Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 7 - Miscellaneous amendments
Outline of chapter
7.1 Schedule 5 to this Bill amends the Income Tax Rates Act 1986 (ITRA 1986) and the Income Tax Assessment Act 1936 (ITAA 1936) to correct some minor technical errors.
Context of reform
7.2 The Government in its Tax Reform: not a new tax, a new tax system :the Howard Governments Plan for a New Tax Systempolicy document, stated its intention to reduce personal income tax rates and thresholds with effect from 1 July 2000. The amendments to reduce personal income tax rates were contained in A New Tax System (Personal Income Tax Cuts) Act 1999 (PITCA 1999). PITCA 1999 inadvertently omitted consequential amendments to section 14 of the ITRA 1986.
7.3 Section 14 provides limitations on the amount of tax payable by trustees of resident deceased estates where the deceased person died not less than 3 years before the end of the year of income. Where the net income of the estate is $416 or less no tax is payable. A shading-in range ensures that trustees of such estates do not have a large liability where the net income is just over $417.
7.4 When the lowest marginal tax rate was 20% the upper limit of the 50% shading-in range was $693. Where the net income was $694 or more trustees paid 20% on the whole net income of the trust up to the $20,700 limit. PITCA 1999 included consequential amendments to the ITRA 1986 to substitute references to $20,700 (the previous upper limit of the lowest marginal tax rate) with references to $20,000 (the new upper limit of the lowest marginal tax rate). However, with the change to the 17% rate the upper limit of the shading-in range for trustees should also have been changed to $630.
Pro-rating of the tax-free threshold
7.5 Section 20 of the ITRA 1986 provides for pro-rating of the tax-free threshold. Taxpayers are subject to pro-rating of the tax-free threshold for a year of income where they are either a resident for only part of that income year or they cease full-time education for the first time during that income year. PITCA 1999 included consequential amendments to the ITRA 1986 to substitute references to $5,400 (the then existing annual tax-free threshold) with references to $6,000 (the new annual tax-free threshold). However, section 20 was not amended to change the monthly amount of tax-free threshold from $450 to $500.
7.6 Subsection 159J(6) of the ITAA 1936 contains a definition of separate net income which makes specific inclusions and exclusions from that term for the purpose of calculating the amount of dependant rebates.
7.7 Prior to 1 July 1999, child disability allowance was a payment that was excluded from the calculation of separate net income. The Assistance for Carers Legislation Amendment Act 1999 amended the Social Security Act 1991 to replace the term child disability allowance with the term carer allowance. As a consequence the definition of separate net income in the ITAA 1936 was amended to replace the reference to child disability allowance with the term carer allowance.
7.8 However, as a result of the introduction of the new family tax benefit, the A New Tax System (Family Assistance) (Consequential and Related Measures) Act (No. 2) 1999 amended the definition of separate net income. The amendment removed a paragraph which contained the previous forms of family assistance as well as other payments including the carer allowance. Three new paragraphs were inserted. In the process the term child disability allowance (which no longer existed) was inserted which had the effect of replacing the term carer allowance.
| New law | Current law |
|---|---|
| The upper limit of the 50% shading-in range will be $630 in respect of a resident deceased estate where the deceased person died not less than 3 years before the end of the year of income. | The upper limit of the 50% shading-in range is $693 in respect of a resident deceased estate where the deceased person died not less than 3 years before the end of the year of income. |
| The monthly allowance of tax-free threshold will be $500 in respect of those taxpayers who are subject to pro-rating of the individual tax-free threshold. | The monthly allowance of tax-free threshold is $450 in respect of those taxpayers who are subject to pro-rating of the individual tax-free threshold. |
| Carer allowance will be excluded from the separate net income of a dependant when calculating dependant rebates for a taxpayer. | Child disability allowance (which no longer exists) is excluded from the separate net income of a dependant when calculating dependant rebates for a taxpayer. |
Detailed explanation of new law
7.9 Schedule 5 to this Bill proposes to amend paragraph 14(2)(c) of the ITRA 1986 to change from $693 to $630, the upper limit of the 50% shading-in range which applies to resident deceased estates where the deceased person died not less than 3 years before the end of the year of income. [Schedule 6, item 3]
7.10 The shading-in range provides a smooth flow of tax increases up to the point where the trustee pays 17% on the whole net income of the trust. If this range did not exist affected trustees would pay the full 17% on the whole of the trusts net income once the net income exceeded $417.
7.11 The upper limit should be $1 less than the amount of net income where the trustee would first pay more tax using the 50% shading-in method than the trustee would by applying the lowest marginal tax rate to the whole net income of the trust. The $693 upper limit of the shading-in area was calculated on the basis of a tax rate of 20% of the net income of the trust. The lowest marginal tax rate from 1 July 2000 is 17%. Without the change such trusts with net income between $630 and $20,001 would pay more than 17% on the net income of the trust.
Pro-rating of the tax-free threshold
7.12 Schedule 5 to this Bill also proposes to amend subsection 20(1) of the ITRA 1986 to change from $450 to $500, the amount of tax-free threshold available to a taxpayer for each month that the taxpayer is eligible to receive a partial tax-free threshold. [Schedule 6, item 4]
7.13 Subsection 20(2) of the ITRA 1986 will also be amended to provide the same treatment to trustees of trust estates assessed under section 98 of the ITAA 1936 in respect of a beneficiaries share of the net income of a trust estate.
7.14 The amendments to section 20 of the ITRA 1986 will mean that each month of tax-free threshold will be worth the full one-twelfth of the annual tax-free threshold.
7.15 Paragraph 159J(6)(ad) of the definition of separate net income contained in subsection 159J(6) of the ITAA 1936 will be amended to refer to the term carer allowance rather than the previously existing term child disability allowance. [Schedule 6, item 1]
7.16 The amendment will mean that a taxpayers dependant in receipt of carer allowance will not have the amount of the payment included in the dependants separate net income. This is consistent with the treatment of the former child disability allowance.
Application and transitional provisions
7.17 The amendments to the ITRA 1986 made by Schedule 5 apply to assessments for the 2000-2001 income year and all later income years. [Schedule 6, item 5]
7.18 The amendment to the ITAA 1936 made by Schedule 5 applies to assessments for the 1999-2000 income year and all later income years. [Schedule 6, item 2]
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