Bills Digest No. 25  1998-99 Taxation Laws Amendment (Private Health Insurance) Bill 1998


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

Taxation Laws Amendment (Private Health Insurance) Bill 1998

Date Introduced: 12 November 1998

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent

 

Purpose

The government has introduced a trilogy of bills, which combine to replace the current private health insurance incentives initiative with another incentives payment scheme aimed at reducing the decline in private health insurance membership and restoring the balance in the health system.

The incentive will be equal to 30% of the cost of private health insurance cover and will not be income tested.

The Private Health Insurance Incentives Bill 1998 introduces incentives in the form of either direct payments or reduced premiums.

The Private Health Insurance Incentives Bill 1998 is complimented by the introduction of the Taxation Laws Amendment (Private Health Insurance) Bill 1998 (the Bill), which provides an alternative incentive in the form of a tax offset (rebate).

The Private Health Insurance Incentives Amendment Bill 1998 completes the reform package by providing for the closing off of the current Private Health Insurance Incentives Scheme (PHIIS) and the repeal of the Private Health Insurance Incentives Act 1997 on 1 July 2000.

 

Background

The current PHIIS has operated from 1 July 1997. The benefit is provided by way of either reduced premiums or tax offset. The scheme is income tested and is therefore not available to singles with incomes above $35,000 nor couples or families with combined incomes in excess of $70,000. The threshold is increased for those with dependent children.

The current incentive amount is dependent upon the type of policy held, but a guide to the benefits available would be $250.00 to a couple with hospital and ancillary cover and $450.00 for families.

There have been dramatic changes in the proportion of the population covered by private health insurance over the last decade or so. In relation to hospital cover, at 30 June 1984, 50.0% of the population had private health cover. In 1998 coverage had fallen to 30.6%.

In 1996 the coverage was 33.6% and in 1997 31.9%. The 1998 figures showed a continued decline in membership to 30.6% but the rate of decline had apparently slowed.

Background - Income Tax Assessment Acts 1936 and 1997

For many years the income tax law has been widely criticised for being too difficult to read and understand. The complexity of the law has increased the costs of taxpayer compliance and government administration.

From 1 July 1994 the Tax Law Improvement Project was established to restructure, renumber and rewrite the income tax law so that it can be more easily understood. The project has taken longer than expected and consequently the Tax Law Improvement Project team has chosen to adopt a 'progressive replacement' approach to the rewrite. This means that when an instalment of rewritten law comes into effect, the rest of the existing law (minus those areas that have been rewritten) continues to operate along side the new law.

The existing law is the Income Tax Assessment Act 1936 (ITAA 1936). The new law is the Income Tax Assessment Act 1997 (ITAA 1997).

The ITAA 1997 is organised on a descending hierarchy numbering system of Chapter -Part-Division-Section. Section numbers are cited with two components separated by a dash as in 'section 43-20'. The first component is the number of the division and the second identifies the section in that division.

The ITAA 1997 contains a provision, section 1-3, which is designed to preserve the relevance of existing case law and ATO rulings.

The coexistence of ITAA 1936 and ITAA 1997 often means that amendments to the law necessarily involve amendments to both Acts. That is the case with this Bill.

 

Main Provisions

1. Summary

The amendments contained in Schedule 2 to the Bill will insert new subdivision 61-H in the ITAA 1997 to provide a private health insurance offset complementary to the Private Health Insurance Incentives Bill 1998 and make other consequential amendments necessary to make the offset a refundable tax offset.

Schedule 1 makes consequential amendments to ITAA 1936.

2. Schedule 2 - Amendment of the Income Tax Assessment Act 1997

2.1 Tax offsets

A tax offset is an amount that is to be subtracted from the tax otherwise payable. In contrast a deduction is subtracted from assessable income in calculating the taxable income on which tax is payable.

The term 'tax offset' is a generic term used in ITAA 1997 to describe what in ITAA 1936 are called rebates and credits.

The sum of all tax offsets allowable to a taxpayer cannot exceed the amount of tax otherwise payable and any unused offsets cannot be carried forward to be set off against tax payable in future years. Nor can offsets be used to reduce the Medicare Levy.

2.2 Establishment of a private health insurance tax offset that mirrors the direct payment or reduced premium incentives in the Private Health Insurance Incentives Bill 1998.

Item 11 of Schedule 2 introduces new subdivision 61-H which permits a person to choose a tax offset for a premium, or an amount in respect of a premium, paid under a private health insurance policy instead of receiving payments or reduced premiums under Chapters 2 or 3 respectively of the Private Health Insurance Incentives Bill 1998.

2.2.1 Entitlement

New section 61-335 states that a person is entitled to a tax offset for the 1998-99 income year or a later income year if:

  • the person has paid a premium under an appropriate private health insurance policy; or
  • an employer has paid, as a fringe benefit, a premium for the person under an appropriate private health insurance policy.

