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

Increasing the dependent spouse tax offset

Part 1 of Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 to increase the dependent spouse tax offset to $2,100 from 1 July 2007.

The full dependent spouse tax offset is available to a resident taxpayer who contributes to the maintenance of a resident spouse whose separate net income does not exceed $282.

Date of effect : These amendments apply to assessments for the 2007-08 income years and later income years.

Proposal announced : This measure was announced in the 2007-08 Budget. It was also announced in the Treasurer's Press Release No. 036 of 8 May 2007.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Nil.

Medicare levy and Medicare levy surcharge low-income thresholds

Part 2 of Schedule 1 to this Bill amends:

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the Medicare Levy Act 1986 to:

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increase the Medicare levy low-income thresholds for individuals and families. The dependent child/student component of the family threshold will also be increased. The increases are in line with movements in the consumer price index (CPI); and

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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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the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to:

increase the Medicare levy surcharge low-income threshold in line with movements in the CPI.

Date of effect : The increased Medicare levy and Medicare levy surcharge low-income thresholds apply from the 2006-07 income year and later income years.

Proposal announced : This measure was announced in the 2007-08 Budget and in the Minister for Revenue and Assistant Treasurer's Press Release No. 047 of 8 May 2007.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Negligible.

Chapter 1 - Increasing the dependent spouse tax offset

Outline of chapter

1.1 Part 1 of Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 to increase the dependent spouse tax offset to $2,100.

Summary of new law

1.2 These amendments will provide for an increase in the dependent spouse tax offset.

1.3 The full dependent spouse tax offset is available to a resident taxpayer who contributes to the maintenance of a resident spouse whose separate net income does not exceed $282. The tax offset is reduced by $1 for every $4 by which the dependent spouse's separate net income exceeds $282.

1.4 The dependent spouse tax offset is increased each year by reference to the consumer price index, in accordance with the indexation provisions set out in section 159HA.

1.5 There are several other related tax offsets that are also affected by the indexation provisions, including: child-housekeeper, invalid relative, parent, housekeeper, the notional sole parent and the notional dependent spouse with child tax offsets.

Detailed explanation of new law

1.6 The 2007-08 amounts for the dependent spouse tax offset, child-housekeeper tax offset, parent tax offset and the invalid relative tax offset are set out in the revised table in subsection 159J(2). The new amounts for the child-housekeeper tax offset, parent tax offset and the invalid relative tax offset have been calculated as if the indexation provisions set out in section 159HA applied for the 2007-08 income year. [ Schedule 1, Part 1, item 7 ]

1.7 The indexation rule set out in section 159HA will not apply for the 2007-08 income year and will recommence for the 2008-09 income year. [ Schedule 1, Part 1, item 5 ]

Application and transitional provisions

1.8 These changes apply to assessments for the 2007-08 income year and later income years. [ Schedule 1, Part 1, item 13 ]

Consequential amendments

1.9 The change to the indexation provisions requires that all other related tax offset amounts in sections 159HA, 159J, 159K and 159L be replaced with the amounts to apply for the 2007-08 income year. The new amounts have been calculated as if the indexation provisions set out in section 159HA applied for the 2007-08 income year. [ Schedule 1, Part 1, items 4, 6 and 8 to 12 ]

1.10 The notional dependent spouse with child tax offset is relevant for the calculation of the tax offset for persons serving overseas with an armed force under the control of:

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the United Nations under section 23AB;

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the zone tax offset under section 79A; and

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the tax offset for defence force members serving overseas.

Amendments are required to these provisions to reflect the increased amount of the dependent spouse tax offset. The notional dependent spouse with child tax offset can only be claimed through the zone tax offset and the overseas forces tax offset. [ Schedule 1, Part 1, items 1 to 3 ]

Chapter 2 - Medicare levy and Medicare levy surcharge low - income thresholds

Outline of chapter

2.1 Part 2 of Schedule 1 to this Bill amends the Medicare Levy Act 1986 (MLA 1986) and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to increase the Medicare levy low-income threshold amounts (threshold amounts) for individuals, families and pensioners below age pension age. It also increases the phase-in limits as a result of the increased threshold amounts.

Context of amendments

Medicare levy low-income thresholds

2.2 The MLA 1986 provides that no Medicare levy is payable for low-income individuals and families where taxable income or combined family taxable income does not exceed stated threshold amounts. The family income threshold increases by a set amount per child. The Medicare levy shades in at a rate of 10 cents in the where the taxable income or combined family taxable income exceeds the threshold amounts.

Medicare levy surcharge low-income threshold

2.3 A Medicare levy surcharge (the surcharge) of one per cent 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 one per cent also applies to reportable fringe benefits in certain cases where taxpayers do not have private patient hospital cover (sections 12 to 16 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999). However, a family member who would otherwise be liable for the surcharge is not required to pay the surcharge where the total of that person's 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.

Summary of new law

2.4 This measure amends:

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

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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; and

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paragraphs 15(1)(c) and 16(2)(c) of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to raise the threshold below which a family member is not required to pay the surcharge on reportable fringe benefits.

Detailed explanation of new law

Medicare levy low-income thresholds

2.5 This Schedule increases the low-income thresholds for individuals and families for the 2006-07 income year and subsequent income years. The increases are in line with movements in the consumer price index.

2.6 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).

2.7 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 $16,284 to $16,740. [ Schedule 1, item 18 ]

2.8 The level of the 'family income threshold' referred to in subsections 8(5) to (7) of the MLA 1986 is to be increased from $27,478 to $28,247 [ Schedule 1, items 19 and 21 ]. The family income threshold is to be increased by a further $2,594 instead of the previous figure of $2,523 for each dependent child or student [ Schedule 1, item 20 ].

2.9 This Schedule also increases the threshold amount for pensioners below age pension age for the 2006-07 income year and subsequent income years. The increase ensures that such pensioners do not have a Medicare levy liability where they face no income tax liability.

2.10 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 $19,583 to $21,637. [ Schedule 1, item 17 ]

Phase-in limit

2.11 Section 7 of the MLA 1986 also provides that the Medicare 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). The rate of the Medicare levy payable in these circumstances is limited to 10 per cent of the excess over the threshold amount that is relevant to the particular person.

2.12 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 $17,604 to $19,694. [ Schedule 1, item 16 ]

2.13 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 $21,170 to $25,455. [ Schedule 1, item 15 ]

2.14 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 10 per cent of the amount of family income that exceeds their family income threshold. This range is increased for dependants as indicated in Table 1.1.

2.15 The increased threshold amounts and phase-in ranges for the 2006-07 income years and subsequent income years are as shown in Table 1.1.

Medicare levy surcharge low-income threshold

2.16 References to the individual low-income threshold amount of $16,284 in the Medicare levy surcharge provisions (in sections 8D and 8G of the MLA 1986) in respect of the surcharge payable on taxable income are also being increased to $16,740. [ Schedule 1, items 22 to 25 ]

2.17 References to the individual low-income threshold amount of $16,284 in the Medicare levy surcharge provisions (in sections 15 and 16 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999) in respect of surcharge on reportable fringe benefits are also being increased to $16,740. [ Schedule 1, item 14 ]

Application and transitional provisions

2.18 These amendments are to apply for the 2006-07 income year and later income years. [ Schedule 1, item 26 ]