House of Representatives

Explanatory Memorandum

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

General Outline and Financial Impact

Reducing Personal Income Tax Rates

Amends the Income Tax Rates Act 1986 to provide for significant personal income tax cuts.

Date of effect: The new rates come into effect on 1 July 2000 and will apply to assessments for the 2000-2001 year of income and later years of income.

Proposal announced: The Government announced the proposed tax cuts in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System on 13 August 1998.

Financial impact: The measure will cost $13.1 billion in 2000-2001, $13.5 billion in 2001-2002 and $14.5 billion in 2002-2003.

Compliance cost impact: See Regulation Impact Statement.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

•

The measure will impact on employers, professional advisers, computer programmers, the Australian Taxation Office (ATO), contractors who process payroll, electronic payroll stockists and electronic payroll producers.

•

Compliance costs for employers will increase, because the new tax rates will require PAYE remitters to recalculate the amount of tax they need to remit to the ATO.

•

To ensure that remitters are able to determine the correct amounts of tax, the ATO will need to devote additional resources to providing information support to the affected groups in the form of an educational campaign. This may consist of advertising, educational pamphlets, mailouts and information in remitter books. These costs are expected to be absorbed within the ATOs annual budget.

Policy objective: To provide stronger incentives for people to work and save.

Increasing Family Tax Assistance

Amends the Income Tax Rates Act 1986 by increasing the Family Tax Assistance tax-free thresholds.

Date of effect: The increased thresholds will apply to assessments for the 2000-2001 year of income and later years of income.

Proposal announced: The Government announced the proposal in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System on 13 August 1998.

Financial impact: This measure is an integral part of the larger family package. The precise revenue cost will depend on the way in which primary carers choose to obtain the benefit. The total budgetary cost of the family package is $2.3 billion in 2000-2001, $2.4 billion in 2001-2002 and $2.6 billion in 2002-2003.

Compliance cost impact: See Regulation Impact Statement.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

•

The measure will impact mainly on eligible employee taxpayers who wish to claim the increased Family Tax Assistance through reduced tax instalment deductions (TIDs), because they will have to lodge a revised employment declaration (ED) with their employers. Employers will also be affected by the new measure because employees will be lodging new EDs.

•

For the 2000-2001 year of income there will be a one-off compliance cost associated with implementing the proposal. Compliance costs will be incurred relative to the extent that employees complete new EDs following the introduction of the new scheme.

•

The measure modifies an existing regime and will have only a minimal effect on the ATOs recurrent costs. There will be some minor transitional costs to the ATO. Computer systems will need to be amended to encompass the change, as will educational booklets such as TaxPack.

Policy objective: To increase the amount of assistance provided to families by increasing the level of Family Tax Assistance provided through the tax system.

Chapter 1 - Reducing personal income tax rates

Overview

1.1 Schedule 1 to the Bill will amend the Income Tax Rates Act 1986 (the ITRA) to provide for a significant reduction in personal income tax rates. Schedule 2 provides for consequential amendments to other Acts affected by the changes in personal tax rates.

Summary of the amendments

Purpose of the amendments

1.2 The amendments will give effect to the Governments announcement in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System, released on 13 August 1998, to cut personal income tax rates for about 95% of all taxpayers.

Date of effect

1.3 Clause 2 of the Bill provides that this Act commences, or is taken to have commenced, after all of the GST-related Acts have received the Royal Assent. This reflects the integration of the measures that will give effect to the Governments plan for a new tax system.

1.4 The amendments in Schedule 1 will generally apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

Background to the legislation

Personal Tax Cuts

1.5 The Government, in its tax reform policy document, stated its intention to provide for personal income tax cuts. The Governments tax reform plan includes changes to the marginal tax rates and an increase in the tax-free threshold.

Explanation of the amendments

Resident taxpayers

1.6 Item 14 of Schedule 1 replaces the table in clause 1 of Part I of Schedule 7 of the ITRA, which sets out the rates of tax on the taxable income of a resident taxpayer. The new rates will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

1.7 The following table sets out the current rates of tax for resident taxpayers and the proposed rates of tax that will apply from 1 July 2000:

1.8 The key features of the new tax scale are:

•

an 11% increase in the tax-free threshold to $6,000. This will help all taxpayers, but is of relatively greater benefit to low income taxpayers;

•

a reduction in the lowest marginal tax rate from 20% to 17%. This also helps all taxpayers, but is of particular benefit to low income taxpayers;

•

large tax cuts for middle income earners with income between $30,000 and $50,000 a year through the replacement of the 34% and 43% rates with a 30% rate. This will mean around 81% of taxpayers will have a top tax rate of 30% or less, compared to around 30% of taxpayers currently; and

•

a $25,000 increase (to $75,000) in the level of income at which the top marginal rate of 47% takes effect. This will ensure that average earners do not drift into paying the top marginal tax rate, which would otherwise have occurred early in the next century.

