House of Representatives

Explanatory Memorandum

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

Chapter 3 - Tax rebate for low income aged persons and pensioners

Outline of chapter

3.1 Schedule 3 to the Clean Energy (Tax Laws Amendments) Bill 2011 amends the Income Tax Assessment Act 1936 (ITAA 1936) to merge the pensioner tax offset into the senior Australians tax offset (SATO). From 1 July 2012, the pensioner tax offset will no longer be available and all individuals previously eligible for the pensioner tax offset will be eligible for the SATO, which will be known as the seniors and pensioners tax offset (SAPTO).

3.2 Schedule 3 also amends the Medicare Levy Act 1986 (MLA 1986) to reflect the merger of the pensioner tax offset and SATO and makes further minor consequential amendments.

Context of amendments

3.3 These amendments give effect to the personal income tax cuts that will assist households for the introduction of a carbon price, as announced in Securing a clean energy future : the Australian Government's climate change plan , on 10 July 2011.

3.4 Section 160AAA of the ITAA 1936 currently provides for a pensioner tax offset and a beneficiary tax offset.

3.5 Subsection 160AAA(2) allows recipients of certain pensions, allowances and benefits under the Social Security Act 1991 and the Veterans' Entitlements Act 1986 , which are known as 'rebatable pensions', to receive the pensioner tax offset, which can be used to reduce the amount of income tax they pay. Subsection 160AAA(3) provides for the beneficiary tax offset which is an offset for recipients of particular allowances that fall within the definition of 'rebatable benefit' in subsection 160AAA(1).

3.6 The amount of pensioner tax offset a person is entitled to receive is determined under Division 2 of Part 8 of the Income Tax Regulations 1936 . The amount varies depending on the person's 'rebate income' and the rate of pension they are receiving. Pursuant to Regulation 150AE of the Income Tax Regulations 1936 , unused amounts of the offset can be transferred to a person's spouse if that spouse is entitled to the SATO.

3.7 Section 160AAAA of the ITAA 1936 allows a person qualified for the Age Pension under the Social Security Act 1991 , who is not in jail for the whole year, to receive a tax offset, known as the SATO, which can be used to reduce the amount of income tax they pay.

3.8 The maximum amounts of SATO that a person can claim are specified in Sub-regulation 150AB(2) of the Income Tax Regulations 1936 . The maximum amounts are: $2,230 for a single; $1,602 for a member of a couple not separated by illness; and $2,040 for a member of a couple separated by illness. Pursuant to Regulation 150AE of the Income Tax Regulations 1936 , unused amounts of SATO can be transferred to a person's spouse if that spouse is also entitled to the SATO.

3.9 Taxpayers entitled to an amount of pensioner tax offset or SATO are eligible for an increased income threshold at which they are exempt from paying the Medicare levy or pay a reduced levy.

3.10 Subsection 7(1) of the MLA 1986 provides that an individual is exempt from paying the Medicare levy if their taxable income is less than the 'threshold amount' as defined in subsection 3(1). Subsection 7(2) provides for a phased amount of the Medicare levy to be paid if the individual's taxable income exceeds the 'threshold amount' but not the 'phase-in limit' in subsection 3(1).

Summary of new law

3.11 From 1 July 2012, the pensioner tax offset will no longer be available and all individuals who would otherwise have been eligible for the pensioner tax offset will instead receive the SATO, which will be known as the SAPTO.

3.12 From 1 July 2012, individuals exempt from the Medicare levy up to the income threshold applying to recipients of the pensioner tax offset will be exempt from the Medicare levy up to the income threshold applying to individuals entitled to the SAPTO (being the income threshold that formerly applied to individuals entitled to the SATO).

Detailed explanation of new law

3.13 Schedule 3 inserts a cross-reference to the definition of 'rebatable benefit' in subsection 160AAA(1) of the ITAA 1936 into the definitions section in subsection 6(1) of the ITAA 1936. A 'rebatable benefit' is any payment specified under subsection 160AAA(1), which includes allowances paid under the Social Security Act 1991 as well as various other government income support payments. [ Schedule 3, item 1 ]

3.14 The heading for section 160AAAA reads 'Tax rebate for low income aged persons', reflecting the continued use of the term 'rebate' to describe tax offsets in the ITAA 1936. This heading is amended to reflect the expansion in the class of people eligible for the SATO. [ Schedule 3, item 2 ]

3.15 Subsection 160AAAA(1) is amended to clarify that a person's entitlement to the SAPTO is subject to the terms of amended subsection 160AAA(4). Subsection 160AAA(4) deals with situations where a person is eligible for both the SAPTO and beneficiary tax offset in an income year. [ Schedule 3, item 3 ]

