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Bills Digest No. 131 1999-2000
Medicare Levy Amendment (Defence - East Timor Levy) Bill 2000

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.

Passage History

Date Introduced: 17 February 2000

House: House of Representatives

Portfolio: Treasury

Commencement: The levy increase (Schedule 1) commences on 1 July 2000. Repeal of the provisions increasing the levy (Schedule 2) takes effect on 1 July 2001.

To amend the Medicare Levy Act 1986 and the Income Tax Assessment Act 1936 to impose a levy on higher income earners for the purpose of partially offsetting Australia's defence costs in East Timor.

Imposition of the Defence - East Timor levy was announced by the Prime Minister, Hon John Howard, in a Ministerial Statement on 23 November 1999.(1) It is anticipated that the levy will raise about $900 million in the 2000-2001 tax year. The money will be used to help finance Australia's continuing involvement in East Timor, to increase the number of fully operational infantry battalions from four to six, and to expand the number of air force personnel by 555 to 13,555.

The levy will be imposed as an increase in the Medicare levy. Only individual taxpayers earning more than $50,000 in 2000-2001 will be required to pay the levy. It will be imposed at two progressive rates of 0.5% and 1% of taxable income. Individual taxpayers with a taxable income above $50,000 will pay the levy at a rate of 0.5%. Those with a taxable income above $100,000 will pay a 1% levy. The 0.5% levy will shade-in from $50,001 to $51,282. The 1% levy will shade-in from $100,001 to $102,564.

The Opposition and the Australian Democrats have both expressed their support for the levy in principle.(2)

Estimates of the costs for Australia of efforts to assist East Timor were provided by the Prime Minister on 23 November 1999. The estimate of the extra defence costs from the deployment of forces in East Timor, and the raising of additional infantry and air force personnel was given as $907 million in 1999-2000; $1089 million in 2000-01; and $901 million in 2001-02.(3) The United Nations is expected to make some reimbursements reportedly of up to $120 million,(4) but these will cover only a small portion of the costs of deployment of Australian forces in East Timor and not the wider defence costs associated with that deployment. Expenditure in the 1999-2000 financial year is being met by appropriating sufficient funds from the Consolidated Revenue Fund to cover expenditure associated with Australia's military and civil operations in East Timor.(5)

The official handover of the Australian led multinational International Force for East Timor (INTERFET) force to the United Nations Transitional Administration in East Timor (UNTAET) force took place on 23 February 2000. About 1500 Australian troops remain in East Timor from a force that reached more than 5500 late last year. The force comprises one infantry battalion, headquarters support staff, military police, medical, logistical and aviation support units. Troops from the 5/7 Royal Australian Regiment will remain stationed on the border between East and West Timor, based in Balibo, for the duration of the UNTAET administration. In addition, 400 Australian logistics troops will stay in Dili until 30 June 2000 when commercial contractors are scheduled to take over the logistics support function for UNTAET.(6)

On 23 November 1999 the Minister for Defence, Hon John Moore, announced an increase of 3,000 troops in army combat strength to bring the total army strength to 26,000 full-time personnel.(7) Of the 3,000 extra troops, about 1,500 will be in logistics, training, headquarters and specialist units including intelligence and construction engineers. The additional troops will increase the number of fully operational infantry battalions from four to six, by bringing to combat readiness an additional two full-time Army battalion groups. It is intended that the additional troops will meet rotational requirements in East Timor as well as any security problems arising from the Sydney Olympics, and the demands of the Bougainville Peace Monitoring Group.

The additional battalion groups will be formed around 4 Royal Australian Regiment (RAR), based at Holsworthy in western Sydney, and 6RAR based at Enoggera in Brisbane. The expansion will be maintained for two years and the longer term size of the infantry force will be addressed in the forthcoming Defence White Paper, expected later this year.

In addition, RAAF strength will be increased by 555 to 13,555 to allow for additional combat support personnel and the raising of an additional airfield defence squadron. The Navy's strength will remain constant at 14,000.

