House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. P.J. Keating, M.P.)

MAIN FEATURES

The main features of the Bills are as follows:

Income Tax Rates Bill 1986

Personal tax rates (Clauses 5-15)

In declaring the rates of tax payable for the 1986-87 financial year and the 1987-88 and subsequent financial years by individuals, and by trustees generally, the Bill will give effect to the proposal, announced in the 19 September 1985 Statement on Reform of the Australian Taxation System, as modified by the 1986-87 Budget announcement, to reform the personal income tax rate scale in two stages. The first stage of the process proposed by this Bill will, with effect from 1 December 1986 -

•

increase the tax-free threshold from $4,595 to $5,100 and the first rate step threshold from $12,500 to $12,600;

•

reduce the 25 per cent marginal rate applying in an income range to $12,600 ($12,500 in 1985-86) to 24 per cent;

•

reduce the 30 per cent marginal rate in the income range $12,601-$19,500 to 29 per cent;

•

reduce the 46 per cent marginal rate in the income range $19,501-$28,000 to 43 per cent;

•

reduce the 48 per cent marginal rate in the income range $28,001-$35,000 to 46 per cent; and

•

reduce the 60 per cent marginal rate for income over $35,000 to 55 per cent.

The second stage of the process will, with effect from 1 July 1987 -

•

reduce the 43 per cent and 46 per cent marginal rates to 40 per cent; and

•

reduce the 55 per cent marginal rate to 49 per cent.

A composite rate scale will apply for the 1986-87 financial year. That scale will comprise a weighted average of five-twelfths of the present rate scale (applicable from 1 July 1986 to 30 November 1986) and seven-twelfths of the new rate scale that is to apply from 1 December 1986 to 30 June 1987.

Consequential on the changes to be made to the personal income tax rate scale, this Bill will also -

•

reduce the rate of tax on the first $19,500 of taxable income of a non-resident individual from 30 per cent to 29.42 per cent for 1986-87 and 29 per cent for 1987- 88 and subsequent years, and apply the proposed reduced marginal rates to taxable income exceeding $19,500 (Schedules 1 and 7);

•

reduce the rate of further tax on uncontrolled partnership income assessed under section 94 of the Income Tax Assessment Act 1936 ("the Assessment Act") from 50 per cent to 49 per cent for 1987-88 and subsequent years (clauses 7 and 12);

•

reduce the rate of tax on income assessed to a trustee under section 99A of the Assessment Act from 60 per cent to 57.08 per cent for 1986-87 and 49 per cent for 1987-88 and subsequent years (clauses 7 and 12); and

•

reduce the maximum rate of tax on the unearned income of all minors subject to the provisions of Division 6AA of Part III of the Assessment Act from 60 per cent to 57.08 per cent for 1986-87 and, for 1987-88 and subsequent years, apply the maximum personal rate of 49 per cent to all such income, subject to shading-in arrangements on relevant income above $416 (clauses 8, 10, 13 and 15 and Schedules 5, 6, 11 and 12).

Company, etc tax rates (Clauses 21-27)

The rates of tax payable for the 1986-87 financial year by companies, by registered organisations, and by trustees of prescribed unit trusts, ineligible approved deposit funds and superannuation funds, will be declared by this Bill.

The rates for companies, registered organisations and prescribed unit trusts for 1986-87 will be the same as for 1985-86 (clauses 23-25). The Bill will, however, give effect to various rate changes for superannuation funds and ineligible approved deposit funds consequential on the changes to be made to the personal income tax rate scale. In that respect, this Bill will -

•

reduce the rate of tax payable by a trustee of a superannuation fund assessed under section 121CC of the Assessment Act from 30 per cent to 24.42 per cent (clause 26);

•

reduce the rate of tax payable by a trustee of a superannuation fund assessed under section 121DA of the Assessment Act from 60 per cent to 57.08 per cent (clause 26);

•

reduce the rate of tax payable by a trustee of a superannuation fund assessed under section 121DAB of the Assessment Act from 46 per cent to 44.25 per cent (clause 26); and

•

reduce the rate of tax payable by a trustee of an ineligible approved deposit fund assessed under section 121DAA of the Assessment Act from 46 per cent to 44.25 per cent (clause 27).

Pro-rating of the tax-free threshold (Clauses 16 to 20)

The Bill will also give effect to the proposal, announced in the 19 September 1985 Statement on Reform of the Australian Taxation System, to allow the tax-free threshold only on a pro-rata basis to certain taxpayers. With effect from the 1986-87 financial year, pro-rating of the threshold will apply in a year of income in which a taxpayer first ceases a course of full-time education or becomes, or ceases to be, a resident of Australia.

In the year of income in which a taxpayer first ceases a course of full-time education, the amount of threshold available to the taxpayer will be the sum of -

(a)

the amount calculated by multiplying the number of months in the year of income from and including the month in which the taxpayer first ceased full-time education, being months during which the taxpayer was also a resident of Australia, by the monthly equivalent of the tax-free threshold ($408 for 1986-87 and $425 for 1987-88 and subsequent years); and

(b)

the lesser of -

(i)

the amount of the taxpayer's assessable income, less related deductions, for the year of income that relates to the period before ceasing full-time education; or

(ii)

the threshold applicable to the period before ceasing education (i.e. generally, the annual tax-free threshold less the amount calculated under (a) above).

