Income Tax Regulations (Amendment)

EXPLANATORY STATEMENT

STATUTORY RULES 1989 No. 358

Issued By The Authority Of The Treasurer

INCOME TAX ASSESSMENT ACT 1936

INCOME TAX REGULATIONS (AMENDMENT)

The purpose of these regulations is to provide for new rates of tax instalment deductions (PAYE deductions) effective for payments of salary or wages received on or after 1 January 1990. The new rates of tax instalment deductions reflect the 1989-90 Budget announcement to raise the taxable income thresholds below which certain taxpayers will not pay Medicare levy for the 1989-90 and subsequent financial years. Under the proposal, individuals with taxable incomes of $10,330 or less and married couples or sole parents with family incomes of $17400 or less will be exempt from the levy. The income threshold for married couples and sole parents is increased by a further $2100 for each dependent child or student.

Income tax instalment amounts

Regulation 54AB of the Income Tax Regulations provides for the calculation of PAYE tax instalment deduction amounts by the use of a formula. The values of the components used in the formula in regulation 54AB are contained in Tables 1 to 5 of the Third Schedule to the Income Tax Regulations and reflect the personal income tax rate scale that has applied from 1 July 1989 and the low income Medicare levy thresholds that were applicable for the 1988-89 financial year.

Where an employee is entitled to have his or her tax instalment amount reduced, e.g., where the employee is entitled to a Medicare levy adjustment or to a rebate for a dependant, the amount calculated by reference to regulation 54AB forms the basis from which any relevant adjustments may be made to determine the actual deduction to be made from the employee’s weekly earnings.

Each of the 5 tables in the Third Schedule has a separate use depending on the circumstances that apply to an employee. The two tables affected by the increased low income Medicare levy thresholds and the circumstances that determine their use, are as follows:

Notes on each of the amending regulations are set out below -

Commencement

By Regulation 1 amending regulations 4, 5 and 6 commence on 1 January 1990.

Principal Regulations

Regulation 2 facilitates reference to the Income Tax Regulations, which, in the amending regulations, are referred to as the “Principal Regulations”.

Statutory Rules 1989 No. 115 - omission of subregulation 9(2)

Regulation 3 omitted subregulation 9(2) of Statutory Rules No. 115 of 1989. Subregulation 9(2) amended all 5 Tables of the Third Schedule to the Principal Regulations, effective from 1 January 1990, to allow for the substitution of the last two items of each Table by one item to reflect the reduction in the tax rate from 49 per cent to 47 per cent on the weekly equivalent of salary and wages over $50,000 per annum on and from that date. Because the Tables in the Third Schedule have been restated by regulation 6 of these amending regulations, with the change to the rate of deduction on the weekly equivalent of salary or wages over $50,000 per annum incorporated and operating from 1 January 1990, subregulation 9(2) of Statutory Rules 1989 No. 115 is no longer necessary.

Rate of deductions - employee claiming general exemption only and employee, not being a prescribed person, claiming general exemption and Medicare levy variation (Regulation 54B)

Regulation 4 has made certain amendments to regulation 54B of the Principal Regulations. Regulation 54B operates to determine the rate of deductions to be made from an employee’s weekly earnings where -

• the employee claims the general exemption (the exemption from deduction on the salary or wages of a week that do not exceed $94) only, including an employee who may also be exempt from Medicare levy (a “prescribed person”) but who has not furnished a Medicare levy variation declaration under regulation 54DACA in which the employee claims exemption from the levy (paragraph 54B(1)(c)); or

• the employee, not being a prescribed person, claims the general exemption and furnishes a Medicare levy variation declaration claiming exemption in whole or in part from the levy because he or she has a dependent (paragraph 54B(1)(d)).

Paragraph (1)(c) of regulation 54B applies where paragraph (1)(d) does not apply, i.e., where the employee has not furnished a Medicare levy variation declaration or where the employee has furnished a variation declaration and the employee’s relevant amount of earnings is less than $180 or is equal to or greater than the “shading out point” in relation to the employee. The tax instalment amount is calculated using the formula in subregulation 54AB(3), and the components for the formula relevant to paragraph 54B(1)(c), as set out in Table 1 of the Third Schedule.

The “shading out point” in relation to an employee is the maximum amount the employee may earn in a week or part of a week before full Medicare levy, or in the case of a “prescribed person”, half levy, is incorporated in his or her weekly tax instalment deduction amount. It is calculated in accordance with the definition of that expression in subregulation 54A(1).

Paragraph (1)(d) of regulation 54B applies when an employee, not being a prescribed person, furnishes a Medicare levy declaration form to his or her employer and the relevant amount of earnings of the employee is within the Medicare levy shading-in range for the employee. That is, the employee’s earnings are not less than $180 but less than the employee’s “shading out point”. The tax instalment amount is the amount calculated in accordance with paragraph (1)(c) reduced by the Medicare levy adjustment amount determined under subregulation 54B(2) and (3).