A person is not entitled to an offset if the premium paid by the person has already been reduced pursuant to the premiums reduction scheme(1) or if the person has received an amount under the incentives payment scheme.(2) New subsection 61-335(5)

2.2.2 Calculation

The calculation provisions mirror the incentive payment sections contained in Chapter 2 of the Private Health Insurance Incentives Bill 1998.

New section 61-340 determines the amount of the offset. Basically the amount is the greater of:

  • 30% of the amount of the premium paid by the person or by the person's employer as a fringe benefit on behalf of the person for the income year; or
  • the incentive amount for the policy for the income year.

It should be noted that if a person was not registered or eligible to apply for registration before 1 January 1999 under the Private Health Insurance Incentives Act 1997 in respect of a policy for the 1998-99 income year, the amount payable is 30% of the amount of the premium paid by the person or the person's employer.

2.2.3 Incentive Amount

Again new section 61-345, which sets out the incentive amount for the purposes of new section 61-340, mirrors the comparable provisions in the Private Health Insurance Incentives Bill 1998.The incentive amount is worked out in accordance with the following table.

Item

Number and kinds of people covered by the policy

Policy provides hospital cover but not ancillary cover

Policy provides ancillary cover but not hospital cover

Policy provides combined cover

1

3 or more people

$350.00

$100.00

$450.00

2

One dependent child and one other person

$350.00

$100.00

$450.00

3

2 people neither of whom is a dependent child

$200.00

$50.00

$250.00

4

One person

$100.00

$25.00

$125.00

A pro rata daily rate formula applies to work out a part year incentive payment.

2.2.4 Refundable tax offset rule

Pursuant to new section 67-25 the amount of the offset is a refundable offset.

The Bill introduces a new concept of refundable offsets into tax legislation. At the moment the only offsets proposed to be refundable are the private health insurance tax offset and dividend imputation credits.

Essentially if the private health insurance tax offset exceeds the tax assessed the outstanding balance or surplus is passed on to the person by way of refund.

If a person has entitlement to tax offsets of a lower priority (and all tax offsets are deemed to be of a lower priority than the private health insurance tax offset under new subsection 67-25(2)) these must be subtracted from the person's tax payable first. Then, the amount of the private health insurance tax offset is next subtracted from any tax payable still outstanding. Finally a payment equal to the amount of the private health insurance tax offset which exceeds the amount of remaining tax payable is refunded to the person. New sections 67-25 and 67-30.

3. Schedule 1 - Amendment of the Income Tax Assessment Act 1936

Schedule 1 makes consequential amendments to the ITAA 1936 including the insertion of new section 264BB whereby the Commissioner may require health funds to provide information relevant to the operation of the Act in respect of each person covered at any time during the financial year by an appropriate private health insurance policy.

4. Application

The amendments to both the ITAA 1936 and ITAA 1997 apply to assessments in respect of income for the 1998-99 income year and all later income years.

Private Health Insurance Incentives Bill 1998

The Private Health Insurance Incentives Bill 1998 establishes a scheme under which persons are entitled to an incentive payment by way of direct payment or reduced premiums. The payment generally represents the greater of 30% of the amount of premium paid or an incentive amount which is predetermined.

Please refer to the Bills Digest in respect of the Private Health Insurance Incentives Bill 1998 for further detail.

Private Health Insurance Incentives Amendment Bill 1998

Schedules 1 & 2 - Amendment and repeal of the Private Health Insurance Incentives Act 1997

Schedule 1 provides transitional provisions that permit the closing off of the current PHIIS and Schedule 2 provides for the repeal of the Private Health Insurance Incentives Act 1997 from 1 July 2000. This should permit finalisation of administrative matters associated with the current scheme.

Please refer to the Bills Digest in respect of the Private Health Insurance Incentives Amendment Bill 1998 for further detail.

 

Concluding Comments

1. Refundable tax offsets

New section 67-20 states that the refundable tax offset rules only apply to a tax offset if it is stated to be subject to the refundable tax offset rules.

The Note to new section 67-20 states that the only tax offset that is subject to these rules is the private health insurance tax offset under new subdivision 61-H.

The inclusion of this note may be queried given the government's proposal(3) to reform the taxation of business entities. A key feature of the redesigned company taxation arrangements would include the refunding of excess dividend imputation credits for resident individual taxpayers and complying superannuation funds.

 

Endnotes

 

  1. Refer to the Private Health Insurance Incentives Bill 1998, Chapter 2.

  2. Ibid. Chapter 3

  3. Refer to the government's plan, Tax Reform: not a new tax, a new tax system.

Contact Officer and Copyright Details

Lesley Lang
23 November 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.

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