Non-resident taxpayers

1.9 As a result of the proposed reductions in personal income tax for residents, it will be necessary to make consequential amendments to the rates of tax payable by non-residents.

1.10 Item 15 of Schedule 1 replaces the table in clause 1 of Part II of Schedule 7 of the ITRA, which sets out the rates of tax on the taxable income of a non-resident taxpayer. The new rates will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

1.11 The following table sets out the current rates of tax on the taxable income of a non-resident taxpayer and the proposed rates of tax that will apply from 1 July 2000:

Landcare and Water Facility Tax Offset

1.12 Division 388 of the Income Tax Assessment Act 1997 provides for a landcare and water facility tax offset. The offset is available to taxpayers whose taxable income for the income year would have been $20,700 or less. The offset is calculated on the basis of 34% of expenditure incurred. The threshold and offset rate are based on the current income tax rates scale.

1.13 To be consistent with the proposed tax rates and threshold that will apply from 1 July 2000, Schedule 2 makes consequential amendments to paragraph 388-55(2)(a) (substituting $20,000 for $20,700) and paragraphs 388-60(1)(a) and (b) (substituting 30% for 34%). [Schedule 2, items 2 and 3]

Consequential Amendments of other Acts

1.14 Items 16 and 17 of Schedule 1 make consequential amendments to Schedules 8 and 10 of the ITRA by omitting $5,400 (wherever occurring) and substituting $6,000, and omitting $20,700 (wherever occurring) and substituting $20,000.

Regulation Impact Statement

Policy Objective

Specification of policy objective

1.15 The policy objective is to provide stronger incentives for people to work and save.

Background

1.16 The Government announced in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System, its intention to cut personal income tax rates and increase the tax-free threshold.

Identification of implementation options

1.17 The only feasible implementation option is to alter the current personal income tax rates and brackets/thresholds in the Income Tax Rates Act 1986 to reflect the desired changes. The new rates will provide that individual taxpayers pay less personal tax.

1.18 The new tax rates will require 710,000 PAYE remitters to familiarise themselves with the new scales and calculate the amount of tax they need to remit to the Australian Taxation Office (ATO).

1.19 The new rates are to operate from 1 July 2000. To ensure that remitters are able to determine the correct amounts of tax, an educational campaign will be conducted by the ATO. This may consist of advertising, educational pamphlets, mailouts and information in remitter books.

1.20 Remitters who do not comply with the payment arrangements using the new rates will be penalised under the existing penalty regime.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

1.21 The proposal will affect the following groups:

•

Employers

•

Professional advisers, eg. tax advisers, computer programmers

•

Australian Taxation Office

•

Contractors who process payroll (Payroll businesses)

•

Electronic payroll stockists

•

Electronic payroll producers.

Assessment of costs

Compliance costs

Initial compliance costs

1.22 Generally, all impact groups will need to familiarise themselves with the change in rates. This may require those in the various impact groups taking 5 or 10 minutes to read information provided to them by the ATO.

1.23 Employers, payers, payroll businesses and professional advisers will need to update their technology and/or methodology for calculating tax payable. Approximately 76% of employers use a manual payroll system, with the remainder using computerised or external systems. Small employers and payers are more likely to use paper-based records and, hence, may face higher implementation costs. However, recalculating tax payable manually is unlikely to require additional staff or to require employers to obtain professional advice from tax agents.

1.24 Many computerised systems are designed to accommodate changes in tax rates with minimal instruction. Most would require around 15 minutes of a computer programmers time to incorporate this measure.

1.25 Electronic payroll stockists and producers will also need to alter the tax rates in their programs, and should face similar compliance costs to employers with computerised systems. The number of payroll producers is not known precisely; the ATO estimates that it is unlikely to exceed 18,000.

1.26 The combined total cost of compliance to employers, payroll businesses and professional advisers of this proposal is estimated to be $4 million (assuming labour costs of $23.90 per hour for a computer programmer and $16.30 for other payroll staff).

