House of Representatives

Explanatory Memorandum

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

NOTES ON CLAUSES

INCOME TAX RATES BILL 1986

Introductory Note

This Bill will declare the rates of tax payable by individuals, and trustees generally, for the 1986-87 financial year (Division 2 of Part II of the Bill), and for the 1987-88 and subsequent financial years (Division 3 of Part II of the Bill).

In so doing, the Bill will give effect to the tax reform proposal of 19 September 1985 to reform the personal income tax rate scale. In accordance with the further announcement in the 1986 Budget the first step in this process will take effect from 1 December 1986, and the second step from 1 July 1987. The Bill also provides for the flow-on of the new personal income tax rates to the rates of tax to apply to non-residents, trustees assessed under sections 98, 99 and 99A of the Income Tax Assessment Act 1936 ("the Assessment Act"), uncontrolled partnership income, trustees of certain superannuation funds and ineligible approved deposit funds, and to the maximum rate of tax to apply to the unearned income of minors (eligible taxable income) assessed under the provisions of Division 6AA of Part III of the Assessment Act. A further measure in this Bill will, with effect from the 1987-88 financial year, apply a flat 49 per cent rate of tax to Division 6AA income above $416 (subject to shading-in arrangements), in lieu of the existing arrangements.

Another 19 September 1985 tax reform proposal provided for by the Bill is the introduction of tax-free threshold pro-rating arrangements with effect from the 1986- 87 financial year (Division 4 of Part II of the Bill). This measure will mean that, subject to certain provisions related to earnings before ceasing full-time education, the amount of tax-free threshold available to a taxpayer in a year of income in which he or she first ceases full-time education will be calculated on a proportionate basis having regard to the period that the taxpayer is both effectively a member of the workforce and is a resident of Australia. Similarly, where a taxpayer becomes, or ceases to be, a resident in a year of income the amount of the tax-free threshold will be calculated on a proportionate basis having regard to the period he or she is a resident in the income year.

Finally, the Bill will also declare the rates of tax payable by companies and registered organisations, and by trustees of prescribed unit trusts, ineligible approved deposit funds and superannuation funds, for the 1986-87 financial year (Part III of the Bill).

The rates of tax declared for a financial year are imposed and levied for that year by a separate Act. The accompanying Income Tax Bill 1986 will impose tax, at the rates declared in this Bill for the relevant financial years. A further Bill - the Taxation Laws (Miscellaneous Provisions) Bill 1986 - will make a number of amendments to the Assessment Act and to various other rates Acts that are consequential on the new rates of personal income tax to be declared by this Bill.

Notes on the clauses of the Bill are set out below.

PART I - PRELIMINARY

Clause 1: Short Title

By this clause the Act is to be cited as the Income Tax Rates Act 1986.

Clause 2: Commencement

Under clause 2 the Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

Clause 3 contains a number of definitions and interpretative provisions to facilitate drafting of the operative clauses of the Bill.

Sub-clause (1) defines the following terms, each of which is to have the given meaning unless the contrary intention appears. Apart from certain expressions that are self-explanatory, these are -

"capital gains component", is a term used in relation to the taxable income of a taxpayer, and is to be taken, in circumstances where the taxpayer's taxable income includes a net capital gain as well as income from sources other than capital gains, as being the part of the taxpayer's taxable income which arises from a net capital gain being included in the taxpayer's assessable income under section 160ZO of the Assessment Act (paragraph (a)(ii)). Where a taxpayer has no taxable income apart from that arising from a capital gain, or would apart from the capital gain have had a loss, the whole of the taxable income will comprise the capital gains component (paragraph (a)(i)). By paragraph (b), the term is to have a corresponding meaning in relation to the net income, or a share or a part of the net income of a trust estate, as it has in relation to the taxable income of a person;

"eligible part" is a term that is used in Schedules 5, 6, 11 and 12 to the Bill. Schedules 5 and 11 apply (in 1986-87 and in 1987-88 and subsequent financial years respectively) where the taxable income of a minor includes income that is eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act of more than $416. The Schedules will not apply if the eligible taxable income is $416 or less - the general rates of tax will in that case apply to the whole of the taxable income. Schedules 6 and 12 apply (in 1986-87 and 1987-88 and subsequent financial years respectively) to the trustee of a trust estate who is liable to be assessed and to pay tax under section 98 of the Assessment Act on a share of the net income of a trust estate to which a taxpayer who is a minor is presently entitled, where Division 6AA of Part III of the Assessment Act is applicable to a part of that share or to parts of 2 or more such shares, if the part, or sum of the parts, is greater than $416;

Where used in relation to the capital gains component of the taxable income of a taxpayer, "eligible part" is, by paragraph (a) of the definition, to mean the part of the taxpayer's capital gains component that is eligible taxable income for the purpose of Division 6AA of Part III of the Assessment Act. Where used in relation to the capital gains component of the net income, or share or part of the net income of the trust estate, the term is by paragraph (b) of the definition to be taken to mean the part of the relevant capital gains component that is net income to which Division 6AA of Part III of the Assessment Act applies;

"ineligible approved deposit fund" is defined by reference to that term within the meaning of Division 9B of Part III of the Assessment Act. In effect, in relation to a year of income, it is a fund that is an approved deposit fund within the meaning of Subdivision AA of Division 2 of the Assessment Act, that had, at the end of the year of income, an approved trustee or approved trustees and which is not exempt from tax under section 23FA of the Assessment Act;

"investment income" is defined by reference to that term within the meaning of Division 9B of Part III of the Assessment Act. The term defines the net income of a superannuation fund that may be subject to income tax under section 121CC of the Assessment Act if the fund fails to comply with the investment rules contained in section 121C of that Act;

"non-profit company" is defined to mean a company that is not carried on for the purposes of profit or gain to its individual member, and is, by the terms of its constituent documents, prohibited from making a distribution to its members. The term also includes a friendly society dispensary;

"non-resident beneficiary" in relation to a year of income is defined to mean a beneficiary who is a prescribed non-resident (itself a defined term) in relation to the year of income;

"non-resident taxpayer" in relation to a year of income is to mean a person who is a prescribed non-resident (also a defined term) in relation to the year of income;

"non-resident trust estate" in relation to a year of income is defined as a trust estate that is not a "resident trust estate" - see later notes on definition of that term;

"prescribed non-resident", is a term used in the Bill to describe persons who are not entitled to the benefit of the tax-free threshold represented by the zero rate step in the personal income tax rate scale because they are not residents of Australia for income tax purposes. In relation to a year of income, the term means a person who, at all times during the year, was a non-resident, other than a person to whom an Australian social security or repatriation pension, allowance or benefit that is subject to tax in Australia, was payable at any time during the year of income. The term "non-resident" has the same meaning as that term has i n the Assessment Act;

"prescribed unit trust", is a drafting measure that facilitates references to a corporate unit trust or a public trading trust (also defined terms) which, under Division 6B and Division 6C respectively of Part III of the Assessment Act, are treated as a company for income tax purposes - the rate of tax applicable to such trusts is declared in Part III of the Bill - see later notes on clauses 24 and 25;

"reduced notional income" is a term that is used in Schedules 3, 5 and 6 (for the 1986-87 financial year) and in Schedules 9, 11 and 12 (for the 1987-88 and subsequent financial years) which declare the rates of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors or inventors) of the Assessment Act. Where used, the term is to be taken to mean, in effect, the amount that would have been the notional income of the taxpayer if the taxpayer had not had a capital gain included in his or her assessable income for the year of income;

"reduced share" is a term that is used in Schedules 6 (for the 1986-87 financial year) and 12 (for 1987-88 and subsequent financial years) in relation to the share of a beneficiary in the net income of a trust estate where Division 6AA of Part III of the Assessment Act applies. It means the part of the share of the beneficiary of that net income other than the capital gains component of that share;

"reduced taxable income" is a term used in Schedules 1, 3, 5 and 6 (for the 1986-87 financial year) and 7, 9, 11 and 12 (for the 1987-88 and subsequent financial years), and is to be taken to mean the taxable income other than the capital gains component of that income;

"registered organisation" is to mean a registered organisation as defined in section 116E of Division 8A of Part III of the Assessment Act. In that Division, the term is used to specify the bodies to which the Division applies. Division 8A operates to tax friendly societies on investment income from certain insurance business, and also taxes them, as well as trade unions and employee organisations registered under the Conciliation and Arbitration Act 1904 (collectively referred to in the Division as "registered organisations"), on investment income from certain annuity business;

"resident beneficiary" is a term used in determining the rate of tax payable by a trustee assessed on behalf of such a beneficiary. The term is to mean a beneficiary who is not a "prescribed non-resident" (see earlier notes on that definition);

"resident taxpayer" is to mean a taxpayer who is not a "prescribed non-resident" (see earlier notes on that definition). Subject to the operation of the proposed tax-free threshold pro-rating arrangements (Division 4 of Part II of the Bill - see later notes on clauses 16 to 20), a resident taxpayer will be entitled to the full tax-free threshold;

"resident trust estate" is to mean a trust estate that is a resident trust estate as defined in Division 6 of the Assessment Act. Under that Division a trust estate is a resident trust estate in relation to a year of income where the trustee was a resident at any time during the year of income or the central management and control of the trust estate was in Australia at any time during the year of income. The term is relevant for the purposes of determining the tax payable by a trustee of a trust estate to which section 99 of the Assessment Act applies;

"superannuation fund" is a term that collectively, refers to a provident, benefit, superannuation or retirement fund and is relevant to Part III of the Bill which provides for the rates of tax payable on the incomes of superannuation funds;

"tax" is a drafting measure that facilitates the reference to income tax imposed by any Act other than income tax that is payable on the following incomes under the provision of the Assessment Act specified and that is imposed by separate Acts -

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diverted income and diverted trust income (section 121H);

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interest paid by a company on a bearer debenture where the name and address of the holder is not supplied to the Commissioner (section 126);

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dividends and interest paid to non-residents (sections 128B, 128N and 128NA);

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income of non-resident companies (section 128T);

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payments in respect of mining operations on Aboriginal land (section 128V);

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film and video tape royalties derived by non-residents (section 136A); and

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redemption of drought bonds (section 159C).

Clause 4: Incorporation

This clause has the effect of providing for the Bill to operate in conjunction with the provisions of the Assessment Act.

PART II - RATES OF INCOME TAX PAYABLE UPON INCOMES OTHER THAN INCOMES OF COMPANIES, PRESCRIBED UNIT TRUSTS, SUPERANNUATION FUNDS AND CERTAIN OTHER TRUSTS

Part II, comprising four Divisions and clauses 5 to 20 inclusive, in conjunction with Schedules 1 to 12, will formally declare the rates of tax payable by individuals, and trustees generally, for the 1986-87 financial year and for the 1987-88 and subsequent financial years.

DIVISION 1 - PRELIMINARY

Clause 5: Interpretation

This clause is a drafting measure by which a reference to "tax" in Part II is to mean a tax as defined in Part I (see notes on clause 3), other than tax payable under the provisions of Part III that declare the rates of tax payable by companies, prescribed unit trusts, superannuation funds and certain other trusts.

DIVISION 2 - FINANCIAL YEAR COMMENCING ON 1 JULY 1986

Subdivision A - Application of Division

Clause 6: Application of Division

This clause will state formally that the rates of tax declared by Division 2 are to apply for the 1986-87 financial year.

Subdivision B - Rates of Tax and Notional Rates

Clause 7: Rates of tax and notional rates

Clause 7 will declare the ordinary rates of tax payable by individuals and trustees generally, and the notional rates and method of calculation of the rate of complementary tax for purposes of the primary producer averaging provisions, for the 1986-87 financial year. The relevant rates declared by this clause are set out in Part I of each of Schedules 1 to 4, as they are to apply in respect of resident taxpayers, resident beneficiaries and resident trust estates, and in Part II of each of Schedules 1 to 4 as they are to apply in respect of non-resident taxpayers, non-resident beneficiaries and non-resident trust estates.

The 1986-87 general rates of tax for individuals are to be declared by sub-clause 7(1) and are set out in Clause 1 of Schedule 1 - Part I for residents and Part II for non-residents. Clause 1 of each of Parts I and II of Schedule 1 is subject to Clauses 2 and 3, in each relevant Part, that set out the method of calculating the rate of tax payable where a capital gains component is included in taxable income.

For residents, the rates in Clause 1 of Part I of Schedule 1 reflect the proposed increase in the tax-free threshold from $4,595 to $5,100 (see also the notes on clauses 16 to 20 concerning pro-rating arrangements for the tax-free threshold), the increase in the threshold for the first step in the rate scale from $12,500 to $12,600 and reductions in all the marginal rates, as from 1 December 1986. The rate scale set out in Part I of Schedule 1 is, in effect, an average of the rates applicable up to 30 November 1986 (as to five-twelfths) and of the new scale to apply from 1 December 1986 to 30 June 1987 (as to seven-twelfths).

The general rates of tax for resident taxpayers for 1986-87 are as follows:

Tax payable for 1986-87 may be calculated from the following table:

The general rates of tax for 1986-87 for non-residents are:

Tax payable for non-residents for 1986-87 may be calculated from the following table:

Clauses 2 and 3 of Parts I and II of Schedule 1 provide the method of calculating the rate of tax payable generally where the taxable income of a taxpayer includes a capital gains component.

