EXPLANATORY STATEMENT
Select Legislative Instrument 2010 No. 136
Issued by authority of the Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Regulations 1936
Section 266 of the Income Tax Assessment Act 1936 (the Act) provides, in part, that the Governor-General may make regulations not inconsistent with the Act, prescribing all matters which by the Act are required to be prescribed, or necessary or convenient to be prescribed for giving effect to the Act.
The amending Regulations update the Income Tax Regulations 1936 (the Principal Regulations) in respect of the tax arrangements for overseas defence service and update the formula in the Principle Regulations used to calculate the rebate threshold for the senior Australians tax offset (SATO) allowed under the Act.
Schedule 1 to the amending Regulations updates the specified area at which duty on Operation Slipper in Afghanistan is ‘eligible duty’ for the purposes of section 23AD and extends the period over which duty with Operation Slipper is ‘eligible duty’. Schedule 2 to the amending Regulations extends the period over which duty on Operation Kruger and Operation Riverbank in Iraq is ‘eligible duty’ for the purposes of section 23AD. Schedule 2 to the amending Regulations also makes minor amendments to Part 8 of the Principal Regulations to correct inconsistent text, such as capitalisation of certain items, and fix grammatical inaccuracies and update all references to the Veterans Entitlements’ Act 1986 that have become out-dated.
Schedule 3 to the amending Regulations changes subregulation 150AB(3A) to ensure that the rebate threshold for senior Australians who are eligible for the SATO remains aligned with their effective tax free threshold.
Details of the amending Regulations are as follows:
Regulation 1 – Name of Regulations
Regulation 1 provides that the Regulations are the Income Tax Amendment Regulations 2010 (No. 2).
Regulation 2 – Commencement
Regulation 2 provides that these Regulations commence as follows:
(a) on 31 July 2009 – regulations 1 to 3 and Schedule 1;
(b) on the day after they are registered – regulation 4 and Schedule 2;
(c) on 1 July 2010 – regulation 5 and Schedule 3.
Regulation 3 – Amendment of Income Tax Regulations 1936
Regulation 3 provides that Schedule 1 amends the Income Tax Regulations 1936 (the Principal Regulations).
Regulation 4 – Amendment of Income Tax Regulations 1936
Regulation 4 provides that Schedule 2 amends the Principal Regulations.
Regulation 5 – Amendment of Income Tax Regulations 1936
Regulation 5 provides that Schedule 3 amends the Principal Regulations.
Schedule 1 – Amendments
Item 1 – Paragraph 7A(a)
Item 1 substitutes paragraph 7A(a) of the Principal Regulations with:
(a) duty with Operation Slipper starting on 31 July 2009 and ending at the end of 30 June 2012 in the area bounded by the following geographical coordinates:
(i) 39° 00’ N 78° 00’ E;
(ii) 39° 00’ N 32° 00’ E;
(iii) 05° 00’ S 32° 00’ E;
(iv) 05° 00’ S 78° 00’ E;
Section 23AD of the Income Tax Assessment Act 1936 (the Act) provides an exemption from income tax of pay and allowances of Australian Defence Force (ADF) members performing certain overseas duty. Subsection 23AD(1) exempts the pay and allowances earned by ADF members from income tax where there is a certificate in force, issued in writing by the Chief of the Defence Force, to the effect that the members are on ‘eligible duty’. Subsection 23AD(2) provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia and after a specified day, is ‘eligible duty’ for the purposes of that section.
Regulation 7A of the Principal Regulations provides that duty with various organisations in various areas outside Australia is ‘eligible duty’ for the purposes of section 23AD.
On 18 September 2009 the Minister for Defence, in consultation with the Prime Minister, extended the declaration of duty on Operation Slipper as being warlike service. However, the declaration was for service in an amended specified area from that currently specified in the Principal Regulations. Substituted paragraph 7A(a) would amend the specified area at which service on Operation Slipper is ‘eligible duty’ for the purposes of section 23AD and extend the period over which service on Operation Slipper at the new specified area is ‘eligible duty’ to 30 June 2012. While the operation is only approved until 30 June 2010 it is expected that the operation will run beyond that date so the exemption will apply until 30 June 2012.
Schedule 2 – Amendments
Items 1 and 2 – Paragraph 7A(d) and paragraph 7A(e)
Item 1 substitutes paragraph 7A(d) of the Principal Regulations with:
(d) duty with Operations Kruger in Iraq starting on 1 January 2009 and ending at the end of 30 June 2011;
Operation Kruger was previously approved until 30 July 2010 however the Operation has been extended until 30 June 2011. Operation Kruger is the ADF contribution to the provision of security to the Australian Embassy in Iraq.
