House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin MP

Schedule 6 - Low income supplement

Summary

This Schedule provides for an annual lump sum low income supplement to be paid to independent adults in low-income households who are not adequately assisted through the tax reform package and the household assistance measures set out in this Bill.

Background

This Schedule introduces a new low income supplement, to be paid to individuals who meet residence, income and tax requirements and who can show that they have not received adequate assistance through the tax system or the other measures set out in this Bill. The amount of the payment is to be $300 for each qualifying individual and is limited to one payment per year.

The low income supplement is to be paid, as an annual tax-exempt lump sum, to adults in low-income households, based on the household's circumstances from the previous income year. The low income supplement will become payable to qualifying individuals from 1 July 2012, with reference to the person's income in the previous financial year. The reason for using the person's income from the previous financial year is to facilitate the timely payment of the low income supplement to people as they need it to compensate them for the effect of the clean energy measures. For example, a person's claim for the low income supplement for the 2012-13 income year will be assessed with reference to the claimant's income for the 2011-12 financial year.

A person must make a new claim for the low income supplement each financial year, and only during the relevant financial year. That is, a claim for the 2012-13 financial year must be lodged between 1 July 2012 and 30 June 2013, and a claim for the 2013-14 financial year must be lodged between 1 July 2013 and 30 June 2014. In addition, claims for the low income supplement in respect of more than one financial year cannot be rolled into one claim. Members of a couple cannot make a combined claim, and will have to make a claim for the low income supplement separately. The person, at the time the claim is lodged, must be an Australian resident or a special category visa holder residing in Australia and not subject to a newly arrived resident's waiting period. In addition, a person must be in Australia at the time of making a claim.

Qualification

Qualification for the low income supplement will require the person to satisfy all of the following criteria - the income requirement, the excluded payment requirement, the tax requirement, and the remaining requirements.

The purpose of the income requirement is to identify potential candidates for the low income supplement who meet the income threshold through an assessment of their adjusted taxable income. The excluded payment requirement identifies whether a claimant has received some government assistance, either through one of the other clean energy payments or through other welfare payments. The remaining requirements set out a number of other matters, such as residency, that must be met to qualify for the low income supplement.

Qualification under the tax requirement for the 2012-13 financial year is to be based on an assessment of whether an individual had a tax liability (that is, tax paid excluding the Medicare levy, Medicare levy surcharge and the one-year flood and cyclone reconstruction levy) in the 2011-12 financial year of less than $300. If an individual had a tax liability of less than $300 in 2011-12, that person is assumed to be not able to receive adequate assistance through the tax reform package and, therefore, meets the tax requirement for the low income supplement. A claimant's tax liability for assessment in 2012-13 is easily identifiable on the claimant's 2011-12 tax assessment.

Due to the tax reform package, there will be an increase in the statutory tax-free threshold, and the maximum value of the low income tax offset will be decreased with effect from the 2012-13 financial year. The net effect of these changes will be an increase in the effective tax-free threshold. This means for low income supplement claims made in 2013-14 and subsequent years, assessing whether a person has met the tax requirement will need to involve a notional assessment of how the person's tax liability compares to that from the tax system in 2011-12.

A person whose taxable income is less than $18,000 will meet the tax requirement of the low income supplement as the person will have received less than $300 in assistance through the tax reform package. Generally, a person who meets the other qualification requirement with taxable income equal to or above $18,000 will have received assistance equal to or above $300.

There are, however, a broad range of tax offsets in the tax system that mean a person can have taxable income higher than $18,000, yet have a tax liability of less than $300. If all offsets a person is entitled to are not accounted for, then the level of tax that would have been paid by a person based on the 2011-12 income year would be overestimated, which would in turn overestimate the level of tax assistance a person would receive under the changes to the tax system.

If the claimant's taxable income is above the statutory tax-free threshold for the relevant income year, assessment on this comprehensive basis requires the claimant to have lodged a tax return and have a tax notice of assessment for the relevant income year, and will involve Centrelink using the amount of the person's eligible tax offsets to calculate whether the tax requirement is met. If the person's taxable income is below the statutory tax-free threshold, the person may choose to provide an estimate of their taxable income and any eligible tax offsets. Where an estimate is not allowed, Centrelink will need to request information from the Australian Taxation Office on the claimant's eligible tax offsets in the previous income year, exclusive of the low income tax offset.