Clause 2 of Part I of Schedule 1 sets out the formula for the calculation of the rate of tax that is to be payable by resident taxpayers generally, where the taxpayer's taxable income includes a capital gains component but does not include income that is subject to the primary producer averaging provisions. Paragraphs (a) and (b) of the clause, when read with other provisions of the Bill, are to that effect.

In circumstances where Clause 2 is applicable to a taxpayer, the rate that is to be payable by the taxpayer on his or her taxable income is to be calculated by the formula

(A+B)/(C)


.

A of the formula represents the tax payable on the taxpayer's reduced taxable income (as defined - see notes on clause 3) and is, in effect, the tax that would be payable by the taxpayer under Clause 1 of Part I of the Schedule - that is, the clause that applies where the taxpayer's taxable income does not include a capital gains component - on the amount that would have been his or her taxable income if that income did not include a capital gains component (as also defined - see notes on clause 3).

B of the formula represents the tax payable on the part of the taxable income that is the capital gains component. The calculation of this amount, according to paragraphs (c) and (d) of Clause 2, proceeds by -

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determining the tax would be payable at the rates set out in Clause 1 of Part I of the Schedule (i.e., the rates that apply generally) on a taxable income equal to the sum of the taxpayer's reduced taxable income (i.e., the taxable income other than the capital gains component) and one-fifth of the capital gains component (paragraph (c)); and

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deducting the amount of tax calculated under A of the formula - which is the tax on the reduced taxable income - from the amount calculated above (paragraph (d)).

That difference is, in effect, the tax that would be payable on one-fifth of the capital gains component if it were the last slice of income. The difference is then multiplied by five to obtain the tax payable on the total capital gains component.

The sum of the amounts obtained in the calculations of A and B is then divided by the taxpayer's total taxable income (C of the formula is to that effect) to obtain the rate to be applied to the total taxable income.

Clause 3 of Part I of Schedule 1 sets out the formula for the calculation of the rate of tax of resident individual taxpayers generally where the taxpayer's taxable income includes a capital gains component and also includes income that is subject to the primary producer averaging provisions. The taxpayer's average income (which by virtue of section 149A of the Assessment Act is the average of the taxable incomes of the current year and the preceding four years, excluding any capital gains components) is to be used as the base to which one-fifth of the capital gains component is to be added for the purposes of calculating the tax payable on that component, instead of the reduced taxable income that was used for that purpose in Clause 2 of Part I of the Schedule. Apart from that, the formula will have an identical effect to the formula in Clause 2.

Clauses 2 and 3 of Part II of Schedule 1 apply to non-resident taxpayers in identical terms to the way that Clauses 2 and 3 of Part I of the Schedule apply to resident taxpayers.

The averaging benefit or complementary tax under section 156 of the Assessment Act for primary producers to whom the averaging provisions of that Act apply for 1986-87 will be calculated by reference to the notional rates declared by sub-clause (2) of clause 7, as set out in Schedule 2 - Part I for residents and Part II for non-residents.

These rates will be used to determine the averaging benefit of a primary producer whose taxable income exceeds his or her average income. Basically, averaging benefit is the difference between tax payable on the taxable income at general rates and tax payable on that income at the notional rate, that is, the rate of tax applicable to the average income.

On the other hand, where the tax payable on taxable income if average rates were applied, exceeds the tax that would be payable at ordinary rates, a complementary amount of tax is required to be paid. Sub-clause (3) sets out the method of calculation of the rate of complementary tax payable by an individual taxpayer. The rate of complementary tax is to be determined by dividing the excess referred to in sub-section 156(4A) of the Assessment Act by the amount of the taxpayer's taxable income. That excess is the excess of the amount of tax that would be payable on the taxable income if the tax were calculated at average tax rates over tax payable at ordinary rates.

Sub-clause (4) similarly enables the rate of complementary tax payable by a trustee of a trust estate to be established where the trustee is required to pay the tax by operation of sub-section 156(5A) of the Assessment Act. The method of calculation is as described above in relation to individuals.

Sub-clause (5) (which is subject to proposed clauses 8 and 10 of this Bill) and Schedule 3 - Part I for residents and Part II for non-residents - will declare the 1986-87 rates of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. Where the taxable income does not consist of or include a capital gains component, the rate of tax payable will be a rate ascertained by dividing by the notional income an amount equal to the tax payable at the general rates specified in Schedule 1 on a taxable income equal to the notional income (Clause 1 of Parts I and II of Schedule 3).

Clause 2 in Part I of Schedule 3 sets out the method of calculating the rate of tax on a resident taxpayer's taxable income where the taxpayer derives a notional income and the taxable income includes a capital gains component.

The method set out for the calculation of the tax in such cases corresponds to that discussed in the earlier notes on Clause 2 of Schedule 1, with two exceptions. The first exception is that the tax calculated on the basis of the reduced taxable income represented by A in the formula

(A+B)/(C)


is to be calculated under Clause 1 of Part I of Schedule 3 (and not Clause 1 of Part I of Schedule 1). The other exception is that, for purposes of calculating the tax on the capital gains component, the reduced notional income (i.e., the amount that would have been the notional income if the taxpayer had not derived a capital gain) is used as the base to which one-fifth of the capital gains component is to be added (paragraph (c) of Clause 2), instead of the reduced taxable income, and in calculating the amount of tax under paragraph (d) of Clause 2, for the purposes of ascertaining the amount B in the formula.

Clause 2 of Part II of Schedule 3 operates to calculate the rates of tax in respect of the taxable income of a non-resident taxpayer who derives a notional income, in an identical manner to the way that Clause 2 of Part I applies to a resident taxpayer.

Sub-clause (6), which is also subject to proposed clauses 8 and 10 of the Bill, will declare the 1986-87 rates of tax (as set out in Schedule 4 - Part I for residents and Part II for non-residents) payable by trustees assessed under section 98 of the Assessment Act on behalf of a beneficiary, or assessed under section 99 on accumulating income of certain trust estates.

The effect of the new rate scale applying for 1986-87 is reflected in Schedules 2 to 4 by reference to the rates of tax payable under Schedule 1. In a case where clause 20 (see later notes on that clause) operates to pro-rate the tax-free threshold (zero rate step in Part I of Schedule 1) of a person in a year of income, the rate of tax payable under Schedules 2 to 4, calculated by reference to Part I of Schedule 1, is to be calculated having regard to the amount of the pro-rated threshold available to the person for the purposes of Schedule 1 in the year of income.

Sub-clause (7) declares the rate of further tax payable for the 1986-87 financial year under section 94 of the Assessment Act where there is included in the taxable income of a taxpayer any amount of income to which that section applies, i.e., a share of partnership income that is or is deemed to be income over which the person does not have the real and effective control and disposal.

The sub-clause will impose further tax on income to which section 94 applies at a rate equal to 50 per cent reduced by the average ordinary rate of tax applicable to the taxpayer's total taxable income. The average ordinary rate of tax is determined for this purpose as being ordinary tax payable divided by the total taxable income. It is expressly provided by sub-clause 7(7) that the ordinary tax payable is to be the tax (including any averaging benefit or complementary tax) before allowance of any rebate or credit to which the taxpayer is entitled.

Sub-clause (8) declares the rate of further tax payable for the 1986-87 financial year under section 94 of the Assessment Act where the taxpayer is a trustee liable to be assessed and to pay tax under section 98 or 99 of that Act.

Sub-clause (9) declares 57.08 per cent as the rate of tax payable by a trustee liable to tax under section 99A of the Assessment Act for the 1986-87 financial year.

Subdivision C - Resident Taxpayers, Resident Beneficiaries and Resident Trust Estates

Sub-division C is comprised of clause 8 - that will declare the rates of tax payable by resident taxpayers or trustees taxed on behalf of resident beneficiaries, where Division 6AA of Part III of the Assessment Act applies - and clause 9 that will limit the tax payable by trustees of certain resident trust estates who are liable to be assessed under section 99 of the Assessment Act.

Clause 8: Rates of tax where Division 6AA of Part III of the Assessment Act applies

This clause will declare the rates of tax that are to be payable for the 1986-87 financial year by a resident taxpayer who is a minor and whose taxable income includes income of more than $416 that is eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act. The clause will not apply if the eligible taxable income is $416 or less - the general rates of tax will in that case apply to the whole of the taxable income.

The clause will also declare the rates of tax that are to be payable for the 1986-87 financial year by a trustee of a trust estate who is liable to be assessed and to pay tax under section 98 of the Assessment Act on a share of the net income of a trust estate to which a resident taxpayer who is a minor is presently entitled, where Division 6AA is applicable to a part of that share or to parts of two or more such shares, if the part, or sum of the parts, is greater than $416.

Sub-clause (1) will declare the rates of tax that are to be paid for 1986-87 by a resident minor whose income includes eligible taxable income of more than $416. The rates declared by the sub-clause are set out in Part I of Schedule 5.

Clause 1 of Part I of Schedule 5 sets out the rates of tax that are to be payable, where the taxable income does not consist of or include a capital gains component, on that part of the minor's taxable income that is not eligible taxable income. This income is referred to in the Schedule as the "relevant part" of the taxable income. The rates of tax are the same as the normal rates that would have applied to that income if it had been the minor's only income.

Clause 2 of Part I of Schedule 5 applies where the taxable income does not consist of or include a capital gains component and sets out the rates of tax that are to be paid on the eligible taxable income. The rate is 46 per cent, except where the ordinary rate payable on the income is higher. In the latter circumstances the excess over $28,000 of the minor's taxable income will be taxed at the existing ordinary rate applicable to taxable income in the income range $28,001-$35,000, i.e. 48 per cent, and for income over $35,000 at the proposed maximum marginal rate of 57.08 per cent.

Clause 3 of Part I of Schedule 5 specifies the rules for the calculation of the rates of tax to be payable by a resident minor taxpayer whose taxable income includes eligible taxable income and a capital gains component.

The rate of tax is to be calculated by the formula

(A+B+C)/(D)


A of the formula is, in effect, the amount of tax that would have been payable by the minor under Clauses 1 and 2 of Schedule 5 if the taxable income had not included a capital gains component.

B of the formula represents the amount of tax payable in respect of the capital gains component of the taxable income, other than the eligible part (see notes on clause 3 of the Bill for the definition of that term).

The amount that will be calculated under this component of the formula will be identical to that which would have been calculated in respect of a capital gain, equal to the minor's capital gain other than the eligible part of the gain, under Schedule 1, if the minor were an adult.

The base to which one-fifth of the capital gains component other than the eligible part is to be added, for the purposes of the calculation of the tax on the part of the minor's capital gain other than the eligible part, will be the average income (if the minor's income is subject to the primary producer averaging provisions), the reduced notional income (if the minor has a notional income for the purposes of section 59AB, section 86 or section 158D of the Assessment Act) or, in other cases, the reduced taxable income.

C of the formula will represent the amount of tax payable in respect of the eligible part of the minor's capital gains component. The steps by which this is done are to first calculate the amount that is five times greater than the difference between the tax that would be payable under Clause 1 of Part I of Schedule 1 on

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a taxable income equal to the sum of the reduced taxable income and 20 per cent of the full amount of the capital gains component; and

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a taxable income equal to the sum of the reduced taxable income and 20 per cent of that part of the capital gains component on which the tax was calculated under component B of the formula, that is, the capital gains component other than the eligible part,

and then calculate the amount that would be payable if the rate of 46% were applied to the eligible part of the capital gains component. Component C will be the greater of these two amounts.

D in the formula is the number of whole dollars in the taxable income (including the full amount of the capital gains component).

Clause 3 of Part II of Schedule 5 is applicable to a non-resident minor taxpayer whose taxable income includes a capital gains component and operates in an identical manner to Clause 3 of Part I of Schedule 5 as that Part applies to a resident minor taxpayer.

Sub-clause (2) of clause 8 is set against the background that $417 is the minimum amount of eligible taxable income that is to be taxed at the rates applicable to eligible income of resident minors - eligible income up to $416 is to be taxed in the ordinary way and, if total taxable income does not exceed $4,890 or the relevant pro-rated threshold (see later notes on Clause 20), no tax will be payable on eligible income of up to $416. If the 46 per cent rate were to apply to eligible income of $417, the result could be that the derivation of one additional dollar of eligible income would produce tax of almost $200.

To avoid this result, sub-clause (2) provides for "shading-in" arrangements to apply where the eligible taxable income is between $417 - the point where such income becomes liable to be taxed at the 46 per cent rate - and $1,372 - the point where the tax under the "shading-in" arrangements reaches the tax at the 46 per cent rate.

Sub-clause (3) will declare the rates of tax payable by a trustee of a trust estate, who is liable to be assessed under section 98 of the Assessment Act in respect of a resident beneficiary's share of the net income of the trust estate, if Division 6AA of Part III of the Assessment Act applies to more than $416 of the share.

The rates payable in those circumstances are set out in Part I of Schedule 6 which is to the same broad effect as Part I of Schedule 5 that applies to eligible income derived directly by a minor.

Sub-clause (4) specifies that the rates of tax set out in Part I of Schedule 6 may, in defined circumstances, also apply where the eligible part of the share of the net income of a trust estate in respect of which a resident minor is presently entitled does not exceed $416. This will be the case where Division 6AA also applies to a part of the beneficiary's share of the net income of another trust estate or other trust estates and the total of all of the eligible parts exceeds $416. Sub-clause (5) is also relevant in this regard.

