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A New Tax System (Bonuses for Older Australians) Bill 1998



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Bills Digest No. 93  1998-99

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A New Tax System (Bonuses for Older Australians) Bill 1998

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any offi cial legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Contents

 

Passage History

A New Tax System (Bonuses for Older Australians) Bill 1998

Date Introduced:  2 December 1998

House:  House of Representatives

Portfolio:  Family and Community Services

Commencement: the day after specified goods and services tax legislation(1) proposed to commence 1 July 2000 has received Royal Assent

Purpose

The purpose of the A New Tax System (Bonuses for Older Australians) Bill 1998 (the Bill), is to provide, subject to certain age and in come qualifications, for a one-off tax free bonus payment to be made to individuals. The bonus payment generally consists of 2 components:

  • an aged persons savings bonus of up to $1,000, and
  • a self-funded retirees supplementary bonus of up to $2,000.

The Bi ll proposes that the payments will be authorised by one of three Commonwealth agencies, the Department of Family and Community Services, the Repatriation Commission and the Australian Taxation Office, depending on whose customer or client the individual is. The decisions in relation to entitlement are subject to review.

Both components of the bonus payment are targeted at lower income groups. The amount of the bonus reduces on a tapering scale as the person’s income exceeds $20,000, reducing to a zero bonus at $30,000.

The stated aim of the Bill is to ‘provide further compensation to help maintain the value of the savings and retirement income of senior Australians’.(2)

Background - Tax Reform Package

On 13 August 1998 the Federal Government released its pro posals for reform of the Australian tax system(3) of which, a Goods and Services Tax (GST) was the centrepiece.

On 2 December 1998 the Treasurer introduced a raft of 16 bills(4) to the House of Representatives comprising the first part of the reform package. Seven of the bills propose to replace the current Wholesale Sales Tax and to enact a GST that will be levied at a rate of 10 per cent with effect from 1 July 2000. Nine of the bills introduced non-GST measures contained in the tax reform plan.

The tax reform plan proposes to:

  • introduce a GST which eliminates sales tax and a range of nine other indirect taxes
  • change Commonwealth-State financial relations by providing States and Territories with an independent revenue base
  • implement significant changes to individual marginal tax rates
  • implement a major rationalisation of family assistance
  • replace the various existing taxation payment and reporting systems of company tax, provisional tax, PAYE,(5) PPS(6) and RPS(7) by one quarterly tax payment system, PAYG(8 )
  • introduce a new universal business number system
  • move toward an entity taxation system which is directed toward the elimination of tax advantages between different business structures, and
  • simplify the imputation system and introduce refunds for excess franking credits.

The main Bill implementing the GST is the A New Tax System (Goods and Services Tax) Bill 1998. The bills digest for that Bill will contain a more detailed history of events l eading up to the GST and, naturally, a detailed account of how the proposed GST will operate.

Background - Compensation Package

1. Introduction

There is no doubt that the reforms proposed by the government present sweeping and fundamental changes to the ta x system in Australia.

The introduction of a GST necessarily raises questions pertaining to the distributional impacts of such a tax. In particular, consideration is given to any potential disadvantage that may be incurred by sectors of the community due to the introduction of a value-added tax.

The compensation package introduced by the government purportedly avoids the situation where persons would be worse-off under the new tax system. The reform package will, therefore, provide an unambiguous increase in total economic welfare if, after implementation, a number of individuals are better off and nobody is made worse off.(9)

The contentious issue, of course, is whether the package succeeds in achieving its aims.

The key issue appears, therefore, to be the accuracy of the projected distributional impacts of the tax reform package. The accuracy of the estimates of the impact of change remain a legitimate concern for those most vulnerable in the community.

2. Economic restructuring

2.1 Equity

The two basic p rinciples of tax equity are horizontal equity and vertical equity.(10)

Horizontal equity means that persons in similar positions should be treated equally and vertical equity means that people should pay taxes in accordance with their ability to pay.(11)

These principles underpin much of the discussion relating to the interaction of the taxation system and social welfare function.(12)

There is considerable disagreement throughout the community in respect of their application. For example, there are widely differing views about the application of horizontal equity and how much less tax those people with children should pay. Similarly there are extreme views relating to how much more tax higher income earners should pay.