The amendments made by this Schedule commence on 14 May 2012, but payments will only be made from 1 July 2012. Claims for the low income supplement will be accepted from 1 July 2012.

Explanation of the changes

Part 1 - Amendment of the social security law

Amendments to the Social Security Act

Item 1 inserts into the definition of clean energy payment, inserted by Schedule 1, reference to the low income supplement.

Item 2 inserts the definition of low income supplement into subsection 23(1) of the Social Security Act.

Item 3 adds new Division 3 at the end of new Part 2.18A, inserted by Schedule 1. New section 916A sets out the definitions of income tax return and tax-free threshold, which are relevant to new Division 3.

New section 916B deals with the qualification requirements for the low income supplement. Qualification is to be based on the person's circumstances from the previous financial year. To qualify for a low income supplement for an income year, the person must satisfy all the requirements set out in new paragraph 916B(a) for the previous income year. That is, the person must satisfy the income requirement in new section 916C, the excluded payment requirement in new section 916D, the tax requirement in new section 916E, and the remaining requirements in new section 916F.

New paragraph 916B(b) requires a person to lodge a claim for the low income supplement, and new paragraph 916B(c) provides that, at the time of lodging the claim for the low income supplement, the person must not be in gaol or a psychiatric institution. For the purposes of the low income supplement, new paragraph 916B(c) overrides section 35 of the Social Security Administration Act (which allows a person in gaol or a psychiatric institution to make a claim in certain limited circumstances).

In addition, at the time the claim is lodged, the person must be an Australian resident and in Australia (see section 29 of the Social Security Administration Act) or a special category visa holder residing in Australia (see section 31A of the Social Security Administration Act).

The note at the end of new section 916B points the reader to new section 27C of the Social Security Administration Act, which provides a time limit in which claims for the low income supplement can be made.

New section 916C sets out the income thresholds that will apply for people claiming the low income supplement. New subsection 916C(1) states that a person will satisfy the income requirement for an income year if the person's qualifying income for the year is less than:

•

$30,000 for singles without a dependent child;

•

$45,000 for couples without a dependent child;

•

$60,000 for singles with a dependent child;

•

$60,000 for couples with a dependent child.

New subsection 916C(2) sets out a person's qualifying income for an income year:

(a)

if the person is a member of a couple at the time of claim, the sum of the person's and the person's partner's accepted adjusted taxable income for the income year; or

(b)

otherwise - the person's accepted adjusted taxable income for the income year.

New subsection 916C(3) provides that a person's adjusted taxable income for an income year is the sum of:

(a)

the person's adjusted taxable income (within the meaning of Schedule 3 to the Family Assistance Act, disregarding clauses 3 and 3A of that Schedule, which relate to the adjusted taxable income of members, or certain former members, of a couple) for the income year; and

(b)

any superannuation income stream benefits received by the person in relation to the income year to the extent that they are non-assessable non-exempt income within the meaning of the Income Tax Assessment Act 1997.

The note at the end of new subsection 916C(3) makes the reader aware that a person's adjusted taxable income is made up of several income components (see Schedule 3 to the Family Assistance Act).

New subsection 916C(4) sets out that a person has an accepted adjusted taxable income if:

(a)

the Commissioner of Taxation has made an assessment of the person's taxable income for the income year and, for each of the other components of the person's adjusted taxable income for the income year, either or both of the following apply:

(i)

the Commissioner holds information about the component;

(ii)

to the extent that the Commissioner does not hold information about the component - the Secretary accepts under new subsection 916C(5) an estimate of the component; or

(b)

the Secretary accepts under new subsection 916C(6) an estimate of the person's adjusted taxable income for the income year.

The purpose of this subsection is to enable the Secretary to use information from the Commissioner of Taxation that the Commissioner has supplied to the Secretary to determine whether the claimant meets the income requirement. However, if the Commissioner does not hold any information in relation to components of a person's adjusted taxable income, the Secretary can accept an estimate from the person. This may occur where a person is not required to lodge an income tax return, for example, because their taxable income is below the tax-free threshold.

The note after new subsection 916(4) makes it clear that, for the purposes of new paragraph 916(4)(a), a person's taxable income is a component of the person's adjusted taxable income (see Schedule 3 to the Family Assistance Act).

New subsection 916C(5) provides that the Secretary may, for the purposes of new subparagraph 916C(4)(a)(ii), accept an estimate of a component of a person's adjusted taxable income for an income year if the Secretary is satisfied that the estimate is reasonable.