3.16 Pursuant to new paragraph 160AAAA(2)(c), recipients of 'social security pensions' and 'service pensions' under the Social Security Act 1991 and the Veterans Entitlements Act 1986 , as well as recipients of limited other benefits largely payable to pension recipients, will be eligible for the SAPTO so long as the individual is not in jail for the whole year. This accords with the requirements for the former SATO. [ Schedule 3, items 4 to 6 ]

3.17 The payments described in new paragraph 160AAAA(2)(c) would have previously entitled individuals to an amount of pensioner tax offset. As a result of this amendment, only benefits available to individuals fitting the description of pensioner are to entitle the individual to an amount of SAPTO.

3.18 The heading for section 160AAAB reads 'Tax rebate for low income aged persons - trustees assessed under section 98'. This heading is amended to reflect the expansion of the beneficiaries described in section 160AAAA in respect of whom a trustee may claim an offset under section 160AAAB. [ Schedule 3, item 7 ]

3.19 Section 160AAAB allows a trustee liable to be assessed under section 98 of the ITAA 1936 to claim an amount of offset in respect of a beneficiary's share of the net income of the trust estate if the beneficiary would be eligible for an offset under section 160AAAA.

3.20 Schedule 3 amends subsection 160AAAB(2) to reflect the expansion of the class of individuals eligible for an offset under section 160AAAA. [ Schedule 3, items 9 to 11 ]

3.21 Subsection 160AAAB(1) is also amended to clarify that a trustee's entitlement to an offset under that section is subject to amended subsection 160AAA(4A). Subsection 160AAA(4A) deals with the situation where a beneficiary is eligible for an amount of beneficiary tax offset in the same year that a trustee is eligible for an amount of offset under section 160AAAB in respect of that beneficiary's share of the net income of a trust estate. [ Schedule 3, item 8 ]

3.22 Current section 160AAA allows a person who receives certain social security payments and benefits to receive either the pensioner tax offset or the beneficiary tax offset.

3.23 The heading for section 160AAA reads 'Rebate in respect of certain pensions, benefits etc'. This heading is amended to reflect the abolition of the pensioner tax offset from section 160AAA. [ Schedule 3, item 12 ]

3.24 Subsection 160AAA(2) and the definition of 'rebatable pension' in subsection 160AAA(1) are repealed to give effect to the abolition of the pensioner tax offset. The definition of 'rebatable pension' formerly described the forms of pension, allowance or benefit entitling an individual to an amount of pensioner tax offset. [ Schedule 3, items 13 and 14 ]

3.25 Subsection 160AAA(4) is amended so that a person entitled to both the SAPTO and the beneficiary tax offset in an income year is able to claim one, but not both, of the offsets if they are of the same value, or the offset of the greater value if they are not the same. [ Schedule 3, item 15 ]

3.26 Former subsection 160AAA(4A) is repealed and a new subsection inserted in its place. New subsection 160AAA(4A) provides that an individual is not entitled to an amount of beneficiary tax offset if they are the beneficiary of a trust whose trustee is entitled to an offset under section 160AAAB and the amount of that offset is the same or greater than the amount of beneficiary tax offset. [ Schedule 3, item 16 ]

3.27 If the offsets are of different value, then the trustee or beneficiary, as appropriate, may claim the offset of greater value.

3.28 Schedule 3 amends the definitions of 'phase-in limit' and 'threshold amount' in the MLA 1986 to remove the separate references to specific amounts for recipients of the pensioner tax offset. [ Schedule 3, items 22 and 23 ]

3.29 The merger of the pensioner tax offset into the SATO means that a specific Medicare levy phase-in limit for recipients of the pensioner tax offset, for taxable income above which a person is liable to pay the full 1.5 per cent Medicare levy on their entire taxable income, is no longer relevant. Similarly, the specific threshold amount for recipients of the pensioner tax offset, for taxable income below which a person is exempt from paying the Medicare levy, is also no longer relevant.

Application and transitional provisions

3.30 The amendments made by this Schedule apply to the 2012-13 income year and later income years. [ Schedule 3, item 24 ]

Consequential amendments

3.31 Section 13-1 of the Income Tax Assessment Act 1997 provides a list of tax offsets available. Section 13-1 is amended to account for the merger of the pensioner tax offset into the SATO. [ Schedule 3, items 17 to 19 ]

3.32 The table in subsection 63-10(1) provides the order which tax offsets are applied against a person's income tax liability. Subsection 63-10(1) is amended to account for the merger of the pensioner tax offset into the SATO. [ Schedule 3, items 20 and 21 ]