Ultimately economic policy is the responsibility of government, which will make explicit value judgments about the desirability of making various groups of people better or worse off, and will be accountable through the political process for judgments it makes.

2.2 Progressive/Regressive tax systems

Debate is also often focussed on the extent to which taxes should be regressive or progressive.

Progressive tax is a tax, which takes an increasing proportion of income as income rises and regressive tax is a tax, which takes a decreasing proportion of income as income rises.(13)

A progressive income tax system is most often associated with wealth re-distribution from those with higher incomes to those with lower incomes.

In Australia at the present time, the net effect of income taxes, indirect taxes, cash transfer and non-cash benefits programs is to redistribute income from the ‘better-off to the less well off’.(14)

2.3 Social security

The tax and social security systems are interdependent.

Community support for both systems depends on the extent t o which they are seen as fair, efficient and predictable.

In balancing competing goals and objectives, tax and welfare systems must raise sufficient revenue to support the effective delivery of services without prejudicing individual initiative or significantly diminishing the incentive to work..

Social security is a system of government financed income transfers designed to effect a distribution of income considered desirable. The main component of most social security systems is welfare benefits, given to those in poverty.(15) This can be done in two ways: (a) by identifying groups that are likely to be poor, and giving benefits to them (eg. the unemployed, the elderly and the disabled) irrespective of their actual income; or (b) by identifying, through means tests, people who are poor. The second of these approaches is a less expensive method of eradicating poverty, but leads to the problem of the poverty trap.(16)

A poverty trap arises from the combination of losing entitlement to income support payments and paying tax that ensures individuals or families retain very little of any extra money they earn. ‘Apart from the inefficiency of suppressing the incentive for p eople in the poverty trap to work, concern exists over the debilitating human effects of removing from people the power to alter their own living standards.’(17)

It appears that an increasing proportion of the population in Australia is caught in poverty traps. This suggests that the interrelationship between the tax system and the social security system is in need of remedial action.

The tax reform package proposes to introduce some initiatives to remedy to a degree problems associated with the poverty trap. A combination of measures are designed to increase social security payments, increase income and assets test free areas, provide extra assistance to families and deliver personal income tax cuts. This should reduce the number of persons affected by the loss of entitlement to income support payments and lessen the tax liability for those persons who do earn extra income. The amendments will reduce effective marginal tax rates by reducing both tax rates and income tax taper rates. This should provide greater encouragement to those persons currently caught in the poverty trap to seek to improve their living standards.

Please refer to the digest in relation to the A New Tax System (Personal Income Tax Cuts) Bill 1998.

3. Distributional Impact of the Package

3.1 Economic modelling

Attempts to model the effects of taxation reform present interesting challenges for economists and a conundrum for those attempting to rationalise the outcomes of any distributional impact analysis.

The key question in estimation theo ry is to identify which approach gives the most useful information about the relevant issue. This first fundamental step can be as contentious as any of the outcomes generated by the analysis. Economists often appear to be in conflict about which model will give the best estimate of distributional impacts in relation to any particular change.

In addition, any analysis generated in the area of taxation reform is usually the subject of caveats that turn on the assumptions required to be made and the problems associated with data shortcomings. It seems that no one model is capable of providing an estimation that is free from caveat nor capable of providing highly accurate analysis across such a wide range of issues that concern taxation reform.

This is illustrated by the setting up of a new forum, Forum for Modelling of Australian Taxation (ForMAT), which had its first meeting on 10 December 1998. The stated purpose of the new forum is to enhance comprehension and quantification of the effects of the changes and to bring together research from many different styles of quantitative modelling, noting that the proposed changes ‘will have ramifications too wide for one approach or economic model to cover.’(18)

The complexity and level of uncertainty generated by economic modelling unfortunately appears to lend itself to interpretation of analysis capable of supporting different views on any given topic.

3.2 Government modelling

The estimation method used in the tax reform package is the common price impact across ho useholds approach (population CPI).