1.27 Under the PAYE system, employers with a total PAYE remittance of less than $25,000 per annum may remit PAYE deductions quarterly. Other employers remit PAYE payments at least monthly. Those employers who are currently paying monthly and remit between $25,000 and $29,300 in PAYE deductions would become eligible to remit quarterly when the proposed personal income tax cuts are implemented. The ATO estimates that this change will affect 13,500 PAYE remitters, and reduce compliance costs by approximately $1 million per annum. This equates to 8 less remittances per annum at a saving of between $7 and $8 per remittance.

Recurrent compliance costs

1.28 Existing PAYE remittance arrangements benefit employers by allowing them to delay the payment of PAYE deductions to the ATO. The proposed changes to personal income tax rates reduce the amount of tax deducted by employers for remittance to the ATO. Some employers will benefit from the measure because, when the personal income tax rates are reduced, they will be able to remit quarterly, rather than monthly. However, other employers will be disadvantaged as the reduced deductions amount to a reduced cash flow. Assuming an interest rate of 7% in 2000-2001, the proposed changes are estimated to reduce the cash flow benefit of the remittance arrangements to employers by $38 million per annum (or10%). The proposed extension of the remittance dates for monthly and quarterly PAYE remitters from the 7th day of the month to the 21st, announced in the Governments tax reform policy document, will partly offset this cost.

Administrative costs

Initial cost - internal

1.29 The ATO will need to devote additional resources in providing information support to the impact groups. One off expenses include:

•

advertising the new rates;

•

changing the TaxPack, other booklets, pamphlets and educational material;

•

updating Taxation Rulings; and

•

educating staff.

Internal computer systems will also need to be updated to ensure correct calculations of tax payable on individual assessments.

1.30 These costs will be absorbed within the ATOs annual budget. Overall resource costs are estimated to be:

Recurrent costs - Internal

1.31 All costs will be initial costs.

Government revenue

1.32 The Government estimates the cost to the revenue of the proposal to be $13.1 billion in 2000-2001; $13.5 billion in 2001-2002; and $14.5 billion in 2002-2003.

Economic Costs

1.33 There are not considered to be any economic costs involved.

Consultation

1.34 The Government announced the proposed measure in its tax reform policy document prior to the election period.

Conclusion

1.35 Implementation of this measure will increase the net pay of individual taxpayers by providing significant cuts in personal income tax rates. It is intended to provide incentives for people to undertake extra work or seek advancement, undertake additional education or training, and increase personal savings.

1.36 The option put forward will require employers, payers and payroll businesses to familiarise themselves with the change in rates. This will involve updating computer programs and/or the methodology used to calculate tax payable. The decreased tax rates will enable more small businesses to remit on a quarterly basis, reducing compliance costs.

1.37 The ATO and Treasury will monitor this measure, as part of the whole taxation system, on a continuing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations, and other taxpayer bodies.

Chapter 2 - Increasing family tax assistance

Overview

2.1 Schedule 1 to the Bill will amend the Income Tax Rates Act 1986 (the ITRA) by further increasing the tax-free threshold for certain taxpayers with dependent children under the Family Tax Assistance (FTA) initiative.

Summary of the amendments

Purpose of the amendments

2.2 The amendments will give effect to the Governments announcement in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System, to provide extra assistance to Australian families.

Date of effect

2.3 Clause 2 of the Bill provides that this Act commences, or is taken to have commenced, after all of the GST-related Acts have received the Royal Assent. This reflects the integration of the measures that will give effect to the Governments plan for a new tax system.

2.4 The amendments in Schedule 1 giving effect to the proposed increases in FTA will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

Background to the legislation

Increasing family tax assistance

2.5 The Government, in its tax reform policy document, released on 13 August 1998, stated its intention to introduce substantial reforms to the various forms of assistance provided to families through the income tax and social security systems.

2.6 The Governments tax reform plan includes providing extra assistance to families by extending the Family Tax Initiative (FTI), introduced by the Government in January 1997. The tax reform policy document also foreshadowed changes to the current delivery of assistance to families under a simplified set of family assistance programs to be delivered by the new Family Assistance Office.

2.7 The FTI is currently available in the form of the Family Tax Payment (FTP) and the FTA. The FTP is administered by the Department of Family and Community Services (formerly the Department of Social Security) and the FTA is administered by the Australian Taxation Office.

2.8 FTA takes the form of increases in the tax-free threshold for certain taxpayers with dependent children with consequent reductions in their tax liability. The proposed amendments deal with increases to the FTA tax-free thresholds. Eligibility for and delivery of the FTA will be subject to the future changes to and simplification of family assistance programs.

Explanation of the amendments

2.9 The FTA currently incorporates two forms of assistance. Part A generally provides for an increase in the standard tax-free threshold of $1,000 for each dependent child. This benefit applies where the family income is less than $70,000 (increasing by $3,000 for each dependent child after the first).

