House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Abolishing the dependent spouse tax offset

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to:

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abolish the dependent spouse tax offset (DSTO);

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expand the dependant (invalid and carer) tax offset (DICTO) by removing the exclusion in relation to spouses previously covered by the dependent spouse tax offset;

•

remove an entitlement to DSTO where it is made available as a component of another tax offset, and replace that component with a component made up of DICTO; and

•

rewrite the notional tax offsets covering children, students and sole parents that are available as components of other tax offsets.

Context of amendments

Operation of the existing law

Dependency tax offsets

2.2 The dependency tax offsets are contained in the ITAA 1936 and were available for taxpayers who maintain certain classes of dependants, which are: spouses, invalid spouses, spouses who care for an invalid, housekeepers, housekeepers (with child), child-housekeepers, child housekeepers (with child), invalid relatives and parents/parents-in-law.

2.3 The dependency tax offsets have been subject to significant amendment over the years in which the offsets have been progressively phased-out or limited. The dependency tax offsets themselves now only apply to limited situations, however, the eligibility rules for those offsets that have been phased-out or limited continue to be used throughout the tax law for other purposes, resulting in significant complexity. This is because inoperative elements of the provision have to be retained and cross references updated to ensure any new limitations and phase-outs are ignored for the purposes of the relevant sections.

Dependent spouse tax offset

2.4 The DSTO is a tax offset that is intended to deliver a concession to taxpayers who maintain a dependent spouse. The DSTO is worth up to $2,471 (indexed) in 2013-14. Generally, eligibility for the DSTO is currently limited to taxpayers who have a spouse born before 1 July 1952.

2.5 The DSTO is contained in section 159J of the ITAA 1936 along with a number of other dependant tax offsets.

2.6 Taxpayers eligible to receive an amount of the zone tax offset (ZTO), overseas civilians tax offset (OCTO) or overseas forces tax offset (OFTO) are effectively exempt from the phase-out of DSTO. These taxpayers may claim an additional amount equal to the DSTO for a dependent spouse born after 1 July 1952 as part of their entitlement to ZTO, OCTO or OFTO. In addition, they may also receive 50 per cent or 20 per cent of the DSTO ($1,236 or $494 (as indexed for 2013-14)) as a further component of their ZTO, OCTO or OFTO.

2.7 The DSTO is income tested, based on the taxpayer's and the spouse's adjusted taxable income. In addition, a taxpayer cannot claim the DSTO in respect of any part of a year for which the taxpayer or their spouse is eligible for Family Tax Benefit Part B (FTB Part B). However, this condition does not apply to the equivalent amount made available under the ZTO, OCTO or OFTO.

Dependant (invalid and carer) tax offset

2.8 A taxpayer may be entitled to the DICTO for an income year if, during that year, they contributed to the maintenance of an eligible dependant. (Subdivision 61-A of the ITAA 1997.)

2.9 The circumstances whereby a taxpayer may be found to contribute to the maintenance of an eligible dependant are not limited. However, where the taxpayer and the dependant reside together, the taxpayer would generally be considered to have contributed to the maintenance of that dependant.

2.10 An eligible dependant may be:

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a taxpayer's spouse, parent, child (aged 16 years or over), brother or sister (aged 16 years or over) who is genuinely unable to work due to invalidity;

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the taxpayer's spouse's parent, brother or sister (aged 16 years or over), who is genuinely unable to work due to invalidity; or

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a taxpayer's spouse or parent/parent-in-law, who is genuinely unable to work due to carer obligations.

2.11 A dependant is considered to be genuinely unable to work due to invalidity where that person receives: a disability support pension or a special needs disability support pension under the Social Security Act 1991; or an invalidity service pension under the Veterans' Entitlements Act 1986.

2.12 A dependant is considered to be genuinely unable to work due to carer obligations if they are:

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receiving a carer payment or carer allowance under the Social Security Act 1991; or

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wholly engaged in providing care to a relative who receives a disability support pension or a special needs disability support pension under the Social Security Act 1991 or an invalidity service pension under the Veterans' Entitlements Act 1986.