The aggregate consumption patterns represented in the official CPI [Consumer Price Index] are used to produce an estimate of the impact of price changes on households. The official CPI weights are based on HES [Household Expenditure Survey] expenditure shares, but the HES expenditure shares are only one input into the calculation of the CPI.

To the extent that, over time, households’ expenditure patterns converge, the population CPI provides a very good estimate, at a point in time, of the impact on any individual household. Conversely, the shortcoming with this approach is that differences in consumption patterns across different groups or different households over time is not reflected.  Given the considerable limitations outlined in the next two sections [concerning different price impacts for different household groups and different effects for different individuals] the population CPI remains the best estimate of the impact on any individual household.(19)

3.3 Controversy surrounding accuracy of projections of distributional impacts

There has been considerable debate as to the accuracy of the distributional impacts espoused by the government in connection with the tax reform package.

The following represen ts a sample of debate and the divergent views as to the most appropriate economic model to use to estimate the impacts of the change.

  • The government maintains that the population CPI provides the best estimate of the impact of the tax reform proposals on a ny individual household.
  • The Australian Labor Party (ALP) appears to have variously supported the approach of the HES model and in more recent times the Monash(20) model which allegedly are in conflict with the estimates of impacts relied upon by the gover nment in formulating its compensation package.
  • A non-government group(21) is conducting a research project, which incorporates reform-induced behavioural change into a general equilibrium model of the economy. The models mentioned above apparently do not t ake into account behavioural change. It is stated that in incorporating behavioural change, tax reform options can be assessed and evaluated in terms of their impacts on equity and efficiency in both the short and long run.
  • Another estimation approach is t he different price impacts for different household groups model. It involves estimating different price effects for different households. The Australian Bureau of Statistics (ABS) does not have a set of CPI weights for groups within the population at this stage, although preliminary work has been done in this area. It would seem, however, that this approach, if the CPI weights were available, would constitute an improvement on the population CPI model.(22)

An example of the complexity of economic modelling and the subsequent variances in interpretation may be found in the discussion relating to the analysis generated by the HES model.

Although Treasury had used the population CPI model it also conducted analysis in accordance with the HES model and the esti mates in relation to that analysis were released in November 1998 with the following resultant and divergent commentary.

  • The government has stated that the population CPI approach remains the best estimate of distributional impacts, indicating a 1.9 per ce nt price increase. Its interpretation of the HES estimates is that it showed ‘that the effect on the cost of living across 11 different household groups at five different income levels varied between 1.3 per cent and 2.5 per cent, with an average of 1.8 per cent. On the basis of the HES, the impact was less on average than Treasury had estimated.’(23)
  • The ALP have interpreted the HES estimates in a different manner, suggesting that the Treasury data released today has confirmed the impacts estimated by the Melbourne Institute, namely that many lower income household groups are affected more by the GST than the average…. Instead of facing a 1.9% price increase claimed by Mr Costello, these vulnerable groups face impacts up to 30% higher than the Government has let on.’(24)

Such competing views of the same analysis serve to underscore the difficulties involved in estimating impacts of change. It is also a reminder that any fundamental error in the methodology used to make such estimates could have far reaching effects on low income earners.

3.4 Senate Select Committee

On 25 November 1998, the Senate referred issues relating to the GST and the new tax system to a Select Committee and three of its Reference Committees.(25) The Select Committee will examine the ec onomic theories, assumptions, calculations, projections, estimates and modelling which underpinned the Government’s proposals for taxation reform.

4. Compensation package Bills

The Bills referred to as the Compensation Package are:

A New Tax System (Compen sation Measures Legislation Amendment) Bill 1998

A New Tax System (Personal Income Tax Cuts) Bill 1998

A New Tax System (Aged Care Compensation Measures Legislation Amendment) Bill 1998, and

A New Tax System (Bonuses for Older Australians) Bill 1998.(26)

Main Provisions

1. Structure of the Bill

As previously mentioned the Bill proposes that the bonus payment may be authorised by one of three Commonwealth agencies depending upon whose customer or client the individual is determined to be.

