Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Amendment of the Medicare Levy Act 1986
Raises the Medicare levy low income exemption thresholds for individuals, married couples and sole parents. Persons with a taxable income or family income below the low income exemption thresholds are not required to pay the levy. The exemption is shaded out gradually.
Date of effect: 1 July 1997
Proposal announced: 1997-98 Budget, 13 May 1997
Financial impact: The estimated cost of raising the low ncomethresholds will be $3 million in 1997-98; $35 million in 1998-99; and $18 million in 1999-00 and 2000-01.
Compliance cost impact: There is no additional complance cost for taxpayers.
Amendment of the Medicare Levy Act 1986
Overview
1.1 The Bill will amend the Medicare Levy Act 1986 (the Act) to increase the Medicare levy low income exemption thresholds ('low income thresholds') for individuals, married couples and sole parents. It will also increase the exemption shade-out thresholds as a result of the increased low income thresholds.
Summary of the amendments
1.2 The measure will amend:
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- sections 7 and 8 of the Act to raise the low income thresholds for individuals, married couples and sole parents;
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- subsection 7(2) of the Act to raise the exemption shade-out threshold for individuals; and
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- sections 8D and 8G of the Act to raise the threshold used to exempt a family member with low income from a liability for the Medicare levy surcharge ('surcharge').
1.3 The amendments will apply from 1 July 1997.
Background to the legislation
1.4 The Act provides an exemption from Medicare levy for low income individuals and families. It does this by stating exemption thresholds for taxable or family income. A person whose income does not exceed a stated threshold is exempt from the levy. For couples and single parents, the threshold increases by a set amount per child. Above the thresholds, the exemption shades out at a rate of 20 cents in the dollar.
Medicare levy surcharge exemption threshold
1.5 A Medicare levy surcharge of 1% applies in certain cases where taxpayers do not have private patient hospital cover (sections 8C - 8G of the Act). However, a person who would otherwise be liable for the surcharge because the person does not have the required private patient hospital cover, and the combined taxable income of the person and the person's spouse ('combined taxable income') is over $100,000 (as increased on account of more than one dependant child), is exempt from the surcharge where the person's taxable incomedoes not exceed the individual low income threshold. Unlike the Medicare levy, there is no shading-out of the exemption above this threshold for surcharge purposes.
Explanation of the amendments
Medicare levy low income exemption thresholds
1.6 The Bill proposes to increase the low income thresholds for individuals, married couples and certain sole parents for the 1997-98 financial year and subsequent financial years. The increases are in line with movements in the consumer price index.
1.7 Section 7 of the Act exempts individuals with taxable incomes at or below the low income threshold from any liability for the Medicare levy. It also applies the levy at a reduced rate for individual taxpayers with taxable incomes within a certain range over which the exemption is shaded-out.
1.8 The level of the individual low income threshold (subsections 7(1) and 7(2) of the Act) is to be increased from $13,127 to $13,389. [Item 1]
1.9 Section 8 of the Act exempts from Medicare levy a person whose family income is below the family low income threshold and who satisfies either of the following:
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- the person is married or in a de facto relationship on the last day of the year of income; or
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- the person is entitled to a sole parent rebate or a rebate for a housekeeper in his or her assessment in respect of the relevant year of income.
1.10 If a person was married on the last day of the year, family income is the taxable income of both the person and the person's spouse. For a person who was not married on the last day of the year of income and who is entitled to the relevant rebate, family income is the person's taxable income.
1.11 The level of the 'family income threshold' in subsections 8(5) and 8(6) of the Act is increased from $22,152 to $22,594 [items 3 and 4] . The threshold will continue to be increased by a further $2,100 for each dependent child or student.
Exemption shade-out thresholds
1.12 The rate of levy payable by a person whose taxable (or family) income exceeds an exemption threshold by a small or moderate amount is reduced so that Medicare levy otherwise payable is limited to 20% of the excess over the exemption threshold that is relevant to the particular person.
1.13 The exemption shade-out threshold for individuals contained in subsection 7(2) of the Act is increased from $14,191 to $14,474. [Item 2]
1.14 There is no shade-out threshold stated in the Act for families as the figure changes with the number of dependants. Instead, subsection 8(2) of the Act contains a formula that limits the levy payable by persons with families to 20 per cent of the amount of family income that exceeds their family income threshold. Effectively, the formula is relevant only where family income is in the range $22,595 to $24,425 (family with no dependent children). This upper figure is increased for dependants as indicated in the table below.
1.15 The increased low income exemption thresholds and exemption shading-out ranges for the 1997-98 financial year and subsequent financial years will be as shown in the following table:
| Category of taxpayer | No levy payable if taxable income (family income) does not exceed (figure for 96-97) | Reduced levy if taxable income (family income) is within range (inclusive) | Ordinary rate of levy payable where taxable income (family income) exceeds (figure for 96-97) |
|---|---|---|---|
| Individual taxpayer | $13,389 ($13,127) | $13,390 - $14,474 | $14,474 ($14,346) |
| Married taxpayer* with the following children and/or students | (family income) | (family income) | (family income) |
| 0 | $22,594 ($22,152) | $22,595 - $24,425 | $24,425 ($24,209) |
| 1 | $24,694 ($24,252) | $24,695 - $26,696 | $26,696 ($26,504) |
| 2 | $26,794 ($26,352) | $26,795 - $28,966 | $28,966 ($28,800) |
| 3 | $28,894 ($28,452) | $28,895 - $31,236 | $31,236 ($31,095) |
| 4 | $30,994 ($30,552) | $30,995 - $33,507 | $33,507 ($33,390) |
| 5 | $33,094 ($32,652) | $33,095 - $35,777 | $35,777 ($35,685) |
| 6 | $35,194** (34,752)** | $35,195** - $38,047*** | $38,047*** ($37,980)**** |
| * or taxpayer entitled to a sole parent, child/housekeeper or housekeeper rebate. | |||
| ** add $2,100 for each extra child. | |||
| *** add $2,270 for each extra child. | |||
| **** add $2,295 for each extra child. | |||
Medicare levy surcharge exemption threshold
1.16 References to the individual low income thresholds of $13,127 in the Medicare levy surcharge provisions (in sections 8D and 8G of the Act) are also proposed to be increased to $13,389, in accordance with the above changes. [Items 5, 6, 7 and 8]
1.17 All the amendments are to apply for the financial year commencing on 1 July 1997 and all later financial years. [Item 9]
1.18 It is necessary to make the commencement of some amendments contained in this Bill to be immediately after the commencement of the Medicare Levy Amendment Act (No. 1) 1997. This is because some figures being amended (increased) by this Bill have been inserted in the Act by the Medicare Levy Amendment Act (No. 1) 1997, and their insertion also applies from 1 July 1997. The Medicare levy Amendment Act (No. 1) 1997 imposed the Medicare levy surcharge and reduced the individual low income exemption shade out threshold as a result of the change of Medicare levy rate with the cessation of the 0.2% 'gun levy'. [Clause 2]