EXPLANATORY STATEMENT
STATUTORY RULES 1983 NO. 213
ISSUED BY THE AUTHORITY OF THE TREASURER
INCOME TAX REGULATIONS (AMENDMENT)
The purpose of these regulations is to implement changed pay-as-you-earn (PAYE) arrangements from 1 October 1983 to give effect to changes to the law which allows a rebate of income tax on home loan interest payments made during the first five years of occupancy of a dwelling. Under the changes, which were announced by the Treasurer in his 19 May economic statement and passed into law by the Income Tax Assessment Amendment Act (No. 3) 1983, there are to be no new entrants to the rebate scheme after 30 September 1983 (subject to some transitional arrangements) and rebate entitlements are to be subject to an income test after that date.
Introductory Note
The Income Tax Assessment Act 1936 provides for a rebate of tax in end-of-year assessments for certain home loan interest payments made on or after 1 July 1982. The rebate is available to a resident taxpayer in respect of his sole or principal residence in Australia during the first five years of owner-occupancy of the residence. A reduction in tax instalments to account for the rebate has been an option for employee taxpayers since 1 July 1982.
The amending regulations provide that an employee will be entitled to a reduction in PAYE tax instalments on account of estimated home loan interest payments after 30 September 1983 only if he satisfies an income test and first occupies a dwelling, as his sole or principal residence, on or before that date. Under transitional arrangements, however, an employee will still be entitled to a reduction in tax instalments for estimated home loan interest payments in
respect of a dwelling he first occupies on or after 1 October 1983 and before 1 July 1985 if he had contracted to acquire or build or commenced to build the dwelling before 1 October 1983.
The income test will apply in such a way that the reduction in tax instalment deductions otherwise available to employees after 30 September 1983 will continue to be available in full to employees whose family incomes in the 1982-83 income year are $24,300 or less shading out proportionately for family incomes up to $27,900. No reduction in tax instalment deductions will be available after 30 September 1983 where an employee’s family income is $27,900 or more.
An employee who considers he will be entitled after 30 September 1983 to a reduction in tax instalments on account of estimated home loan interest payments will need to lodge a new declaration with his employer showing the estimated amount of home loan interest payments for the relevant financial year and family taxable income for the 1982-83 year so that the appropriate income-tested reduction may be made in the tax instalment deductions otherwise applicable. Employers will determine the reduction using a formula, set out in the regulations, which incorporates the income test.
As an alternative to lodging a home loan interest declaration with his employer, an employee who for personal reasons may not want to disclose relevant details to the employer or who is likely to have several employers during the year may lodge the declaration with the Commissioner of Taxation. The Commissioner will determine the appropriate reduction to be made in tax instalments and issue a certificate on the basis of which the employer will be authorised to act in making the reduction in tax instalments.
Notes on the amending regulations, which will adjust the PAYE scheme now in operation to account for the changes outlined in this introductory note, are set out below.
Regulation 1 provides for the amending regulations to come into operation on 1 October 1983.
Regulation 2 is a drafting measure and facilitates references to the Income Tax Regulations which in the amending regulations are referred to as the “Principal Regulations”.
Regulation 3 amends sub-regulation 54DB(1) to include a definition of “relevant combined taxable income”. Sub-regulation 54DB(1) defines certain terms used in Subdivision AA of Division 2 of Part VI of the Income Tax Regulations which governs existing reductions in PAYE tax instalments to account for the home loan interest rebate. The term “relevant combined taxable income” is given the same meaning as it has in Subdivision AA of Division 17 of Part III of the Act and is used to describe the family income which is to be taken into account in applying an income test to determine a taxpayer’s eligibility for a reduction in PAYE tax instalments in respect of home loan interest. Broadly, the relevant combined taxable income of an employee is the combined 1982-83 taxable income of the employee and the person (if any) who, on 1 October 1983, is his or her spouse. Where, as a consequence of the transitional measures, an employee first occupies a dwelling on or after 1 October 1983 and is entitled to the rebate, the relevant combined taxable income is the combined 1982-83 taxable income of the employee and the person (if any) who is his or her spouse on the date of that first occupation.
Regulation 4 amends sub-regulation 54DE(2) which prescribes the information that is required to be set out in a declaration made by an employee who seeks a reduction in his or her PAYE deductions on account of an anticipated entitlement to the home loan interest tax rebate available for interest paid in the first 5 years of owner-occupation. Regulation 4 inserts a new paragraph (fa) in sub-regulation 54DE(2) to prescribe the information required to be set out in an employee’s declaration to allow for the income test to be applied. The
employee will be required to state the amount of the relevant combined taxable income (see earlier notes on Regulation 3) or, where that amount is unknown to the employee, a fair and reasonable estimate of that amount.