The regulation extends the period over which service as part of Operation Kruger is ‘eligible duty’ for the purposes of section 23AD until 30 June 2011.
Item 2 substitutes paragraph 7A(e) of the Principal Regulations with:
(e) duty with Operation Riverbank in Iraq starting on 21 July 2008 and ending at the end of 31 December 2011.
Operation Riverbank was previously approved until 31 July 2010 however the Operation has been extended until 31 December 2011. Operation Riverbank is the ADF contribution to the United Nations Assistance Mission in Iraq.
The regulation extends the period over which service as part of Operation Riverbank is ‘eligible duty’ for the purposes of section 23AD until 31 December 2011.
Items 3 to 7 – Regulation 148
Items 3 and 4 replace the term ‘table B’ with ‘Table B’ in paragraphs (a) and (b) of the definition of illness-separated-rate social security pension in regulation 148 of the Principal Regulations for consistency with capitalising of other table references.
Item 5 substitutes the definition of Lowest marginal tax rate in regulation 148 with:
lowest marginal tax rate, in relation to a year of income, means the rate that is:
(a) the lowest rate specified in the table in Part 1 in Schedule 7 to the Income Tax Rates Act 1986, in the application of the table to that year of income; and
(b) expressed as a decimal fraction.
The substituted definition amends the title from ‘Lowest marginal tax rate’ to ‘lowest marginal tax rate’ and also amends the word ‘Table’ to ‘table.’
Item 6 removes incorrect capitalising by replacing the term ‘Rebatable benefit’ with ‘rebatable benefit’ in the definitions of Rebatable benefit and rebatable pension in regulation 148 of the Principal Regulations.
Item 7 substitutes the definition of Tax-free threshold in regulation 148 of the Principal Regulations with:
tax-free threshold, in relation to a year of income, means an amount of income equal to the lowest amount mentioned in the table in Part 1 of Schedule 7 to the Income Tax Rates Act 1986.
This removes a reference to Division 5 of the Income Tax Rates Act 1986 which has been repealed as part of reforms made in A New Tax System (Family Assistance) (Consequential and Related Measures) Act (No. 1) 1999.
Items 8 to 10 – Regulation 150A
Items 8 to 10 correct outdated cross-references to the Veterans’ Entitlements Act 1986 in Regulation 150A of the Principal Regulations.
Item 8 replaces the term ‘column 2 of item 4 in table B at point 41-B1 or 43-B1 of VEA’ with ‘column 2 of item 1 in Table B at point SCH6-B1 of VEA’ in the definition of illness-separated-rate service pension in Regulation 150A of the Principal Regulations.
Item 9 replaces the term ‘column 2 of item 3 in Table B at point 41‑B1 or 43-B1 of VEA’ with ‘column 2 of item 2 in Table B at point SCH6-B1 of VEA’ in the definition of partnered-rate service pension in Regulation 150A of the Principal Regulations.
Item 10 replaces the term ‘column 2 of item 1 in table B at point 41‑B1 or 43-B1 of VEA’ with ‘column 2 of item 1 in Table B at point SCH6-B1 of VEA’ in the definition of single-rate service pension in Regulation 150A of the Principal Regulations.
Items 11 to 20 – Regulation 151
Items 11 to 13 replace ‘a illness-separated rate’ with ‘an illness-separated-rate’ in paragraph 151(4)(b), subparagraph 151(4)(b)(i) and subparagraph 151(4)(b)(ii) in the Principal Regulations. This ensures grammatical correctness.
Item 14 replaces ‘the amount, indexed in accordance with Division 21 in Part III of VEA, applicable under item 4 in Table D1 at point 41‑D4’ with ‘the amount, indexed in accordance with Subdivision B of Division 18 in Part IIIB of VEA, applicable under item 3 in Table E-1 at point SCH6-E6 of that Act’ in subparagraph 151(4)(e)(i) in the Principal Regulations. This corrects an outdated reference to the Veterans’ Entitlements Act 1986.
Item 15 replaces ‘the amount, indexed in accordance with Division 21 in Part III of VEA, applicable under item 1 in Table D1 at point 41‑D4’ with ‘the amount, indexed in accordance with Subdivision B of Division 18 in Part IIIB of VEA, applicable under item 1 in Table E-1 at point SCH6-E6 of that Act’ in sub‑subparagraph 151(4)(e)(iii)(B) in the Principal Regulations. This corrects an outdated reference to the Veterans’ Entitlements Act 1986.
