House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Reducing personal income tax rates

Overview

1.1 Schedule 1 to the Bill will amend the Income Tax Rates Act 1986 (the ITRA) to provide for a significant reduction in personal income tax rates. Schedule 2 provides for consequential amendments to other Acts affected by the changes in personal tax rates.

Summary of the amendments

Purpose of the amendments

1.2 The amendments will give effect to the Governments announcement in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System , released on 13 August 1998, to cut personal income tax rates for about 95% of all taxpayers.

Date of effect

1.3 Clause 2 of the Bill provides that this Act commences, or is taken to have commenced, after all of the GST-related Acts have received the Royal Assent. This reflects the integration of the measures that will give effect to the Governments plan for a new tax system.

1.4 The amendments in Schedule 1 will generally apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

Background to the legislation

Personal Tax Cuts

1.5 The Government, in its tax reform policy document, stated its intention to provide for personal income tax cuts. The Governments tax reform plan includes changes to the marginal tax rates and an increase in the tax-free threshold.

Explanation of the amendments

Resident taxpayers

1.6 Item 14 of Schedule 1 replaces the table in clause 1 of Part I of Schedule 7 of the ITRA, which sets out the rates of tax on the taxable income of a resident taxpayer. The new rates will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

1.7 The following table sets out the current rates of tax for resident taxpayers and the proposed rates of tax that will apply from 1 July 2000:

1.8 The key features of the new tax scale are:

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an 11% increase in the tax-free threshold to $6,000. This will help all taxpayers, but is of relatively greater benefit to low income taxpayers;

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a reduction in the lowest marginal tax rate from 20% to 17%. This also helps all taxpayers, but is of particular benefit to low income taxpayers;

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large tax cuts for middle income earners with income between $30,000 and $50,000 a year through the replacement of the 34% and 43% rates with a 30% rate. This will mean around 81% of taxpayers will have a top tax rate of 30% or less, compared to around 30% of taxpayers currently; and

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a $25,000 increase (to $75,000) in the level of income at which the top marginal rate of 47% takes effect. This will ensure that average earners do not drift into paying the top marginal tax rate, which would otherwise have occurred early in the next century.

Non-resident taxpayers

1.9 As a result of the proposed reductions in personal income tax for residents, it will be necessary to make consequential amendments to the rates of tax payable by non-residents.

1.10 Item 15 of Schedule 1 replaces the table in clause 1 of Part II of Schedule 7 of the ITRA, which sets out the rates of tax on the taxable income of a non-resident taxpayer. The new rates will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, subitem 1(1)]

1.11 The following table sets out the current rates of tax on the taxable income of a non-resident taxpayer and the proposed rates of tax that will apply from 1 July 2000:

Landcare and Water Facility Tax Offset

1.12 Division 388 of the Income Tax Assessment Act 1997 provides for a landcare and water facility tax offset. The offset is available to taxpayers whose taxable income for the income year would have been $20,700 or less. The offset is calculated on the basis of 34% of expenditure incurred. The threshold and offset rate are based on the current income tax rates scale.

1.13 To be consistent with the proposed tax rates and threshold that will apply from 1 July 2000, Schedule 2 makes consequential amendments to paragraph 388-55(2)(a) (substituting $20,000 for $20,700) and paragraphs 388-60(1)(a) and (b) (substituting 30% for 34%). [Schedule 2, items 2 and 3]

Consequential Amendments of other Acts

1.14 Items 16 and 17 of Schedule 1 make consequential amendments to Schedules 8 and 10 of the ITRA by omitting $5,400 (wherever occurring) and substituting $6,000, and omitting $20,700 (wherever occurring) and substituting $20,000.

Regulation Impact Statement

Policy Objective

Specification of policy objective

1.15 The policy objective is to provide stronger incentives for people to work and save.

Background

1.16 The Government announced in its tax reform policy document, Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System , its intention to cut personal income tax rates and increase the tax-free threshold.

Identification of implementation options

1.17 The only feasible implementation option is to alter the current personal income tax rates and brackets/thresholds in the Income Tax Rates Act 1986 to reflect the desired changes. The new rates will provide that individual taxpayers pay less personal tax.

1.18 The new tax rates will require 710,000 PAYE remitters to familiarise themselves with the new scales and calculate the amount of tax they need to remit to the Australian Taxation Office (ATO).

1.19 The new rates are to operate from 1 July 2000. To ensure that remitters are able to determine the correct amounts of tax, an educational campaign will be conducted by the ATO. This may consist of advertising, educational pamphlets, mailouts and information in remitter books.

