Bills Digest No. 86 1998-99 A New Tax System (Medicare Levy Surcharge - Fringe Benefits) 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 and Copyright Details

Passage History

A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998

Date Introduced: 2 December 1998

House: House of Representatives

Portfolio: Treasury

Commencement: Commences on the day on which the A New Tax System (Fringe Benefits Reporting) Act 1998 receives Royal Assent.

Purpose

From the 1999-2000 year of income, employers will be required to identify on group certificates the grossed-up taxable value of certain employee fringe benefits under measures proposed in the A New Tax System (Fringe Benefits Reporting) Bill 1998.(1) This value will be included in the income tests used to impose the Medicare levy surcharge for employees without private patient hospital insurance. This Bill proposes to impose a Medicare levy surcharge (MLS) on persons whose taxable income and reportable fringe benefits exceeds certain thresholds. The MLS to be imposed by this Bill is 1% of the reportable fringe benefits component. The Medicare Levy Act 1986 will continue to impose the MLS of 1% on the taxable income component.

Background

Implementing the A New Tax System

This Bill is one of a package of 17 Bills(2) 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,(3) which will be referred to as the A New Tax System (ANTS) in this Digest. The 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.(4) The Prime Minister also stated in Parliament that further tranches of legislation will be introduced early in 1999 to implement the new tax system.(5)

Proposal to include fringe benefits in income tests for surcharges and levies in the A New Tax System

ANTS foreshadowed major reforms of the taxation of fringe benefits, including a system of reporting certain fringe benefits that could be attributed to each employee for the purpose of imposing certain surcharges and levies. The outlines of these reform measures are set out in the companion Digest on the - A New Tax System (Fringe Benefits Reporting) Bill 1998.

The proposal which is relevant to this Bill was stated in ANTS as follows.

Improving income tests for surcharges and government benefits by requiring employers, from the 1999-00 FBT year of income, to identify on group certificates the grossed-up taxable value of an employee's fringe benefits that are part of their remuneration package or award, where the value of the benefits exceed $1000:

while tax liability for such benefits will remain with the employer (under FBT) their value will be included as income for determining liability for tax surcharges (such as the Medicare levy surcharge and superannuation contributions surcharge) and income related obligations such as child support
the non-grossed-up amount for a wider range of fringe benefits will also be included in assessing entitlement to certain income-tested government benefits (ie Family Allowance and the parental income test for Youth Allowance).(6)

This Bill implements the proposal to impose the MLS on fringe benefits attributed to employees.

The Medicare Levy Surcharge

In an attempt to stabilise the level of coverage of private health insurance in Australia, the Government announced in the 1996-97 Budget a two-pronged strategy which offered means-tested subsidies for people with private health insurance and a penalty through the MLS for higher income people without private health insurance. The penalty element of the strategy was contained in the Medicare Levy Amendment Act (No. 1) 1997.(7)

Main Provisions

The thrust of this Bill and the thresholds for liability to the MLS follow closely the provisions of the Medicare Levy Amendment Act 1996(8) which amended the Medicare Levy Act 1983 (the MLA). The requirements of an insurance policy that provides private patient hospital cover to avoid liability are also similar to the provisions in the Medicare Levy Amendment Act 1996. The amendments to the MLA impose a 1% MLS on taxable income from the year 1997-98.

This Bill imposes a 1% MLS on reportable fringe benefits totals of employees for the 1999-2000 year of income and later years of income (proposed section 10).

This section of the Digest covers the main provisions only and the reader is referred to the Explanatory Memorandum for details and the useful examples it contains.

When does an insurance policy provide private patient hospital cover?

Proposed section 4 provides that a policy will provide private patient hospital cover if it is an applicable benefits arrangement under section 5A of the National Health Act 1953. This will be satisfied if there is an arrangement between a registered organisation conducting a health benefits fund and a person contributing to the health fund, where there is cover (wholly or partly) for liabilities for:

fees incurred for hospital treatment; and
professional services of a medical practitioner during treatment at the hospital.

in respect of which a Medicare benefit is payable.

What is the family surcharge threshold?

The family surcharge threshold is $100,000 for a person for a year of income under proposed subsection 6(1), where the person has less than 2 dependents.

Where the person has two or more dependents the threshold amount is calculated in accordance with the following formula in proposed subsection 6(2).

$100,000 + ($1,500 x (Number of dependants who are children - 1))

The term dependent is defined in proposed section 5 and follows the definition for Medicare levy purposes. Basically, a person is dependent of another if that person is resident in Australia and is either a spouse or a child of the person contributing to their maintenance.

