fergus ceases full-time education for the first time in November 2006 and starts a job on 2 March 2007. Fergus does not earn any income whilst studying.

Under the current law Fergus would have a reduced tax-free threshold. This would be calculated by multiplying the number of months Fergus was not studying (eight) by the $500 monthly equivalent. Hence Fergus's tax-free threshold would have been $4,000.

Under the new law Fergus has a tax-free threshold of $6,000.

Application and transitional provisions

3.8 These amendments apply to assessments for income years commencing on or after 1 July 2006, as announced in the 2006-07 Budget. [ Schedule 3, item 9 ]

Index

Schedule 1: Fringe benefits tax amendments

Schedule 2: GST car and pharmaceutical concessions

Schedule 3: Removing part-year tax-free threshold for taxpayers who have ceased to be full-time students