Income Tax Regulations (Amendment) 1997 No. 141
EXPLANATORY STATEMENT
STATUTORY RULES 1997 No. 141
Issued by the Authority of the Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Regulations (Amendment)
GENERAL OUTLINE
Background
The purpose of these regulations that amend the Income Tax Regulations is to make changes to the provisions that set out the various calculations of amounts that employers are to deduct from the salary or wages that they pay to their employees. The various calculations encompass the variety of situations that may apply to employees under the law. The changes reflect changes to the law and the correction of some minor technical inaccuracies.
For salary and wage earners, income tax (including Medicare levy and Higher Education Contribution Scheme (HECS) repayments) is collected under the tax instalment system contained in the Income Tax Regulations. The collection is authorised by section 221C of the Income Tax Assessment Act 1936 (ITAA) that provides that tax instalment deductions may be made at the rates prescribed in the regulations. Regulation 71 provides generally for the calculation of tax instalment deductions. Other regulations provide for the calculation of special rates of tax instalment deductions and to provide for certain benefits available under the income tax law to be taken into account in calculating the amount deducted.
The amendments contained in these regulations may be grouped into five categories as listed below. An explanation of the amendments contained in each category is provided in subsequent paragraphs. Each amendment is to apply from 1 July 1997. The five categories are:
* New HECS repayment income thresholds and exemption;
* Repeal of 'gun levy' provisions;
Medicare levy rate and low income exemption thresholds changes;
* Medicare levy surcharge; and
* Correction of minor technical inaccuracies.
HECS changes
The Higher Education Legislation Amendment Act 1996 (Act No. 74 of 1996) amended, with effect from 1 July 1997, the income thresholds prescribed in the Higher Education Funding Act 1988 (HEFA) for HECS repayments. It also provided for an exemption from making HECS repayments for certain low income persons who pay a reduced amount of Medicare levy because of the operation of section 8 of Medicare Levy Act 1986 (MLA) (new subsection 106Q(7), HEFA). The rates of deduction of tax instalments set out in the Income Tax Regulations take into account the liabilities imposed by the HEFA. The changes there require that the rates of deduction of tax instalments contained in the Income Tax Regulation be adjusted accordingly.
A number of amendments are straight forward. These make changes as follows:
* to reflect a new drafting style (subregulations 17.1 and 17.2); and
* on account of the new income thresholds contained in the HEFA - some references in existing subregulation 82B(4) to paragraphs in HEFA are to be changed to align them with new paragraphs in the HEFA that operate from 1 July 1997 - and to update the "NOTE" to the subregulation that provides the weekly dollar figures applicable from 1 July 1997 (subregulations 17.4-7).
Further amendments are related to the insertion of new subregulation 82B(6) (subregulations 17.3, 17.8 and 19.2). This new subregulation provides an exemption from making HECS repayments for certain low income earners.
The new subregulation is required because the Income Tax Regulations require an employee who has a HECS debt and who makes an employment declaration to state that fact on the declaration and the employer is then required to increase tax instalment deductions as set out in regulation 82B. However, from 1 July 1997, subsection 106Q(7) of the HEFA operates to provide that no amount of HECS repayment is payable for a year of income if a person with a HECS debt is not required to pay Medicare levy, or is entitled to pay a reduced amount of Medicare levy, because of section 8 of the MLA.
Section 8 provides an exemption from Medicare levy for family persons whose taxable (or family) incomes fall below the Medicare levy low income exemption or reduction thresholds. The Government announced in the 1997-98 Budget that it intends to increase the family exemption threshold to apply from 1 July 1997 to $22,594 (increase by $2, 100 per dependent child). This will result in a reduced rate of Medicare levy being payable up to $24,425 (increase by $2,270 per dependent child).
Amendments contained in subregulations 17.3, 17.8 and 19.2 provide for the exemption from making HECS repayments to be taken into account in determining the amount of tax instalments to be deducted.
Subregulations 17.8 and 19.2 essentially operate together to provide an avenue for an employee to notify his or her employer of entitlement to a HECS repayment exemption. Subregulation 17.8 inserts new subregulation 82B(6) to provide that paragraph 82B(3)(b) (which determines the additional amount of tax instalments to be deducted on account of HECS) does not apply to an employee who has provided a Medicare levy variation declaration to his or her employer making a statement in accordance with new subregulation 86(7).
Subregulation 19.2 inserts new subregulation 86(7) that requires an employee who is eligible to be exempt from making HECS repayments to state in his or her Medicare levy variation declaration that he or she is so entitled to full or partial relief under section 8 of the MLA.
The amendment made by subregulation 17.3 makes paragraph 82B(3)(b) subject to new subregulation 82B(6).
Repeal of the 'gun levy'
The Medicare levy rate reverts to 1.5 per cent from 1 July 1997 upon cessation of the increased rate of 1.7 per cent that was imposed for the 1996-97 year of income to provide funds to purchase guns under the Government's gun buy back scheme. The tax instalment deduction rates contained in the Income Tax Regulations were amended last year to reflect. the increased rate. The deduction rates are being amended to take account of the reversion to the normal rate of 1.5 per cent with effect from 1 July 1997.