New subsection 916C(6) provides that the Secretary may, for the purposes of new paragraph 916C(4)(b), accept an estimate of a person's adjusted taxable income for the income year if:

(a)

the person's estimated taxable income is not more than the tax-free threshold for the income year; and

(b)

the Secretary is satisfied on each of these points: the estimate of each of the components of the person's adjusted taxable income is reasonable; the Commissioner of Taxation has not made an assessment of the person's taxable income for the income year; and the person has not lodged, and is not required to lodge, a tax return. With respect to an estimate of a person's adjusted taxable income, a person must provide an estimate of each component of their adjusted taxable income. To accept the estimate, the Secretary must also be satisfied that the person has not lodged, and is not required to lodge under tax law, an income tax return for the income year. If a person has lodged an income tax return, even if not required under the tax law, paragraph 916(4)(a) will apply to the person. That is, the Secretary will use information obtained by the Commissioner of Taxation concerning components of adjusted taxable income and, to the extent that the Commissioner does not hold information concerning a component, an estimate may be accepted.

New subsection 916C(7) provides a definition of the term claim time used in this section. It is intended that, for the purposes of assessing whether a person satisfies the income requirement, information about the person's partner's adjusted taxable income (or estimate of the person's partner's adjusted taxable income) will relate to information about the person's partner at the time the claim is made.

Example

On 1 November 2012, Mary makes a claim for the low income supplement based on her circumstances for the 2011-12 income year. She is currently a member of a couple, although she and her partner, John, only moved in together in August 2012. However, for the purposes of assessing whether Mary meets the income requirements, details about John's adjusted taxable income for the 2011-12 financial year will be taken into consideration.

New section 916D sets out the excluded payment requirements that must be satisfied for a claimant to qualify for the low income supplement. New subsection 916D(1) provides that a person satisfies this requirement for an income year if:

(a)

there were at least 92 days during the year in respect of which relevant clean energy payments were not paid (in other words, the person would satisfy the excluded payment requirement if they did not receive a relevant clean energy payment for 91 days or less during the income year); and

(b)

the requirements of new subsection 916D(2) are satisfied for the income year; and

(c)

the person did not receive any of the payments set out in new subsection 916D(3) for at least 13 weeks during the year.

The note at the end of new subsection 916D(1) signposts new subsection 916D(5), which provides a definition of relevant clean energy payment.

New subsection 916D(2) sets out the excluded payment requirement with respect to family tax benefit. A person satisfies this subsection if there were at least 13 weeks during the income year for which the person did not have an FTB child.

However, if there were fewer than 13 weeks during the income year for which the person did not have an FTB child, a person satisfies new subsection 916D(2) if all the following apply:

(a)

the Secretary made a determination under paragraph 19(b) of the Family Assistance Administration Act that the person was not entitled to family tax benefit for a past period; and

(b)

because of that determination, there were at least 13 weeks during the income year for which the person was not entitled to family tax benefit; and

(c)

the determination was not made because of section 26 of the Family Assistance Act.

The intention is to require a person to test their entitlement for family tax benefit at the end of the 13-week period during the income year. For example, if a determination is made under paragraph 19(a) or a variation under section 31 of the Family Assistance Administration Act that the person is not entitled to be paid family tax benefit, it is intended that the person should, after 13 weeks, make a past period claim to check whether they continued to be not entitled to family tax benefit for that period.

The requirement that the determination not have been made because of section 26 of the Family Assistance Act is to address the situation where a person is not receiving family tax benefit during the 13-week period because their partner at the time was receiving family tax benefit instead. This rule is intended to prevent unintended access to the low income supplement simply because a couple swapped receipt of family tax benefit during the year (for example, 26 weeks for one member of a couple and 26 weeks for the other).

New subsection 916D(3) sets out the list of payments for the purposes of new paragraph 916D(1)(c).

New subsection 916D(4) deems, for the purposes of new paragraph 619D(3)(g), that, if a person has received a lump sum compensation payment as mentioned in new paragraph 619D(3)(g), the person is taken to be receiving the weekly amount that would have been payable had the person not chosen to receive that compensation as a lump sum.

This provision applies whether the lump sum was paid before, on or after the commencement of this Division. For example, where a person has received a lump sum two years ago, which is intended to compensate a person for the future, this subsection deems that person to be receiving weekly compensation payments. Therefore, if a person is deemed to receive weekly payments for, say, 38 weeks during the income year, the person would satisfy the excluded payment requirement. If the person was deemed to receive payments for, say, 40 weeks during the income year, they would not satisfy this requirement.

