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Taxation Laws Amendment (Rates and Provisional Tax) Bill 1990



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PURPOSE

To introduce the rates of tax for the periods 1 july 1990 to 31 December 1990 and for later years. The Bill will also provide a method for calculating deemed income for provisional tax purposed for 1990-91 and subsequent years and extend liability to pay provisional tax to certain wage and salary earners, and reduce the level of tax rebate for net medical expenses over $1000 from 29% to 25% from 1 July 1990 and to 21% from 1 July 1991.

BACKGROUND

The measures contained in this Bill were announced in the February 1990 Economic Statement and the 1990-91 Budget. The changes to personal tax rates proposed by this Bill were foreshadowed in the February 1990 Economic Statement. The proposed rates scale to apply does not differ from that proposed in the February 1990 Economic Statement. In the Explanatory Memorandum to this Bill, the cost to Commonwealth revenue of the proposed changes to personal tax rates is estimated at $1 230 million in 1990-91 and $2 585 million in 1991-92.

The reduction in the level of tax rebate for net medical expenses over $1000 from 29% to 21% proposed by this Bill was announced in the 1990-91 Budget. Currently, a rebate of tax is available to a taxpayer whose net medical expenses in a financial year exceed $1000. For 1989- 90, the rebate was calculated at the rate of 29% of the excess over $1000. To qualify for the rebate, the medical expenses have to be paid by a resident or a resident dependant. Medical expenses are eligible for the rebate only to the extent that they are not recouped or entitled to be recouped from a government or public authority or a society, association or fund (e.g. reimbursements from Medicare or a health insurance fund). The stated reason for the reduction in the rebate proposed by this Bill is the abolition of the 29% marginal rate of income tax proposed by this Bill. In the Explanatory Memorandum to this Bill, the gain to Commonwealth revenue of the proposed changes to the medical expenses rebate is estimated at $7 million in 1991-92 and $15 million in a full year.

Provisional tax is payable by individuals who receive non-wage or salary income during the year. The amount of provisional tax payable during a year is based on the previous years income, increased by a certain amount (this was 12% in 1988-89 and 10% in 1989-90). Taxpayers also have the option of self assessment where there has been a substantial change in their position. The relevant tax rate is applied to the notional income for the year to calculate the provisional tax payments. Provisional tax is generally paid in four instalments, with the final instalment adjusting the actual tax payable (based on actual income) with the amount calculated based on the notional income. Tax is payable in a lump sum at the end of the year where the provisional tax payable in the previous year did not exceed $5000.

On 6 September 1989, the Government introduced the Income Tax Assessment Amendment Bill 1989. Certain provisional tax matters were dealt with in that Bill, including that provisional tax payable in 1989-90 would be calculated by taking the qualifying reductions from the adjusted income. Basically, adjusted income would be the previous years income increased by 10%. Qualifying reductions related to the number of rebates. The Bill also proposed to increase the threshold above which provisional tax has to be paid by instalments from $5000 to $8000.

In reliance on the passage of this Bill, the Commissioner of Taxation issued 1989-90 provisional tax notifications relying on the provisions of the Bill in expectation that the new rules would be law before provisional tax became due on 1 April 1990. However, the Bill did not get passed in 1989 and, when Parliament was dissolved for the 1990 Federal election, the Bill lapsed. On 21 February 1990, the Commissioner of Taxation issued a Media Release stating `As the various adjustments (to provisional tax) have not be enacted,.... it was now necessary, in the circumstances to adjust provisional tax payable down to the basic amount provided for in the tax law without allowing for the adjustments in the Bill (i.e. the 1989 Bill)'.

The proposed extension of provisional tax liability to certain wage and salary income proposed by this Bill is a 1990-91 Budget measure. The stated objective of the proposal is to remove opportunities to defer the payment of tax on wages and salary (note: this will particularly apply in relation to directors' fees, commissions and bonuses, and short-term contract employees). It is proposed that liability for provisional tax will be extended to all cases where, in respect of the year preceding the year for which the provisional tax liability is to be imposed: (a) a taxpayer with salary or wage income has a tax liability of $3000 or more; and (b) the shortfall of tax instalment deduction in respect of the salary or wages income of the income years is $3000 or more. In the Explanatory Memorandum to this Bill, the proposed extension of provisional tax liability to certain wage and salary income is estimated to increase Commonwealth revenue by $370 million in 1990-91.