Background

2.13 The dependency tax offsets originate from a time when the single income family was the norm, and the welfare system was in its infancy. In recent years, former Parliaments enacted amendments to limit the number of people who could receive a tax concession in respect of their dependant.

2.14 In their 2008-09 Budget, the former Government announced the introduction of an income test for the dependency offsets, linking the income limit to that for FTB Part B. This was estimated to raise $125 million over the forward estimates at the time.

2.15 The DSTO is already being phased-out for most taxpayers. The former Government implemented several measures phasing out the DSTO and consolidating the other dependency offsets.

2.16 In their 2011-12 Budget, it was announced that DSTO would be restricted to taxpayers with a spouse born before 1 July 1971, with an estimated revenue gain at the time of $755 million over the forward estimates.

2.17 In their 2011-12 Mid-year Economic and Fiscal Outlook, it was announced that eligibility for DSTO would be further restricted to taxpayers with a spouse born before 1 July 1952, with an estimated revenue gain at the time of $370 million over the forward estimates.

2.18 In their 2012-13 Budget, it was announced that the eight other dependency tax offsets would be consolidated into a single offset that could be claimed by taxpayers maintaining certain dependants who were genuinely unable to work due to invalidity or carer obligations. At the time, this was estimated to generate revenue of $70 million over the forward estimates.

2.19 Taxpayers eligible to receive ZTO, OCTO or OFTO were not affected by these measures.

2.20 In addition, the proposal to have the consolidation of the dependency offsets begin to apply to taxpayers eligible for the ZTO, OCTO or OFTO means that these taxpayers: would no longer be able to receive a concession for a parent or parent-in-law who is able to work, or for a housekeeper or a child housekeeper; but may be able to receive a higher amount of offset for an invalid relative, or for a parent or parent-in-law who is genuinely unable to work.

Summary of new law

2.21 Schedule 2 to this Bill amends the ITAA 1936 and the ITAA 1997 to:

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repeal the provisions providing an entitlement to the DSTO, and associated cross references to the DSTO contained in other provisions in the tax law;

•

expand the DICTO by repealing the provision excluding spouses covered by the dependent spouse tax offset from being covered by DICTO;

•

remove the DSTO and instead allow the DICTO to be claimed as a component of the ZTO, OCTO, OFTO; and

•

rewrite the notional tax offsets contained in the ITAA 1936 covering children, students and sole parents into the ITAA 1997 (which are used for calculating components of ZTO, OCTO and OFTO) and update cross references to reflect the rewrite.

Comparison of key features of new law and current law

Detailed explanation of new law

Repealing the dependent spouse tax offset

2.22 Schedule 2 to this Bill repeals sections 159J and 159JA of the ITAA 1936. The effect of the repeal is to abolish the DSTO for all taxpayers. [Schedule 2, item 16]

2.23 Schedule 2 to this Bill also repeals cross references to the DSTO included in sections 23AB (about OCTO), 79A (about ZTO) and 79B (about OFTO) of the ITAA 1936. The effect of removing these cross- references is to abolish a secondary form of access to the DSTO for taxpayers receiving a ZTO, OCTO or OFTO. [Schedule 2, items 1, 3, 4, 6, 7, 9, 11 and 13 to 15, subsections 23AB(7), 23AB(7A), 79A(2), 79A(4), 79B(2), 79B(4), 79B(4A) and 79B(6) of the ITAA 1936]

Expanding eligibility for the dependant (invalid and carer) tax offset

2.24 Schedule 2 repeals paragraphs 61-10(1)(d) and (e) of the ITAA 1997. The effect of the repeal is to broaden eligibility for the DICTO to cover those spouses who genuinely are unable to work due to invalidity or carer obligations that were previously covered by the DSTO. [Schedule 2, item 28, subsection 61-10(1) of the ITAA 1997]

2.25 Schedule 2 also incorporates the DICTO into the ZTO, OFTO and OCTO as a 'concessional/relevant rebate amount' so that an additional 20 per cent or 50 per cent of a taxpayer's DICTO entitlement can be claimed as a component of those offsets. This replaces the 20 per cent or 50 per cent of a taxpayer's DSTO entitlement (ignoring eligibility conditions) that could previously be claimed as part of the ZTO, OFTO and OCTO. [Schedule 2, items 3, 7 and 14, subsections 23AB(7A), 79A(4) (definition of 'relevant rebate amount'), and 79B(6) (definition of 'concessional rebate amount') of the ITAA 1936]

Rewrite of the notional tax offsets

2.26 While the dependency tax offsets provisions contained in sections 159J, 159JA, 159K, 159L, 159LA and 159M of the ITAA 1936 no longer apply in respect of any income year, certain elements of those offsets do operate as notional tax offsets for purposes of other taxation laws.