Sub-clause (5) is set against the background that "shading-in" arrangements, to the same effect as those described in the notes on sub-clause (2) in relation to the eligible income of a minor, are to apply under sub-clause (6), when read with sub-clause (7), where a resident beneficiary is entitled to a share of the net income of only one trust estate and Division 6AA applies to an amount of that share of between $416 and $1,372. These arrangements cannot apply in a case where sub-clause (4) applies since the eligible part in this case is $416 or less. However, sub-clause (5) will empower the Commissioner of Taxation to reduce the tax that would otherwise be payable in accordance with sub-clause (4) where the sum of the eligible parts of the shares of net income of trust estates in respect of which the resident beneficiary is presently entitled does not exceed $1,372. Sub-clause (9) sets out matters to which the Commissioner is to have regard in deciding on the amount of the reduction in the tax payable that is to be made in accordance with sub-clause (5). The broad aim is to arrive at an amount of tax on the notionally aggregated trust incomes that is equivalent to the amount that would result under the "shading-in" provisions of sub-clause (6) if the income were that of only one trust estate.

Sub-clause (6) specifies, subject to sub-clause (7), "shading-in" arrangements that are to apply where the eligible part of the share of a resident minor beneficiary of the net income of a trust estate exceeds $416 but does not exceed $1,372. The "shading-in" arrangements correspond in effect with those applicable to eligible taxable income of between $417 and $1,372 derived directly by a minor - see earlier notes on sub-clause (2).

Sub-clause (7) specifies that sub-clause (6) is not to apply to limit the tax payable by a trustee on the eligible part of a share of the net income of a trust estate in respect of which a resident minor is presently entitled that is between $417 and $1,372 if the beneficiary is also entitled to a share of income of another trust estate or other trust estates, to a part of which or of each of which Division 6AA applies. However, in circumstances where sub-clause (6) is not applied because of the operation of sub-clause (7), sub-clause (8) empowers the Commissioner of Taxation to reduce the tax that would otherwise be payable by the trustee in accordance with sub-clause (3) if the sum of the eligible parts does not exceed $1,372. Sub-clause (8) will have a corresponding effect in relation to a trustee who would otherwise be liable to pay tax under sub-clause (3), as sub-clause (5) is to have in relation to a trustee who would otherwise be liable to pay tax under sub-clause (4).

Sub-clause (9) sets out the matters to which the Commissioner is to have regard in forming an opinion, for the purposes of sub-clause (5) or (8), as to the amount, if any, by which the tax that would otherwise be payable by a trustee on a share of the net income of a trust estate should be reduced. The sub-clause, in effect, requires the Commissioner to notionally aggregate all of the shares of trust net income in respect of which a resident beneficiary is presently entitled, and all of the parts of those shares to which Division 6AA of Part III of the Assessment Act applies. Having done that, the Commissioner then has to determine the amount to which the tax payable by a trustee on a share of the net income of a trust estate would have been limited under sub-clause (6) if that share were equal in amount to the sum of those shares and included an eligible part equal in amount to the sum of those eligible parts. As a final step, the Commissioner has to have regard to the amount by which he has, by the application of sub-clause (5) or (8), reduced the tax payable on the share or shares of the resident beneficiary of the net income of any other trust estates.

Clause 9: Limitation on tax payable by certain trustees

This clause will apply for the 1986-87 year where a trustee is assessable under section 99 of the Assessment Act in respect of the net income of a resident trust estate that is either an inter vivos trust or the estate of a person who died 3 years or more before the end of the year of income, and in respect of which the trustee is not entitled to the zero rate step. The clause will limit the tax otherwise payable by the trustee in terms of sub-clause (6) of clause 7 and Part I of Schedule 4 (see earlier notes on clause 7).

Sub-clause (1) proposes that the trustee is not to be liable to tax if the net income or the part of the net income of the resident trust estate does not exceed $416. Sub-clause (2) will apply where the net income exceeds $416 but not $813 (in lieu of $832 in the 1985-86 year and reflecting the application of the proposed 24 per cent rate from 1 December 1986 in the first rate step) and will limit the tax to 50 per cent of the excess over $416.

Subdivision D - Non-resident Taxpayers, Non-Resident Beneficiaries and Non-Resident Trust Estates

Subdivision D applies to non-residents in much the same way as Subdivision C applies to residents. It declares the 1986-87 rates of tax payable by non-resident taxpayers, and trustees assessed on their behalf, where Division 6AA of Part III of the Assessment Act applies.

Clause 10: Rates of tax where Division 6AA of Part III of the Assessment Act applies

Clause 10 deals with Division 6AA cases and is similar to clause 8, except that there is no minimum taxable income for non-residents. For 1986-87 the rate of tax on eligible income up to $416 is to be 29.42 per cent or tax at normal rates, whichever is greater and, subject to "shading-in" arrangements, a rate of 46 per cent will apply to eligible taxable income over $416. For incomes above $28,000, the rates of 48 per cent and 57.08 per cent will apply.

Sub-clause (1) will declare the rates for a non-resident individual minor deriving eligible income, as set out in Part II of Schedule 5.

Sub-clause (2) limits the tax payable in terms of sub-clause (1), where the eligible taxable income does not exceed $416 and where it does exceed $416 but not $760. Paragraph (2)(a) limits the tax payable on eligible income not exceeding $416 to 29.42 per cent or tax on that income when aggregated with other income, at ordinary rates, whichever is the greater. Paragraph (2)(b) provides "shading-in" arrangements for eligible income between $416 and $760. These arrangements are comparable to those that are to apply for a resident individual minor deriving eligible taxable income (see earlier notes on clause 8).

Sub-clause (3) declares the rates set out in Part II of Schedule 6 to be the rates of tax payable for 1986-87 by a trustee taxed under section 98 of the Assessment Act on behalf of a non-resident minor beneficiary.

Sub-clause (4), which is subject to sub-clause (5), limits the tax otherwise payable by a trustee in terms of sub-clause (3) in the same way as sub-clause (2) does for individuals.

Sub-clauses (5) to (7) are to the same effect as sub-clauses (7) to (9) of clause 8 which relate to resident beneficiaries - see the earlier notes on those sub-clauses. Sub-clauses (5) to (7) apply where a non-resident minor beneficiary, on whose behalf a trustee is assessed, is entitled to income from another trust estate to which Division 6AA also applies.

DIVISION 3 - FINANCIAL YEAR COMMENCING ON 1 JULY 1987 AND SUBSEQUENT FINANCIAL YEARS

Division 3 - consisting of clauses 11 to 15 and in conjunction with Schedules 7 to 12 - formally declares the rates of tax payable for the 1987-88 and subsequent financial years. Division 3 has four subdivisions which correspond with the four subdivisions in Division 2 relating to the 1986-87 financial year.

Subdivision A - Application of Division

Clause 11: Application of Division

Clause 11 will formally provide that the rates of tax declared by Division 3 will apply for the 1987-88 and subsequent financial years.

Subdivision B - Rates of Tax and Notional Rates

Clause 12: Rates of tax and notional rates

Clause 12 will declare the ordinary rates of tax payable for 1987-88 and subsequent financial years by individuals and trustees generally. The rates are set out in Schedules 7 to 10 to this Bill. Part I of each of those Schedules applies to resident taxpayers, and Part II to non-resident taxpayers.

The general rates of tax for individuals are to be declared by sub-clause (1) and are set out in Clause 1 of Schedule 7.

Clause 1 of each of Parts I and II of Schedule 7 is subject to Clauses 2 and 3, in each relevant Part, that set out the method of calculating the rate of tax payable where a capital gains component is included in taxable income. The rates for resident taxpayers for 1987-88 and subsequent financial years differ from those for the 1986-87 financial year (set out in Part I of Schedule 1) in that they reflect both the full year effect of the changes proposed to take effect from 1 December 1986 in respect of taxable income up to $19,500 and, in respect of taxable income above $19,500, the proposed further reductions in the marginal rates to apply from 1 July 1987.

The general rates of tax for resident taxpayers for 1987-88 and subsequent years are:

Tax payable by resident taxpayers for 1987-88 may be calculated from the following table:

The general rates of tax applicable to non-resident individuals are also declared by proposed sub-clause (1) and are set out in Part II of Schedule 7. These rates also differ from those set out in Part II of Schedule 1 that are to apply for the 1986-87 financial year in that they reflect the full year effect of the new rate that is to apply from 1 December 1986 on taxable income up to $19,500 and the proposed reduction in rates on taxable income above $19,500 from 1 July 1987.

The general rates of tax for the 1987-88 and subsequent financial years for non-residents are:

Tax payable by non-resident taxpayers for 1987-88 may be calculated from the following table:

Sub-clauses (2) to (9) of clause 12, as applicable to 1987-88 and subsequent financial years, correspond with sub-clauses (2) to (9) of clause 7 that are to apply for the 1986-87 financial year and which are discussed earlier in this memorandum.

The notional rates of tax for purposes of the average rebate or complementary tax for primary producers are to be declared by sub-clause (2) and are set out in Schedule 8. They reflect the changes to the rate scale to be effected by sub-clause (1) and Schedule 7.

Sub-clauses (3) and (4) set out the method of calculating the rate of complementary tax payable on primary production income where an individual taxpayer or trustee of a trust estate is required to pay the tax by operation of sub-section 156(4A) or 156(5A) of the Assessment Act.

The rates to be declared by sub-clause (5) for taxpayers deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors or inventors) of the Assessment Act are set out in Schedule 9.

Sub-clause (6) declares the rates of tax payable by a trustee in pursuance of section 98 or 99 of the Assessment Act. These rates are set out in Schedule 10.

Sub-clause (7) declares the rate of further tax payable on income to which section 94 of the Assessment Act applies where there is included in the taxable income of a taxpayer any amount of income to which that section applies, i.e., a share of partnership income that is or is deemed to be income over which the person does not have real and effective control and disposal. Sub-clause (8) declares the rate of further tax payable under section 94 where the taxpayer is a trustee liable to be assessed and to pay tax under sections 98 or 99 of the Assessment Act.

For the 1987-88 and subsequent financial years the rate of further tax imposed will be a rate of 49 per cent reduced by the average ordinary rate applicable to the taxpayer's total taxable income or the net income of the trust in respect of which the trustee is liable to be assessed.

Sub-clause (9) declares the rate of tax payable by a trustee under section 99A of the Assessment Act to be 49 per cent for 1987-88 and subsequent years.

Subdivision C - Resident Taxpayers, Resident Beneficiaries and Resident Trust Estates

Clause 13: Rates of tax where Division 6AA of Part III of the Assessment Act applies

Clause 13 will declare the rates of tax payable for the 1987- 88 and subsequent financial years by a resident taxpayer and a trustee assessed on behalf of a resident beneficiary where Division 6AA of Part III of the Assessment Act applies. The rates which are set out in Part I of Schedules 11 and 12 apply where eligible taxable income exceeds $416. Subject to "shading-in" arrangements where eligible taxable income is in the range of $417 to $1,615 (see earlier notes on clause 8 for an explanation of the operation of "shading-in" arrangements) the rate of tax on eligible taxable income above $416 is to be 49 per cent for the 1987-88 and subsequent financial years.

Clause 14: Limitation on tax payable by certain trustees

Clause 14 limits the tax otherwise payable for the 1987-88 and subsequent financial years by trustees of certain resident trust estates who are liable to be assessed under section 99 of the Assessment Act. This clause corresponds to clause 9 (see earlier notes on that clause) which applies for the 1986-87 financial year. Sub-clause (1) provides that no tax is payable if the net income of the resident trust estate does not exceed $416 (the same as for 1986-87). Sub-clause (2) applies where the net income exceeds $416 but not $800 ($813 for 1986-87) and will limit the tax otherwise payable to 50 per cent of the excess over $416. The lower amount of $800 at which "shading-in" is achieved reflects the full year effect of the 24 per cent rate in the first rate step in 1987-88 and subsequent years.

Subdivision D - Non-resident Taxpayers, Non-resident Beneficiaries and Non-resident Trust Estates

Clause 15: Rates of tax where Division 6AA of Part III of the Assessment Act applies

Clause 15 declares the rates of tax payable by non-resident taxpayers and trustees assessed on behalf of non-resident beneficiaries, where Division 6AA of Part III of the Assessment Act applies. The rates are set out in Part II of Schedules 11 and 12. For 1987-88 and subsequent years the rate of tax on eligible income up to $416 is to be 29 per cent or tax at normal rates, whichever is greater and, subject to "shading-in" arrangements for eligible taxable income in the range $417 to $905 (see earlier notes on clause 10 for an explanation of the operation of the "shading-in" arrangements), the rate of 49 per cent will apply to eligible income over $416.

DIVISION 4 - PRO-RATING OF THE TAX-FREE THRESHOLD

Division 4 consists of clauses 16 to 20 and will provide for the pro-rating of the tax-free threshold (the zero rate step in the personal income tax rate scale) for those taxpayers who, in the 1986-87 or a subsequent financial year, first cease a course of full-time education or become, or cease to be, a resident of Australia.

