House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Indexation of Medicare levy threshold

This Bill will amend the Medicare Levy Act 1986 and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999. This Bill will increase the Medicare levy low income thresholds for individuals, married couples and sole parents. The dependent child/student component of the family threshold will also be increased. It will also increase the Medicare levy surcharge low income threshold. The thresholds will increase in line with increases in the Consumer Price Index. This Bill will also increase the upper level of the shading-in of the Medicare levy for individuals as a result of the increased low income threshold.

Date of effect : The increased Medicare levy and Medicare levy surcharge low income thresholds will apply from the 2000-2001 year of income and later years of income.

Proposal announced : Not previously announced.

Financial impact : The measure will cost the revenue $1 million in 2000-2001, $35 million in 2001-2002 and $20 million in 2002-2003.

Compliance cost impact : Negligible.

Chapter 1 - Indexation of Medicare levy threshold

Outline of chapter

1.1 This Bill will amend the Medicare Levy Act 1986 (MLA 1986) and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 (MLS-FB 1999) 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.

Context of reform

Low income thresholds

1.2 The MLA 1986 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

1.3 A Medicare levy surcharge on taxable income of 1% applies in certain cases where taxpayers do not have private patient hospital cover (sections 8B to 8G of the MLA 1986). A Medicare levy surcharge on reportable fringe benefits of 1% applies in certain cases where taxpayers do not have private patient hospital cover (sections 12 to 16 of the MLS-FB 1999). However, a person who would otherwise be liable for the Medicare levy surcharge is exempt from the surcharge where the total of the person's taxable income and reportable fringe benefits does not exceed the individual low income threshold. Unlike the Medicare levy, there is no shading-out of the exemption above this threshold for Medicare levy surcharge purposes.

Summary of new law

1.4 The measure will amend:

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sections 7 and 8 of the MLA 1986 to raise the low income thresholds for individuals, married couples and sole parents;

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subsection 7(2) of the MLA 1986 to raise the exemption shade-out threshold for individuals;

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sections 8D and 8G of the MLA 1986 to raise the threshold used to exempt a family member with low income from a liability for the Medicare levy surcharge on taxable income; and

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paragraphs 15(1)(c) and 16(2)(c) of the MLS-FB 1999 to raise the threshold used to exempt a family member with low income from a liability for the Medicare levy surcharge on reportable fringe benefits.

Detailed explanation of new law

Medicare levy low income thresholds

1.5 This Bill proposes to increase the low income thresholds for individuals, married couples and certain sole parents for the 2000-2001 financial year and subsequent financial years. The increases are in line with movements in the Consumer Price Index.

1.6 Section 7 of the MLA 1986 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 above the exemption threshold.

1.7 The level of the individual low income threshold (subsections 7(1) and 7(2) of the MLA 1986) is to be increased from $13,550 to $13,807. [Schedule 1, items 3 and 4]

1.8 Section 8 of the MLA 1986 exempts from the Medicare levy a person, whose family income is below the family low income threshold, and either:

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the person is married or in a defacto relationship on the last day of the year of income; or

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the person would have been 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 had the consequential amendments not been made in respect of the introduction of the family tax benefit.

1.9 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 but qualified to use family income in paragraph 1.8, that amount will be the persons taxable income.

1.10 The level of the family income threshold in subsections 8(5) and 8(6) of the MLA 1986 is increased from $22,865 to $23,299 [Schedule 1, items 6 and 8] . The threshold will be increased by a further $2,140 instead of the previous figure of $2,100 for each dependent child or student [Schedule 1, item 7] .

Exemption shade-out thresholds

1.11 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 the Medicare levy otherwise payable is limited to 20% of the excess over the exemption threshold that is relevant to the particular person.

1.12 The exemption shade-out threshold for individuals contained in subsection 7(2) of the MLA 1986 is increased from $14,648 to $14,926. [Schedule 1, item 5]

1.13 There is no shade-out threshold 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 20 % 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 $23,300 to $25,188 (family with no dependent children). This range is increased for dependants as indicated in Table 1.1.

1.14 The increased low income exemption thresholds and exemption shading-out ranges for the 2000-2001 financial year and subsequent financial years will be as shown in Table 1.1.

Medicare levy surcharge low income exemption threshold

1.15 References to the individual low income thresholds of $13,550 in the Medicare levy surcharge provisions (in sections 8D and 8G of the MLA 1986) in respect of the Medicare levy surcharge on taxable income, are also to be increased to $13,807 in accordance with the changes for individual taxpayers referred to in Table 1.1. [Schedule 1, items 9 to 12]

1.16 References to the individual low income thresholds of $13,550 in the Medicare levy surcharge provisions (in sections 15 and 16 of the MLS-FB 1999 in respect of the Medicare levy surcharge on reportable fringe benefits, are also to be increased to $13,807. [Schedule 1, item 1]

Application and transitional provisions

1.17 All the amendments are to apply from the 2000-2001 year of income and later years of income. [Schedule 1, items 2 and 13]