The Bill is therefore structured to reflect the fact that the three agencies are involved. Accordingly Part 2 deals with Family and Community Service customers, Part 3 deals with Veterans’ Affairs customers and Part 4 deals with ATO clients.(27)

For the most part the provisions in each of Parts 2 , 3 and 4 may be considered to be mirror provisions, but there are necessary differences in some clauses arising from the differing nature of the agencies. Where appropriate, amendments have been made to the provisions that calculate income in each Part to provide consistency of entitlement to bonus payments for customers and clients of each agency. Please refer to the comments in relation to the adequacy of the proposed adjustments on page 19 at paragraphs 2 and 3.

2. Determining whose customer an individual is

A first step in determining entitlement to the bonus payment is to decide whose customer or client the individual is considered to be. The provisions of the relevant Part may then be applied to the individual to reach a determination in respect of the claim for the bonus payment.

2.1 Family and Community Services customers

Pursuant to sub-clause 7(3) in Part 2 of the Bill an individual who makes a proper claim is a Family and Community Services customer.

A claim by an individual for a bonus payment under sub-clause 7(2) is a proper claim if certain criteria are satisfied. These are:

  • he or she is not required to lodge an income tax return for the 1999-2000 income year, nor have they lodged one and nor do they intend to lodge one; and
  • on 1 July 2000 he or she is not receiving a service pension, a carer service pension or an income support supplement; and
  • the claim is made after 30 June 2000 and before 1 July 2001; and
  • the claim is made in the appropriate manner.

2.2 Veterans’ Affairs customers

Pu rsuant to sub-clause 22(3) in Part 3 of the Bill an individual who makes a proper claim is a Veterans’ Affairs customer.

A claim by an individual for a bonus payment under sub-clause 22(2) is a proper claim if certain criteria are satisfied. These are:

  • he or she is not required to lodge an income tax return for the 1999-2000 income year, nor have they lodged one and nor do they intend to lodge one; and
  • on 1 July 2000 he or she is  receiving a service pension, a carer service pension or an income support sup plement; and
  • the claim is made after 30 June 2000 and before 1 July 2001; and
  • the claim is made in the appropriate manner.

2.3 ATO clients

Pursuant to sub-clause 35(3) in Part 4 of the Bill an individual who makes a proper claim is an ATO client.

A claim by an individual for a bonus payment under sub-clause 35(2) is a proper claim if certain criteria are satisfied. These are:

  • either he or she is required to lodge an income tax return for the 1999-2000 income year, or
  • if he or she is not required to lodge a return, does so anyway and makes a claim for the bonus payment, provided that he or she has not made a claim for a bonus payment to either of the other two agencies under Parts 2 or 3 ; and
  • the claim is made after 30 June 2000 and before 1 July 2001; and
  • t he claim specifies which qualifying year or years that the individual claims he or she is entitled to payment. ‘Qualifying year’ means the 1998-1999 or 1999-2000 income years; and
  • the claim is made in the appropriate manner.

3. Family and Community Services customer - qualification for bonus payment

Pursuant to clause 10 a Family and Community Services customer is qualified for a bonus payment under Part 2 if the customer is qualified for:

  • only the aged persons savings bonus component, or
  • the aged persons s avings bonus component and the self-funded retirees supplementary bonus component of the bonus payment.

3.1 Aged persons savings bonus component

Pursuant to subclause 11(1) a Family and Community Services customer is qualified for the aged persons savings bonus if:

  • he or she is aged 60 and is an Australian resident on 1 July 2000; and
  • his or her annual retirement income is less than $30,000; and
  • he or she has annual savings and investment income.

3.1.1 Calculation of annual retirement income and annual savings and investment income

An individual’s annual retirement income and annual savings and investment income is worked out under clause 5 or 6 depending upon whether the Department of Family and Community Services has on one or more occasions during the qualifying years worked out the customer’s ordinary income in accordance with the Social Security Act 1991 .

Qualifying years refers to years commencing on 1 July 1998 or 1 July 1999.