Where the tax-free threshold available to a taxpayer is, by the operation of Division 4, reduced from the maximum amount of $4,890 for the 1986-87 financial year or $5,100 for the 1987-88 and subsequent financial years, to a lesser amount, that lesser amount is to be substituted for the amount of $4,890 in Part I of Schedule 1 or $5,100 in Part I of Schedule 7, as the case may be, and tax payable by the taxpayer for that financial year is to be calculated having regard to the reduced tax-free threshold. That is, tax at the relevant rate of 24.42 per cent for 1986-87 and 24 per cent for 1987-88 and subsequent years will be imposed on income in the range from the new reduced threshold up to $12,500 or $12,600, as the case may be.

Ceasing full-time education

Pro-rating of the tax-free threshold will apply in a year of income where a person first ceases to be engaged in a course of full-time education at a school, college, university or similar institution and is not engaged in such a course of full-time education at the end of the year of income. For this purpose, a person will be considered to be engaged in a course of full-time education if he or she is on a vacation break in a course, or is enrolled in a course of full-time education that starts within 4 months of finishing an earlier course.

Where a person ceases to be engaged in a course of full-time education within 4 months of the end of a year of income, and is therefore not otherwise engaged in a course at the end of a year of income, he or she will, nevertheless, not be subject to pro-rating in the relevant year of income if he or she engages in another course within 4 months of the cessation of the earlier course. In this way, pro-rating will not apply to persons who cease a course near the end of a year of income but enrol in, or commence, another course for the next semester that may start after the end of the year of income. However, persons who complete a course of full-time education will be subject to pro-rating if they are not engaged in a further course at the end of the year of income or do not satisfy the 4 month rule, even though they may commence a further course of full-time education at some later date.

Where pro-rating applies to a person who ceases full-time education in a year of income, the level of the tax-free threshold available to the person, in lieu of the annual thresholds of $4,890 in 1986-87 and $5,100 in 1987-88 and subsequent years, will be one-twelfth of the annual level, i.e., $408 for 1986-87 and $425 for subsequent years, multiplied by the number of months the person was not engaged in a course of full-time education in the year of income. For this calculation, the month in which the person ceases education will be taken as a month when he or she was not in full-time education.

This adjusted threshold, otherwise available for the year of income, is to be increased where the person received income during the year that relates to the period when he or she was in full-time education. Generally, the level of the threshold otherwise available will be increased by an amount, up to the level of the balance of the annual threshold, equal to the part of the assessable income of the year of income that relates, or is deemed to relate, to the period while in full-time education reduced by any allowable deductions incurred in earning that income.

Pro-rating of the threshold as a consequence of ceasing full-time education will only occur once in a person's lifetime. Where at any time in an earlier year of income a person has fulfilled the tests for the operation of pro-rating, whether while in education in Australia or elsewhere, or before the operation of these provisions, he or she will not be subject to their application in a subsequent year of income.

Residency

Pro-rating of the tax-free threshold will also apply in a year of income where a person becomes a resident of Australia, or ceases to be such a resident.

At present, a person is entitled to the full tax-free threshold if he or she is a resident at any time in the year of income. Similar to the proposed operation of the law for persons ceasing full-time education, a proportionate part of the maximum tax-free threshold otherwise available in a year of income will apply on the basis of the number of months the person was a resident in the year of income. Pro-rating on the basis of residency may occur on more than one occasion in a person's lifetime.

No additional amount will be added to the pro-rated threshold as a consequence of income derived in the period that the person was a non-resident in the year of income.

The threshold will not be pro-rated on account of residency if in the year of income the person is in receipt of a social security or repatriation pension (other than unemployment, sickness or special benefits) that is subject to tax in Australia. This maintains the present operation of the law that extends the tax-free threshold to such persons who are non-residents for the whole of a year of income.

Assessment of trustees

Trustees assessed under section 98 of the Assessment Act, on the share of a beneficiary of the net income of a trust estate of a year of income, will be entitled to a part only of the tax-free threshold where the beneficiary is a resident for only part of the year of income. In this way, the threshold available in calculating the tax payable by a trustee will reflect the level of the threshold that is, or would be, available to the beneficiary in respect of his or her personal assessment.

Residency/Education

Where a person becomes a resident of Australia, and subsequently ceases full-time education in the same year of income, the threshold will only be available for the number of months in the year from the time of ceasing education. The addition to the threshold for income earned in the year of income before ceasing education will be limited to an amount calculated on the basis of the number of months he or she was in full-time education and was a resident.

Where a person ceases full-time education and then ceases to be a resident, the threshold will only be available for the number of months from the time of ceasing education to the time of ceasing residency. The addition to the threshold for earnings while in full-time education would still be available.

Beneficiary Rebates

Taxpayers subject to pro-rating of the tax-free threshold in a year of income may also be eligible for a beneficiary rebate in the year of income under section 160AAA of the Assessment Act. The thresholds for the operation of the rebates will not be pro-rated and the rebate of tax calculated in the usual manner will be able to be off-set against the tax otherwise payable.

Clause 16: Interpretation

Sub-clause 16(1) defines a number of terms used in Division IV. These are:

"beneficiary" is defined in relation to a trust estate to include a person who is capable of benefiting under the trust. The definition is relevant to the operation of clause 19 (see later notes on that clause) and the determination of the period in a year of income when a person was a beneficiary of a trust estate.

"eligible pensioner" is defined to mean a person to whom, at any time during the year of income, a pension, allowance or benefit is payable under certain Repatriation statutes, the Social Security Act 1947 (other than Part VII that provides for the payment of unemployment, sickness or special benefits) or the Tuberculosis Act 1948, being a pension, allowance or benefit in respect of which the person is liable to be assessed and to pay income tax in Australia. The term is relevant to the operation of clause 18 (see later notes on that clause) that determines the period of residency of a person in a year of income. A person who would otherwise be subject to pro-rating of the tax-free threshold by being a resident for only a part of a year of income will, if the person is an eligible pensioner in the year of income, be entitled to the full threshold. This operation is consistent with the existing law that allows a tax-free threshold to non-resident recipients of the social security and repatriation pensions, allowances or benefits referred to in the definition that are taxable in Australia.

"partial threshold allowance month" is a term that will identify the month or months during a year of income that are to be taken into account in determining the proportion of the tax-free threshold that is to be available to a taxpayer. It will mean a month where -

(a)

the whole or a part of a part-year workforce period (see notes on clause 17) subsists in relation to the taxpayer and the taxpayer was a resident of Australia (paragraph (a)); or

(b)

the whole or a part of a part-year residency period (see notes on clause 18) subsists in relation to the taxpayer (paragraph (b)).

"related deductions" is a term used in clause 19 for the purpose of calculating the amount (if any) of pre-workforce income (see notes on clause 19) that may contribute to the amount of a taxpayer's tax-free threshold determined under clause 20. By the definition, a deduction that is allowed or allowable to a taxpayer in the year of income will be a related deduction in relation to a particular kind of assessable income, where the deduction -

(a)

relates exclusively to that particular kind of assessable income (paragraph (a)); or

(b)

in the opinion of the Commissioner, may appropriately be related to that particular kind of assessable income (paragraph (b)).

Thus, outgoings that are incurred in deriving more than one kind of assessable income will be apportionable to the different kinds of income headings to which they relate.

"salary or wages" is defined for the purposes of its use in the determination of pre-workforce income (see notes on clause 19). It means assessable income that is salary or wages for purposes of the PAYE tax instalment deduction provisions of the Assessment Act.

"study period" is defined for the purposes of the operation of clause 19 in determining pre-workforce income. It means the period in a year of income commencing at the start of the year and ending on the day on which a person first ceases a course of full-time education, such as to satisfy the terms of clause 17 in calculating a "part-year workforce period".

Sub-clause (2) is an interpretative provision relevant to the operation of clause 17 and will assist in determining whether a person has ceased to be engaged in a course of full-time education or is engaged in a course at the end of a year of income. Paragraph (a) specifies that a person will be taken to be engaged in a course of full-time education where he or she is on a vacation break in the particular course. Paragraph (b) stipulates that a person enrolled in a course of education is to be deemed to be engaged in that course.

Clause 17: Part-year workforce period

Clause 17 contains the rules for calculating a "part-year workforce period" in relation to a taxpayer in relation to a year of income. The part of the annual tax-free threshold that is to be allowed to a taxpayer is to be calculated having regard to the number of months in the year of income ("partial threshold allowance month" defined in sub-clause 16(1)) where a "part-year workforce period" subsists during a month in which the taxpayer was a resident.

By sub-clause (1), a "part-year workforce period" in relation to a taxpayer occurs in a year of income where -

•

on an occasion (or on 2 or more occasions) in the income year the taxpayer ceased (whether in or out of Australia) to be engaged in a course of full-time education at a school, college, university or similar institution (paragraph (a));

•

the taxpayer was not engaged in such a course of full-time education at the end of the year of income (refer also sub-clause 16(2)) (paragraph (b)); and

•

where the occasion, or the last of the occasions referred to in paragraph (a) (that is, the cessation of full-time education) occurs in the last 4 months of the year of income, the taxpayer is not at any time in the 4 month period after that occasion engaged in a course of full-time education (paragraph (c)).

A "part-year workforce period" will generally occur in a year of income where a taxpayer ceases full-time education for the first time. This will be where a person ceases a course of full-time education in a year and is not engaged in such a course at the end of the year, that is, after ceasing education the taxpayer is in employment, is unemployed, or is on holidays prior to commencing employment. Paragraph (c) will override the test in paragraph (b), i.e., not engaged in a course of full-time education at the end of the income year, so that a "part-year workforce period" will not occur in a year of income if a taxpayer ceases a course within the last 4 months of a year of income and commences another such course within 4 months of the cessation of the earlier course. It will operate so that pro-rating on account of ceasing education will not apply to a taxpayer in an income year, that is, there will be no "part-year workforce period" in the year, where he or she finishes a course in the latter part of the year but starts another within 4 months even though that may occur early in the next income year - such a person would otherwise be subject to pro-rating because of the tests in paragraphs (a) and (b).

Where a "part-year workforce period" for a taxpayer occurs in a year of income, the period will run from the first day of the month in which the taxpayer ceased to be engaged in a course of full-time education, or if he or she ceased to be engaged in such a course on more than one occasion in the year, the first day of the month in which the last occasion occurs (paragraph (d)), until the end of the year of income (paragraph (e)).

Sub-clause (2) will operate where pro-rating of the threshold on account of ceasing education would have applied to a taxpayer in a preceding year of income, that is, a "part-year workforce period" occurred in an earlier year of income (whether before or after the commencement of Division 4 of the Income Tax Rates Act 1986). In such a case a "part-year workforce period" shall be deemed not to have occurred in the current year of income - in effect, where a taxpayer is subject to pro-rating in an income year because of ceasing education, or would have been subject to pro-rating if the provisions had operated at the time when he or she first ceased education, pro-rating for that reason will not apply to the taxpayer in a later income year.

By sub-clause (3), pro-rating because of ceasing education will not apply if the period of a "part-year workforce period" in a year of income is the whole of a year of income. In practice, this would be where the taxpayer ceased education in July of the relevant income year. However, for the purposes of sub-clause (2) of this clause the full-year period will still be treated as a "part-year workforce period" so that pro-rating will not apply in a later year.

Clause 18: Part-year residency period

Clause 18 sets out the rules for calculating "part-year residency periods" in relation to a taxpayer in relation to a year of income. The part of the annual tax-free threshold that is otherwise allowable to a taxpayer will be reduced where a person becomes, or ceases to be, a resident of Australia in a year of income. The maximum tax-free threshold will be allowable on a proportionate basis having regard to the number of months in the year of income ("partial threshold allowance month") where a "part-year residency period" subsists during a month.

In effect, any month or part of a month in a year of income in which a person is a resident will be taken to account in calculating a "part-year residency period" (sub-clause (1)).

By sub-clause (2), a period in a year of income is not to be taken to be a "part-year residency period" if the taxpayer is an "eligible pensioner" in the year of income or the period is the whole of the income year.

As indicated in the earlier notes on clause 16, the term "eligible pensioner" in relation to a year of income is defined to mean a person who receives at any time during the year a social security or repatriation pension, allowance or benefit (other than unemployment, sickness or special benefits) in respect of which the person is liable to be taxed in Australia.

Unlike pro-rating of the threshold on account of ceasing education, pro-rating of the threshold on account of residency may occur in more than one year of income.

The term "resident" has the meaning defined in sub-section 6(1) of the Assessment Act.

Clause 19: Pre-workforce income

Clause 19 sets out a basis for calculating the amounts of "pre-workforce income" derived by a taxpayer in a year of income. Such income will only be derived in a year of income where there is a part-year workforce period in the year of income, i.e., the taxpayer ceased full-time education in the year. The total of the amounts of pre-workforce income derived by a taxpayer in a year of income, that is, the income deemed to be derived in the study period in the year, is relevant for determining the amount of the tax-free threshold that is to be allowed to a taxpayer in the particular year. In effect, the "pre-workforce income", subject to an upper limit, will be added to the threshold otherwise available to a taxpayer because of pro-rating on account of "partial threshold allowance months" to obtain the total tax-free threshold to be used in calculating his or her tax payable.

In the calculation of "pre-workforce income", assessable income of a particular kind will be reduced by deductions that relate exclusively to, or may appropriately be related to, that kind of income. These deductions are defined in clause 16 as "related deductions" - see earlier notes on that clause.

Clause 19 will allocate the income of a taxpayer for a year of income to his or her study period in the income year to determine the total amount of "pre-workforce income" derived in the study period. The term "study period" is also defined in clause 16 and, broadly, is the period in a year of income before the taxpayer ceased full-time education.