When are people treated as married?

Proposed section 7 defines when people are treated as married.

De fact couples are treated as married under proposed subsection 7(1). The proposed test is that:

a man and a woman have lived together as husband and wife on a bona fide domestic basis, for a period
although not legally married to each other have lived, as if
they were married to each other for that period, and
neither of them were married to anyone else for that period.

New widows and widowers are treated as married until the end of an year of income under proposed subsection 7(3), where:

the last person (the deceased) to whom another person was married died during the year of income, and
the death occurred while they were married.

Persons living separately and apart are not taken to be married under proposed subsection 7(2).

Who is a prescribed person?

Proposed sections 8, 13 and 14 modify the definition of prescribed person in Part VIIB of the ITAA 1936. The main categories of prescribed persons under Part VIIB are defence personnel, persons entitled under veterans' entitlement legislation, blind pensioners and sickness beneficiaries. Prescribed persons are entitled to a full or partial exemption from the Medicare levy. The Explanatory Memorandum explains the modifications of the definition of prescribed person for the purposes of proposed sections 8, 13,and 14.(9)

What is the amount of surcharge for a single person without dependents?

Proposed section 12 (Single person without dependants) provides that a surcharge of 1% is payable on the person's reportable fringe benefits total if the person:

is not a married person
does not have any dependants
is not covered by an insurance policy that provides private patient hospital cover
is not a prescribed person, and
has a taxable income and reportable fringe benefits total exceeding $50 000.

What is the amount of surcharge for a single person with dependents and who is not married?

Proposed section 13 (Single person with dependants who is not married) provides that a surcharge of 1% is payable on the person's reportable fringe benefits total if the person:

is not a married person
has one or more dependants
is not, or at least one of their dependants is not covered by an insurance policy that provides private patient hospital cover
is not a prescribed person, and
has a taxable income and reportable fringe benefits total exceeding the family surcharge threshold for that person.

What is the amount of surcharge for married person?

Proposed Division 4 sets out the basis for the imposition of the MLS on a married person.

It applies if the person :

is married
the person, or at least one of the person's dependants is not covered by an insurance policy that provides private patient hospital cover; and
the person is not a prescribed person.

The family surcharge threshold test is applied to a married person under proposed paragraph 15(b) with the taxable income and reportable fringe benefits total of the spouse being included in the calculations under subparagraphs 15(b)(iii) and (iv). Where this combined total exceeds the relevant family surcharge threshold, and the sum of the person's taxable income and reportable fringe benefits total for the year of income is more than $13,389 (proposed paragraph 15(c), the surcharge is payable.

The amount of the surcharge is 1% of that person's reportable fringe benefits total.

Where each spouse has reportable fringe benefits totals and where the requirements of proposed section 15 are satisfied, each spouse will be liable to the surcharge at 1% of the reportable fringe benefits total.

Concluding Comments

The reader is referred to the Concluding Comments on the companion Digest to the A New Tax System (Fringe Benefits Reporting) Bill 1998.

Endnotes

Reference should be made to the Bills Digest on A New Tax System (Fringe Benefits Reporting ) Bill 1998 for highlights of that Bill.
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, and
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.

Circulated by the Hon. Peter Costello MP, Treasurer of the Commonwealth of Australia (AGPS) August 1998.
Hansard, House of Representatives, 2 December 1998, p. 1087.
Hansard, House of Representatives, 3 December 1998, p. 1343.
Tax Reform: not a new tax, a new tax system: The Howard Government's Plan for a New Tax System; pp. 49-50
The reader is referred to the Bills Digest 76 1996-97 for the Private Health Insurance Incentives Act 1997.A new private health insurance incentive scheme takes effect from 1 January 1999 following the enactment of the Private Health Insurance Incentives Act 1998, the Taxation Laws Amendment (Private Health Insurance) Act 1998 and the Private Health Insurance Incentives Amendment Act 1998. The latter Act repealed the Private Health Insurance Incentives Act 1997. The reader is referred to Bills Digests Nos. 23-25 1998-99 for the background to the relative Bills.
The reader is referred to the Bills Digest 77 1996-97 for the Medicare Levy Amendment Bill (No. 2) 1996 for highlights of the provisions which imposed the MLS on taxable income.
Explanatory Memorandum to the A New Tax System (Fringe Benefits Reporting) Bill 1998 and A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998; paragraphs 1.132; 1.147-1.148 and 1.151 respectively.

Contact Officer and Copyright Details

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

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Published by the Department of the Parliamentary Library, 1999.