Regulation 5 amends regulation 54DK which sets out the appropriate reduction that is to be made to an employee’s tax instalment deductions where the employee furnishes a home loan interest declaration to his employer in respect of the existing rebate scheme, that is, where he has provided information in accordance with sub-regulation 54DE(2). Under existing sub-regulation 54DK(1) an employer is required to calculate the weekly reduction by multiplying the employee’s estimated home loan interest in a declaration by the factor 0.0057. This amount is then compared with the “prescribed amount”, i.e., the statutory upper limit of the rebate, also expressed on a weekly basis, determined by reference to sub-regulation 54DK(2), (3) or (4) as the case required. The rate of tax instalments that would otherwise apply is then reduced by the lesser of the two amounts.
Paragraph (a) of regulation 5 inserts an income test in sub-regulation 54DK(1) to be applied in cutting down the reduction in instalments which, but for this amendment, would be available under that sub-regulation. The income test is expressed as the formula A – A , which represents the following factors:
A is the standard reduction in instalments, i.e., the reduction before the application of the income test; and
B is the number of whole dollars - called “the declared amount” - in the relevant combined taxable income (or the employee’s estimate thereof) shown in the employee’s declaration (paragraph 54DE(2)(fa)) where the amount exceeds
$24,300. Where the amount does not exceed $24,300 the formula will not be applied. Where the declared amount is equal to or exceeds $27,900, B will be 27,900.
Where the employee’s relevant combined taxable income is $24,300 or less there will therefore be no reduction in the standard reduction represented by A. Where the combined taxable income exceeds $24,300 the income test shades out the reduction otherwise available over the income range $24,300 to $27,900 (a range of $3,600). The formula expresses the excess of the number of dollars of income over 24,300 as a fraction of 3,600 and then cuts down the reduction othwise applicable by that fraction. Thus, if an employee’s declared income falls half way along the income range over which the rebate shades out the formula results in one-half of the PAYE reduction on account of home loan interest payments being withdrawn.
Paragraph (b) of regulation 5 inserts a new sub-regulation (1A) in regulation 54DK. It will operate so that results of less than 20 cents produced by the reduction portion of the formula, i.e., A are to be disregarded by employers and all other results of that portion of the calculation are to be rounded to the nearest five cents.
Example; Without the income test the reduction on account of home loan interest payments in the prescribed PAYE instalment would be $7.60 per week and the employee’s declared amount is $27,180. Application of the formula reduces the weekly reduction of $7.60 to $1.50, calculated as follows:
$7.60 (A) - $7.60 (A)
= $7.60 - $7.60 (4)
= $7.60 - $6.10 ($6.08 rounded to the nearest five cents) = $1.50
Regulation 6 provides for the transition from the existing home loan interest rebate scheme to the income-tested scheme which will operate from 1 October 1983. Sub-regulation (1) proposes that declarations lodged by an employee with an employer or the Commissioner, being declarations in accordance with the regulations applying before 1 October 1983, i.e., before the amending regulations come into effect, are to have no effect after 30 September 1983. Thus, employers are not authorised to allow a reduction of tax instalments after that date on the basis of such a declaration. Similarly, any certificate issued to an employee by the Commissioner under regulation 54DG, following lodgment of such a declaration, will not be valid after 30 September 1983.
By sub-regulations (2) and (3) certificates issued by the Commissioner of Taxation to employees under regulation 54DG as in force before 1 October 1983 in respect of the 1983-84 financial year are to be returned to the Commissioner. The certificates are those issued to an employee who for personal reasons furnished the Commissioner (rather than his employer) with a declaration and statement. Such a certificate specifies that, in a nominated financial year, the employee is entitled to a specified variation in the prescribed rate of tax instalment deductions on account of estimated home loan interest payments.
The purpose of these two sub-regulations is to ensure the prompt withdrawal from circulation of certificates which are to have no effect after 30 September 1983.
Employees lodging a declaration in anticipation of an entitlement to a home loan interest rebate are required by regulation 54DC to supply a lender’s statement in the form specified in regulation 54DF issued not more than three months earlier. By sub-regulation (4) , employees who have furnished an employer or the Commissioner with a declaration and lender’s statement in relation to the 1983-84 financial year and who lodge fresh declarations after 30 September 1983 in relation to the 1983-84 financial year need not supply another such statement.