The following amounts will be pre-workforce income in a year of income -

•

assessable income derived by way of salary or wages in the study period, reduced by any related deductions (paragraph (a));

•

assessable income derived by way of the proceeds of a business carried on by the taxpayer alone during the study period, calculated in accordance with the formula

(A*B)/(C)


, where -

A

is the amount of the assessable income from the business reduced by any related deductions;

B

is the number of days in the study period when the business was carried on by the taxpayer alone; and

C

is the number of days in the period during the year of income when the business was carried on by the taxpayer alone (paragraph (b));

•

assessable income from the net income of a partnership, where the taxpayer was a partner during the study period, reduced by any related deductions, and apportioned on a similar basis as applies in paragraph (b) - paragraph (c);

•

assessable income included under section 97, 98A, 99B or 100 of the Assessment Act, where the taxpayer was a beneficiary (see earlier notes on definition of that term in clause 16) in the relevant trust estate during the study period, reduced by any related deductions, and apportioned on a similar basis as in paragraph (b) - (paragraph (d));

•

any other assessable income derived in the year of income, not covered by paragraphs (a) to (d) (e.g., interest or dividends), reduced by any related deductions and apportioned on the basis that the number of days in the study period bears to the number of days in the year of income (paragraph (e)).

Clause 20: Pro-rating of the tax-free threshold

Clause 20 sets out the basis of calculating the amount of the tax-free threshold to apply for an individual taxpayer where there are one or more partial threshold allowance months as defined in clause 16 (see earlier notes on that clause) in relation to the individual in the year of income. The clause also sets out the basis of calculating the threshold for a trustee assessed under section 98 of the Assessment Act on the share of a beneficiary in a year of income where the beneficiary is a non-resident for part of the year of income.

By virtue of sub-clause (1), where the section operates in relation to a year of income for an individual taxpayer, the tax-free threshold of $4,890 for the 1986-87 year of income (Part I of Schedule 1 to the Bill), or $5,100 for the 1987-88 and subsequent years of income (Part I of Schedule 7 to the Bill) (paragraph (a) and (b)), is to be replaced by an amount calculated in accordance with the formula

(A*B)+C


, where -

A

is $408 for 1986-87 (paragraph (c)), and $425 in subsequent years (paragraph (d));

B

is -

(i)

where the pro-rating is solely on account of residency of the taxpayer, the number of partial threshold allowance months in relation to the year of income (i.e., the number of months the taxpayer was a resident) (paragraph (e)); or

(ii)

where there is a part-year workforce period in relation to the taxpayer in relation to the year of income (i.e., the taxpayer ceased education during the year), the number of partial threshold allowance months in the year of income, not including any such month before the commencement of the part-year workforce period (i.e., the number of months after ceasing education during which the taxpayer was also a resident) (paragraph (f)); and

C

is so much of the amount of pre-workforce income (defined in clause 19 as, broadly, the income derived while still in full-time education) derived by the taxpayer in the year of income as does not exceed the amount calculated in accordance with the formula

D*E


, where -

D

is the same component as A, (i.e., $408 for 1986-87 and $425 in subsequent years); and

E

is -

(i)

where pro-rating does not apply on account of residency, the number of months in the year occurring before the commencement of the part-year workforce period (i.e., the months while in full-time education) (paragraph (g)); or

(ii)

in any other case, the number of months in any part-year residency period in the year, not including any months included in the part-year workforce period (i.e., the months in the year while both a resident and in full-time education) (paragraph (h)).

Thus, the part AB of the formula will operate to determine the tax-free threshold of an individual taxpayer in a year of income, where -

(a)

he or she has a part-year residency period or periods (clause 18) in relation to the year of income; or

(b)

he or she has a part-year workforce period (clause 17) in relation to the year of income, but does not have any pre-workforce income (clause 19);

Where the situation is represented by (a) above the tax-free threshold is the component A multiplied by the number of months of residency. However, where (b) applies, because the taxpayer ceased full-time education during the year, any periods of residency are not included in the calculation, except to the extent they are part of the part-year workforce period (refer paragraph (a) of the definition of "partial threshold allowance month" in clause 16 explained in earlier notes).

The component C of the formula only comes into the calculation where a taxpayer has pre-workforce income (refer clause 19) in relation to a year of income - broadly, income derived before ceasing full-time education - to determine an additional amount to be added to the amount calculated by the part AB of the formula. The amount for component C (that is, the pre-workforce income) is limited to the amount calculated by multiplying component A by -

(a)

where there is no part-year residency period (clause 18) in the year of income (i.e., basically, the taxpayer is a resident for the whole of the year of income) - the number of months that occur before the start of the part-year workforce period (clause 17) (i.e., broadly, the number of months in full-time education); or

(b)

in any other case, the number of months in the year included in a part-year residency period that occur before the start of the part-year workforce period (i.e., broadly, the number of months in the year the taxpayer is a resident before he or she ceases full-time education).

Basically, in calculating the limit to be imposed on component C, any months in the year of income when the taxpayer was not a resident will not be taken into account. Also, there is no calculation for component C where pro-rating is applying only on account of a part-year residency period. Pro-rating must apply on account of a part-year workforce period for there to be an amount of pre-workforce income.

Sub-clause (2) of clause 20 applies to limit the tax-free threshold available in calculating the tax payable by the trustee of a trust estate under section 98 of the Assessment Act in respect of the share of a beneficiary in the trust estate of a year of income, where there are one or more part-year residency periods in relation to the beneficiary in the year of income.

Similar to the calculation provided for in sub-clause (1), in calculating the tax payable by the trustee the reference in Part I of Schedule 1 to $4,890, and in Part I of Schedule 7 to $5,100 (paragraphs (a) and (b)), is to be taken to be a reference to the amount calculated in accordance with the formula

A*B


, where -

A

is $408 for 1986-87 (paragraph (c)) and $425 in subsequent years (paragraph (d)); and

B

is the number of months in the year of income when a part-year residency period or periods subsisted in relation to the beneficiary in the year of income.

Sub-clause (3) makes it clear that the clause does not apply to determine the tax payable by a trustee under section 99.

The application of the foregoing rules is explained in the following examples.

Example 1

Taxpayer -

•

arrives in Australia from overseas on 14 August 1986 and becomes a resident from that day;

•

continues his or her full-time secondary education on arrival but ceases the course on 21 November 1986; and

•

earns $8,000 in the balance of the year.

Example 2

Taxpayer -

•

resident for the whole of the year;

•

derives salary or wage income in the period July-October 1986 of $600 and incurs $25 allowable outgoings in earning the income;

•

ceases a course of full-time education on 3 December 1986; and

•

earns $8,000 in the period February-June 1986 and makes allowable gifts of $45.

Example 3

Taxpayer -

•

arrives in Australia from overseas on 14 August 1986;

•

departs Australia permanently on 24 February 1987;

•

treated as a resident for Assessment Act purposes for period in Australia;

•

earns $8,000 while a resident of Australia

PART III - RATES OF INCOME TAX PAYABLE UPON INCOMES OF COMPANIES, PRESCRIBED UNIT TRUSTS, SUPERANNUATION FUNDS AND CERTAIN OTHER TRUSTS

Part III of the Bill - comprising clauses 21 to 27 - will formally declare the rates of tax payable on the 1985-86 incomes of companies, registered organisations and prescribed unit trusts and on the 1986-87 incomes of superannuation funds and ineligible approved deposit funds.

Clause 21: Interpretation

Clause 21 is a drafting measure that excludes from the meaning of tax in Part III, tax that is within the scope of Part II of the Bill - the Part that declares the rates of tax payable by individuals and trustees generally.

Clause 22: Act to be deemed to be the Act declaring rates of income tax

Clause 22 specifies that the proposed Income Tax Rates Act 1986 is to be deemed to be the Act that declares the rates of tax for the 1986-87 year of tax, for the purposes of section 104 of the Assessment Act.

Clauses 23 to 27

Clauses 23 to 27 of the Bill declare the various rates of tax payable by taxpayers to which Part III applies. In many cases, the rates of tax to be declared by this Bill reflect the changes that are proposed to the personal income tax rate scales. Specifically, the rates of tax declared by clauses 23 to 27 for the 1986-87 financial year are as follows -

•

by sub-clause 23(2) and paragraph (a) of sub-clause 23(3) the general rate of tax payable on the taxable income of companies is to remain at 46 per cent;

•

by paragraph (b) of sub-clause 23(3) the rate of additional tax payable by a private company on the amount by which dividends paid fall short of a sufficient distribution is to remain at 50 per cent;

•

by sub-clause 23(4) the rate of tax payable by a registered organisation is to remain at 20 per cent;

•

by sub-clause 23(5) a non-profit company, not being a registered organisation, will not pay tax where its taxable income does not exceed $416, and where its taxable income exceeds $416 but does not exceed $2,542, the rate at which tax "shades-in" will remain at 55 per cent of the excess of the taxable income over $416;

•

by clauses 24 and 25 the rate of tax payable by a trustee on the net income of a corporate unit trust or a public trading trust (collectively referred to as "prescribed unit trusts") to which sections 102K and 102S (respectively) of the Assessment Act apply, is to remain at 46 per cent;

•

by sub-clause 26(1) the rate of tax payable by a trustee on certain taxable income of superannuation funds to which section 121CA or 121CB of the Assessment Act applies is to remain at 50 per cent;

•

by sub-clause 26(2) the rate of tax payable by a trustee on the investment income of an employer sponsored superannuation fund which fails to comply with certain investment rules and to which section 121CC of the Assessment Act applies is to be reduced to 24.42 per cent;

•

by sub-clause 26(3) the rate of tax payable on income of trusts that are superannuation funds to which section 121DA of the Assessment Act applies is to be reduced to 57.08 per cent;

•

by sub-clause 26(4) the rate of tax payable on income of trusts that are superannuation funds to which section 121DAB of the Assessment Act applies is to be reduced to 44.25 per cent; and

•

by clause 27 the rate of tax payable by the trustee on the taxable income of an ineligible approved deposit fund is to be reduced to 44.25 per cent.

INCOME TAX BILL 1986

This Bill will formally impose - at the rates to be declared by the accompanying Income Tax Rates Bill 1986 - the tax payable -

•

by individuals, and by trustees generally, for the 1986-87 financial year;

•

by trustees of superannuation funds and ineligible approved deposit funds for the 1986-87 financial year; and

•

by companies, registered organisations, corporate unit trusts and public trading trusts for the 1986-87 financial year, in respect of income of the 1985-86 income year.

Notes on the clauses of the Bill follow.

Clause 1: Short Title

By this clause the Act is to be cited as the Income Tax Rates Act 1986.

Clause 2: Commencement

By this clause, the Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

This clause contains measures to assist in interpretation. The definitions of "non-profit company", "prescribed unit trust" and "registered organisation" are in the same terms as the definitions used in clause 3 of the Income Tax Rates Bill 1986 explained earlier in these notes.

Clause 4: Incorporation

This clause effectively provides for the Bill to operate in conjunction with the provisions of the Assessment Act.

Clause 5: Imposition of income tax

Sub-clause (1) of clause 5 has the effect, when read with clause 7, of formally imposing for the 1986-87 financial year income tax payable by taxpayers generally at the rates to be declared for that year by the Income Tax Rates Bill 1986. As indicated in earlier notes, the rates of tax to be declared by that Bill for 1986-87 for individuals and trustees generally, reflect the proposed changes to the personal income tax rate scale that are to apply from 1 December 1986. The rates declared for certain superannuation funds and for ineligible approved deposit funds also reflect proposed changes to the personal income tax rate scale.

Sub-clause (2) excludes from the scope of the Bill taxes that are payable in accordance with various sections of the Income Tax Assessment Act (1936) ("the Assessment Act") and which are imposed by separate Acts. These other taxes and the relevant sections of the Assessment Act are those payable on diverted income (section 121H), interest paid by a company on bearer debentures (section 126), withholding taxes (sections 128B, 128N, 128NA and 128V), branch profits tax (section 128T), film and video tape royalties (section 136A) and the redemption of drought bonds in certain circumstances (section 159C).

Sub-clause (3) ensures that non-profit companies (as defined) are not required to pay tax where their taxable income does not exceed S416.

Clause 6: Adjustments where amounts paid by, or refunded to, taxpayer would not exceed 49 cents

By clause 6, an adjustment of tax may be made where the amount due to, or by, the taxpayer does not exceed 49 cents. If a taxpayer's assessment results in an amount of 49 cents or less being payable to the taxpayer, paragraph (2)(a) of this clause imposes additional tax equal to the amount of the refund. In the converse situation, where an amount of 49 cents or less would be payable to the Commissioner, paragraph (2)(b) provides for a reduction of an equivalent amount in the amount of tax otherwise payable.

Clause 7: Levy of tax

Clause 7 operates to formally levy the tax imposed by clause 5 of the Bill in respect of the 1986-87 financial year and, until the Parliament otherwise provides, for the 1987-88 financial year. This will mean that, for the purposes of Part II of the Income Tax Rates Bill 1986, the rates declared in Division 2 for the 1986-87 financial year are to be levied and payable for that year only, and the rates declared in Division 3 for the 1987-88 and subsequent financial years are to be levied and payable for the 1987-88 financial year, until the Parliament otherwise provides.

