Explanatory Memorandum
(Circulated by authority of the Minister for Veterans' Affairs, The Honourable Bruce Billson MP)Schedule 5 - Amendments to the Income Tax Assessment Act 1997
Overview
The amendments to the Income Tax Assessment Act 1997 to be made by this Schedule will clarify the taxable status of Defence Force Income Support Allowance (DFISA) payments.
Background
The Veterans' Entitlements (Clarke Review) Act 2004 in providing for the payment of the DFISA included consequential amendments to section 52-65 of the Income Tax Assessment Act 1997 .
Section 52-65 refers to the taxable status of the various payments made under the VEA. The amendments included DFISA as new item 5A.1 in the table of payments listed in section 52-65.
The reference to DFISA states that the "social security pension or social security benefit that is also payable to you on the day this allowance is payable to you is exempt from income tax under section 52-10".
The intention of the provision is to associate the taxable status of a person's DFISA payment with the taxable status of the basic rate component of the primary payment of social security pension or benefit.
Using the example of a person in receipt of an age pension under the SSA, the DFISA payment received by the person would be regarded as a taxable payment on the basis that the basic rate component of the age pension is a taxable payment.
Where the primary payment is regarded as being a tax exempt payment under the provisions of section 52-10 of the ITAA any associated payment of DFISA will also be regarded as being tax exempt.
While most taxable primary payments contain components that are tax exempt, such as rent assistance, pharmaceutical allowance and remote area allowance, it is the taxable status of the basic component of the primary payment that is to be relevant in determining the taxable status of DFISA.
Notwithstanding the intention of the amendments, the advice of the Australian Taxation Office is that because of the description of the taxable status of DFISA that is given in section 52-65 of the ITAA it will regard DFISA as being a tax exempt payment where the person is receiving a primary payment that contains both taxable and tax exempt components.
Explanation of the clauses
Item 1 amends section 52-65 of the Income Tax Assessment Act 1997 to clarify the taxable status of DFISA.
Table item 5A.1 is repealed and substituted. The reference to DFISA states that it will be exempt only where the whole of the social security pension or benefit is fully exempt from income tax under section 52-10.
Commencement
Item 1 commences on 1 July 2007.
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