EXPLANATORY STATEMENT
STATUTORY RULES 1985 NO. 278
ISSUED BY THE AUTHORITY OF THE TREASURER
These regulations amending the Income Tax Regulations arise from the 1985-86 Budget proposal to increase from $50,000 to $55,000 the maximum amount of the post 30 June 1983 component of lump sum termination payments (called eligible termination payments) that is subject to income tax at a rate of not more than 15% where made to a taxpayer aged 55 years or more. The post 30 June 1983 component of an eligible termination payment is the component that relates to service after 30 June 1983.
Reflecting amendments of the Income Tax Assessment Act (incorporated in the Taxation Laws Amendment Bill (No. 2) 1985) to give effect to the Budget proposal, the regulations amend Income Tax Regulation 54DAP, which prescribes the rate of pay-as-you-earn tax instalment deductions to be made from eligible termination payments. Regulation 54DAP, as amended, provides that tax instalment deductions at a rate of 16% (including Medicare levy of 1%) are to be made by an employer from the first $55,000 (instead of $50,000) of the post 30 June 1983 component of an eligible termination payment made to an employee aged 55 years or more at the date of payment.
Regulation 1 increases the previous $50,000 threshold amount to $55,000, while regulation 2 provides that the amendment made by regulation 1 applies in respect of an eligible termination payment included in any salary or wages that an employee receives, or is entitled to receive, on or after 1 November 1985.
Overview
The Income Tax Regulations 1985, as amended by Statutory Rules 1985 No. 278, were enacted to address the budget proposal introduced in the 1985-86 Budget to adjust the tax treatment of eligible termination payments for employees aged 55 years or older. This adjustment aimed to increase the maximum amount of the post 30 June 1983 component of lump sum termination payments that is subject to income tax at a reduced rate of 15%. The changes were implemented to reflect the amendments made to the Income Tax Assessment Act by the Taxation Laws Amendment Bill (No. 2) 1985. The regulations, issued by the authority of the Treasurer, specifically modify Income Tax Regulation 54DAP, which governs the rate of pay-as-you-earn tax instalment deductions applicable to eligible termination payments. The policy objective of these amendments is to provide a fiscal incentive for older employees receiving termination payments, aligning with the broader goal of supporting income stability for retirees and those nearing retirement.
Scope and Application
The regulations amending the Income Tax Regulations, as set out in Statutory Rules 1985 No. 278, apply to eligible termination payments made to employees who are aged 55 years or more at the date of payment. These regulations, issued under the authority of the Treasurer, arise from the 1985-86 Budget proposal and affect the maximum amount of the post 30 June 1983 component of lump sum termination payments that is subject to income tax at a reduced rate. Specifically, the amendments increase the threshold from $50,000 to $55,000 for the post 30 June 1983 component of an eligible termination payment that is taxed at a rate of not more than 15%. This change is reflected in Income Tax Regulation 54DAP, which now requires employers to make tax instalment deductions at a rate of 16% (including a 1% Medicare levy) from the first $55,000 of the specified component. The amendments apply to payments included in any salary or wages received by the employee on or after 1 November 1985. The regulations themselves do not explicitly state any exclusions, exemptions, or thresholds beyond those specified, but the application is subject to the overarching provisions of the Income Tax Assessment Act.
Key Provisions
The main operative sections of these statutory rules pertain to the adjustment of the threshold amount for tax-free lump sum termination payments, as well as the rate of pay-as-you-earn (PAYE) tax deductions applicable to these payments. Specifically, Regulation 1 increases the maximum amount of the post-30 June 1983 component of lump sum termination payments that can be subject to income tax at a reduced rate of 15% for employees aged 55 years or older, from $50,000 to $55,000. Regulation 54DAP, amended by these rules, stipulates that employers must now deduct tax instalments at a rate of 16% (inclusive of the 1% Medicare levy) from the first $55,000 of the post-30 June 1983 component of any eligible termination payment made to eligible employees. Regulation 2 ensures that these changes apply to termination payments included in any salary or wages an employee receives or is entitled to receive on or after 1 November 1985.
These regulations impose specific obligations on employers regarding the tax deductions from eligible termination payments. Employers must now apply the 16% tax rate, including the Medicare levy, to the first $55,000 of any termination payment made to employees aged 55 or older, provided the payment is received on or after 1 November 1985. This change ensures that employers accurately withhold the appropriate amount of tax from these payments, aligning with the legislative amendments aimed at providing a tax concession for older employees receiving termination payments.
Breaching these regulations by failing to adhere to the specified tax deduction rates could result in civil or criminal consequences, depending on the intent and extent of the non-compliance. Employers who do not correctly apply the 16% tax rate to the first $55,000 of eligible termination payments may face penalties. While the specific penalties are not detailed in the explanatory statement, non-compliance with tax regulations generally can attract fines and other enforcement actions. It is essential for employers to comply with these obligations to avoid potential legal and financial repercussions.