Clauses 8 and 9 : Provisional tax

Clause 8 will formally impose provisional tax for the 1986-87 financial year, as required by sub-section 221YB(3) of the Assessment Act (refer Clause 9).

Clause 10: Instalments of tax

Clause 10 of the Bill will authorise the collection in the 1987-88 financial year of instalments of tax payable by companies, corporate unit trusts and public trading trusts in accordance with the relevant provisions of the Assessment Act.

TAXATION LAWS (MISCELLANEOUS PROVISIONS) BILL 1986

Introductory Note

This Bill will amend a number of taxing Acts mainly as a consequence of changes proposed to the personal rate scale from 1 December 1986 and from 1 July 1987 by the Income Tax Rates Bill 1986. It will also give effect to Budget proposals to -

•

increase the taxable income level at or below which the maximum pensioner rebate of $250 is available; and

•

increase the maximum levels of the beneficiary rebates and the taxable income levels above which they begin to shade-out.

In addition, the Bill will extend the benefit of the beneficiary rebates to recipients of benefits or payments under the Commonwealth's Tertiary Education Assistance Scheme (TEAS) and the Adult Secondary Education Assistance Scheme (ASEAS).

Clause 1: Short title

The proposed Act is to be cited as the Taxation Laws (Miscellaneous Provisions) Act 1986.

Clause 2: Commencement

By this clause it is proposed that this Act shall come into operation on the day on which it receives Royal Assent. But for this clause, the Act would, by virtue of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Amendments

By clause 3 the Acts specified in the Schedule to the Bill are to be amended as set out in the Schedule. The particular amendments are discussed hereunder.

Income Tax Assessment Act 1936

Rebate for net medical expenses in excess of $1,000 (section 159P)

Sub-section 159P(3A) of the Income Tax Assessment Act 1936 ("the Assessment Act") allows a rebate of tax equal to 30 per cent of eligible net medical expenses in excess of $1,000 incurred during a year of income by taxpayers on their own or their dependants' behalf. The Schedule to the Bill proposes that sub-section 159P(3A) be amended to set the level of the rebate at 29 per cent. Under sub-clause 4(2) of the Bill (which is subject to sub-clause 4(3)), the amendment will apply to assessments in respect of income of the year of income that commenced on 1 July 1986 and of all subsequent years of income.

Sub-clause 4(3) is a transitional measure that is to have application only for the 1986-87 financial year. It will specify that the rate of the rebate to be allowed under sub-section 159P(3A) in 1986-87 assessments is to be 29.42 per cent.

The change in the rate of the net medical expenses rebate is consistent with the reduction proposed by the Income Tax Rates Bill 1986 to the rate of tax on a range of income to $19,500. As explained in the earlier notes on that Bill, the existing rate of 30 per cent is to be reduced to 29.42 per cent in 1986-87 and to 29 per cent in 1987-88 and subsequent years.

Rebate for interest on home loan payments (section 159ZK)

By sub-section 159ZK(1) of the Assessment Act a rebate of tax of 30 per cent of the interest on home loan payments is allowed during the first 5 years of owner-occupation of a sole or principal residence. The Schedule to the Bill proposes that sub-section 159ZK(1) be amended to set the level of the rebate at 29 per cent. By virtue of sub-clause 4(2) of the Bill, the amendment will apply to assessments in respect of income of the year of income that commenced on 1 July 1986 and of all subsequent years, subject to the transitional measure in sub-clause 4(4), that is to have application only for the 1986-87 financial year. By this latter provision the rebate to be allowed under sub-section 159ZK(1) in 1986-87 assessments is to be 29.42 per cent.

Pensioner and Beneficiary Rebates (section 160AAA)

Section 160AAA of the Assessment Act may provide a rebate of tax where an amount is included in a taxpayer's assessable income that is -

•

an Australian social security pension or repatriation pension that is subject to tax in Australia (pensioner rebate - sub-section 160AAA(1)); or

•

a benefit paid under Part VII of the Social Security Act 1947 - generally, unemployment, sickness or special benefits (beneficiary rebates - sub-section 160AAA(2)).

The amendments of the Assessment Act proposed by this Bill will -

•

increase the taxable income level at or below which the maximum pensioner rebate of $250 is available;

•

increase the maximum level of the beneficiary rebates and the taxable income limits above which they begin to shade-out; and

•

extend the benefit of the beneficiary rebate provisions, with effect from 1 July 1986, to recipients of benefits or payments under the Commonwealth's Tertiary Education Assistance Scheme (TEAS) and the Adult Secondary Education Assistance Scheme (ASEAS).

Pensioner rebate

Under sub-section 160AAA(1) of the Assessment Act a taxpayer in receipt of an Australian social security or repatriation pension that is subject to tax in Australia may be entitled to a rebate of tax which is designed to ensure that persons wholly or mainly dependent on such pensions will not have to pay tax. The maximum rebate of $250 shades-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds a specified level. The new levels proposed by the Schedule for 1986-87 and for 1987-88 and subsequent years reflect the effect of the personal income tax rate scales that are to apply from 1 December 1986 to 30 June 1987 and from 1 July 1987.

The Schedule proposes that paragraphs 160AAA(1)(g) and (h) be amended to increase the taxable income level - from $5,595 to $6,142 - at which the maximum amount of the pensioner rebate is available before it begins to shade-out. This proposed change reflects the effect of the new personal income tax rate scale that is to apply from 1 July 1987, and will mean that where an eligible taxpayer's taxable income (that is, total assessable income less allowable deductions) is $6,142 or less in 1987-88 ($5,914 or less for 1986-87 - see sub-clause 4(5) of the Bill), the full rebate of $250 will be allowed. The rebate cannot however, in terms of existing section 160AD of the Assessment Act, exceed the tax that would otherwise be payable. The rebate will be shaded-out where a taxpayer's taxable income exceeds $6,142 in 1987-88 ($5,914 for 1986-87), and will shade-out fully at a taxable income of $8,142 in 1987-88 ($7,914 in 1986-87).

By sub-clause 4(2) of the Bill, the amendments to sub-section 160AAA(1) proposed by the Schedule are to first apply in assessments of the 1986-87 year of income, but this is subject to sub-clause 4(5) which is a transitional provision having application in relation to the pensioner rebate for that year only.

Beneficiary rebates

This Bill proposes to amend sub-section 160AAA(2) of the Assessment Act to increase the maximum rebates of tax, and to increase the taxable income level at or below which the rebates are available, for taxpayers whose assessable income includes certain social security benefits. It will also extend the benefit of the rebate to the recipients of certain educational allowances.

Under sub-section 160AAA(2) of the Assessment Act, where the assessable income of a taxpayer includes a benefit that is paid under Part VII of the Social Security Act 1947 (unemployment, sickness or special benefits), a married (including de facto married) taxpayer may be entitled to a rebate of $220. For other taxpayers in receipt of a benefit the rebate is $170. As with the pensioner rebate provisions, the rebates shade-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds a specified level - $8,795 in the case of a married taxpayer and S5,275 in any other case.

The recipients of educational allowances to which the benefit of the beneficiary rebates is to be extended are those receiving benefits as a grant of Tertiary Education Assistance (TEAS) under the Student Assistance Act 1973 and payments under the Adult Secondary Education Assistance Scheme (ASEAS). The relevant benefits and payments are included in a taxpayer's assessable income where they are received in respect of a period on and after 1 January 1986.

The Schedule proposes that sub-section 160AAA(2) be omitted and substituted by a new sub-section 160AAA(2). Proposed new sub-section 160AAA(2) differs from the existing sub-section (2) in two aspects. First, it is re-drafted to include recipients of TEAS benefits and ASEAS payments within its scope. Second, it increases the levels of the rebates from $220 to $280 for married beneficiaries and, for other beneficiaries, from $170 to $190. Reflecting these increased rebate levels and the new personal income tax rate scale for 1986-87, the revised sub-section (2) incorporates new taxable income limits at or below which the maximum rebate is available. These limits are, $9,436 for married beneficiaries and, $5,669 for other beneficiaries.

By new sub-section 160AAA(2), where a taxpayer's assessable income includes a social security benefit (paragraph (a)), a TEAS benefit (paragraph (b)) or an ASEAS payment (paragraph (c)), the taxpayer will be entitled to a maximum rebate of -

•

$280 in the case of a married taxpayer where the taxpayer's taxable income does not exceed $9,436, shading-out at 12.5 cents for each dollar of taxable income above $9,436, that is, there will be no rebate available where a married taxpayer's taxable income exceeds $11,675 (paragraph (d)); and

•

$190 in any other case where the taxpayer's taxable income does not exceed $5,669, shading-out at 12.5 cents for each dollar of taxable income above $5,669, that is, there will be no rebate available where the taxpayer's taxable income exceeds $7,188 (paragraph (e)).

As with the pensioner rebate, the rebate cannot exceed the tax that would otherwise be payable.

By sub-clause 4(2) of the Bill the amendment to sub-section 160AAA(2) proposed by the Schedule is to first apply in assessments of the 1986-87 year of income.

Rebate on the assessable proceeds of certain life assurance policies (section 160AAB)

Section 160AAB of the Assessment Act authorises a rebate of tax in respect of bonuses, and other amounts in the nature of bonuses, received under life assurance policies and included in the taxpayer's assessable income by virtue of section 26AH of the Assessment Act. The rebate is currently set at 30 per cent of the amount included in assessable income.

The Schedule to the Bill proposes to amend section 160AAB by omitting the references to a 30 per cent rate of rebate in sub-sections 160AAB(2), (3), (4), (5), (5A) and (6) and substituting in those sub-sections a reference to a 29 per cent rate. The section is also to be amended to omit sub-section (7), which was a transitional application provision relevant only to the 1982-83 financial year.

By sub-clause 4(2) of the Bill, the amendments to section 160AAB proposed by the Schedule are to first apply in income tax assessments for the 1986-87 year of income. By sub-clause 4(6), however, the rate of the rebate to apply in that year is to be 29.42 per cent.

Rebate on fully assessable lump sum termination payments (section 160AA)

Section 160AA of the Assessment Act provides a rebate of tax to limit to no more than 30 per cent the rate of tax on lump sum payments on termination of employment in lieu of unused annual leave, and long service leave (accrued after 15 August 1978) and on the post-June 1983 component of lump sum superannuation and kindred termination payments (called eligible termination payments). Where the recipient of an eligible termination payment is aged 55 or more, section 160AA further limits the rate of tax on the first $55,000 of the post-June 1983 component to no more than 15 per cent.

Section 160AA operates by first determining -

•

the part of any rebatable termination payment (or payments) included in a taxpayer's taxable income that, having regard to the tax-free threshold, where appropriate, is actually subject to tax - referred to in the law as the "relevant income amount"; and

•

the tax (the "additional tax amount") that is attributable to, broadly, the "relevant income amount".

The taxpayer's rebate entitlement is then calculated, under existing paragraph 160AA(1)(d), by deducting from the "additional tax amount" the sum of -

•

15 per cent of the "qualifying 15% amount", if any - i.e., the part of the "relevant income amount" to be taxed at a maximum rate of 15 per cent (sub-paragraph (i));

•

25 per cent of the "qualifying 25% amount", if any - i.e., the part of the "relevant income amount", not being a "qualifying 15% amount", that falls to be taxed at the present lowest marginal rate (sub-paragraph (ii)); and

•

30 per cent of the remainder of the "relevant income amount" (sub-paragraph (iii)),

with any excess of the "additional tax amount" over that sum being allowed as a rebate of tax. The rebate calculation takes into account the fact that, in the case of resident taxpayers, part of a 30 per cent rebatable termination amount may lie in the range of taxable income to which the 25 per cent (for 1985-86) tax rate applies.

By the Income Tax Rates Bill 1986 (see earlier notes on that Bill), it is proposed that new rates of tax below the 30 per cent rate will apply to both resident and non-resident taxpayers for the 1986-87 and subsequent financial years. The rates below 30 per cent that are proposed for the 1986-87 financial year are -

•

resident taxpayers: 24.42 per cent, 26.50 per cent and 29.42 per cent; and

•

non-resident taxpayers: 29.42 per cent.

The rates below 30 per cent that are proposed for the 1987-88 and subsequent financial years are -

•

resident taxpayers: 24 per cent and 29 per cent; and

•

non-resident taxpayers: 29 per cent.

The amendments of section 160AA proposed by the Schedule and sub-clause 4(7) of the Bill will ensure that the appropriate rebate is allowed having regard to the proposed new rates of tax for 1986-87 and 1987-88 and subsequent income years. By virtue of sub-clause 4(2) of the Bill the amendments are to apply in respect of income tax assessments for the 1986-87 and subsequent years of income.

The Schedule to the Bill proposes that existing paragraph (d) of sub-section 160AA(1) be omitted and replaced by a new paragraph 160AA(1)(d). Under that new paragraph, a resident taxpayer's rebate entitlement is to be calculated by comparing the "additional tax amount" to the sum of -

•

15 per cent of the "qualifying 15% amount", if any - i.e., as under the existing arrangements (sub-paragraph (i));

•

24 per cent of the "qualifying 24% amount", if any - i.e., the part of the "relevant income amount" (see earlier notes on the operation of section 160AA), not being a "qualifying 15% amount", that falls to be taxed at the lowest marginal rate for resident taxpayers (sub-paragraph (ii));

•

29 per cent of the "qualifying 29% amount", if any - i.e., the part of the "relevant income amount", not being a "qualifying 15% amount" or a "qualifying 24% amount", that falls to be taxed at the 29 per cent tax rate (sub-paragraph (iii)); and

•

30 per cent of the remainder of the "relevant income amount" (sub-paragraph (iv)),

with the excess of the "additional tax amount" over that sum being allowed as a rebate of tax.