New subsection 916D(5) provides for the meaning of relevant clean energy payment for the purposes of new paragraph 916D(1)(a).

New section 916E sets out the tax requirements that must be satisfied to qualify for the low income supplement. Essentially, if the person's tax liability would be less than $300 under the 2011-12 tax system, the person would not receive adequate assistance through the changes to the tax system starting in 2012-13 and, therefore, the person meets the tax requirement for the low income supplement.

New subsection 916E(1) provides that a person satisfies the tax requirement for the income year if the person's accepted taxable income for the income year is:

(a)

less than $18,000; or

(b)

$18,000 or more but less than the person's LIS threshold amount for the income year.

New subsection 916E(2) provides that a person has an accepted taxable income for an income year if the Commissioner of Taxation has made an assessment of the person's taxable income for the income year or the Secretary accepts an estimate of the person's taxable income for the income year under new subsection 916E(3).

New subsection 916E(3) provides rules for when the Secretary may accept an estimate of a person's taxable income for an income year. The Secretary may accept an estimate if:

(a)

the estimate is not more than the tax-free threshold for the income year; and

(b)

the Secretary is satisfied that the estimate is reasonable, the Commissioner of Taxation has not made an assessment of the person's taxable income for the income year, and the person has not lodged and is not required under the tax law to lodge an income tax return for the income year; and

(c)

if the estimate is $18,000 or more, the person has provided the Secretary with an estimate of the person's eligible tax offsets (within the meaning of new subsection 916E(4)) for the income year and the Secretary is satisfied that the estimate is reasonable.

New subsection 916E(4) provides the following calculation for working out a person's LIS threshold amount:

A person's eligible tax offsets for an income year are the person's tax offsets (if any) for the income year, disregarding any tax offset for low income earners under section 195N of the Income Tax Assessment Act 1936. Tax offset has the same meaning as in the Income Tax Assessment Act 1997.

The claimant's eligible tax offsets are divided by 0.15 to give amount (a). Amount (a) is then added to $18,000 to give amount (b). If amount (b) is greater than the person's taxable income, they meet the tax requirement for the low income supplement.

Tax offsets are targeted benefits that reduce the amount of tax a person is liable to pay. Most tax offsets only allow a person to reduce their income tax liability to zero, not provide a net payment. For the purposes of new subsection 916E(4), a person's eligible tax offsets are considered, including amounts not utilised because the person does not have an income tax liability.

Example

In his 2012-13 tax return, William was entitled to $445 in low income tax offset and also claimed $500 under the net medical expenses tax offset and a further $338 in zone tax offset as he lives in a designated remote area. William's total offsets excluding the low-income tax offset amount to $838 ($500 + $338). Thus his amount (a) is $5,587 ($838 / 0.15) and his particular LIS threshold (or amount (b), that is, $18,000 + $5,587) is $23,587. If William's taxable income was $23,000 in 2012-13, he would be entitled to claim the low income supplement in 2013-14. If William's taxable income was $25,000 in 2012-13, he would not be entitled to claim the low income supplement in 2013-14, but would have still benefited from tax cuts which would have reduced his tax liability by around $500.

New section 916F sets out the remaining requirements that must be met for a person to qualify for the low income supplement. To qualify, a person must, at all times during the year: have been an Australian resident or a special category visa holder living in Australia; have remained in Australia for at least 39 weeks of the year; and not have been subject to a newly arrived resident's waiting period at any time during the year.

Additionally: the claimant must not have been a dependent child of another person for more than 25 weeks of the year; the claimant must not have been in gaol or a psychiatric institution for more than 25 weeks of the year; and no other person must have been eligible for family tax benefit for the claimant for more than 25 weeks of the year. (The claimant in this instance refers to a child of the other person.)

New section 916G specifies that a person cannot receive more than one low income supplement for an income year.

New section 916H provides for special rules to restrict the unintended consequence of a person, who has been paid a low income supplement, becoming entitled because of this to other benefits. It provides that, if a provision provides a benefit (whether a pension, benefit, payment, supplement or any other sort of benefit), a person meets specified criteria, and one of the criteria is that the person is receiving a social security payment, or is a recipient of a social security payment, then, for the purposes of the provision, a person is not taken to be receiving a social security payment, or to be a recipient of a social security payment, merely because the person receives a low income supplement.

