Kowalski and Commissioner of Taxation

[2006] AATA 669

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 669

ADMINISTRATIVE APPEALS TRIBUNAL          № VT2005/596

TAXATION        APPEALS        DIVISION

Re:            HARRY KOWALSKI

Applicant

And:         COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Dr Gordon Hughes, Member

Date:31 July 2006

Place:Melbourne

Decision:The Tribunal affirms the decision under review.

(sgd) Gordon Hughes

Member

TAXATION – Medicare levy surcharge – untaxed element of Eligible Termination Payment –whether income within tax‑free threshold is “taxable income”.

Income Tax Assessment Act 1936  ss 27B(1)(a), 27B(1)(b), 159S, 159SA, 159SF, 251U, 251S

Income Tax Assessment Act 1997  ss 4‑15, 6‑5

Medicare Levy Act 1986 ss 6, 8B

Income Tax Rates Act 1986

REASONS FOR DECISION

31 July 2006  Dr Gordon Hughes, Member

1.      This matter was heard before the Tribunal on 19 June 2006.  The applicant represented himself.  The respondent was represented by Mr A. Vourgoutzis, advocate with the ATO Legal Services Branch.

2.      The applicant was appealing against a decision by the respondent on 10 October 2005 to disallow his objection to being charged the Medicare Levy Surcharge, by an amended assessment dated 26 August 2005 for the year ended 30 June 2003.

3.      The applicant raised two contentions on appeal.  First he contended that the untaxed element of an Eligible Termination Payment (ETP) received in February 2003 should be excluded from his taxable income for the purpose of calculating the Medicare Levy and Medicare Levy surcharge for the year ended 30 June 2003.  Secondly, he contended that the respondent had, over a period of time, incorrectly assessed his liability to pay the Medicare Levy by including as taxable income the first $6,000 of his income.

BACKGROUND

4.      The details of the moneys the applicant received in the taxation years, and other factual information relevant to the application, were not in dispute.

5.      On 14 February 2003 the applicant received an ETP of $22,736.  The ETP was comprised of the following two components:

(a)$4,202 post June 1983 untaxed element; and

(b)$18,534 post June 1983 taxed element.

6.      The applicant was born on 23 December 1947.  Therefore, the ETP was an age 55 ETP as defined by s 159S of the Income Tax Assessment Act1936 (ITAA36).  Specifically, s 159S defines age 55 ETP as meaning in relation to a taxpayer, … an ETP made in relation to the taxpayer on or after the taxpayer's 55th birthday.

7.      Throughout the relevant year, the applicant:

(a)was a resident of Australia;

(b)was not married:

(c)did not have any dependants;

(d)was not covered by an insurance policy that provided for private patient hospital cover; and

(e)was not a prescribed person as defined by s 251U of the ITAA36.

8.      In addition to the ETP, the applicant derived income of $48,892 from other sources in the relevant year.

UNTAXED ELEMENT OF ETP

9.      The applicant contended that the amount of $4,202 post June 1983 untaxed ETP should not be taken into account for the purposes of calculating the Medicare Levy.  He contended that it was inconsistent with the beneficial nature of superannuation legislation for his employer's superannuation contribution, which had been paid over a number of years, to be taxed in this manner on an aggregated basis.

10.     The Tribunal is unable to accept the applicant's contention in this regard.  The Tribunal instead accepts and adopts the reasoning advanced by the respondent.

11.     The Medicare Levy is imposed by s 5 of the Medicare Levy Act 1986 (MLA). It is assessed and payable in accordance with Part VIIB of the ITAA36.

12. Section 251S of the ITAA36 provides, amongst other things, that:

(1)       . . . levy by the name of Medicare Levy is levied, and shall be paid, at the rate applicable under the relevant Act imposing the levy, for the financial year that commenced on 1 July 1983, and for each succeeding financial year, upon:

(a)the taxable income of the year of income of a person, not being a company or a person in the capacity of a trustee, who, at any time during the year of income, was a resident of Australia…

In other words, Medicare levy is imposed upon "taxable income", and it thus becomes necessary in the case of each person to determine what in fact does amount to "taxable income".

13.     Section 4-15 of the Income Tax Assessment Act 1997 (ITAA97) provides that:

(1)      Work out your taxable income for the income year like this:

Taxable income = Assessable income – DeductionS

…

14.     Assessable income includes:

(a)income according to ordinary concepts, which is called "ordinary income" such as salary (see s 6-5 of the ITAA97); and

(b)statutory income, being amounts that are not ordinary income but are included in assessable income by specific provisions about assessable income (see s 6-10 of the ITAA97).

15. Subsection 27B(1) of the ITAA36 is one such provision. It provides that if an ETP is made in relation to a taxpayer in a year of income, the taxpayer's assessable income for that year includes:

…

(a)the taxed element of the retained amount of the post-June 83 component; and

(b)       the untaxed element of the retained amount of the post-June 83 component.

…

16.     Accordingly, the amount of $22,736 received by the applicant as an ETP in the year ended 30 June 2003 was included by the respondent in the applicant's assessable income (and accordingly taxable income) for that year.  Consequently, when the applicant filed his income tax return for the year ending 30 June 2003, he declared a taxable income of $71,628 which included the ETP of $22,736.

17. Subsection 251S(1A) of the ITAA36 effectively provides that the Medicare Levy is not payable, however, on that portion of any ETP included in assessable income in respect of which a rebate under s 159SA will effectively reduce the primary rate of tax of nil percent. In other words, if the taxpayer is entitled to a rebate such that his or her maximum rate of tax is nil percent, then no Medicare Levy will apply.