Tax at the rate of 24.42 per cent in 1986-87 and 24 per cent in subsequent years will be payable on income in the range from the reduced amount of threshold for a taxpayer up to the top of the first rate step ($12,500 in 1986-87 and $12,600 in subsequent years).

The Bill will also modify the operation of the residency arrangements for rating purposes such that the full tax-free threshold may not be available to a taxpayer who becomes, or ceases to be, a resident of Australia during 1986-87 or a subsequent year of income.

The threshold available in the year of income in which the taxpayer becomes a resident will be calculated on a pro-rata basis from and including the month of becoming a resident. Where a taxpayer becomes a resident in a year of income and subsequently ceases full-time education in that year, the threshold will be calculated from and including the month in which full-time education ceased.

For a taxpayer who ceases to be a resident in a year of income, the threshold will be allowed on a pro-rata basis up to and including the month in which the taxpayer ceases to be a resident. Where a taxpayer ceases full-time education in a year of income and, in the same year of income, subsequently ceases to be a resident, the threshold will be calculated from and including the month of ceasing full-time education up to and including the month the taxpayer leaves Australia.

Unlike the situation where a resident ceases full-time education, there will be no additional threshold available as a consequence of the derivation of income during a period in the year when the taxpayer was a non-resident.

The existing operation of the law that confers the benefit of the full tax-free threshold on non-residents receiving Australian social security or repatriation pensions, allowances or benefits that are subject to Australian tax will be maintained. In other words, such taxpayers will not be subject to the pro-rating arrangements where they are residents for only part of the year.

Income Tax Bill 1986

The rates of tax payable for 1986-87 and, until Parliament otherwise provides, for 1987-88, by -

•

individuals and trustees generally;

•

companies;

•

registered organisations; and

•

trustees of prescribed unit trusts, superannuation funds and certain other trusts,

as proposed by the Income Tax Rates Bill 1986 (see earlier notes), will be formally imposed by this Bill. This Bill will also formally impose provisional tax for the 1986-87 year of income and authorise the collection of instalments of tax payable by companies and prescribed unit trusts on income of the 1986-87 year of income.

Taxation Laws (Miscellaneous Provisions) Bill 1986

This Bill will amend the following Acts -

•

Income Tax Assessment Act 1936;

•

Income Tax (Bearer Debentures) Act 1971;

•

Income Tax (Mining Withholding Tax) Act 1979;

•

Income Tax (Rates) Act 1982;

•

Trust Recoupment Tax Act 1985;

•

Trust Recoupment Tax Assessment Act 1985,

to make various changes to rates of tax and rebates of tax mainly as a consequence of changes to the personal rate scales that are to apply from 1 December 1986 and from 1 July 1987.

Home loan interest, medical expense and short-term life assurance policy rebates (Clauses 3 and 4, and Schedule)

The level of the rebates of tax available for net medical expenses in excess of $1,000, for home loan interest payments for first home buyers and for assessable proceeds of certain policies issued by life assurance companies and friendly societies, will be adjusted by this Bill to 29.42 per cent in 1986-87 and 29 per cent in 1987-88 and subsequent years.

Rebate in respect of certain pensions, etc. (Clauses 3 and 4, and Schedule)

The Bill will give effect to the Budget proposal to increase the income level at which the existing rebate of tax of $250 for taxpayers in receipt of Australian social security or repatriation pensions that are taxable in Australia begins to shade-out. The increase - from $5,595 to $5,914 in 1986-87 and to $6,142 in subsequent years - reflects the effect of the proposed income tax rate scale that is to apply from 1 December 1986. The maximum rebate will continue to shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of the above mentioned new income levels. No rebate will thus be available at taxable incomes in excess of $7,913 in 1986- 87 and $8,141 in subsequent years.

This Bill will also give effect to the Budget proposal to increase for 1986-87 the maximum rebates of tax, and the income levels above which the rebates shade-out, for taxpayers in receipt of social security unemployment, sickness or special benefits. For married (including de facto married) taxpayers the maximum rebate will be increased from $220 to $280 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $9,436 ($8,795 in 1985- 86). For other taxpayers the maximum rebate will increase from $170 to $190 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $5,669 ($5,275 in 1985-86). No rebate will be available at taxable incomes in excess of $11,675 for married taxpayers and $7,188 for others.

In addition, the Bill will extend this rebate to recipients of payments under the Commonwealth's Tertiary Education Assistance Scheme (TEAS) and the Adult Secondary Education Assistance Scheme (ASEAS) from the beginning of the 1986-87 income year. This follows as a consequence of the removal, from 1 January 1986, of the exemption from income tax that previously applied to those payments.