2.10 Part B directs additional assistance to single income families (including sole parents) with at least one dependent child under the age of 5 years. Part B generally provides for an additional increase in the tax-free threshold for one parent of $2,500. This benefit is subject to an income ceiling of $65,000 (which is increased by $3,000 for each additional dependent child, regardless of whether they are under the age of 5 years). A further requirement is that, if the taxpayer had a spouse on the last day of the income year, the spouses taxable income for that year must be less than spouse income ceiling ($4,573 in 1997-1998).

2.11 Where a child is a dependant of a person for only part of a year of income, FTA benefits are pro rated according to the proportion of the number of days that the child was a dependant during the year.

2.12 The proposed amendments will increase the FTA tax-free thresholds as follows:

•

FTA Part A - the current increase in the tax-free threshold provided for in subsections 20C(2) and 20S(3) of the ITRA will be increased from $1,000 to $2,000 [Schedule 1, items 5 and 12] ; and

•

FTA Part B - the current increase in the tax-free threshold provided for in subsections 20D(2) and 20T(3) will be increased from $2,500 to $5,000. [Schedule 1, items 10 and 13]

2.13 The effect of the proposed amendments is that from 1 July 2000 all single income families (including sole parents) with a child under 5 years will have an effective tax-free threshold of $13,000. This is made up of the new $6,000 tax-free threshold plus $2,000 (FTA Part A) for one dependent child and the further $5,000 (FTA Part B) provided to single income families with young children.

2.14 The proposed amendments, which double the existing tax-free threshold increases, together with proposed amendments to the income tax rates outlined in Chapter 1, mean that families will receive:

•

an increase in assistance of $140 a year (a 70% increase) for each dependent child; and

•

an extra $350 a year (a 70% increase) for single income families with a child aged under 5 years.

2.15 The table below shows the increase in assistance for different types of families from 1 July 2000 and the total increase in assistance that will have been provided since January 1997 when the Government introduced the FTI.

2.16 Item 11 of Schedule 1 replaces the existing table of tax rates for FTA in subsection 20E(2) of the ITRA, to reflect the lower income tax rates that will be introduced from 1 July 2000. The tax rate for taxable income that exceeds $20,000 but does not exceed the adjusted tax-free threshold (defined in subsection 20E(3) of the ITRA) will be reduced from 14% to 13%. This will ensure that taxpayers only have to pay tax on the amount of their taxable income that exceeds $20,000 but does not exceed the adjusted tax-free threshold on the basis of the difference between the lowest marginal tax rate (17%) and the next marginal tax rate (30%). This is consistent with the way FTA currently operates.

2.17 Items 2 and 7 of Schedule 1 amend subsections 20C(1) and 20D(1) respectively to make it clear that the increase in the tax-free threshold for the 1996-97 year of income is based on the schedule of tax rates that was in force immediately before the commencement of the new schedule of tax rates that will come into effect from 1 July 2000.

2.18 Items 1, 4, 6 and 9 of Schedule 1 replace the word taxpayers in paragraphs 20C(1)(b) and (2)(b) and paragraphs 20D(1)(b) and (2)(b) with the word taxpayers. These are simply technical corrections.

2.19 Items 3 & 8 make consequential amendments to paragraphs 20C(2)(a) and 20D(2)(a) by omitting 1997-98 and substituting 2000-01.

2.20 Items 16 and 17 of Schedule 1 make consequential amendments to various provisions of the ITRA by omitting $5,400 (wherever occurring), and substituting $6,000 and omitting $20,700 (wherever occurring) and substituting $20,000.

2.21 Item 1 of Schedule 2 makes consequential amendments to subsection 23AF(17E) (definition of tax free threshold increase), subsection 23AG(5B) (definition of tax free threshold increase), paragraph 221YDA(1)(g) and subparagraph 221YDA(2)(a)(iv) of the Income Tax Assessment Act 1936. The amendments to paragraph 221YDA(1)(g) and subparagraph 221YDA(2)(a)(iv) apply for the purposes of working out amounts of provisional tax payable for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(2)]

Regulation Impact Statement Increasing Family Tax Assistance

Policy objective

2.22 The policy objective, as stated by the Government in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System, is to increase the amount of assistance provided to families by increasing the level of FTA provided through the tax system.

Identification of implementation options

2.23 Only one implementation option is considered feasible, based on the current delivery of the FTA. The Government has foreshadowed, in its tax reform policy document, that eligibility for and delivery of the FTA will be subject to reform and simplification of assistance currently provided to families.