18. Section 159SA(1) of the ITAA36 provides:

(1)       If the assessable income of the taxpayer of the current year of income includes any eligible assessable income, the taxpayer is entitled to a rebate of tax in the taxpayer’s assessment of such amount (if any) as will ensure that the rate of tax on a rebatable amount specified in Table 1 will not be more than the corresponding rate of tax specified in that table.

TABLE 1—MAXIMUM RATES OF TAX ON ELIGIBLE ASSESSABLE INCOME

Item	Class of eligible assessable income	Corresponding rebatable amount	Rates of tax (%)
1	current year's total of taxpayer's s.27B(1)(a) amounts for non-age 55 ETPs	derived	20
2	current year's total of taxpayer's s.27B(1)(a) amounts for age 55 ETPs	low rate part	0
3	current year's total of taxpayer's s.27B(1)(a) amounts for age 55 ETPs	remaining part	15
4	current year's total of taxpayer's s.27B(1)(b) amounts for non-age 55 ETPs	Derived	30
5	current year's total of taxpayer's s.27B(1)(b) amounts for age 55 ETPs	low rate part	15
6	current year's total of taxpayer's s.27B(1)(b) amounts for age 55 ETPs	remaining part	30
7	current year's total of taxpayer's s.27B(1)(a) amounts	derived	15
8	current year's total of taxpayer's s.27B(1)(b) amounts for non-age 55 ETPs	derived	30
9	current year's total of taxpayer's eligible assessable income (excluding amounts covered by Items 1 to 8)	derived	30

…

19.     For the purposes of this application, only Item 2 in Table 1 of s 159SA is relevant.  It specifies that the maximum rate of tax on the "low rate part" of a taxpayer's s 27B(1)(a) amount (ie. the taxed element of the retained amount of the post-June 83 component of an ETP) for age 55 ETPs is nil percent.

20.     The "low rate part" is so much of the taxed element of the retained amount of the post June 83 component which does not exceed the residual amount under s 159SF for that year.  For the relevant year, the residual amount in relation to the applicant was $112,405.

21.     Therefore, for the purposes of calculating the Medicare Levy, the amount of $18,534 (being the taxed element of the ETP) is excluded from the applicant's taxable income.

22.     In contrast, the Medicare Levy is payable on the untaxed element of the ETP.  Items 5 and 6 in Table 1 of s 159SA specify that the maximum rate of tax on the "low rate part" and "remaining part" of a taxpayer's s 27B(1)(b) amount (that is, the untaxed element of the retained amount of the post June 83 component of an ETP) for age 55 ETPs is 15 percent and 30 percent respectively.

23.     It follows that the amount of $4,202 (being the untaxed element of the ETP) was not excluded from the applicant's taxable income for the purposes of calculating Medicare Levy.

24.     As a result, the applicant's taxable income of $71,628 was reduced by $18,534 to $53,094 for the purposes of calculating Medicare Levy.

25.     Section 6 of the MLA provides that the rate of levy payable by a person on taxable income is 1.5 percent.

26.     However, if the taxable income exceeds $50,000, s 8B of the MLA provides that the levy is increased by 1 percent of the taxpayer's taxable income during the period when the taxpayer (as is the case here):

(a)is not married:

(b)does not have any dependants;

(c)is not covered by an insurance policy that provided for private patient hospital cover; and

(d)is not a prescribed person as defined by s 251U of the ITAA36.

27.     The respondent therefore correctly calculated that the applicant was liable for the following amount of Medicare Levy and Medicare Levy Surcharge for the relevant year:

Taxable Income as modified by s 251S of ITAA36	Rate	Levy $
$53,094	1.5% (s 6 of MLA)	796.41
$53,094	1% (s 8B of MLA)	530.94
Total	1,327.35

TAX FREE THRESHOLD

28.     The applicant’s second contention was that the first $6,000 of income is exempt income or is otherwise excluded from taxable income for the purposes of calculating Medicare Levy.

29.     The applicant contended that, under "ordinary language", the first $6,000 of income is not taxable.  Under "ordinary language" income which is "exempt" is therefore "excluded from being assessable".  As no rate of tax is specified for the first $6,000 of income, it is therefore "not assessable".  The tax free threshold should therefore, according to the applicant, be regarded as "exempt" income.

30.     The applicant contended that exempt income is not taxable income and is therefore not subject to Medicare Levy.

31. As referred to above, Medicare Levy and Medicare Levy Surcharge is imposed on a taxpayer's taxable income (as modified by s 251S of the ITAA36).

32. There is no provision in any Act which removes the first $6,000 of income from a taxpayer's taxable income or otherwise provides that it is exempt income for the purposes of s 6-20 of the ITAA97.

33. Notwithstanding that the first $6,000 of taxable income is subject to a nil rate of tax, it is still part of taxable income. The Tribunal agrees with the respondent that this is clear from the words used in the Table found in Part 1 of Schedule 7 of the Income Tax Rates Act 1986.  There can only be a part of the ordinary taxable income of the taxpayer that exceeds $6,000… (emphasis added) if there is also a part which does not exceed $6,000. An amount cannot be both taxable income and exempt income, as the two concepts are mutually exclusive (see ss 6-15(2) of the ITAA97).

34.     For the above reasons, the Tribunal rejects the applicant's contention that the respondent incorrectly assessed his liability to pay the Medicare Levy by including as taxable income the first $6,000 of the applicant's income.

35.     For the above reasons, the Tribunal affirms the decision under review.

I certify that the thirty‑five [35] preceding paragraphs are a true copy of the reasons for the decision of:

Dr Gordon Hughes, Member

(sgd)     Olympia Sarrinikolaou

Clerk

Date of hearing:  19 June 2006

Date of decision:  31 July 2006
Advocate for the applicant:          Self-represented

Advocate for the respondent:       Mr A. Vourgoutzis, ATO Legal Services Branch