In announcing the Defence - East Timor levy, the Prime Minister said that the projected Budget surplus of $3.1 billion for the year 2000-01 had been reduced by $1.8 billion in concessions to the Democrats to get the GST passed, a loss of $500 million in public debt interest caused by delayed receipts from the sale of the second tranche of Telstra, and by East Timor defence expenditure of $1.1 billion. He said that, without the levy, the Budget faced a cash deficit of $500 million. According to the Prime Minister, the only alternative to the levy would be further cuts in government spending in areas such as health, education and welfare for the needy.(8)

The Medicare levy was first used to finance projects not connected with the provision of medical treatment when it was increased temporarily by 0.2 per cent in the 1996-97 tax year to fund the gun buy-back scheme.(9) On that occasion, the increased levy applied to all individual taxpayers and raised $488.23 million.(10)

Only individual taxpayers are required to pay the Medicare levy because its purpose is to assist in funding the universal health insurance scheme. It does not apply to most other taxable entities, such as companies. This raises a number of equity matters in relation to the proposed increase in the Medicare levy to fund the current defence and East Timor commitments:

• Companies and certain other taxable entities will not be liable to pay the Defence - East Timor levy. According to press reports, a number of people writing to newspapers or calling radio stations have complained that the business community is not being asked to contribute to the national interest.(11)
• Individual taxpayers with a method of reducing their assessable income, for example through deductions based on negative gearing while they acquire a capital asset, may not be subject to the increase. Those receiving fringe benefits will also benefit because fringe benefits are not included in the calculation of assessable income for the purposes of calculating the amount of Medicare levy.(12)
• Public concern has been expressed about the $50,000 threshold for the increase. It is suggested that single income households will be liable for the increase while those with two incomes will not be liable. For example, a household which receives two incomes of $40,000 each will not be liable for the increase, while one with a single income of $51,000 will be.(13)

Some commentators have argued that the use of the Medicare levy to fund projects not connected with the universal health scheme could be regarded as misleading. They have suggested that if its use is to become more common, then an alternative method of increasing tax should be found. One obvious alternative would be to increase the rates of tax contained in the Income Tax Rates Act 1986. This would have the advantage of enabling the rates to be increased for all classes of taxpayers, not just for individuals, and may be seen as more equitable. Another alternative would be to introduce a separate levy that could be used for temporary tax increases, such as the gun buy-back or the Defence - East Timor commitments. Such a levy could remain on the statute books and only be activated when spending such as the current proposal is desired.

In a press release following the Prime Minister's announcement of the introduction of the East Timor levy, the Treasurer, Hon Peter Costello, stated that 'the levy is estimated to raise around $900 million in 2000-01'.(14) An estimate based on the latest taxation statistics (1997-98) published by the Australian Taxation Office indicates that the revenue raised by the levy may fall well short of expectations.

Using the 1997-98 taxation data, an additional 0.5 per cent levy on individuals with annual taxable incomes between $50 001 and $99 999 would have raised approximately $308 million, while an additional 1 per cent levy on individuals with annual taxable incomes above $100 000 would have raised approximately $263 million, or a total of $571 million. Allowance needs to be made for movement of more taxpayers into both of these income groups as well as inflation and wage increases in the period between 1997-98 and 2000-01. However, it is difficult to imagine even a generous allowance for these factors raising a further $300 million.

An estimated eighty per cent of individual taxpayers will be exempt from paying the Defence - East Timor levy as they earn less than $50,000 a year. The effect of the levy on taxpayers earning over $50,000 a year will be to reduce the anticipated income tax cut that is to come in from 1 July 2000 to offset the start of the GST. The Prime Minister has stated that applying the levy only on the top 20 per cent of taxpayers would protect 'low and many middle-income earners'. The levy would begin on the same day as the new tax system and reduce, only slightly, the tax cuts these people would receive. According to the Prime Minister, an individual earning $60,000 will now get a tax cut of $56 a week compared with $62 under the revised tax package.(15) Calculations by the University of Canberra's National Centre for Social and Economic Modelling (NATSEM) which were published in the press on 24 November 1999(16) show changes in the value of the tax cuts. NATSEM figures take into account the announced tax cuts, increased welfare payments, the cost of a GST and the imposition of the East Timor levy.

Takes into account tax cuts and the price effect of the GST for each type of family. Dual income family assumes 50:50 income split with children aged 5 to 12. - Source: Natsem, University of Canberra. (Reprinted from Sydney Morning Herald, 24 November 1999, p 1).

*Figures may differ by 1 cent due to rounding.