Where the Department has been required to calculate the customer’s ordinary income in either qualifying year, clause 5 applies.

The first step is to determine a customer’s annual retirement income for each qualifying year, which is generally the customer’s amount of ordinary income for that year. The second is to determine a customer’s annual savings and investment income for each qualifying year, which is that amount of the ordinary income attributable to savings and investments(28) for that year.

Finally, the customer’s annual retirement income and annual savings and investment income are determined to be the relevant amounts from either qualifying year that result in the greatest bonus payment being made to the customer.

Where the Department has not calculated the customer’s ordinary income in either qualifying year, clause 6 applies.

Essentially the customer’s annual retirement income is the customer’s ordinary income as worked out under the Social Security Act 1991 on the basis of the customer’s circumstances at the time the Secretary to the Department first determines the customer’s entitlement to a bonus payment.

The customer’s annual savings and investment income is that amount of ordinary income attributable to savings and investments.

3.2 Self-funded retirees supplementary bonus component

Pursuant to subclause 11(2) a Family and Community Services customer is qualified for the self-funded retirees supplementary bonus if:

  • he or she is qualified for the aged persons savings bonus; and
  • on 1 July 2000, he is aged 65 or she is aged 61 ½; and
  • he or she has not received certain disqualify ing pensions or benefits(29) during the period 1 April 2000 to 1 July 2000; and
  • he or she has an annual savings and investment income amount of more than $1,000 for 1988-1999 or 1999-2000.

It should be noted that a customer’s annual savings and investment income amount is calculated in accordance with clauses 5 and 6 as set out in paragraph 3.1.1 above.

4. Veterans’ Affairs Customer - qualification for bonus payment

Pursuant to clause 25 a Veterans’ Affairs customer is qualified for an aged persons savings bonus payment under Part 3 if:

  • he or she is aged 60 and is an Australian resident on 1 July 2000; and
  • his or her annual retirement income is less than $30,000; and
  • he or she has annual savings and investment income.

4.1 Calculation of annual retirement income and annual savings and investment income

An individual’s annual retirement income and annual savings and investment income is worked out under clause 20 or 21 depending upon whether the Repatriation Commission has on one or more occasions during the qualifying years worked out the customer’s ordinary income in accordance with the Veterans’ Entitlement Act 1986 .

Qualifying years refers to the years commencing on 1 July 1998 or 1 July 1999.

Where the Commission has been required to calculate the customer’s ordinary income in either qualifying year, clause 20 applies.

The first step is to determine a customer’s annual retirement income for each qualifying year, which is generally the customer’s amount of ordinary income for that year. The second is to determine a customer’s annual savings and investment income for each qualifying year, which is that amount of the ordinary income attributable to savings and investments(30) for that year.

Finally, the customer’s annual retirement income and annual savings and investment income are determined to be the relevant amounts from either qualifying year that result in the greatest bonus payment being made to the customer.

Where the Commission has not calculated the customer’s ordinary income in either qualifying year, clause 21 applies.

Essentially the customer’s annual retirement income is the customer’s ordinary income as last worked out under the Veterans’ Entitlements Act 1986 before it determines the customer’s entitlement to a bonus payment.

The customer’s annual savings and investment income is that amount of ordinary income attributable to savings and investments.

4.2 No reference to self-funded retirees supplementary bonus component

Part 3 applies to a Veterans’ Affairs customer. A Veterans’ Affairs customer is defined in clause 22 to be an individual receiving a service pension, a carer service pension or an income support supplement. These payments are a disqualifying event in terms of qualifying for the self-funded retirees supplementary bonus component in Parts 2 and 4 . Part 3 , therefore, does not refer to the self-funded retirees supplementary bonus component of the bonus payment.

5. ATO client- qualification for bonus payment

Pursuant to clause 38 an ATO client is qualified for a bonus payment under Part 4 if the client is qualified for:

  • only the aged persons savings bonus component, or
  • the aged persons savings bonus component and the self-funded retirees suppl ementary bonus component of the bonus payment.

