Income Tax Regulations (Amendment)

EXPLANATORY STATEMENT

STATUTORY RULES 1990 NO.

Issued by Authority of the Treasurer

INCOME TAX ASSESSMENT ACT 1936

INCOME TAX REGULATIONS (Amendment)

The main purpose of these regulations which amended the Income Tax Regulations is to provide for new rates of tax instalment deductions (PAYE deductions), effective for payment of salary or wages received by employees on or after 1 January 1991. The new rates of tax instalment deductions reflect:

(a) the new personal income tax rates announced in the 1990 February Economic Statement, the 1990-91 Budget and on 20 November 1990 to operate from 1 January 1991;

(b) the 1990-91 Budget announcement to raise the taxable income thresholds below which certain taxpayers will not pay Medicare levy for 1990-91 and subsequent financial years.

Another change of a consequential drafting nature was also made.

Income tax instalment amounts

For resident taxpayers the changes to the income tax rate scale to apply from 1 January 1991 are as follows:

Taxable Income Range

For non-resident taxpayers the 29 per cent rate will apply for incomes up to $20,700 and the other rates as described will apply for higher incomes.

The changes to the rate scale, other than the new 20% rate, were enacted in the Taxation Laws Amendment (Rates and Provisional Tax) Act 1990 which received the Royal Assent on 6 November

1990. The Bill to declare the new marginal tax rate of 20 per cent to apply from 1 January 1991 is to be introduced into the Parliament in the 1990 Budget sittings. However, Crown Law advice is that regulations adjusting the rate of tax instalment deductions may validly be made before the Bill is enacted.

A change was made to the “no-exemption” scale that applies to employees receiving earnings from a second job. It reflects an increase from $13,700 to $15,100 in assumed earnings from an employee’s main job to apply from 1 January 1991.

Medicare levy - low income thresholds

The new rates of tax instalment deductions reflect the 1990-91 Budget announcement to raise the level of the low income thresholds below which Medicare levy will not be payable by an individual, a married couple or a sole parent.

For the 1990-91 financial year, individuals with taxable incomes of $11,745 or less and married couples or sole parents with family incomes of $19,045 or less will be exempt from Medicare levy. The income threshold for married couples and sole parents is increased by a further $2,100 for each dependent child or student. The changes provide for the shading-in of the levy above a threshold at the rate of 20 cents in the dollar of the excess of the income above the threshold.

General

Regulation 71 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 71 are contained in Tables 1 to 5 of Schedule 3 to the Income Tax Regulations.

Where an employee is entitled to have his or her PAYE 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 71 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 Schedule 3 has a separate use depending on the circumstances that apply to an employee.

Notes on the amending regulations are set out below:

Commencement

By subregulation 1.1 the amending Regulations are to come into operation on 1 January 1991.

Amendment

Subregulation 2.1 states that the Income Tax Regulations are amended as set out in the amending Regulations.

Regulation 70 (Interpretation)

Subregulation 3.1 amended the definition of “general exemption” in subregulation 70(1) of the Income Tax Regulations, which contains definitions applying in Subdivision 2 of Division 2 of Part 7 of those Regulations dealing with the rates of tax deduction from the salary or wages of employees. In relation to an employee, the term “general exemption” means an exemption from tax instalment deductions for the purpose of section 221C of the Income Tax Assessment Act 1936. That is, an exemption from tax instalment deductions for an employee on weekly salary or wages, to account for no tax being payable until taxable income in respect of a year of income exceeds the tax-free (general exemption) threshold.

The weekly exemption level of “$93.99” was amended to raise it to “$98.99”, to account for the increase in the annual general tax-free threshold from $5,100 to $5,400 to apply from 1 January 1991.

Subregulations 3.2, 3.3 and 3.4 amended the definition of the term “prescribed non-resident” in subregulation 70(1) of the Income Tax Regulations to omit paragraph (d) which referred to a pension, allowance or benefit payable under the Tuberculosis Act 1948. Such payments are no longer made under that Act.

Subregulation 3.5 amended the definition of the term “weekly family income threshold” in subregulation 70(1) of the Income Tax Regulations by adjusting the denominator in the formula that is part of the term. The term is used in relation to an employee who has declared in a Medicare levy variation declaration that he or she has a dependent spouse or one or more dependent children.

