Bills Digest No. 92   1998-99 A New Tax System (Income Tax Laws Amendment) 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
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

Date Introduced: 2 December 1998

House: House of Representatives

Portfolio: Treasury

Commencement: This Act commences after the following goods and services tax (GST) related Acts receive Royal assent.

Purpose

The purpose of the Bill is to:

• provide that bonus payments made to certain older Australians will be exempt from income tax and also be treated as 'excluded exempt income' for the purposes of the carry forward loss provisions of the Income Tax Assessment Act 1997
• repeal the savings tax offset provisions of the Income Tax Assessment Act 1997, which were designed to give assistance to individual taxpayers who save or invest, and encourage potential savers or investors, and
• amend the Income Tax Regulations to provide for an increase in the maximum rebate available to low income aged persons and certain pensioners by $250 a year (for a single person) and $175 a year (for each of a couple).

Background

Implementing the A New Tax System

This Bill is one of a package of 17 Bills(1) that was introduced into the House of Representatives in December 1998, to give effect to Government's proposals on 13 August 1998 for a new tax system, which included the introduction of a GST. The outlines of Government's proposals were contained in the policy document Tax Reform: not a new tax, a new tax system: The Howard Government's Plan for a New Tax System,(2) which will be referred to as the A New Tax System (ANTS) in this Digest. An Overview of ANTS and further details of the proposals were contained in Fact Sheets, all of which were available at the time of writing in the Government's Tax Reform Website: http://www.taxreform.gov.au

Proposed section 1-3 of the A New Tax System (Goods and Services Tax) Bill 1998 (the GST Bill) provides that the Commonwealth will introduce further legislation to give effect to the Agreement on Principles for the Reform of Commonwealth-State Financial Relations endorsed at the Special Premiers' Conference in Canberra on 13 November 1998. In the Second Reading Speech on the GST Bill, the Treasurer stated that the Government proposes to enact the whole package by the end of this financial year and that when the package is enacted, Australia will have a new tax system from 1 July 2000.(3) The Prime Minister also stated in Parliament that further tranches of legislation will be introduced early in 1999 to implement the new tax system.(4)

Tax exemption of bonus payment for savings for Older Australians

ANTS indicated that pensioners and self-funded retirees, who have income from savings, will be provided with special payments to maintain the value of savings and retirement income; viz. the Aged Persons Savings Bonus (the APSB) and the Self-funded Retirees Supplementary Bonus (SFRSB).(5) The A New Tax System (Bonuses for Older Australians) Bill 1998 (the BOA Bill) includes measures to give effect to a bonus payment for older Australian in two components (ie. the APSB and the SFRSB). The Bill provides for both components of the bonus payment to be exempt from income tax. The Bills Digest on the BOA Bill should be referred to for full details of the measures. For ease of reference a brief outline of these payments is given below.

The Aged Persons Savings Bonus Component

The Aged Persons Savings Bonus (APSB) is a one-off tax free payment of up to $1,000 per person available to retired people 60 years or older on 1 July 2000, subject to an income test.

Self-Funded Retirees Supplementary Bonus Component

The Self-Funded Retirees Supplementary Bonus (SFRSB) is an upfront tax free payment of up to $2,000 for retirees, not in receipt of government benefits, subject to an income test. It is available to those who have attained age pension age ( 65 years for a man and 611/2 for a woman) on 1 July 2000. It is also a requirement that as a general rule that such a person should not have received a social security pension or benefit during the 3 months leading up to and including 1 July 2000.

Test of Income from Savings for Bonus Payments

ANTS proposed that both bonuses were to be calculated on the basis of a dollar of bonus for each dollar of income from savings and investments in 1998-99 or 1999-00. The BOA Bill provides that he or she

• has a savings and investment income amount of $1,000 for 1998-1999 or 1999-2000 to qualify for the maximum APSB of $1,000, and
• has a savings and investment income amount of $2,000 for 1998-1999 or 1999-2000 to qualify for the maximum SFRSB of $2,000.