Some commentators have argued that the tax cuts, valued at around $12 billion, were too generous to higher-income earners in the first place. According to one commentator, after the East Timor levy, 'the 80 per cent of taxpayers earning less than $50,000 are now looking better relative to those on higher incomes, but still don't gain as much. A single person earning just over the average salary at $40,000 per year gets a $10.81 per week benefit, compared with a benefit of $33.63 for an individual on $60,000.'(17)

Although there has been widespread support for Australia's continued deployment of troops in East Timor, a number of business, medical and hospital groups have criticised the use of the Medicare levy to fund the cost. The Australian Chamber of Commerce and Industry said the Government should have cut spending rather than impose a new tax. The Australian Industry Group also said that the levy was effectively a new tax and that it would 'affect economic activity adversely. It will slow consumption, it will have an effect on confidence, particularly following on the recent interest rate rise and it could cut in on a slowing economy rather than a growing, faster one'.(18) The Prime Minister responded that he thought 'the reaction of some business spokesmen on the Timor issue was just unrealistic'.(19)

Public health groups said that they supported the Timor operation but that the Medicare levy should be used to fund health. They wanted the temporary rise in the levy extended, and the extra funds applied to public hospitals.(20) The Chief Minister of the ACT, Mrs Kate Carnell, also said that the levy should be increased permanently, but the money used for public hospitals.(21)

The AMA said that the Medicare levy was a misnomer and the title should be scrapped. Dr David Brand, president of the AMA, said that the Government should rename the Medicare levy ' the 'extra tax tax' because that's what it is' .(22)

Taxation Australia, which represents small business and other taxpayers, said using the levy was 'questionable' and 'just another burden on middle Australia'. They suggested that the Government should have funded the military operation by cutting spending or going into deficit for a year.(23) Ray Regan of the Taxpayers Association said on the 7.30 Report on 23 November 1999 that

Item 1 of Schedule 1 inserts a new section 8H in the Medicare Act 1986 in order to impose the Defence - East Timor levy. The levy will apply to the taxable income of individuals and trustees of certain estates for the 2000-01 year of income. The Bill provides tables in proposed subsections 8H(1) and 8H(4) showing the rates of the levy and the shade-in arrangements. Shading-in provisions are included so that taxpayers do not pay the full rate of the levy immediately their taxable income exceeds the threshold.

Individual taxpayers who are liable for the Medicare levy will be required to pay the Defence - East Timor levy if their taxable income exceeds $50,000. Proposed subsection 8H(2) provides a limited exception for taxpayers who do not pay the full rate of Medicare levy because of their Medicare levy family income threshold. This exception is designed to ensure that people will not be liable for the new levy unless they are subject to the full rate of Medicare levy.

Members of the Australian Defence Force (ADF) are exempt from the Medicare levy because they receive free medical treatment due to their employment. Dependants of ADF members may also be entitled to free medical treatment or to pay a half rate of Medicare levy.(25) Amendments contained in proposed subsection 9(2) of the Medicare Levy Act 1986 and proposed subsections 251T(2), (3) and (4) of the Income Tax Assessment Act 1936 will have the effect of imposing the Defence - East Timor levy on ADF members where their taxable income exceeds $50,000. (Members of the ADF also paid the gun buy-back levy in the 1996-97 taxation year.)

Item 3 of Schedule 1 provides that the amendments made by the Schedule apply during the 2000-01 financial year.

Schedule 2 repeals the amendments made by Schedule 1 effective from 1 July 2001 (items 1-5 of Schedule 2).