MAIN PROVISIONS

Clauses 3 and 4 will amend the Acts that establish the rates of tax payable in 1990-91 and later years respectively, and will reflect the reductions announced in the February Statement. Schedule 1 of the Bill contains the rates for the period 1 January 1991 to 31 December 1991, which is a composite of the current rates and those to apply from 1 January 1991. The rates for subsequent years, which are those announced in the February Statement, are contained in Schedule 2 of the Bill.

Part 3 of the Bill (clauses 6 to 10) deals with provisional tax. Clause 7 will amend section 221YA of the Income tax Assessment Act 1936 (the Principal Act) to provide that the provisional tax uplift factor (i.e. the amount that the previous years income is deemed to have increased) will be 10% each year unless the another amount, to a maximum of 12%, has been declared by regulation. (This will remove the need for annual legislation dealing with the deemed increase in income for provisional tax purposes.)

Clause 8 will insert a new section 221YAB into the Principal Act which will make certain PAYE taxpayers liable for provisional tax. This will occur where they following two conditions are satisfied: 1. The amount calculated using the formula tax payable minus credited amounts is $3000 or more. The tax payable component is based on the persons liability for the previous year. The credit amount relates to any credits the person may have been entitled to in the previous year, for example, to a reduction of provisional tax liability or from the person buying additional tax stamps. Under this formula, the $3000 limit will be quite easily reached. 2. The amount calculated using the formula (notional gross tax minus qualifying rebates) less PAYE deductions is $3000 or more. Notional gross tax is based on the tax payable on the previous years wages and salaries with certain matters excluded (e.g. eligible lump sums, assessable retirement amounts and eligible termination payments. This is to be reduced by any qualifying rebates that the person was entitled to in the previous year. Qualifying rebates are those in respect of dependents, sole parents, housekeepers, isolated areas, Defence force members serving overseas and members of UN armed forces. If the amount calculated is $3000 or more than the persons PAYE deductions (including any relevant credits), the person will have satisfied this part of the test. The basic result of the provision is that if a person had a tax liability of $3000 or more in the previous year and a wage and salary tax liability that was $3000 or more than their PAYE deductions in the previous year, they will be liable to provisional tax on their current wage and/or salary.

Section 221YC of the Principal Act will be amended by clause 9 to provide that the amount of provisional tax payable will be the `uplifted provisional tax amount' of the taxpayer. This term is dealt with in proposed section 221YCAA which will be inserted into the Principal Act by clause 10. Where the persons provisional tax income is equal to their income for the preceding year, the following will apply: The amount will be calculated in accordance with the formula: adjusted preceding years tax minus qualifying reductions. The former term is basically the sum of the various categories of income (other than capital gains) increased by the provisional tax uplift factor (see above). Other than primary producers rebates under the income equalisation scheme, the person will be treated as if not entitled to any rebates. Basically, qualifying reductions will be the qualifying rebates referred to above plus any franking rebates and any rebates available under the primary producers income averaging scheme. Where the pre-condition referred to above does not apply then, simplistically, the uplifted provisional tax amount will be the previous years income, with any capital gains excluded, multiplied by the uplift factor. (This is very simplified and in practice the calculation will depend on whether the person receives certain deductions).

The uplift factor for 1990-91 will be 10% (clause 13).

The rebate for medical expenses over $1000 will be reduced from 29% to 25% from 1 July 1990 by clause 3 which will implement the changes contained in Schedule 1 of the Bill. The rate will be 21% from 1 July 1991 (clause 4 which will implement Schedule 2 of the Bill).

The Bill will commence on 1 July 1990 (clause 12).

Bills Digest Service 19 September 1990 Parliamentary Research Service

For further information, if required, contact the Economics and Commerce Group on 06 2772460.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1990.