The APSB and SFRSB are phased out for savings and investment income over the amounts of $1,000 and $2,000 respectively.

Income Test for Bonus Payments

The bonuses are targeted to lower income groups with taxable incomes less than $20,000 in 1998-99 or 1999-00 and phasing out between $20,000 and $30,000. The phasing out is at the rate of 10 cents in the dollar on taxable income in excess of $20,000 for the $1,000 APSB. The phasing out for the combined payment of $3,000 for the APSB and the SFRSB is 30 cents in the dollar for income in excess of $20,000.

Financial Impact

ANTS indicated that the APSB and the SFRSB would cost revenue $1.3 billion in the year 2000-01.(6) The Explanatory Memorandum to the BOA Bill agrees with this estimate.(7) The estimate must take into account that the bonus payments will be tax free.

Repeal of the savings tax offset

The savings offset, which was introduced by the Taxation Laws Amendment Act (No 3) 1998,(8) is available from 1 July 1998 for resident individuals in respect of savings and investment income and undeducted superannuation contributions of employees. It will also apply to the self-employed. The tax offset or rebate is available to net personal income from savings and investment, including net business income, up to an annual cap of $3,000. In the first year it will apply at a transitional rate of 7.5% and increase to 15% thereafter. This will deliver a tax saving of up to $225 per year in 1998-99 and up to $450 per year thereafter. The Income Tax Regulations were amended to provide a method for an employer to calculate the reduction in tax instalment deductions where an employee claims the offset (the reduction is calculated by multiplying the weekly savings offset amount to which the employee claims to be entitled by 1.9%).

In the Second Reading Speech to the Bill which introduced the savings offset scheme, the Parliamentary Secretary [Cabinet] to the Prime Minister) stated:

The co-contribution or matching superannuation scheme was announced by the Labor Government in the 1995-96 Budget when it was proposed to replace the L-A-W tax reductions by Government contributions to match employee contributions to superannuation. The proposal was that through awards and industrial agreements there would be a phased requirement for employees to contribute 3% of their earnings to superannuation by year 2000. It was also envisaged that there would be matching government contributions, subject to a means test, to a maximum of 3% of the earnings of employees (and by self employed out of their after tax income). Taken together, with the maximum rate of employer contribution under the Superannuation Guarantee scheme, which will rise to 9% by 2002-3, this would have provided by that date a 15% contribution towards superannuation. Estimates prepared in 1995 by the Retirement Income Modelling Task Force (RIM) suggest that the measures would have contributed to a net increase in national saving of around 1 per cent of GDP per year by year 2005. It was also estimated that this measure will result in the Government contributing some $4.5 billion to the superannuation accounts of employees and the self-employed by 2001-02.(10)

Increase in rebates for low income aged persons and certain pensioners

In ANTS the Government announced that it will increase the rebates to low income aged persons and certain pensioners over and above the usual annual increases by $250 for singles and $175 for couples. It stated that this would result in 70,000 additional part-pensioners and self-funded retirees paying no income tax and providing an extra tax cut to 330,000 older Australians.(11)

The rebates for low income aged persons and certain pensioners are available under sections 160AAAA and 160AAA of the Income Tax Assessment Act 1936. The calculation of the rebate for certain pensioners is determined under Income Tax Regulation 151 and the rebate for low income aged persons is calculated under Income Tax Regulation 150AD. The amount of the rebate is not fixed but is calculated annually by reference to formulae in the Income Tax Regulations. The pensioner rebate and the low income aged persons rebate levels and thresholds for 1997-98 are set out in the following table.(12)

For 1997-98, the pensioner rebates will enable single pensioners to earn non-pension taxable income up to $100 per fortnight, and pensioner couples to earn combined non-pension taxable income up to $176 per fortnight, without paying income tax. These income levels are based on the pension income test free amounts.