In the case of a non-resident taxpayer, the taxpayer's rebate entitlement will be calculated without regard to any "qualifying 24% amount" because the lowest marginal rate of tax to be applied for non-resident taxpayers is to be 29 per cent in 1987-88 and subsequent years (29.42 per cent in 1986-87).

The Schedule proposes the omission of the existing definition of "qualifying 25% amount" from sub-section 160AA(2) and the substitution of two new definitions -

"qualifying 24% amount" is to mean the part of a rebatable termination payment, other than the part that is to be subject to tax at a maximum rate of 15 per cent, that falls within the range of taxable income from the tax-free threshold to $12,600, so that for resident taxpayers it attracts the 24 per cent marginal tax rate for 1987-88. By new sub-paragraph 160AA(1)(d)(ii), only 24 per cent of that part of the payment will be included in the amount that is compared to the "additional tax amount" for the purpose of calculating any allowable rebate. There will be a "qualifying 24% amount" only where the taxpayer is a resident and the "notional (non-lump sum) taxable income" (i.e., taxable income other than rebatable termination payments actually subject to tax) does not exceed $12,600. In other words, some part of the rebatable termination payments must attract the 24 per cent marginal rate for 1987-88. In those circumstances, the "qualifying 24% amount" will be the excess of $12,600 - or, if the amount of the "non-15% taxable income" (i.e., taxable income other than the component of an eligible termination payment to which a maximum rate of 15 per cent applies) is less than $12,600, the excess of that amount - over the "notional (non-lump sum) taxable income".

"qualifying 29% amount" is to mean the part of a rebatable termination payment, other than the part that is to be subject to tax at a maximum rate of 15 per cent, that, for resident taxpayers falls within the range of taxable income from $12,601 to $19,500 and, for non-resident taxpayers falls within the range of taxable income up to $19,500, so that it attracts the 29 per cent marginal tax rate for 1987-88. By new sub-paragraph 160AA(1)(d)(iii), only 29 per cent of that part of the payment will be included in the amount that is compared, together with 15 per cent of any "qualifying 15% amount" and, for resident taxpayers, 24 per cent of any "qualifying 24% amount", to the "additional tax amount" for the purpose of calculating any rebate to be allowed. There will be a "qualifying 29% amount" only where the "notional (non-lump sum) taxable income" does not exceed $19,500. In those circumstances, the "qualifying 29% amount" will be -

•

where the taxpayer is a resident, the excess of $19,500 - or, if the amount of the "non-15% taxable income" (see notes on the definition of "qualifying 24% amount") is less than $19,500, the excess of that amount over the sum of the "notional (non-lump sum) taxable income, and any "qualifying 24% amount" (paragraph (a)); and

•

where the taxpayer is a non-resident, the excess of $19,500 - or, if the amount of the "non-15% taxable income" is less than $19,500, the excess of that amount - over the "notional (non-lump sum) taxable income" (paragraph (b)).

The Schedule to the Bill also proposes the omission of references to "$4,595" (the tax-free threshold that applied in the resident's tax scale for 1984-85 and 1985-86) from paragraph 160AA(1)(b) and from the definition of "relevant income amount" in sub-section 160AA(2) and the substitution of references to "the tax threshold". As explained earlier, the "relevant income amount" is that part of any rebatable termination payment (or payments) included in a taxpayer's taxable income that is actually subject to tax, having regard to the existence of a tax-free threshold for resident taxpayers. The use of the term "tax threshold" (see the following notes on the definition of that term) will enable the appropriate threshold amount to be applied for the purposes of determining a "relevant income amount".

Finally, the Schedule proposes that a definition of "tax threshold" be inserted at the end of sub-section 160AA(2). By that definition, the term is to mean S5,100 (the tax-free threshold amount in the general rate scale for 1987-88 and subsequent financial years as set out in Part 1 of Schedule 7 of the Income Tax Rates Bill 1986 - see earlier notes), or where, by operation of the proposed tax-free threshold pro-rating measures in the Income Tax Rates Bill 1986 (see earlier notes on that Bill), a different threshold would be available to the taxpayer, that different amount.

By the operation of sub-clause 4(7) of the Bill, the provisions of section 160AA as proposed to be amended by the Schedule, are to be modified for the 1986-87 transitional year. This is necessary to ensure that the appropriate marginal tax rates and the tax-free threshold that are to apply for 1986-87, are incorporated in the measures in section 160AA that operate to calculate the rebate of tax for that year. By way of comparison, the following table sets out the relevant marginal rates and taxable income ranges for 1986-87 and 1987-88 and subsequent years.

As a transitional measure to give effect to the rates of tax that are to apply in 1986-87, paragraph 4(7)(a) of the Bill proposes that section 160AA be applied for the 1986-87 income year as if paragraph (1)(d), - as proposed to be substituted in the Assessment Act by the Schedule to this Bill for 1987-88 and subsequent income years - were omitted and a modified paragraph 160AA(1)(d) substituted for that year. The modified paragraph 160AA(1)(d) differs from the "omitted" paragraph (d) in two ways. First, the references to 24 per cent and 29 per cent of the respective qualifying amounts are substituted by references to 24.42 per cent of a "qualifying 24.42% amount" (modified sub-paragraph (ii)) and 29.42 per cent of a "qualifying 29.42% amount" (modified sub-paragraph (iv)) respectively. Second, the paragraph incorporates a further step in the process of determining a taxpayer's rebate entitlement that reflects the operation of a 26.5 per cent tax rate during 1986-87 (modified sub-paragraph (iii)).

In effect, the rebate to be allowed under section 160AA for the 1986-87 year will be the excess of the "additional tax amount" over the sum of -

•

15 per cent of the "qualifying 15% amount" (sub-paragraph (i));

•

24.42 per cent of the "qualifying 24.42% amount" (sub-paragraph (ii));

•

26.5 per cent of the "qualifying 26.5% amount" (sub-paragraph (iii));

•

29.42 per cent of the "qualifying 29.42% amount" (sub-paragraph (iv)); and

•

30 per cent of the remainder of the "relevant income amount" (sub-paragraph (v)).

By paragraph 4(7)(b) of the Bill, section 160AA is also to be applied in 1986-87 as if the definitions of "qualifying 24% amount" and "qualifying 29% amount" - as proposed to be inserted in sub-section 160AA(2) by the Schedule to the Bill for the 1987-88 and subsequent income years - were substituted by the following definitions -

"qualifying 24.42% amount" is to mean the part of a rebatable termination payment, other than the part that is to be subject to tax at a maximum rate of 15 per cent, that falls within the range of taxable income from the tax-free threshold to $12,500. A "qualifying 24.42% amount" will not be available unless the taxpayer is a resident and the "notional (non-lump sum) taxable income" does not exceed $12,500;

"qualifying 26.5% amount" is to mean the part of a rebatable termination payment, other than the part that is to be subject to tax at a maximum rate of 15 per cent, that falls within the range of taxable income from $12,501 to S12,600. A "qualifying 26.5% amount" will not be available unless the taxpayer is a resident and the "notional (non-lump sum) taxable income" does not exceed $12,600;

"qualifying 29.42% amount" is to mean the part of a rebatable termination payment, other than the part that is to be subject to tax at a maximum rate of 29.42 per cent, that falls within the range of taxable income from $12,601 to $19,500 for residents, and up to $19,500 for non-residents. A "qualifying 29.42% amount" will not be available where the "notional (non-lump sum) taxable income" exceeds $19,500.

As a final transitional arrangement for the application of section 160AA in 1986-87, the references to S5,100 and the reference to Schedule 7 in the definition of "tax threshold" in sub-section 160AA(2) are, by paragraph (4)(7)(c), to be substituted by a reference to $4,890 and a reference to Schedule 1. This will ensure that the appropriate tax threshold is applied for 1986-87 for the purposes of determining a "relevant income amount" in sub-section 160AA(2).

Further amendments of sub-section 160AA(2) that are proposed by the Schedule are the omission of the reference to the Income Tax (Rates) Act 1982 in the definitions of "non-resident taxpayer" and "resident taxpayer" and the substitution of a reference to the proposed Income Tax Rates Act 1986. This is a drafting measure to ensure that the terms will retain their meanings after the Income Tax (Rates) Act 1982 ceases to have effect for the 1986-87 and subsequent financial years.

Capital gains (section 160ZYO)

By the Schedule to the Bill a minor typographical error is to be corrected in sub-section 160ZYO(1) of the Assessment Act.

Liability of a company to pay instalments of tax (section 221AC)

Existing sub-section 221AC(2) of the Assessment Act provides that instalments of tax are not payable by a company in respect of the income of the company of any particular year of income unless the relevant Act that declares the rates of tax relevant to that year, or to the preceding year, of income provides that instalments are so payable. The purpose of this sub-section is to require, before such instalments are payable, an annual determination to that effect.

The Schedule to the Bill proposes the omission of sub-section 221AC(2) and its replacement with a new sub-section 221AC(2). The new section will stipulate that instalments are not payable in respect of the income of a company of a year of income unless the relevant Act that imposes income tax on the income of companies of the year, or the preceding year, of income provides that instalments of tax are payable in respect of income of that year of income.

New sub-section 221AC(2) is a drafting measure consequential upon the proposal to separate the declaration and imposition functions for company income tax rates. In future, the Act declaring the rates of tax will not be an annual Act, but will be a standing measure supplemented by an annual Act imposing tax.

By sub-clause 4(8), proposed new sub-section 221AC(2) is to apply in relation to the 1986-87 year of income and all subsequent years of income.

Deductions from mining payments (section 221ZB)

Sub-section 221ZB(1) of the Assessment Act requires that a person shall not make a mining payment that is, broadly, a payment in respect of mining operations on Aboriginal land, unless the person has made a deduction therefrom of an amount equal to 6 per cent of the payment. That rate is equal to tax at 30 per cent on an amount equal to one-fifth of the mining payment.

The Schedule to the Bill proposes that this rate of deduction be changed to 5.8 per cent - equal to tax at 29 per cent on one-fifth of the mining payment. By sub-clause 4(9) of the Bill the new rate of deduction is to apply to mining payments made or applied on or after 1 December 1986.

Income Tax (Bearer Debentures) Act 1971

The Schedule to the Bill will amend the Income Tax (Bearer Debentures) Act 1971 to alter the rate of tax payable under section 126 of the Assessment Act on interest payable by a company on bearer debentures where the names and addresses of the holders of the debentures are not provided by the company to the Commissioner of Taxation.

The Schedule will omit sub-paragraphs 6(b)(ii) and (iii) of the Income Tax (Bearer Debentures) Act 1971 and substitute four new sub-paragraphs - sub-paragraphs (ii) to (v) inclusive. By these sub-paragraphs it is proposed that the existing rate of 60 per cent applying to interest paid or credited after 23 November 1983 will continue to apply to relevant interest paid or credited before 1 December 1986 (sub-paragraph (iii)). For interest paid or credited on or after 1 December 1986 and on or before 1 July 1987, the rate is to be 55 per cent (sub-paragraph (iv)); and for interest paid or credited on or after 1 July 1987 the rate of tax is to be 49 per cent (sub-paragraph (v)).

Income Tax (Mining Withholding Tax) Act 1979

In line with the amendment of sub-section 221ZB of the Assessment Act described above, the Schedule also proposes an amendment to section 6 of the Income Tax (Mining Withholding Tax) Act 1979 that declares the rate of tax payable in respect of mining payments relating to the use of Aboriginal land for mining operations. The rate of tax is to be 5.8 per cent. By clause 5 of the Bill the rate is to apply to payments made on or after 1 December 1986.

Income Tax (Rates) Act 1982

The Schedule also proposes changes to the Income Tax (Rates) Act 1982 which now declares the rates of tax payable by individuals and trustees generally for the 1985-86 and subsequent financial years.

Consequential upon the introduction of an Income Tax Rates Bill 1986 that will declare the rates of tax payable by individual taxpayers and trustees generally for the 1986-87 and subsequent financial years, the amendments to the Income Tax (Rates) Act 1982 proposed by the Schedule will ensure that this Act will have no further application in relation to income of years of income subsequent to the 1985-86 income year. This will be done by formally deleting references in the Act to such "subsequent years".

The Schedule to the Bill also proposes to remedy a minor typographical error in Part II of Schedule 24. By clause 6 of the Bill this amendment applies to assessments for the 1985-86 income year.

Trust Recoupment Tax Act 1985

The Trust Recoupment Tax Act 1985 formally imposes the trust recoupment tax, liability for which is established by the Trust Recoupment Tax Assessment Act 1985. The trust recoupment tax legislation is designed to ensure the recovery of income tax sought to be avoided under new generation trust stripping schemes entered into on or after 12 May 1982.

Under the Trust Recoupment Tax Assessment Act 1985, where income is sought to be stripped under arrangements of a specified type, the trustee is liable to pay trust recoupment tax on the income, called a "primary taxable amount", of the year of income.