1.20 Remitters who do not comply with the payment arrangements using the new rates will be penalised under the existing penalty regime.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

1.21 The proposal will affect the following groups:

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Employers

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Professional advisers, eg. tax advisers, computer programmers

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Australian Taxation Office

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Contractors who process payroll (Payroll businesses)

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Electronic payroll stockists

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Electronic payroll producers.

Assessment of costs

Compliance costs

Initial compliance costs

1.22 Generally, all impact groups will need to familiarise themselves with the change in rates. This may require those in the various impact groups taking 5 or 10 minutes to read information provided to them by the ATO.

1.23 Employers, payers, payroll businesses and professional advisers will need to update their technology and/or methodology for calculating tax payable. Approximately 76% of employers use a manual payroll system, with the remainder using computerised or external systems. Small employers and payers are more likely to use paper-based records and, hence, may face higher implementation costs. However, recalculating tax payable manually is unlikely to require additional staff or to require employers to obtain professional advice from tax agents.

1.24 Many computerised systems are designed to accommodate changes in tax rates with minimal instruction. Most would require around 15 minutes of a computer programmers time to incorporate this measure.

1.25 Electronic payroll stockists and producers will also need to alter the tax rates in their programs, and should face similar compliance costs to employers with computerised systems. The number of payroll producers is not known precisely; the ATO estimates that it is unlikely to exceed 18,000.

1.26 The combined total cost of compliance to employers, payroll businesses and professional advisers of this proposal is estimated to be $4 million (assuming labour costs of $23.90 per hour for a computer programmer and $16.30 for other payroll staff).

1.27 Under the PAYE system, employers with a total PAYE remittance of less than $25,000 per annum may remit PAYE deductions quarterly. Other employers remit PAYE payments at least monthly. Those employers who are currently paying monthly and remit between $25,000 and $29,300 in PAYE deductions would become eligible to remit quarterly when the proposed personal income tax cuts are implemented. The ATO estimates that this change will affect 13,500 PAYE remitters, and reduce compliance costs by approximately $1 million per annum. This equates to 8 less remittances per annum at a saving of between $7 and $8 per remittance.

Recurrent compliance costs

1.28 Existing PAYE remittance arrangements benefit employers by allowing them to delay the payment of PAYE deductions to the ATO. The proposed changes to personal income tax rates reduce the amount of tax deducted by employers for remittance to the ATO. Some employers will benefit from the measure because, when the personal income tax rates are reduced, they will be able to remit quarterly, rather than monthly. However, other employers will be disadvantaged as the reduced deductions amount to a reduced cash flow. Assuming an interest rate of 7% in 2000-2001, the proposed changes are estimated to reduce the cash flow benefit of the remittance arrangements to employers by $38 million per annum (or10%). The proposed extension of the remittance dates for monthly and quarterly PAYE remitters from the 7th day of the month to the 21st, announced in the Governments tax reform policy document, will partly offset this cost.

Administrative costs

Initial cost - internal

1.29 The ATO will need to devote additional resources in providing information support to the impact groups. One off expenses include:

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advertising the new rates;

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changing the TaxPack, other booklets, pamphlets and educational material;

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updating Taxation Rulings; and

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educating staff.

Internal computer systems will also need to be updated to ensure correct calculations of tax payable on individual assessments.

1.30 These costs will be absorbed within the ATOs annual budget. Overall resource costs are estimated to be:

Recurrent costs - Internal

1.31 All costs will be initial costs.

Government revenue

1.32 The Government estimates the cost to the revenue of the proposal to be $13.1 billion in 2000-2001; $13.5 billion in 2001-2002; and $14.5 billion in 2002-2003.

Economic Costs

1.33 There are not considered to be any economic costs involved.

Consultation

1.34 The Government announced the proposed measure in its tax reform policy document prior to the election period.

Conclusion

1.35 Implementation of this measure will increase the net pay of individual taxpayers by providing significant cuts in personal income tax rates. It is intended to provide incentives for people to undertake extra work or seek advancement, undertake additional education or training, and increase personal savings.

1.36 The option put forward will require employers, payers and payroll businesses to familiarise themselves with the change in rates. This will involve updating computer programs and/or the methodology used to calculate tax payable. The decreased tax rates will enable more small businesses to remit on a quarterly basis, reducing compliance costs.

1.37 The ATO and Treasury will monitor this measure, as part of the whole taxation system, on a continuing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations, and other taxpayer bodies.