1. Howard, John, MP, 'Ministerial statement: East Timor: Australian Defence Force deployment', House of Representatives, Debates, 23 November 1999, p. 12371-5.
2. Beazley, Kim, MP, House of Representatives, Debates, 23 November 1999, p. 12376: 'To begin with, let me convey the opposition's support for the proposals in the Prime Minister's statement, both those relating to the force structure and the mechanisms put in place to pay for them'; Lees, Sen Meg, 'Ministerial statement: East Timor: Australian Defence Force deployment', Senate, Debates, 23 November 1999, p. 10421: 'I wish to put on record the support of the Australian Democrats for those fundraising proposals and for both parts of this initiative - the Government in their actions and the comments made by the Prime Minister'.
3. Howard, John, MP, 'Ministerial statement: East Timor: Australian Defence Force deployment', op cit, p. 12373.
4. The figure of $120 m. appeared in an article in the West Australian: 'Howard sets tax for Timor troops', Karen Middleton, West Australian, 24 November 1999.
5. Appropriation (East Timor) Bill 1999, Bills Digest No. 95, 1999-2000.
6. Hawke, Allan, Defence: the state of the nation: edited version of an address by the Secretary, Department of Defence to the United Services Institute, 2 February 2000, Australian Defence College, Canberra, p. 13.
7. Hon John Moore, Minister for Defence, 'Government boosts Army and Air Force strength', Media Release, MIN340/99, 23 November 1999.
8. Howard, John, MP, 'Ministerial statement: East Timor: Australian defence force deployment', House of Representatives, Parliamentary Debates, 23 November 1999, p. 12371-5.
9. When the Medicare levy was introduced in 1984 as part of the Medicare health system, it was set at 1 per cent of personal taxable income. It rose in December 1986 to 1.25 per cent of taxable income, then to 1.4 per cent in mid 1993, and to 1.5 per cent in 1995. In mid-1996, it rose to 1.7 per cent, temporarily, in order to fund the gun buy-back scheme. Today, the Medicare levy is 1.5 per cent of taxable income. In the 1999-2000 financial year the Medicare levy is expected to raise $4.3 billion. Since July 1997, higher income earners without private health insurance, have been required to pay an extra 1 per cent Medicare levy surcharge. The surcharge is levied on single taxpayers earning more than $50,000 and on families earning more than $100,000 a year. Australian Taxation Office statistics record that 6,649,266 Australians paid the Medicare levy in 1997-98. Of these, 107,276 also paid the surcharge.
10. Treasury, 'Budget strategy and outlook 1999-2000', Budget paper No. 1, Appendix C: Revenue statistics 1988-89 to 1999-2000 (Cash Basis), p. 6-23.
11. 'PM misses mark with Timor tax', by Ross Peake, Canberra Times 27 November 1999, p. C1.
12. The Treasurer, Hon Peter Costello, confirmed that the Timor levy would not apply to people earning below $50,000 even if fringe benefits put their gross income above that threshold. (Canberra Times, 26 November 1999, p. 2.)
13. 'PM misses mark with Timor tax', by Ross Peake, Canberra Times 27 November 1999, p. C1; 'Sole breadwinner families hit hard', by Tom Allard, Sydney Morning Herald, 25 November 1999, p. 8.
14. Costello, Peter, MP, Press release, 23 November 1999.
15. Howard, John, MP, 'Ministerial statement: East Timor: Australian Defence Force deployment', House of Representatives, Debates, 23 November 1999, p. 12371-5.
16. Michelle Grattan, 'New tax funds Timor', Sydney Morning Herald, 24 November 1999, p. 1.
17. Tom Allard, 'Levy will hit high earners hardest', Sydney Morning Herald, 24 November 1999, p. 9. Also Ian Henderson, 'Battlers spared any surplus burden', Australian, 24 November 1999, p. 4.
18. 'Business and doctors oppose levy', Canberra Times, 25 November 1999, p. 2.
19. Ross Peake, 'Business reaction to Timor tax unreal: PM', Canberra Times, 26 November 1999, p. 2.
20. 'Extend East Timor levy to fund health - PHAA', Public Health Association of Australia Inc., Media release, 23 November 1999.
21. 'Make it permanent, says Carnell, but for hospitals', Canberra Times, 24 November 1999.
22. 'Scrap the Medicare levy, say doctors', Australian, 25 November 1999, p. 3.
23. 'Mixed response to Medicare levy increase', by Mary-Anne Toy, Age, 24 November 1999.
24. Ray Regan, Taxpayers Association, 'East Timor: high- earning taxpayers to pay a levy to cover the cost of peacekeeping troops', 7.30 Report, 23 November 1999, p. 2. This argument was also made by Professor Fran Baum, president of the Public Health Association who said that 'any new tax for specific purposes, like this one, and the guns buy-back scheme before it, should also apply to business. Business is recording record profits yet will not be required to foot the bill for East Timor.' (Canberra Times, 25 November 1999)
25. Income Tax Assessment Act 1936 paragraph 251U(1)(a).

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