The pensioner rebate is available to recipients of the following social security pensions: the Age Pension, the Disability Support Pension (taxpayer of Age Pension age), the Disability Wage Supplement (taxpayer of Age Pension age) absorbed by the Disability Support Pension (from 1 January 1998), the Wife Pension (taxpayer or spouse of Age Pension age), the Parenting Payment (single) (formerly the Sole Parent Pension), the Widow Pension (Class B), the Carer Payment formerly the carer Pension (taxpayer or caree of Age Pension age), the Mature Age Allowance (where received before 1 July1996) and the Mature Age Partner Allowance. It is also available to recipients of the following service pensions: Age Service Pension, Invalidity Service Pension (taxpayer or spouse of Age Pension age), Partner Service Pension (taxpayer or spouse of Age Pension age) and Carer Service Pension (taxpayer or caree of Age Pension age).

The low income aged persons rebate is available to persons at or above age pension age (currently 61 years for women and 65 for men) who have taxable income below the pensioner rebate cut-out threshold. The low income aged persons rebate ensures that an eligible person who has taxable income up to the pensioner rebate shade-out threshold, will not have a tax liability. This rebate level will be equivalent to the pensioner rebate level for a given level of taxable income, so that a single self-funded retiree with an income of $11,700 or less and a partnered couple with an income of $19,760 or less will not have a tax liability.

It must also be noted that pensioners, low income aged persons, or beneficiaries with some income tax liabilities will be able to utilise the low income tax rebate, which is available to all taxpayers with taxable income less than $24,450 in addition to the above rebates. The maximum rebate is $150, reduced by four cents in every dollar by which the taxpayer's taxable income exceeds $20,700.(13)

Financial Impact

The Explanatory Memorandum states that the budgetary cost of these measures is $0.08 billion in 2000-2001, $0.08 billion in 2001-2002 and $0.08 billion in 2002-2003.(14)

Main Provisions

Tax exempt status of bonus payments to older Australians

The amendments to the Income Tax Assessment Act 1997 by Item 3 to Schedule 1 to this Bill will ensure that a bonus payment made directly to an eligible person under the A New Tax System (Bonuses for Older Australians) Act 1998 will be treated as exempt income under proposed section 52-130.

• In addition, Item 2 which inserts proposed subsection 36-20(3A) provides that a bonus payment will not be taken into account in calculating net exempt income for the purpose of determining whether or not tax losses of earlier income years are deductible.

Abolition of the savings and investment income tax offset

Subdivision 61-A of the Income Tax Assessment Act 1997, provides for a savings tax offset designed to give assistance to individual taxpayers who save or invest, and encourage potential savers or investors. Item 5of Schedule 2 repeals subdivision 61-A and Item 6deletes the definition of savings and investment income in subsection 995-(1) which applied to the operation of subdivision 61-A. Item 7provides that the amendments made by Schedule 2apply to assessments for the 1999-2000 income year and later income years.

Increase in rebates for low income aged persons and certain pensioners

Item 3 of Schedule 3 inserts proposed subregulation 150AB(2A) to extend the definition of rebate amount for low income aged persons so that the rebate is increased by $250 (for a single person) or $175 (for each of a couple). Item 6of Schedule 3 inserts proposed subregulation 151 (3A)to make a similar extension of the definition of taxpayer's rebate amount and its amount for certain pensioners. The new definitions will apply to assessments for the 2000-2001 year of income and later years of income.

Item 8 of Schedule 3 provides that the amendment of the Income Tax Regulations by Schedule 3 does not prevent the amendment or repeal, by regulations, of the Income Tax Regulations as amended by this Schedule. It is therefore open to the Government to amend the Income Tax Regulations so as to withdraw the additional rebate amounts for the 2000-2001 year of income and subsequent years either directly or indirectly by varying the formula for calculating the rebates. Although the additional rebates are introduced as part of the New Tax System and much has been said of the need for all the States to agree to increase the rate of GST which has been initially fixed at 10 per cent, the terms of Item 8is an acceptance that the plenary constitutional powers given to the Commonwealth to enact laws relating to taxation under section 51(ii) of the Constitution cannot be circumscribed in any way which is not written down in the Constitution. The writer takes the view that there is no provision in the Constitution to require the Commonwealth to consult the States to either vary the Income Tax Regulations or the provisions of the:

• A New Tax System (Goods and Services Tax Imposition - Excise) Act 1998
• A New Tax System (Goods and Services Tax Imposition - Customs) Act 1998, and
• A New Tax System (Goods and Services Tax Imposition - General) Act 1998

which will initially fix the rate of GST at 10%.