5.1 Aged persons savings bonus component

Pursuant to subclause 39(1) an ATO client is qualified for the aged persons savings bonus if:

  • he or she is aged 60 and is an Australian resident on 1 July 2000; and
  • his or her taxable income is less than $30,000; and
  • he or she has adjusted savings and investment income.

5.1.1 Calculation of taxable income and adjusted savings and investment income

Taxable income has the same meaning as in the Income Tax Assessment Act 1997 . ( Clause 33 )

An individual’s adjusted savings and investment income for a qualifying year is worked out in accordance with clause 34 .

Qualifying year means the 1998-1999 or 1999-2000 income year.

The first step in working out the amount of adjusted savings and investment income for a qualifying year is to work out the amount of a client’s savings and investment income. ( Subclause 34(1) )

This is basically, the sum of all assessable income other than PAYE earnings plus payments made by way of superannuation, pension or retiring allowance or by way of an annuity or a supplement to a pension or annuity, plus assessable amounts of eligible termination payments and some amounts of remuneration or allowances paid to members of local governing bodies. ( Subclauses 34(3) and (4) )

The second step is to subtract deductions that relate to the savings and investment income. This produces the adjusted savings and investment income. ( Subclause 34 (2) )

5.2 Self-funded retirees supplementary bonus component

Pursuant to subclause 39(2) an ATO client is qualified for the self-funded retirees supplementary bonus if:

  • he or she is qualified for the aged persons savings bonus; and
  • on 1 July 2000, he is aged 65 or she is aged 61 ½; and
  • he or she has not received certain disqualif ying pensions or benefits(31) during the period 1 April 2000 to 1 July 2000; and
  • he or she has an adjusted savings and investment income amount of more than $1,000 for 1988-1999 or 1999-2000.

It should be noted that a client’s adjusted savings and investme nt income amount is calculated in accordance with clause 34 as set out in paragraph 5.1.1 above.

6. Amount of payment - Family and Community Services customer

Pursuant to clause 15 the amount of a Family and Community Services customer’s bonus payment is:

  • if the person is qualified for the aged persons savings bonus component - the amount of that component; or
  • if the person is qualified for both the aged persons savings bonus and the self-funded retirees supplementary bonus component - the sum of those compo nents.

6.1 Amount of aged persons savings bonus component

The amount of the aged persons savings bonus component is a maximum of $1,000 and is worked out in accordance with a table set out in subclause 15(2).

Where a customer’s annual retirement income is $20,000 or less the amount of the aged persons savings bonus component is equal to the customer’s annual savings and investment income up to a maximum of $1,000.

Where a customer’s annual retirement income is more than $20,000 but less than $30,000 a taper applies.

The amount of the payment is equal to a customer’s annual savings and investment income up to a maximum of $1,000.  From this amount is then subtracted the ‘phasing out fraction’ of the amount of the customer’s annual savings and investment income.

The ‘phasing out fraction’ is defined in subclause 15(5) to be a customer’s annual retirement income less $20,000 divided by $10,000.

6.2 Amount of self-funded retirees supplementary bonus component

The amount of the self-funded retirees supplementary bonus component is a maximum of $2,000 and is worked out in accordance with a table set out in subclause 15(3) .

Where a customer’s annual retirement income is $20,000 or less the amount of the self-funded retirees supplementary bonus component is equal to an amount, up to a maximum of $2,000, by which the customer’s annual savings and investment income exceeds $1,000.

Where a customer’s annual retirement income is more than $20,000 but less than $30,000 a taper applies.

The amount of the payment is equal to an amount, up to a maximum of $2,000, by which the customer’s annual savings and investment income exceeds $1,000.  From this amount is then subtracted the ‘phasing out fraction’ of the amount of the customer’s annual savings and investment income which exceeds $1,000 but is less than or equal to $2,000.

The ‘phasing out fraction’ is defined in subclause 15(5) to be a customer’s annual retirement income less $20,000 divided by $10,000.

7. Amount of payment - Veterans’ Affairs customer

Pursuant to clause 29 the amount of a Veterans’ Affairs customer’s aged persons savings bonus payment is worked out in accordance with the table contained in subclause 29(1) that essentially mirrors the aged persons savings bonus component provisions for a Family and Community Services customer.

