Senate

Supplementary Explanatory Memorandum

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

General outline and financial impact

The A New Tax System (Personal Income Tax Cuts) Bill 1998 contains amendments to the Income Tax Rates Act 1986 to provide significant personal income tax cuts announced in the Governments tax reform policy document, Tax Reform: not a new tax, a new tax system.

Following negotiations with the Australian Democrats, the Government has agreed to revise certain aspects of its tax package, including exempting basic food from the GST.

The Government also agreed with the Democrats to reduce the tax cuts for individual taxpayers whose taxable income is more than $50,000 a year.

The amendments being moved by the Government will increase the proposed 40% rate to 42%, and reduce the proposed threshold for the top rate of 47% from $75,000 to $60,000.

These changes are illustrated in the following table:

Date of effect: The proposed amendments do not affect the application date contained in the Bill. The revised rates will 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 revised tax scale on 28 May 1999.

Financial impact: The amendments will reduce the cost to the revenue resulting from the personal tax cuts from $13.1 to $11.99 billion in 2000-2001, $13.5 to $12.33 billion in 2001-2002 and $14.5 to $13.17 billion in 2002-2003.

Compliance cost impact: See Regulation Impact Statement.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

•

The number of employers who will convert from monthly to quarterly remittance of tax instalment deductions will fall from 13,500 to 12,250. Even though the compliance cost savings are slightly lower than the original proposal, the savings are still expected to be approximately $1 million per annum.

•

The cash flow cost to employers is estimated to fall from $38million to $35 million per annum.

•

The overall cost of compliance to employers remains unchanged.

Chapter 1 - Reducing personal income tax rates

Background to the amendments

1.1 The A New Tax System (Personal Income Tax Cuts) Bill 1998 (the Bill) contains amendments to the Income Tax Rates Act 1986 (the ITRA 1986) to provide for the personal income tax cuts that were announced in the Governments tax reform policy document, Tax Reform: not a new tax, a new tax system.

1.2 Following negotiations with the Australian Democrats, the Government has agreed to reduce the tax cuts for taxpayers whose taxable income is more than $50,000 a year, as part of a negotiated package of proposals, including exempting basic food from the GST.

Explanation of amendments

Family Tax Assistance

1.3 Item 11 of Schedule 1 to the Bill proposed to replace the existing table of tax rates for Family Tax Assistance in subsection 20E(2) of the ITRA 1986 as a consequence of the proposed changes to the personal rates of tax for resident taxpayers. Amendment (1) replaces the table in item 11 to reflect the proposed new rates that will apply to income in excess of $50,000.

Resident taxpayers

1.4 The table of tax rates in item 14 of Schedule 1 to the Bill contains the proposed personal rates of tax that would apply to resident taxpayers from 1 July 2000. Amendment (2) replaces that table with the new scale proposed for resident taxpayers. The effect of the amendment is illustrated as follows:

1.5 The tax cuts originally proposed for taxpayers whose taxable income does not exceed $50,000 will not be affected. This ensures that, even under the Government's revised tax reform plan, the top marginal rate of tax for around 81% of individual taxpayers will be no more than 30%. Although the tax cuts for individual taxpayers whose taxable income is more than $50,000 a year will be reduced, the tax cuts for these individuals remain significant.

Non-resident taxpayers

1.6 The table of tax rates in item 15 of Schedule 1 to the Bill contains the proposed personal rates of tax that would apply to non-resident taxpayers from 1 July 2000. Amendment (3) replaces that table with the new scale proposed for non-resident taxpayers. The effect of the amendment is illustrated as follows:

Regulation Impact Statement

1.7 The amendments to the Bill will modify the compliance costs and the revenue estimates outlined in the Regulation Impact Statement which was contained in the Explanatory Memorandum that accompanied the Bill.

Assessment of costs

Compliance costs

Recurrent compliance costs

1.8 It was estimated in paragraph 1.27 of the Regulation Impact Statement that 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 personal income tax cuts were implemented. It was estimated that the change would affect 13,500 PAYE remitters and reduce compliance costs by approximately $1 million per annum.

1.9 Under the revised personal income tax rates, employers who are currently paying monthly and remit between $25,000 and $28,900 in PAYE deductions would become eligible to remit quarterly. It is estimated that this will affect 12,250 PAYE remitters. Even though the compliance cost savings are slightly lower than under the original proposal, the annual compliance cost savings will still be approximately $1 million.

1.10 The revised personal income tax rates will impact on employers cash flow costs. Under the original proposal, the cash flow cost was estimated to be $38 million per annum assuming an interest rate of 7% in the 2000-2001 year of income. Under the revised proposal it is estimated that the cash flow cost to employers will be $35 million per annum.

Government revenue

1.11 The amendments will reduce the cost to the revenue resulting from the personal tax rate cuts from $13.1 to $11.99 billion in 2000-2001, $13.5 to $12.33 billion in 2001-2002 and $14.5 to $13.17 billion in 2002-2003.

Conclusion

1.12 Overall, the cost of compliance to employers remains unchanged under the revised proposal.