House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 2 - Medicare levy low-income thresholds and Medicare levy surcharge

Outline of chapter

2.1 Schedule 2 to the Clean Energy (Tax Laws Amendments) Bill 2011 amends the Medicare Levy Act 1986 (MLA 1986) and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to increase the Medicare levy and the Medicare levy surcharge low-income threshold amounts (threshold amounts) at which individuals are exempt from paying the Medicare levy. This Schedule also increases the phase-in limits as a result of the increased thresholds.

Context of amendments

2.2 These amendments give effect to the personal income tax cuts that will assist households for the introduction of a carbon price, announced by the Prime Minister in Securing a clean energy future : the Australian Government's climate change plan , on 10 July 2011. The amendments ensure that individuals do not have a Medicare levy liability where they face no income tax liability.

Medicare levy low-income thresholds

2.3 Subsections 7(1) and 8(1) of the MLA 1986 provide that no Medicare levy is payable by low-income individuals and families whose taxable income or combined family taxable income does not exceed stated threshold amounts.

2.4 Pursuant to subsection 7(2), the Medicare levy applies at a reduced rate to taxpayers with taxable incomes above the threshold amount but no more than the 'phase-in limit' specified in subsection 3(1). The rate of the Medicare levy payable in these circumstances is limited to 10 per cent of the excess income over the threshold amount.

2.5 Subsections 8(2) to (4) provide for a reduced Medicare levy to be paid by individuals with a spouse and/or dependants if the individual's family income exceeds the 'family income threshold' prescribed in subsection 8(5) or, for individuals who are entitled for the year of income to a rebate under section 160AAAA of the Income Tax Assessment Act 1936 (ITAA 1936), the relevant provision is subsection 8(7).

Medicare levy surcharge low-income threshold

2.6 The Medicare levy surcharge (surcharge) applies on taxable income, including any amount on which family trust distribution tax has been paid, in certain cases where taxpayers do not have appropriate private patient hospital cover pursuant to sections 8B to 8G of the MLA 1986. The surcharge also applies on reportable fringe benefits in certain cases where taxpayers do not have appropriate private patient hospital cover pursuant to sections 12 to 16 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 .

2.7 A taxpayer will not be required to pay the surcharge where the total of their 'income for surcharge purposes' does not exceed the individual's low-income threshold amount. 'Income for surcharge purposes' is defined in section 995-1 of the Income Tax Assessment Act 1997 . Unlike the Medicare levy, there is no shading-in of the surcharge above the threshold amount.

Summary of new law

2.8 Schedule 2 amends:

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subsections 3(1) and 8(7) of the MLA 1986 to raise the threshold amounts and phase-in limits at which individuals are liable to pay an amount of the Medicare levy;

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paragraphs 8D(3)(c) and 8G(2)(c) and subparagraphs 8D(4)(a)(ii) and 8G(3)(a)(ii) of the MLA 1986 to raise the threshold below which a family member is not required to pay the surcharge on taxable income (including amounts on which family trust distribution tax has been paid); and

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paragraphs 15(1)(c) and 16(2)(c) of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to raise the threshold below which a family member is not required to pay the surcharge on reportable fringe benefits.

Detailed explanation of new law

Amendments to the Medicare Levy Act 1986

Low-income thresholds

2.9 Schedule 2 increases the low-income thresholds at which individuals are exempt from paying the Medicare levy. These increases ensure that individuals do not have a Medicare levy liability where they face no income tax liability, taking into account the increase in effective tax-free thresholds that result from the tax cuts described in Chapter 1 of this explanatory memorandum.

2.10 The low-income threshold for individuals entitled to an offset under section 160AAAA of the ITAA 1936 is increased from $30,685 to $32,279. As a result of amendments described in Chapter 3 of this explanatory memorandum, this threshold will apply to both seniors and pensioners entitled to the new seniors and pensioners tax offset (SAPTO). [ Schedule 2, item 4 ]

2.11 The low-income threshold amount for a single individual with no dependants is increased from $18,839 to $20,542. [ Schedule 2, item 5 ]

2.12 The family income threshold for individuals with a spouse and/or dependants who are entitled to an offset under section 160AAAA of the ITAA 1936, is increased from $44,500 to $46,000. This threshold will apply for seniors and pensioners eligible for the SAPTO as a result of amendments described in Chapter 3. [ Schedule 2, item 6 ]

Phase-in limit

2.13 The phase-in limit for individuals contained in paragraph (c) of the definition of 'phase-in limit' in subsection 3(1) of the MLA 1986 is increased from $22,163 to $24,167. [ Schedule 2, item 3 ]

2.14 The phase-in limit for recipients of the offset under section 160AAAA of the ITAA 1936 is increased from $36,100 to $37,975. As a result of amendments described in Chapter 3, this phase-in limit will apply to all recipients of the SAPTO. [ Schedule 2, item 2 ]

Medicare levy surcharge low-income threshold

2.15 Schedule 2 amends references to the individual low-income threshold amount of '$18,839' in the Medicare levy surcharge provisions in sections 8D and 8G of the MLA 1986, to '$20,542'. As a result, taxpayers with income for surcharge purposes below $20,542 will not be liable to pay the Medicare levy surcharge on any taxable income and amount subject to family trust distribution tax they have received in the income year. [ Schedule 2, items 7 to 10 ]

Amendment to the A New Tax System ( Medicare Levy Surcharge - Fringe Benefits ) Act 1999

2.16 Schedule 2 amends references to the individual low-income threshold amount of '$18,839' in the Medicare levy surcharge provisions in sections 15 and 16 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 , to '$20,542'. As a result, taxpayers with income for surcharge purposes below $20,542 will not be liable to pay the Medicare levy surcharge on any reportable fringe benefits income they have. [ Schedule 2, item 1 ]

Application and transitional provisions

2.17 The amendments made by Schedule 2 apply for the 2012-13 year of income and later years of income. [ Schedule 2, item 11 ]