2.27 The dependent child/dependent student tax offset (section 159J) and the sole parent tax offset (section 159K) do not provide any taxpayer with a tax offset and have not provided a tax offset to any taxpayer for a number of years. However, those two offsets are used to calculate the amount of a taxpayer's ZTO and OFTO, and the dependent child/dependent student tax offset is used to calculate the amount of taxpayer's OCTO. This is because those offsets incorporate, as a component of a larger entitlement, a portion of other offsets a taxpayer may be entitled to, even if that entitlement is notional.

2.28 Dependants for whom a taxpayer may be entitled to a notional offset can also be dependants for the purposes of the net medical expenses tax offset and the Medicare levy family income threshold.

2.29 As the dependency tax offsets have been the subject of numerous amendments over the last 50 years, the provisions are now extremely complex and difficult to understand and apply. For this reason, this Bill also rewrites parts of the dependency tax offsets that are still required into the ITAA 1997.

2.30 The notional dependant (non-student child under 21 or student) tax offset contained in section 159J of the ITAA 1936 has been rewritten into the ITAA 1997. [Schedule 2, item 17, Subdivision 961-A of the ITAA 1997]

2.31 The effect of section 159J has been replicated into the rewritten provision. There are no changes to the operation of that notional offset.

2.32 The notional sole parent tax offset in section 159K of the ITAA 1936 has also been rewritten into the ITAA 1997. There are no changes to the operation of that notional offset. [Schedule 2, item 17, Subdivision 961-B of the ITAA 1997]

Consequential amendments

Cross references to the notional tax offsets

2.33 The amendments replace cross references to the old notional tax offsets to the new notional tax offsets. [Schedule 2, items 21 to 23 and 30 to 32]

2.34 The amendments to the definition of 'dependant' for the purposes of the net medical expenses tax offset has been updated to remove all references to dependants for which a rebate under section 159J may be available and instead refer only to dependents who are the taxpayer's spouse, child (under 21) or who are covered by the notional tax offsets or DICTO. [Schedule 2, items 21 and 22]

Repeal of redundant provisions

2.35 Provisions that are redundant as a result of the repeal of the dependent spouse tax offset are repealed. [Schedule 2, items 18 to 20, 24 to 26 and 33]

Technical amendments

2.36 A number of technical amendments are made to the DICTO to ensure it operates as intended. The intended operation of DICTO is set out in the explanatory memorandum to the Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013.

2.37 These technical amendments are beneficial to taxpayers.

Application and transitional provisions

2.38 The amendments generally apply to the 2014-15 income year and to all later income years. [Schedule 2, item 38]

2.39 The technical amendments apply to the 2012-13 income year and to all later income years which align with the introduction of the DICTO. The amendments are all beneficial to taxpayers. [Schedule 2, item 39]

Finding tables

2.40 This Chapter includes finding tables to help you locate which provision in this Bill corresponds to a provision in the current law that has been rewritten, and vice versa.

2.41 References to old law in the finding tables are to these provisions in the ITAA 1936.

2.42 References to the new law are to provisions of the ITAA 1997, unless otherwise indicated. Also, in the finding tables:

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No equivalent means that this is a new provision that has no equivalent in the current law. Typically, these would be guide material.

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Omitted means that the provision of the current law has not been rewritten in the new law.

Finding table 1 - old law to new law

Finding table 2 - new law to old law

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Abolishing the dependent spouse tax offset

2.43 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.44 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to:

•

abolish the dependent spouse tax offset (DSTO);

•

expand the dependant (invalid and carer) tax offset (DICTO) by removing the exclusion in relation to spouses previous covered by the dependent spouse tax offset; and

•

rewrite the notional tax offsets covering children, students and sole parents.