Concluding Comments

Withdrawal of the Savings Offset Scheme

When the Savings Tax Offset scheme was proposed by the Treasurer in the 1997-98 Budget Speech, the general criticism was that as it was not means tested it opened the way for those who have already saved to claim the rebate regardless of their income or assets. The Australian Council of Social Service criticised the proposal as the concession was beyond the reach of low wage earners and social security recipients who would not be in a position to contribute $3,000 per year to superannuation or have other savings amounting to between $50,000 to $100,000 to be in a position to claim the maximum offset of $450. It added that the main beneficiaries will be high income earners and wealthy retirees.(15) Also, since it went to those with income from past savings the concession did not necessarily promote new savings.

These criticisms of ACOSS and others to the Savings Tax Offset scheme appear to have been met in Government's decision to withdraw the scheme and partially replace it with the income tested bonus payments for savings by older Australians. This leaves Australia without either the co-contribution scheme proposed by the Labor Government to boost national savings or the savings tax offset scheme announced by the Government in the 1997-98 Budget to achieve the same ends. The Government's decision to withdraw the Savings Tax Offset scheme and its impact on national savings cannot be viewed in isolation from the other measures in ANTS. The Explanatory Memorandum to the Bill sets out the reasons for the withdrawal of the Savings Tax Offset scheme as follows:

The personal tax cuts which is part of the compensation package on the introduction of the GST, have been criticised by ACOSS and other social welfare organisations in that they are skewed in favour of high income earners. This may in the end prevent the desired savings being made by the majority of persons in the lower income groups who are likely to be dependent upon the social security system in old age.

Financial impact

The Explanatory Memorandum states that the withdrawal of the savings tax offset scheme will increase revenue by $0.79 billion in 1999-2000, $2.04 billion in 2000-2001, $2.14 billion in 2000-2002 and $2.24 billion in 2002-2003.(17)

The savings offset scheme gives way to the personal income tax cuts proposed in the A New Tax System (Personal Income Tax Cuts) Bill 1998, to take effect on the introduction of the GST. The personal income tax cuts would cost $13.1 billion in 2000-2001, $13.5 billion in 2001-2002 and $14.5 billion in 2002-2003.(18)

In addition to the personal income tax cuts the A New Tax System (Personal Income Tax Cuts) Bill 1998 proposes an increase in the tax-free threshold for certain taxpayers with dependent children under the Family Tax Assistance (FTA) initiative. The total budgetary cost of the family package is $2.3 billion in 2000-2001, $2.4 billion in 2001-2002 and $2.6 billion in 2002-2003.

It was mentioned earlier that the savings offset scheme replaced the superannuation co-contribution scheme which was estimated to cost $4.5 billion in 2001-2002.

The savings offset scheme replaced the L-A-W tax cuts and it is ironic that the withdrawal of the former to give way to the personal income tax cuts marks the transmutation of the L-A-W tax cuts to usher in the GST.

After tax impact of measures in the package on Age Pensioners and Self-funded Retirees

The measures in this Bill such as the tax free bonuses for older Australians and the increase in rebates for low income aged persons and certain pensioners will assist this group in the community to offset the adverse impact of the GST. On the other hand the repeal of the savings tax offset may be expected to adversely affect self-funded retirees in particular. However the package of Bills introduced so far have compensation components in the following Bills:

• A New Tax System (Compensation Measures Legislation Amendment ) Bill 1998
• A New Tax System (Personal Tax Cuts) Bill 1998
• A New Tax System (Aged Care Compensation Measures Legislation Amendment) Bill 1998
• A New Tax System (Bonuses for Older Australian) Bill 1998.