The specific amendments, that basically reverse the 'gun levy' changes made from 1 July 1996, make changes as follows:
* regulations 72A and 74A are repealed as they were inserted only to cover situations arising under the 'gun levy' (regulations 7 and 10);
* references to repealed regulations 72A and 74A or provisions based on them are being removed (regulations 12,13 and 23 and subregulations 5.1, 5.3, 6.1 and 19.1);
* a number of amendments are required to reflect the change of rate from 1.7 per cent to 1 - 5 per cent, including changes to the table in subregulation 98(1), the repeal of Tables 1A and lB in Schedule 3 (these were relevant only with the 'gun levy') and the replacement of Tables 1, 3 and 4 (to reflect the lower Medicare levy rate and increased thresholds) (regulation 24 and subregulations 4.1, 6.6-7, 8.7-8 and 26.14); and
* the new regulation 87 that was inserted from 1 July 1996 to cover situations dealt with by the previous regulation 87 plus new situations that arose only because of the 'gun levy' is to be repealed and replaced with a regulation along the line that originally existed, and the opportunity has been taken to improve the drafting style of the regulation (regulation 21).
Medicare levy rate and exemption thresholds changes
The MLA was amended by the Medicare Levy Amendment Act (No. 1) 1997 (MLAA) to increase the Medicare levy low income exemption thresholds and reduced levy ranges from 1 July 1996. A number of regulations need to be amended to reflect the new thresholds. As the amending regulations are to apply from 1 July 1997 they also reflect the change in the rate of Medicare levy payable from that date because of the cessation of the 'gun levy'. Relevant changes to the tables in regulation 98 and Schedule 3 have been mentioned above.
The thresholds stated in the MLA are an annual figure whereas the Income Tax Regulations provide for the determination of tax instalment deductions in respect of weekly salary or wages. Thus the figures contained in regulations 72 and 73 are basically the weekly rate for the annual figures. The new figures inserted by the amending regulations are the weekly equivalent of the new annual thresholds and the Medicare levy rate of 1.5 per cent applicable from 1 July 1997 (subregulations 6.2-5, 8.2 and 8.4-6)
Medicare levy surcharge
The MLAA introduces, from 1 July 1997, a 1 per cent Medicare levy surcharge for individuals with a taxable income greater than $50,000 and families with combined taxable incomes greater than $100,000 (increased by $1,500 per dependent child after the first) who do not have private patient hospital cover for themselves and all their dependants.
It is the Government's intention that a salary or wage taxpayer who is liable for the new surcharge be able to request, if he or she so wishes, that their tax instalment deductions be increased to provide for their surcharge liability. The Income Tax Regulations are amended to enable an employer to deduct an increased amount of tax instalments upon the request of such a salary or wage taxpayer.
The specific amendments make changes as follows:
* new regulation 86A has been inserted to provide, in the circumstances outlined above, for an employee to give his or her employer a declaration enabling the employer to deduct an amount of tax instalment greater than that which would otherwise be deducted. The amount of the increase is determined by the formula contained in the new regulation; as the surcharge is 1 per cent of taxable income the formula provides for the increase to be 1 per cent of weekly salary or wages, The requirement set out in the new regulation in relation to the operation of a Medicare levy variation declaration are similar to those already contained in existing regulation 86 in relation to Medicare levy variation declarations (regulation 20); and
* appropriate reference to the new regulation are inserted in existing regulations
(regulation 22 and subregulations 4.2 and 5.2).
Correction of minor technical inaccuracies
A number of minor inaccuracies have been identified in the Income Tax Regulations and have been corrected.
The specific amendments make changes as follows:
* regulation 73 - paragraph 73(1)(e) is intended to apply to a family employee who has at least one dependent child and the income level stated therein and to reflect in the amount of tax instalments that are deducted the fact that the employee is entitled to an exemption from Medicare levy. The paragraph was worded incorrectly to apply even where the employee who otherwise satisfies the provision does not have at least one dependent child. Table 3 in Schedule 3 already provides the appropriate reduction of Medicare levy in the relevant circumstances. The amendment puts the paragraph on the intended basis and also makes a minor drafting style change (subregulations 8.3 and 8.1 respectively);
* regulation 82 - the amount of tax instalment deduction to be deducted under regulation 82 is intended to be determined by applying the lowest marginal rate o tax (including Medicare levy) to the relevant lump sum payment. The marginal rate presently contained in the regulation is not the lowest marginal rate; an adjustment to the figure was not made some years ago when the relevant tax rate reduced by 1 cent in the dollar. It is proposed to change the figure presently contained in regulation 82 to the lowest marginal rate of tax (including Medicare levy) that applies from 1 July 1997. The amendment also contains a change as explained in the next paragraph (regulation 16);
* regulations 2, 74, 75, 79 80, 80A, 82 and 83A - amendments are proposed to be made to these regulations to ensure that all the rounding provisions contained in Division 2, Part 7 of the Income Tax Regulations operate as intended. Presently, could be argued that certain provisions that are intended to operate to round to the nearest 5 cents the amounts determined under formula do not so operate in all circumstances. The amendments will ensure that the provisions do operate as intended. The correct intention is achieved by inserting a meaning of the term 'worked out to the nearest 5 cents' in existing regulation 2 and the use of that term in regulations 74, 75, 79, 80, 80A, 82 and 83A (regulations 3, 9, 11, 13, 14, 15 and 16 and subregulation 18.1). The amendments will mean that subregulation 83A(3) is no longer required (subregulation 18.2); and
* regulation 118 - this regulation refers to subparagraph 221F(5)(f)(ii). That subparagraph was deleted by Taxation Laws Amendment Act (No. 3) 1995 and replaced with paragraph 221F(5J)(b). The proposed amendment merely reflects the change of paragraph number (regulation 25).