2.24 The FTA is currently delivered on assessment at the end of the financial year. Employee taxpayers can also claim FTA during the year, through a reduction in their tax instalment deductions (TIDs), by lodging an employment declaration (ED) with their employer.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

2.25 The groups impacted by the proposal are as follows:

a) individual taxpayers with children

•

Eligible employee taxpayers who wish to claim the increased FTA through reduced TIDs will have to lodge a revised ED with their employers.

•

Under the existing scheme, at 1 July 1998, approximately 15% of eligible employees have elected to receive their FTA benefits by way of reduced TIDs. However, the number of employees who will elect to have reduced TIDs under the new scheme cannot be reliably estimated because it will depend upon the method by which individual primary carers choose to claim the benefit.

b) employers

•

Employers will be affected by the new measure because employees will be lodging new EDs to claim their entitlement to the increased FTA through reduced TIDs. Employers will need to work out the new rate of tax instalments to deduct from their employees salary or wages and remit that amount to the ATO. As with current requirements, employers will have to send in an employees new ED to the ATO within 28 days of receiving it and keep a copy of it themselves for 5 years.

c) the ATO

•

The measure modifies existing arrangements, but will have only a minimal impact on the ATO. Changes will need to be made to both taxpayer and staff educational materials and to computer systems.

Assessment of costs

Compliance costs

2.26 For the 2000-2001 year of income there will be a one-off compliance cost associated with implementing the proposal. There will be no recurrent compliance costs, as the changes will be subsumed within the normal ED process at no additional cost. Compliance costs will be incurred relative to the extent that eligible employees complete new EDs following the introduction of the new scheme. The initial compliance cost will consist of:

a) costs of general understanding

There will be initial costs associated with learning the new measure for both individuals and employers. However, as the change is not complex, individuals and employers should not require professional advice or assistance. Initial assistance will be provided by the ATO through educational booklets. Affected individuals may also contact the ATOs enquiries line if they are unsure of the new arrangements.

It is assumed that FTA eligible taxpayers would take approximately five minutes to read educational material and understand the changes. It is also assumed that all group employers (750,000) would have a clerk spend approximately 10 minutes to read and interpret the changes, at an average after-tax cost to an employer of $11/hr.

b) costs of current FTA employees completing a revised ED

It is assumed that all compliance costs are borne by the employer, as employees will complete their forms at work. To the extent that eligible employees will complete new EDs to change their TID arrangements under the new scheme, it is estimated that this will take an average of 25 minutes at an after-tax salary of $11/hr. For each of these taxpayers, a company clerk (at an average of $11/hr after-tax cost to the employer) will spend 15 minutes processing, filing and forwarding the new forms.

c) costs for remaining FTA eligible employees and new employees

Those employees who currently receive FTA upon assessment (75% of the total) will take about five minutes to understand the proposal. They will not bear any compliance costs in addition to these, as the method of calculation will be the same as it is currently. Upon preparing their tax returns, these taxpayers will simply determine their entitlement under the new rates rather than the old.

New employees after 1 July 2000 will also not bear any additional compliance costs if they claim the FTA through reduced TIDs. This is because a new employee is currently required to complete an ED form upon commencing employment and, thus no further work will be required.

Administrative costs

2.27 The measure modifies an existing regime and will have only a minimal effect on the ATOs recurrent costs. There will be some minor transitional costs to the ATO. Computer systems will need to be amended to encompass the change, as will educational booklets such as TaxPack.

2.28 The modification of computer systems and educational booklets such as TaxPack will not impose significant administration costs on the ATO. These costs will be absorbed within the ATOs annual budget.

Government revenue

2.29 This measure is an integral part of the larger family package. The precise revenue cost will depend on the way in which primary carers choose to obtain the benefit. The total budgetary cost of the family package is $2.3 billion in 2000-2001, $2.4 billion in 2001-2002 and $2.6 billion in 2002-2003.

Assessment of benefits

2.30 Taxpayers who wish to obtain FTA through the tax system will be able to choose whether they receive the benefit at the end of the year on assessment or throughout the year as a reduction in their TIDs.

Conclusion

2.31 Implementation of this measure will increase the assistance provided to families from the Government. Eligibility for and delivery of FTA will be subject to the reform and simplification of family assistance programs foreshadowed by the Government in its tax reform policy document. The Government is currently consulting with community organisations on the details of the new structure.

2.32 The ATO and Treasury will monitor this measure, as part of the whole taxation system, on a continuing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and business associations and other taxpayer bodies.