The term “weekly family income threshold” is the weekly equivalent of the family income threshold that may be used to determine a taxpayer’s liability to Medicare levy when an assessment for the year of income is made. In effect, an employee’s “weekly family income threshold” amount is the maximum amount the employee who declares a dependant for Medicare levy purposes may earn in a week or part of a week before having an amount of Medicare levy included in his or her weekly tax instalment deductions.

The amount of “weekly family income threshold” is the amount rounded to the nearest cent, calculated in accordance with the formula -

A

52.896532

The component A is the family income threshold in relation to the employee as determined by section 8 of the Medicare Lew Act 1986 - for example, an employee who has a dependent spouse and 2 dependent children will have a family income threshold of $23,245 (i.e., $19,045 plus $2,100 for each child), and a sole parent with one dependent child will have a family income threshold of $21,145 (i.e., $19,045 plus $2,100 for the child).

The denominator in the formula was changed to 52.806. The change was a consequence of the incorporation of the 20% rate of tax in the calculation of the factor.

Rate of deductions - Employee claiming general exemption only and employee, not being a prescribed person, claiming general exemption and Medicare levy variation (Regulation 72)

Regulation 4 amended regulation 72 of the Income Tax Regulations. Regulation 7 2 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 $93 - now increased to $98) 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 86 in which the employee claims exemption from the levy (paragraph 72(1) (O); 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 dependant (paragraph 72(1)(d)).

Paragraph (1)(c) of regulation 72 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 $195 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 71(3), and the components for the formula relevant to paragraph 72(1)(c), as set out in Table 1 of Schedule 3.

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 70(1).

Paragraph (1)(d) of regulation 72 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 $195 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 subregulations 72(2) and (3).

Paragraphs (2)(a) and (2)(b) of regulation 7 2 operate to remove from the amount of the tax instalment deductions calculated for subparagraph 72(1)(d)(iii) an amount of Medicare levy already included in the instalment deductions by the operation of the formula in regulation 71. The removal is necessary in these instances 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.

Subregulation 4.1 made necessary amendments to paragraph 72(1)(d), 72(2) (a) and 72(2)(b) of the Income Tax Regulations to account for the new 1990-91 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.

4, 5, 6 and 7 in Table 1 of the new Schedule 3 inserted in the Income Tax Regulations by regulation 6 of the amending Regulations.

Rate of deductions - employee, being a prescribed person, claiming general exemption and Medicare levy variation (Regulation 73)

Regulation 5 amended regulation 73 of the Income Tax Regulations. Regulation 73 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 86 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 73(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 71(3), and the components for the formula relevant to paragraph 73(1)(c) as set out in Table 2 of Schedule 3.

Paragraphs (d) and (e) of subregulation 73(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 $329 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 Schedule 3. By the operation of the formula specified, no Medicare levy is included in the tax instalment amount for earnings less than $329 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 73(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 71, 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 73 set out the basis for the calculation of the Medicare levy adjustment amount (the reduction) referred to in paragraph 73(1He ) in much the same way as the Medicare levy adjustment amount is calculated in accordance with subregulations 72(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 73(2) allow for the operation of sections 8 and 9 of the Medicare Lew Act 1986 that provide for levy to shade-in for an employee who is not a “prescribed person”.

Regulation 5 made the necessary amendments to paragraphs 73(1)(e), 73(2)(a) and 73(2)(b) of the Income Tax Regulations to account for the new 1990-91 low income family threshold. The amendments omit references to the 1989-90 weekly equivalent Medicare levy thresholds and substitute 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 1990-91 Medicare levy thresholds are reflected in components in items 2, 3, 4, 5, 6 and 7 in Table 3 of the new Schedule 3 inserted in the Income Tax Regulations by regulation 6.

Schedule 3

Subregulation 6.1 omitted Schedule 3 to the Income Tax Regulations and substituted a new Schedule 3.

Schedule 3 contains a series of tables specifying the values of components to be used in a formula from which an employee’s weekly tax instalments are calculated. The formula is contained in regulation 71 of the Income Tax Regulations.

The values of the new components to be used in the formula in regulation 71 give effect to the changes from 1 January 1991 to the personal income tax scales and to the new Medicare levy thresholds for 1990-91. The instalment schedules issued by the Commissioner of Taxation to employers and the general public are compiled using the formula.