New section 916J sets out that the amount of the low income supplement for an income year is $300.

Amendments to the Social Security Administration Act

Item 4 makes a minor technical amendment to subsection 16(3) as a consequence of the amendment made by item 5.

Item 5 inserts new subsection 16(3A), providing that a claim by a person for the low income supplement for an income year must not be combined with any other claim. In effect, claims for the low income supplement in respect of more than one financial year cannot be rolled into one claim.

Item 6 inserts a new Subdivision FC into Division 1 of Part 3. New Subdivision FC provides rules that impose a time limit for a person to make a claim for the low income supplement. The new Subdivision comprises new section 27C, which provides that a claim for the low income supplement for an income year must be made during that income year (that is, between 1 July and 30 June of the relevant income year). However, a claim will be accepted after the end of that income year if the Secretary is satisfied that there are special circumstances that affected the person being able to lodge the claim within the prescribed time limit, and if the claim is made within a reasonable period having regard to the circumstances affecting the person.

Item 7 inserts new section 204B into Division 3 of Part 5. The effect of new section 204B is to allow tax information about people in relation to claims for the low income supplement and tax file numbers to be used to verify that a person meets the income and tax requirement for qualification for the payment.

New subsection 204B(1) provides that the Secretary may, in relation to claims for the low income supplement, require the Commissioner of Taxation to provide the Secretary with information about people, including tax file numbers. The information that the Secretary can seek under this provision must be information in the possession of the Commissioner that relates to taxable income, tax offsets (within the meaning of the Income Tax Assessment Act 1997), adjusted taxable income (within the meaning of the Family Assistance Act) and income tax (within the meaning of Income Tax Assessment Act 1997) for an income year. In addition, the information provided by the Commissioner must not be information that the Secretary is able to require the Commissioner to provide under section 204A.

New subsection 204B(2) limits the purposes for which the information provided pursuant to new subsection 204B(1) may be used. The purposes are limited to ascertaining whether a person is or was qualified for the low income supplement for an income year.

Part 2 - Application and transitional provisions

Item 8 is an application provision which provides that the amendments made by Part 1 of this Schedule to the Social Security Act and the Social Security Administration Act apply in relation to claims for low income supplement made on or after 1 July 2012.

Item 9 provides the tax-free threshold for the 2011-12 income year. For the purposes of applying new subsections 916C(6) and 916E(3) of the Social Security Act (as inserted by this Schedule) in relation to the 2011-12 income year, the definition of tax-free threshold in new section 916A does not apply and the tax-free threshold is $6,000.

Item 10 provides the tax requirement that must be met if a person makes a claim for the low income supplement for the 2012-13 income year. A claim for the 2012-13 income year will be assessed on the household's circumstances for the 2011-12 financial year.

Subitem 10(1) provides that new subsection 916E(1) of the Social Security Act (as inserted by this Schedule) does not apply in relation to a claim that is made for low income supplement for the 2012-13 income year and the person is taken to satisfy the tax requirement referred to in new subparagraph 916B(a)(iii) of that Act for the 2011-12 income year if the person satisfies the requirement in subitem 10(2).

A person satisfies subitem 10(2) if:

(a)

for the 2011-12 income year, the person has an accepted taxable income (within the meaning of new subsection 916E(2) of the Social Security Act, as inserted by this Schedule); and

(b)

the amount of income tax owed by the person for the 2011-12 income year (as worked out under subsection 4-10(3) of the Income Tax Assessment Act 1997 by reference to the person's accepted taxable income) is less than $300. That is, if a person's tax liability is less than $300 for the 2011-12 income year, the person would not have received adequate assistance through the tax system and, accordingly, would meet the tax requirement for the low income supplement.

Part 3 - Other amendments

Amendments to the Income Tax Assessment Act 1936

Item 11 inserts new paragraph 202(haa) into section 202 of the Income Tax Assessment Act 1936 ( ITAA 1936) to facilitate the administration of new Division 3 of new Part 2.18A of the Social Security Act (which deals with payment of low income supplement).

Amendments to the Taxation Administration Act 1953

Items 12 and 13 make minor technical amendments to paragraphs 8WAA(1AA)(b), 8WB(1A)(a) and 8WB(1A)(b) of the Taxation Administration Act 1953 as a consequence of the amendment made by item 11.