In assessing the impact of the GST on age pensioners and self-funded retirees it is necessary to take into account not only the provisions in this Bill but as well the impact of the measures in the four Bills mentioned above.(19)

ANTS assesses the impact of the entire tax reform package on age pensioners and self-funded retirees in the following terms.(20)

Age pensioners

Self-funded retirees

The cameos referred to in ANTS are included in Attachments A to D(21) in this Digest for ease of reference.

The cameos show the government's estimates of the effects of the tax reform proposals on various pensioner and self-funded retiree households. The effect at different income levels within each of these household groups is shown. The total outcome of the tax package takes into account personal income tax cuts, increases in social security payments and the increase in the cost of living due to the impact of the GST and the removal of other taxes.

Concerns of the impact of the increase in CPI on the introduction of the GST

There are concerns that the cost of living adjustment from the GST in the cameos in ANTS may not reflect the actual price impacts following the introduction of the GST. This is of particular concern to age pensioners and self-funded retirees who will be the most vulnerable groups in the community should there be a steep increase in the CPI on the introduction of the GST.

In these cameos, the government has used a common price impact across the different household types. The size of the price impact has been estimated using Treasury's Price Revenue Incidence Simulation Model (PRISMOD). This price input-output model traces the effects of price changes through the economy until they impact on the consumers (final purchasers). An important assumption of PRISMOD is that the full effect of price changes, including the abolition of a number of indirect taxes is passed through to the consumers. Also, PRISMOD does not calculate how long it will take this price impact to flow through to consumers.

PRISMOD is just one of the models estimating the effect on the economy of the government's tax reform package that have recently received press attention.(22) For all models, the results are influenced by such factors as the assumptions that are made and the data used. Some models may give very detailed results, others more general; some may give short-run analyses while others look at the longer-term. These types of factors have to be considered when comparing the results of competing models.

A critical assumption in the modelling of the price impacts is that all of the reductions in indirect taxes are fully passed through. With this assumption the 10 per cent GST results in a 1.9 per cent increase in prices (ignoring tobacco). Consumers get all of the benefit of the indirect tax reductions and business gets none. However, if there is less then full passing through of the other tax reductions, then the CPI impact will be higher. Consumers will receive less of the indirect tax reductions but other businesses will benefit. For example, if farmers and other rural users were to benefit from the reduction in the diesel fuel taxes, there would be less passed on to consumers.

On the Government's figures full passing through of indirect tax reductions gives a 1.9 per cent CPI effect. No passing through of the indirect tax reductions would give the full GST effect, a 10 per cent CPI increase. Hence if consumers and business were to split the benefits with a 50 per cent passing through of indirect tax reductions, the CPI would increase by 5.95 per cent. If, in addition, only 50 per cent of the GST were passed on the total impact would be a CPI increase of 0.95 per cent.

PRISMOD has estimated the (one-off) common price impact, as measured by the change in the Consumer Price Index (CPI), to be 1.9% in 2001-02. The government has also conceded that the impact in the first year (2000-01) will most probably be higher than the eventual outcome of 1.9%, given the timing issues involved with the abolition of various other Federal and State taxes.

The use of a common price impact on all households has come in for criticism, as has the application of the 1.9% price impact on disposable incomes rather than actual expenditure. Evidence from other models, particularly analyses using HES data (considered invalid by Treasury), suggest that pensioner and self-funded retiree households will experience a cost of living increase of as high as 2.5%. Moreover, many of these households are spending more than their disposable income as they run down their assets in retirement. That means applying the CPI estimate to disposable income significantly understates the compensation required.

In the meantime, the government's estimates are on the table and open to scrutiny. To provide compensation packages that will treat everybody equally is impossible because, even within small groups of the population such as pensioner households, there are such diverse ranges of income mixes and expenditure patterns. It is for this reason that, in the latest review of the CPI,(23) submissions from the Australian Council of Social Service (ACOSS) and the Australian Pensioners' and Superannuants' Federation (AP&SF) did not support the application of special CPIs for pensioners or older people.