Paragraphs (2)(a) and (2)(b) of regulation 54B operate to remove

from the amount of the tax instalment deductions calculated for subparagraph 54B(1)(d)(iii) the amount of Medicare levy already included in the instalment deductions by the operation of the formula in regulation 54AB, because the level of the weekly earnings is below the Medicare levy threshold (i.e., the weekly family income threshold). Paragraph (2)(c) operates to shade-in the levy when the weekly earnings of the employee are just above the level of the weekly family income threshold.

Regulation 4 has made the necessary amendments to subparagraph 54B(1)(d)(ii), paragraph 54B(2)(a) and paragraph 54B(2)(b) to account for the new low income threshold for individuals above which the Medicare levy is included in instalment deductions. The amendments substitute references to threshold amounts determined on the basis of the new Medicare levy thresholds.

The amounts varied are as follows :

Corresponding increases to reflect the 1989-90 Medicare levy thresholds are reflected in components in items numbered 2, 3, 4, 5, 6 and 7 in Table 1 of the new Third Schedule inserted in the Principal Regulations by regulation 6.

Rate of deductions - employee, being a prescribed person, claiming general exemption and Medicare levy variation (Regulation 54BA)

Regulation 5 has made certain amendments to regulation 54BA of the Principal Regulations. Regulation 54BA prescribes the tax instalment amount for an employee who is a prescribed person (that is, a person exempt from Medicare levy) and who -

• claims the general exemption; and

• furnishes a Medicare levy variation declaration to his or her employer under regulation 54DACA in which the employee declares -

.. that he or she is exempt from Medicare levy by virtue of being a “prescribed person” with no dependants or with dependants who are also prescribed persons, or

.. that he or she has a dependant who is not a “prescribed person” and the employee is entitled to full or partial relief from the levy.

Paragraph (c) of subregulation 54BA(1) applies where the employee has no dependants for Medicare levy purposes or has one or more dependants, each of whom is also a “prescribed person”. Where paragraph (c) applies, the tax instalment amount is calculated using the formula in subregulation 54AB(3), and the components for the formula relevant to paragraph 54BA(1)(c) as set out in Table 2 of the Third Schedule.

Paragraphs (d) and (e) of subregulation 54BA(1) apply where an employee has a dependent spouse who is not a “prescribed person” or one or more dependent children who are not prescribed persons. By paragraph (d) where the employee’s relevant amount of earnings is less than $304 or is equal to or greater than the “shading out point” in relation to the employee, the tax instalment amount is calculated by using the formula and the components shown in Table 3 of the Third Schedule. By the operation of the formula specified, no Medicare levy is included in the tax instalment amount for earnings less than $304 and where the relevant amount of earnings exceeds the employee’s “shading out point”, levy at half the 1.25 per cent rate is included.

Paragraph (e) of subregulation 54BA(1) applies where the employee’s relevant amount of earnings is within the range where Medicare levy is shaded-in. The tax instalment amount is the amount calculated as if paragraph (d) applied, by the operation of the formula specified in regulation 54AB, Medicare levy is included in the tax instalment deductions at the relevant level of earnings and it is necessary to make a reduction to shade-in the levy.

Subregulations (2) and (3) of regulation 54BA set out the basis for the calculation of the Medicare levy adjustment amount (the reduction) referred to in paragraph 54BA(1)(e) in much the same way as the Medicare levy adjustment amount is calculated in accordance with subregulations 54B(2) and (3) (see earlier notes for an explanation of the operation of those subregulations). The formulae in paragraphs (a) (b) and (c) of subregulation 54BA(2) allow for the operation of sections 8 and 9 of the

Medicare Lew Act 1986 that provide for levy to shade-in at one half of the 20 per cent rate at which levy shades-in for an employee who is not a “prescribed person”.

Regulation 5 has made the necessary amendments to paragraph 54BA(1)(e), paragraph 54BA(2)(a) and paragraph 54BA(2)(b) to account for the new low income family threshold. The amendments omitted references to the 1988-89 weekly equivalent Medicare levy thresholds and substituted references to the threshold amounts determined on the basis of the new Medicare levy thresholds.

The amounts varied are as follows :

Corresponding increases to reflect the 1989-90 Medicare levy thresholds are reflected in components in items 2, 3, 4, 5, 6 and 7 in Table 3 of the new Third Schedule inserted in the Principal Regulations by regulation 6.

Third Schedule

Regulation 6 repealed the Third Schedule to the Principal Regulations and substituted a new Third Schedule. The components in Tables 1 and 3 in the Third Schedule have been adjusted, as discussed above, to account for the 1989-90 Medicare levy thresholds. The only other change made to each of the Tables 1-5 is to account for the adjustment in the rate of deduction on the weekly equivalent of salary or wages in excess of $50,000 per annum, as discussed in the explanation of regulation 3.