Items 16 and 17 replace ‘within the meaning of Part III of the Veterans’ Entitlements Act 1986’ with ‘within the meaning of Part I of VEA’ in sub-subparagraph 151(4)(f)(i)(A) and sub-subparagraph 151(4)(f)(i)(B) in the Principal Regulations. This corrects an outdated reference to the Veterans’ Entitlements Act 1986 and ensures consistency with other references to the Veterans’ Entitlements Act 1986 in Part 8 in the Principal Regulations as it is defined to mean ‘VEA’ in regulation 148.
Item 18 replaces ‘a illness-separated rate’ with ‘an illness-separated-rate’ in paragraph 151(4)(h)(i) in the Principal Regulations. This ensures grammatical correctness.
Item 19 replaces ‘1 kind’ with ‘one kind’ in subregulation 151(5) in the Principal Regulations. This removes an inappropriate numeric reference in the regulations.
Item 20 replaces ‘Divisions 4, 5 and 6 of Part III of the Veterans’ Entitlements Act 1986’ with ‘Divisions 4 or 5 of Part III of VEA’ in paragraph 151(7)(a) in the Principal Regulations . This corrects an outdated reference to the Veterans’ Entitlements Act 1986 and ensures consistency with other references to the Veterans’ Entitlements Act 1986 in Part 8 in the Principal Regulations as it is defined to mean ‘VEA’ in regulation 148.
Schedule 3 – Amendments
Item 1 – Subregulation 150AB(3A)
Item 1 substitutes subregulation 150AB(3A) of the Principal Regulations with:
(3A) If the taxpayer’s rebate threshold, if it were calculated using the formula in subregulation (3), would be an amount that is greater than the amount at which the rebate of tax under section 159N of the Act is reduced, the taxpayer’s rebate threshold for a year of income is the amount calculated using the formula:
(C × D) + E + F + (G × 0.04)
C + 0.04
where:
C is the lowest marginal tax rate.
D is the tax-free threshold.
E is the maximum amount of rebate allowable under section 159N of the Act.
F is the taxpayer’s rebate amount for the year of income, worked out in accordance with subregulations (2) and (2B).
G is the amount at which the rebate of tax under section 159N of the Act is reduced.
The Government provides a special tax offset for seniors called the senior Australians tax offset (SATO). The SATO increases eligible taxpayers’ effective tax free threshold by increasing the amount of taxable income a taxpayer can receive before they incur a tax liability. The effective tax free threshold is determined by calculating the point at which the SATO and low income tax offset (LITO) will exactly offset the tax liability that the taxpayer would otherwise bear.
The SATO is available to taxpayers who, on at least one day during the income year, are of Age Pension or Veterans Service Pension age and who meet the eligibility requirements for the Age Pension or Veterans Pension. That is, they are either in receipt of the Age or Veterans Pension or do not qualify for an Age Pension because of the income and/or assets test that apply to the Age or Veterans Pension.
In order to access SATO the taxpayer’s ‘rebate income’ must also be below the income threshold determined by the formula specified in regulation 150AB of the Principal Regulations. ‘Rebate income’ comprises a taxpayer’s taxable income, reportable superannuation contributions, total net investment losses and adjusted fringe benefits. Prior to 1 July 2009, it was a taxpayer’s taxable income rather than rebate income which was assessed in determining their eligibility to the SATO.
The amount of SATO is $2,230 for a single taxpayer, $1,602 for each member of a couple and $2,040 for each member of an illness-separated couple. Taxpayers eligible for the SATO are also eligible for the low income tax offset (LITO). In 2010‑11, the amount of LITO is $1,500.
The SATO begins to phase out once taxable income exceeds the rebate threshold at a rate of 12.5 cents for each additional dollar of rebate income. The rebate threshold is currently aligned with the ‘effective tax free threshold’ for senior Australians; that is, the point where their entitlement to the SATO and LITO will exactly offset the income tax that would otherwise be payable.
In 2010‑11, the rebate threshold will exceed the amount at which the LITO begins to phase out ($30,000). Item 1 amends subregulation 150AB(3A) in the Principal Regulations, ensuring that the rebate threshold for senior Australians who are eligible for the SATO remains aligned with their effective tax free threshold. The effect of this is that the income amount at which the SATO begins phasing out is the same as the income amount at which a senior Australian eligible for the SATO begins paying tax. Using the formula in the amended Regulations, the rebate thresholds for the 2010‑11 year would be $30,685 for a single senior Australian.
In addition, subregulation 150AB(3A) is amended so that the formula can be applied to determine the rebate threshold should the couples and/or couples separated by illness rebate threshold exceed the amount at which the LITO begins to phase out in future years.