The Act also establishes a liability to pay trust recoupment tax for a year of income, on an amount of income, called a "secondary taxable amount", where the tax on the primary taxable amount is unlikely to be paid by the trustee, e.g., because the stripped trust has been wound up. In such cases, the secondary taxable amount will be equal to the unpaid trust recoupment tax imposed on the primary taxable amount, multiplied by a factor of "one and two-thirds". Both the primary taxable amount of a year of income and the secondary taxable amount are presently subject to tax at 60 per cent.

The Schedule proposes to amend paragraph 5(a) of the Trust Recoupment Tax Act 1985 to impose a rate of 49 per cent on a primary taxable amount and a secondary taxable amount. Under sub-clause 7(1) of the Bill the amendment is to apply, subject to the operation of a transitional measure in sub-clause 7(2), in relation to assessments of the 1986-87 year and all subsequent years of income. Under the transitional measure in sub-clause 7(2) the rate is to be 57.08 per cent in 1986-87.

Trust Recoupment Tax Assessment Act 1985

The Schedule also proposes to amend sub-section 6(3) of the Trust Recoupment Tax Assessment Act 1985. Section 6 of that Act sets out the circumstances under which certain persons who, in effect, benefited from the income stripped from a trust, may become jointly and severally liable for trust recoupment tax. Sub-section 6(3) of the Act creates a secondary taxable amount that, as indicated above, is equal to the unpaid trust recoupment tax on a primary taxable amount, multiplied by the factor "one and two-thirds". Because the rate of tax payable on a primary taxable amount and a secondary taxable amount is the same, the tax payable on a secondary taxable amount created under sub-section 6(3) is equal to the unpaid recoupment tax payable on the primary taxable amount.

Following the proposal to change the rate of trust recoupment tax on a primary taxable amount, the Schedule also proposes to amend the level of the multiplier to be applied to unpaid recoupment tax to ascertain a secondary taxable amount. The multiplier used in sub-section 6(3) is to be changed from "one and two-thirds" (based on the present rate of tax of 60 per cent), to "2.04" - reflecting the proposed new rate of 49 per cent. Subject to a transitional measure in sub-clause 8(2), the amendment to be made by the Schedule is to apply, by virtue of sub-clause 8(1) of the Bill, for 1986-87 and all subsequent years. By the operation of sub-clause 8(2) of the Bill, the multiplier is to be "1.75" for the 1986-87 financial year - reflecting the rate of 57.08 per cent that is to apply for that year.

Clause 4: Application of amendments of the Income Tax Assessment Act 1936

Sub-clause 4(1) of the Bill is a drafting measure and states that a reference in clause 4 to the "Principal Act" means the Income Tax Assessment Act 1936.

Sub-clauses 4(2) to (8) inclusive, relate to the application of the amendments proposed to sections 159P, 159ZK, 160AAA, 160AAB, 160AA and 221AC of the Assessment Act and are discussed in the explanations of the amendments to those provisions proposed by the Schedule - refer to the earlier notes on clause 3 of the Bill.

By sub-clause 4(9) the change in rate for the purposes of section 221ZB of the Assessment Act applicable to mining payments to Aboriginal councils, is to apply to payments made or applied on or after 1 December 1986.

Clause 5: Application of amendment of the Income Tax (Mining Withholding Tax) Act 1979

This clause proposes that the amendment to the Income Tax (Mining Withholding Tax) Act 1979 by the Schedule is to apply to mining payments made or applied on or after 1 December 1986.

Clause 6: Application of amendment of the Income Tax (Rates) Act 1982

The operation of this clause is discussed in the explanations on clause 3 under the heading "Income Tax (Rates) Act 1982".

Clause 7: Application of amendment of the Trust Recoupment Tax Act 1985

Clause 8: Application of amendment of the Trust Recoupment Tax Assessment Act 1985

Clauses 7 and 8 relate to the application of the amendments proposed by the Schedule to the Bill to the Trust Recoupment Tax Act 1985 and the Trust Recoupment Tax Assessment Act 1985. The operation of these clauses is discussed in the explanations of the amendments to the Acts proposed by the Schedule to the Bill - refer to earlier notes on clause 3.

MEDICARE LEVY BILL 1986

Clause 1: Short title

By this clause the Act imposing Medicare levy for 1986-87 will be cited as the Medicare Levy Act 1986.

Clause 2: Commencement

This clause provides for the Act to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

Sub-clause (1) contains formal definitions providing shorthand references to the Income Tax Assessment Act 1936 (the "Assessment Act") and the Medicare levy.

Sub-clause (2) is also a formal provision that relates references to taxable income or net income in the Bill to taxable income or net income of the relevant year of income.

Sub-section 251R(2) of the Assessment Act provides that, for levy purposes, de facto married couples are to be treated as being legally married. Under the proposed levy arrangements a legally or de facto married couple whose combined taxable incomes do not exceed a certain amount will not be required to pay levy - see notes on clause 8. The relevant time for determining whether a couple are married is the last day of the year of income.

Sub-clause (3) modifies the classes of people who would otherwise be taken as married. By paragraph (a) of the sub-clause a couple who have separated will not be taken to be married.

By paragraph (b) a person whose spouse has died during the year and who has not re-married at year's end will be taken to have been married on the last day of the year.

By sub-clause (4) expressions in the Bill that are also used in the Medicare levy provisions of the Assessment Act are to have the meaning they have in those provisions.

Clause 4: Incorporation

This clause has the effect of providing for the Bill to operate in conjunction with the relevant Medicare levy provisions of the Assessment Act.

Clause 5: Imposition of Medicare levy

This clause formally imposes Medicare levy that is payable in accordance with Part VIIB of the Assessment Act. Subsequent clauses deal with the rate of levy and with various circumstances affecting the amount, if any, of levy payable.

Clause 6: Rate of levy

This clause fixes the rate of Medicare levy for 1986-87 at 1.145 per cent, which is a weighted average of 5/12ths of the present 1 per cent levy that is to apply up to 30 November 1986, and of 7/12ths of the 1.25 per cent levy that is to apply from 1 December 1986.

Sub-clause (1) will apply in relation to individual taxpayers. By section 251S of the Assessment Act, levy is payable on the taxable income of an individual who is a resident of Australia for any part of the income year.

Sub-clause (2) declares a levy of 1.145 per cent to be payable by the trustee of a trust estate assessable under section 98 of the Assessment Act. Trustees are liable to be assessed under that section in respect of trust income to which a beneficiary who is under a legal disability, e.g., infancy, is presently entitled and may, by section 251S of the Assessment Act, be subject to the levy. The liability of such a trustee to pay levy may be affected by clause 10 of the Bill.

Sub-clause (3) declares a rate of levy of 1.145 per cent on income assessable to a trustee under section 99 or section 99A of the Assessment Act. A trustee is assessable under those sections in respect of trust income to which no beneficiary is presently entitled. Liability for levy in these circumstances is created by section 251S of the Assessment Act, other than where the trustee is a trustee of a deceased estate.

Clause 7: Levy in cases of small incomes

The purpose of this clause is to grant relief from Medicare levy to taxpayers on low incomes and to phase in the levy for those taxpayers with taxable incomes that exceed the thresholds below which no levy is payable.

By sub-clause (1) a taxpayer whose taxable income for 1986-87 is $8,030 or less will not be required to pay levy.

Where a taxpayer's taxable income for 1986-87 exceeds $8,030 but does not exceed $8,517, the amount of levy payable is, by sub-clause (2), to be limited to 20 per cent of the amount of the excess of the taxable income over $8,030. The amount of levy ascertained in this way is to be further reduced by any reduction to which the person is entitled by reason of the family income threshold provisions of the Bill (clause 8), or because the taxpayer is a prescribed person for part of the year of income (clause 9).

Under section 251S of the Assessment Act, levy is payable by a trustee (other than a trustee of a deceased estate) who is assessable and liable to pay tax under section 99 of that Act. This occurs where the income in respect of which the trustee is assessable is $417 or more. By sub-clause (3) no levy is payable where the net income of the trust estate is $416 or less. Where the net income of the trust estate in respect of which the trustee is liable to be assessed exceeds $416 but does not exceed $441, the amount of levy payable is, by sub-clause (4), to be limited to 20 per cent of the amount of the excess of the net income over $416.

Clause 8: Amount of levy - person who has spouse or dependants

The purpose of this clause is to grant relief from Medicare levy to a person who has a family if the "family's" income is not greater than a threshold amount.

Sub-clause (1) specifies two conditions for exemption from levy under this provision. The first is that the person be legally or de facto married at the last day of the year of income or that the person be entitled to a rebate in his or her assessment in respect of the year of income for a daughter-housekeeper, or a housekeeper or as a sole parent. The second condition is that the income of the person's family (i.e. the taxable income of the person plus that of his or her spouse, if any) does not exceed the income threshold in relation to the person (i.e., $13,370 plus $1,660 for each dependent child or student of the taxpayer or his or her spouse).

Sub-clause (2) in effect "shades-in" the amount of levy payable by a couple, or a sole parent, where the couple or sole parent is not entitled to exemption from levy by sub-clause (1), because the "family income" exceeds the relevant "family income threshold" by a small or moderate amount. In such circumstances the amount of levy payable by the taxpayer is to be reduced in accordance with a formula specified in the sub-clause. The effect of the sub-clause is to limit the levy payable by the taxpayer (before the application of any reduction to which the taxpayer is entitled as a part year prescribed person) to 20 per cent of the excess of the "family income" over the "family income threshold".

Sub-clause (3) applies in the situation where both of a "married" couple are levy payers. In that situation each of the couple would, but for sub-clause (3), be entitled to have his or her levy liability reduced by the amount calculated under sub-clause (2). Sub-clause (3) avoids that result by providing, in effect, that where each of a couple are levy payers, any reduction in levy calculated in accordance with sub-clause (2) is to be apportioned between the couple on the basis of their taxable incomes.

For sub-clause (4) to operate two circumstances must be met. The first is that sub-clause (3) must operate to apportion the reduction in levy ascertained in accordance with sub-clause (2) between the couple (paragraph (a) of the sub-clause). The second is that one of a couple's share of the reduction amount ascertained in accordance with sub-clauses (2) and (3) exceeds the amount of levy he or she would be required to pay but for clause 9 (paragraph (b)). Where those circumstances are met the clause will operate to reduce the levy payable by the spouse of the person by that excess amount.

Sub-clause (5) defines two of the terms used in clause 8 -

"family income" is defined by the sub-clause to mean for each of a legally or de facto married couple the taxable income of the taxpayer plus that of his or her spouse, or for a person other than a married person (generally these will be sole parents), his or her taxable income.

"family income threshold" is defined by the sub-clause to mean $13,370 increased by $1,660 for each dependent child or student in respect of whom the taxpayer or his or her spouse, if any, would have been entitled to an income tax dependant rebate if those rebates had not been replaced by family allowances.

Sub-clause (6) provides that in determining the "family income threshold" of a person who is not a legally or de facto married person at the last day of the year of income, a child or student shall not be taken into account in calculating the family income threshold of that person unless the person is receiving family allowances for the child or student. This will avoid each person of a separated couple being able to increase their threshold on account of the child or student.

Clause 9: Reduction of levy - person who is prescribed person for part of year of income

The purpose of this clause is to give a reduction in the amount of levy that would otherwise be payable under preceding provisions where the taxpayer is a "prescribed person" for part only of the year.

The meaning of the expression "prescribed person" is contained in section 251U of the Assessment Act. Under that section a person is a prescribed person during a particular period if, for example, he or she was entitled to free medical treatment as a member of the Defence Force or under any of the Repatriation Acts, and had no dependants or had dependants who also qualified as prescribed persons. By section 251T of the Assessment Act, a taxpayer is freed entirely from the levy if he or she was a prescribed person during the whole of the year of income.

Under clause 9 of the Bill, a person who qualifies as a prescribed person for part only of the year (for example, because he or she is a member of the Defence Force for part only of the year, or for any period has dependants who do not qualify as prescribed persons and who is deemed by sub-section 251U(3) of the Assessment Act to have been a prescribed person for one-half of that period) will have his or her levy reduced by an amount corresponding to the proportion of the year that the person so qualifies.

Clause 10: Levy payable by a trustee assessable under section 98 of the Assessment Act

The purpose of this clause is to calculate the levy liability of a trustee assessed under section 98 of the Assessment Act in respect of the share of trust income of a beneficiary who is under a legal disability (e.g., a minor) in the same way as if that income were assessed to the beneficiary concerned.

Levy is imposed on the trustee by clause 6(2) of the Bill and the effect of clause 10 is that if the beneficiary were to have the benefit of one of the low income thresholds if he or she were to be assessed on the income, the same rules are to apply where the income is assessed to the trustee.

Clause 11: Financial years for which levy is payable

By sub-clause (1) the Medicare levy is payable for the 1986- 87 financial year.

Sub-clause (2) provides, as an interim measure, that until the Parliament formally declares otherwise, the levy imposed by the Bill is also to apply for the 1987-88 year. A provision of this kind is needed for cases where it is necessary early in the financial year to make an assessment in respect of income of that year, e.g., where a person is leaving Australia.

Because the provisions of the Bill in its application for 1986-87 are constructed on the basis that the levy is 5/12 ths of one per cent (for the period 1 July 1986 to 30 November 1986) and 7/12 ths of 1.25 per cent (for the period 1 December 1986 to 30 June 1987), sub-clause (3) provides for the interim operation of sub-clause (2) in 1987-88 based on the rate of 1.25 per cent that is to be imposed in that year.