Replacement Supplementary Explanation Memorandum
Amendments and requests for amendment to be moved on behalf of the Government (Circulated by authority of the Treasurer, the Hon. Peter Costello)Replacement Supplementary Explanation Memorandum
General outline and financial impact
The Income Tax Rates Amendment (Family Tax Initiative) Bill 1996 (the Bill) will provide for family tax assistance (FTA), which is the tax part of the family tax initiative. These measures will amend the Bill as follows:
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- to permit a taxpayer, when claiming family tax assistance, to obtain and quote, on a voluntary basis, the tax file number (TFN) of his or her spouse in the taxpayer's tax return;
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- to include in taxable income for the purposes of FTA, the income of a taxpayer's spouse where the spouse is under a legal disability and has no income other than a share of the net income of a trust;
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- to require a trustee to treat a beneficiary's share of the net income of a trust as the beneficiary's taxable income, for the purposes of determining whether a trustee, who is assessable on the share of trust income of a beneficiary under a legal disability, is entitled to FTA on behalf of the beneficiary; and
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- to make a minor technical correction to the Bill.
Date of effect: 1 January 1997.
Proposal announced: The family tax initiative was first announced by the Prime Minister on 18 February 1996. The implementation of the proposal was announced by the Treasurer in the 1996-97 Budget on 20 August 1996. These amendments have not be previously announced.
Financial impact: The financial impact of the requests and the amendments is expected to be negligible.
Compliance cost impact: For each of these measures, the compliance cost impact is expected to be minimal.
The measure in relation to spouses' TFNs is voluntary, but a taxpayer who chooses to quote his or her spouse's TFN will have to comply with administrative arrangements put in place to ensure that the spouse's consent is sought before his or her TFN is quoted.
The trustee measures will reduce compliance costs for trustees, since trustees will not need to calculate the beneficiary's taxable income.
A taxpayer, whose spouse is under a legal disability and has no income other than a share of the net income of a trust, will need to ascertain the amount of that share in order to calculate the taxpayer's FTA entitlement.
Explanation of requests for amendment
The new definition will apply to a beneficiary of a trust estate, if the beneficiary is under a legal disability and his or her only income is a share of the income of a trust estate. A person is under a legal disability if the person is a minor, bankrupt or insane.
Normally, if a beneficiary is in this category, the beneficiary is treated as having no taxable income, and the income is taxed in the hands of the trustee as though the trustee were an individual.
However, for the purposes of FTA, the beneficiary's share of trust income will be included in the beneficiary's taxable income. This will mean that taxpayers whose spouses are beneficiaries in this category will be required to take into account their spouses shares of trust income when working out their eligibility for FTA.
The definition will not apply if proposed section 20J applies, that is, if the taxpayer is a trustee for a beneficiary who is under a legal disability (see request 2).
This change is necessary to ensure the FTA income tests work properly. The payment of tax by trustees on behalf of legally disabled beneficiaries should not result in that income being excluded from the FTA income tests.
Request 2 will insert a new subsection (2) into section 20J. Section 20J applies where a trustee is liable to tax in respect of a beneficiary's share in the net income of a trust, because the beneficiary is under a legal disability. If the beneficiary qualifies for FTA, the trustee's liability will be reduced by the amount of the beneficiary's entitlement to FTA. The Bill presently requires the trustee to assess the beneficiary's entitlement to FTA by reference to the beneficiary's actual taxable income.
The effect of request 2 will be that the trustee will only have to consider the beneficiary's income from the trust when the trustee is measuring his or her entitlement to FTA on behalf of the beneficiary.
The change is consistent with the existing law, in that a trustee only has to pay tax on the beneficiary's income from the trust, and not on the beneficiary's other income.
Explanation of amendments
There will be a minor technical correction to proposed subparagraph 20P(3)(b)(iii).
The amendment will clarify the operation of paragraph 20P(3)(b). At the moment, subparagraph 20P(3)(b)(iii) refers to people who are not living together at the end of the year of income. It will be amended to make it clear that paragraph 20P(3)(b) is, in fact, intended to be applied to people who are living together at the end of the year of income, but who separate after then.
A new section, section 20V, will be inserted into the Bill.
As more than one family member may claim for a particular child, or a family may claim both through the tax system and from the Department of Social Security, a mechanism is required for data matching, to ensure that only appropriate amounts are claimed.
This can be done most efficiently with TFNs, when the TFNs of both members of the couple are known.
To find out the TFNs of both members of a couple, it is planned to ask taxpayers to provide their spouses' TFNs in their tax returns. This would be on a voluntary basis, and there would be no penalties for taxpayers who did not do so; nevertheless, it is believed that sufficient information will be obtained to be useful in audit activity.
Consequently, an amendment to the existing law is required to allow taxpayers who wish to do so to quote the TFNs of their spouses in their tax returns. Without the amendment, it would be an offence for a taxpayer to ask his or her spouse for the spouse's tax file number, and for the taxpayer to quote the tax file number to the Commissioner, under sections 8WA and 8WB of the Tax Administration Act 1953.
Subsection 20V(1) will specifically permit, but not compel, a spouse to quote his or her TFN to a taxpayer for the purposes of FTA, and subsection (2) will allow, but not compel, a taxpayer to quote his or her spouse's TFN for the purposes of FTA.
Administrative arrangements will be put in place to ensure that the consent of the spouse is sought before his or her TFN is quoted.