Human rights implications

2.45 The Committee has previously sought further information in respect of the consolidation of the dependency tax offsets and a number of human rights. ^[1] The then Assistant Treasurer's response was published in a subsequent report of the Committee. ^[2]

2.46 The measure contained in Schedule 2 does not engage any of the applicable rights or freedoms. However, given the Committee's previous view in relation to the consolidation of the dependency tax offsets, the following is noted in relation to the right to social security and the right to an adequate standard of living, family and children's rights.

2.47 The measure contained in Schedule 2 does not alter an individual's entitlement to direct assistance through the social security system.

2.48 The dependency tax offsets originate from a time when the single income family was the norm, and the welfare system was in its infancy. Over time, the means by which Parliaments have provided assistance to families has changed to reflect changing Australian society.

2.49 Whilst at times it is appropriate to use the tax system to provide assistance, the dependency tax offsets have been subject to significant amendment over the years in which the offsets have been progressively phased-out or limited and replaced with more appropriate forms of direct assistance.

2.50 The dependency tax offsets themselves now only apply to limited situations, however, the eligibility rules continue to be used throughout the tax law for other purposes which have resulted in significant complexity. This is because inoperative elements of the provision have to be retained and cross references updated to ensure any new limitations and phase-outs are ignored for the purposes of the relevant sections.

2.51 The objective of the measure contained in Schedule 2 is to further simplify the system of tax offsets in line with the previous amendments to consolidate the dependency offsets and Government budget priorities.

2.52 The effect of the measure is to remove the remaining limited eligibility to the dependent spouse tax offset for taxpayers with dependent spouses born before 1 July 1952 and those taxpayers eligible to receive an equivalent amount as part of their zone tax offset (ZTO), overseas civilians tax offset (OCTO), or overseas forces tax offset (OFTO). The amendments generally apply to the 2014-15 income year and to all later income years.

2.53 However, a taxpayer may be entitled to the DICTO (the consolidated offset) for an income year if, during that year, they contributed to the maintenance of an eligible dependant. (Subdivision 61-A of the ITAA 1997.)

2.54 The circumstances whereby a taxpayer may be found to contribute to the maintenance of an eligible dependant are not limited. However, where the taxpayer and the dependant reside together, the taxpayer would generally be considered to have contributed to the maintenance of that dependant.

2.55 An eligible dependant may be:

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a taxpayer's spouse, parent, child (aged 16 years or over), brother or sister (aged 16 years or over) who is genuinely unable to work due to invalidity;

•

the taxpayer's spouse's parent, brother or sister (aged 16 years or over), who is genuinely unable to work due to invalidity; or

•

a taxpayer's spouse or parent/parent-in-law, who is genuinely unable to work due to carer obligations.

2.56 A dependant is considered to be genuinely unable to work due to invalidity where that person receives a disability support pension or a special needs disability support pension under the Social Security Act 1991, or an invalidity service pension under the Veterans' Entitlements Act 1986.

2.57 A dependant is considered to be genuinely unable to work due to carer obligations if they are:

•

receiving a carer payment or carer allowance under the Social Security Act 1991; or

•

wholly engaged in providing care to a relative who receives a disability support pension or a special needs disability support pension under the Social Security Act 1991 or an invalidity service pension under the Veterans' Entitlements Act 1986.

2.58 It is estimated that around 85,000 to 90,000 taxpayers will claim DSTO with respect to the 2012-13 income year, and that around three quarters of these taxpayers utilised this offset to reduce their income tax liability. Around 6,000 taxpayers are estimated to be able to claim the DICTO, instead of DSTO, for a dependent spouse who is invalid or cares for an invalid and would not be worse off under the proposal.

2.59 In addition, the proposal to have the consolidation of the dependency offsets begin to apply to taxpayers eligible for the ZTO, OCTO or OFTO means that these taxpayers would no longer be able to receive a concession for a parent or parent-in-law who is able to work, or for a housekeeper or a child housekeeper; but would be able to receive a higher amount of offset for an invalid relative, or for a parent or parent-in-law who is genuinely unable to work.

Conclusion

2.60 This Schedule is compatible with human rights as it does not raise any human rights issues.