Rebate of tax in respect of certain employment termination payments (Clauses 3 and 4, and Schedule)

The provisions for calculating the amount of any rebate to be allowed where certain payments in consequence of a taxpayer's termination of employment are included in the taxpayer's assessable income, are to be amended by this Bill to reflect the changes proposed to the income tax rate scale for 1986-87 and 1987-88 and subsequent years. The post-June 1983 component of a lump sum superannuation or kindred termination payment is subject to a maximum rate of 30 per cent and, where the taxpayer is aged 55 or more, the first $55,000 is taxed at a maximum rate of 15 per cent. Where the tax that would otherwise be payable at normal rates exceeds the tax at these maximum rates, section 160AA of the Assessment Act operates to allow an offsetting rebate of tax. Similarly the section limits to 30 per cent the rate of tax payable in respect of lump sum employment termination payments made in lieu of accrued annual leave, and/or long service leave entitlements accrued after 15 August 1978.

The proposed amendments will ensure that, where appropriate, the new marginal rates of tax for both resident and non-resident taxpayers below the 30 per cent maximum rate that would otherwise prevail for taxing the fully assessable termination payments, are applied in the calculation of a taxpayer's rebate entitlement. In this regard, the relevant new rates to be applied in the rebate calculation are, as appropriate, 24.42 per cent, 26.5 per cent and 29.42 per cent for 1986-87 and 24 per cent and 29 per cent for 1987-88 and subsequent financial years.

Mining withholding payments (Clauses 3, 4 and 5, and Schedule)

The rate of tax payable in respect of mining payments to Aboriginal councils is to be reduced from 6 per cent to 5.8 per cent for payments made on or after 1 December 1986. The rate to be imposed from 1 December 1986 represents the rate of 29 per cent that is to apply in the personal rate scale from that date applied to one-fifth of the gross payments.

Bearer debenture interest (Clause 3 and Schedule)

Under section 126 of the Income Tax Assessment Act 1936 the present rate of tax payable on interest paid by a company on bearer debentures, where the names and addresses of the holders of the debentures are not furnished to the Commissioner of Taxation, is equivalent to the maximum rate in the personal rate scale - now 60 per cent. In line with the reduction proposed in that rate, the rate of tax payable under section 126 is to be changed to -

•

55 per cent for interest paid or credited on or after 1 December 1986 and before 1 July 1987; and

•

49 per cent for interest paid or credited on or after 1 July 1987.

Rates of tax (Clauses 3 and 6, and Schedule)

Reflecting the proposal to legislate for an Income Tax Rates Act 1986 to declare rates of tax for the 1986-87 and subsequent financial years, consequential drafting amendments will also be made to the Income Tax (Rates) Act 1982 to ensure that the various rates declared by that Act have no application beyond the end of the 1985-86 income year.

Trust recoupment tax (Clauses 3, 7 and 8, and Schedule)

Changes are also proposed to the Trust Recoupment Tax Act 1985 to apply a rate of 57.08 per cent on a primary or secondary taxable amount for the 1986-87 financial year, and a rate of 49 per cent for the 1987-88 and subsequent years in lieu of the existing 60 per cent rate. These changes are also in line with the proposed reduction in the maximum personal marginal rate, and the rate to apply to income assessed to a trustee under section 99A of the Income Tax Assessment Act 1936. An amendment of the Trust Recoupment Tax Assessment Act 1985 proposes to change the multiplier in sub-section 6(3) of that Act which is used for calculating a secondary taxable amount. The new multipliers for 1986-87 and 1987-88 and subsequent years reflect the rate of trust recoupment tax that will be payable in the relevant years on primary taxable amounts.

Medicare Levy Bill 1986

The Medicare levy will, by this Bill, be payable on taxable incomes for 1986-87 and, until the Parliament otherwise provides, for 1987-88. The levy arrangements contained in the Bill will -

•

give effect to the Budget announcement to increase the basic rate of levy from 1 per cent to 1.25 per cent of the taxable income of an individual or trustee with effect from 1 December 1986, by declaring and imposing a composite rate of 1.145 per cent for 1986-87 and a rate of 1.25 per cent for 1987-88 (clause 6);

•

ensure that no levy will be payable by -

• .

a person whose taxable income does not exceed $8,030 (clause 7); or

• .

a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $13,370, or by a sole parent where his or her taxable income does not exceed $13,370; for each dependent child or student maintained by a married couple or sole parent, the threshold for payment of the levy is to be increased by $1,660 (clause 8); and

•

provide relief from levy for-

• .

veterans, war widows, Defence Force personnel, holders on a non-income tested basis of pensioner health benefits cards, health benefits cards and health care cards, and other "prescribed persons" under existing provisions of Part VIIB of the Income Tax Assessment Act 1936, who are exempt from the levy for part of a year, or who are required to pay levy because they have dependants eligible for Medicare benefits (clause 9).

The Bill does not place a limit on the amount of levy payable by an individual or a married couple.

The provisions of Part VIIB of the Income Tax Assessment Act 1936 concerning, amongst other things, liability to the levy, exemptions for certain trustees and prescribed persons and the definition of prescribed persons, remain unchanged.

A more detailed explanation of the provisions of the Bills is contained in the following notes.