Readers are referred to the Bills Digest on the A New Tax System (Compensation Measures Legislation Amendment) Bill 1998 for further comments on Economic Modelling and the Government Modelling for ANTS.(24)

Endnotes

2. A list of the Bills is set out below:

   • A New Tax System (Aged Care Compensation Measures Legislation Amendment) Bill 1998,
   • A New Tax System (Australian Business Number Consequential Amendments) Bill 1998,
   • A New Tax System (Australian Business Number) Bill 1998,
   • A New Tax System (Bonuses for Older Australians) Bill 1998,
   • A New Tax System (Compensation Measures Legislation Amendment) Bill 1998,
   • A New Tax System (End of Sales Tax) Bill 1998,
   • A New Tax System (Fringe Benefits Reporting) Bill 1998,
   • A New Tax System (Goods and Services Tax Administration) Bill 1998,
   • A New Tax System (Goods and Services Tax Imposition - Customs) Bill 1998,
   • A New Tax System (Goods and Services Tax Imposition - Excise) Bill 1998,
   • A New Tax System (Goods and Services Tax Imposition - General) Bill 1998,
   • A New Tax System (Goods and Services Tax Transition) Bill 1998,
   • A New Tax System (Goods and Services Tax) Bill 1998,
   • A New Tax System (Income Tax Laws Amendment) Bill 1998,
   • A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998,
   • A New Tax System (Personal Income Tax Cuts) Bill 1998, First Reading,
   • A New Tax System (Trade Practices Amendment) Bill 1998, First Reading,

   The first 16 of these Bills were introduced on 2 December 1998 and the 17^th Bill was introduced on 10 December 1998.

3. Circulated by the Hon. Peter Costello MP, Treasurer of the Commonwealth of Australia (AGPS) August 1998.

4. Hansard, House of Representatives, 2 December 1998, p. 1087.

5. Hansard, House of Representatives, 3 December 1998, p. 1343.

6. Tax Reform: not a new tax, a new tax system: The Howard Government's Plan for a New Tax System (ANTS), p.21, pp. 58 - 59 and p.176.

7. Ibid., p. 21 and p. 34.

8. Explanatory Memorandum to the A New Tax System (Bonuses for Older Australians) Bill 1998; Outline and Financial Statement.

9. The Reader is referred to the Bills Digest No. 129 1997 - 98 for the background to this Bill that was enacted as the Taxation Laws Amendment Act (No 3) 1998.

10. Hansard, House of Representatives, 4 December 1997; p. 12138

11. Saving For Our Future; Statement by Mr Ralph Willis; Treasurer 9 May 1995, p. 6

12. ANTS, p. 21.

13. Press Release No. 7 of 25 March 1998 of the Assistant Treasurer.

14. The A New Tax System (Personal Income Tax Cuts) Bill 1998 provides for the threshold to be reduced to $20,000. The reader is referred to the Bills Digest on this Bill for details.

15. Explanatory Memorandum, p. 2 and New Tax Plan, p. 33

16. Bills Digest No. 129 1997-98; paragraph on Savings Rebate.

17. Explanatory Memorandum, paragraph, p. 6

18. Ibid., p. 2 and ANTS, p. 33

19. Explanatory Memorandum to the A New Tax System (Personal Income Tax Cuts) Bill 1998, p.1

20. The reader is referred to the Bills Digests on these Bills for details of the compensation measures.

21. ANTS, pp. 175 - 176

22. Attachment A - Single self-funded retiree (ANTS;p.201); Attachment B - Single age pensioner (ANTS; p. 199); Attachment C - Age Pensioner Couple (ANTS ; p. 200); Attachment D - Self-funded retiree couple (ANTS; p. 202).

23. These include models from Econtech, the Economic Modelling Bureau of Australia and the Melbourne Institute of Applied Economic and Social Research.

24. Outcome of the 13^th Series Australian Consumer Price Index Review, Information Paper, 1997,catalogue number 6453.0, ABS, pp. 20, 22.

25. Bills Digest No. 72 1998 - 99; paragraph 3, pp. 5 - 7.

Contact Officer and Copyright Details

Bernard Pulle
27 January 1999
Bills Digest Service
Information and Research Services

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