7.1 Amount of aged persons savings bonus payment

The amount of the aged persons savings bonus payment is a maximum of $1,000 and is worked ou t in accordance with a table set out in subclause 29(1).

Where a customer’s annual retirement income is $20,000 or less the amount of the aged persons savings bonus payment is equal to the customer’s annual savings and investment income up to a maximum of $1,000.

Where a customer’s annual retirement income is more than $20,000 but less than $30,000 a taper applies.

The amount of the payment is equal to a customer’s annual savings and investment income up to a maximum of $1,000.  From this amount is then subtracted the ‘phasing out fraction’ of the amount of the customer’s annual savings and investment income.

The ‘phasing out fraction’ is defined in subclause 29(3) to be a customer’s annual retirement income less $20,000 divided by $10,000.

8. Amount of payment - ATO client

Pursuant to subclause 43(1) if the Commissioner is satisfied that an ATO client is qualified for a bonus payment in respect of 1 qualifying year the client is entitled to the amount of the bonus payment worked out in respect of that year.

Pursuant to subclause 43(2) where an ATO client is qualified for a bonus payment in respect of both qualifying years, the client is entitled to the amount of bonus payment, which is worked out to be the highest of those amounts.

Pursuant to subclause 43(3) the amount of a Family and Community Services customer’s bonus payment is:

  • if the person is qualified for the aged persons savings bonus component - the amount of that component; or
  • if the person is qualified for both the aged persons savings bonus and t he self-funded retirees supplementary bonus component- the sum of those components.

8.1 Amount of aged persons savings bonus component

Pursuant to clause 43 the amount of an ATO client’s aged persons savings bonus payment is worked out in accordance with the table contained in subclause 43(4) that essentially mirrors the aged persons savings bonus component provisions for a Family and Community Services customer.

The amount of the aged persons savings bonus component is a maximum of $1,000.

Where a client’s taxable income is $20,000 or less the amount of the aged persons savings bonus component is equal to the client’s adjusted savings and investment income up to a maximum of $1,000.

Where a client’s taxable income is more than $20,000 but less than $30,000 a taper applies.

The amount of the payment is equal to a client’s adjusted savings and investment income up to a maximum of $1,000.  From this amount is then subtracted the ‘phasin g out fraction’ of the amount of the client’s adjusted savings and investment income.

The ‘phasing out fraction’ is defined in subclause 43(7) to be a client’s taxable income less $20,000 divided by $10,000.

8.2 Amount of self-funded retirees supplementary bonus component

The amount of the self-funded retirees supplementary bonus component is a maximum of $2,000 and is worked out in accordance with a table set out in subclause 43(5) .

Where a client’s taxable income is $20,000 or less the amount of the self-funded retirees supplementary bonus component is equal to an amount, up to a maximum of $2,000, by which the client’s adjusted savings and investment income exceeds $1,000.

Where a client’s taxable income is more than $20,000 but less than $30,000 a taper applies.

The amount of the payment is equal to an amount, up to a maximum of $2,000, by which the client’s adjusted savings and investment income exceeds $1,000.  From this amount is then subtracted the ‘phasing out fraction’ of the amount of the client’s adjusted savings and investment income which exceeds $1,000 but is less than or equal to $2,000.

The ‘phasing out fraction’ is defined in subclause 43(7) to be a client’s taxable income less $20,000 divided by $10,000.

9. Making the bonus payment

9.1 Family and Community Services, Veterans’ Affairs and ATO

Pursuant to subclauses 16 , 30 and 44, if either the Secretary to the Department of Family and Community Services, the Repatriation Commission or the Commissioner of Taxation determines that a claim for a bonus payment is to be granted, each of them must, on behalf of the Commonwealth, make the bonus payment to the client at such time and in such manner as they determine.

9.2 Centrelink

At page 1 of the Explanatory Memorandum, the notes in relation to the clauses of the Bill indicate that it is intended that the bonuses will be paid by Centrelink as paying agent for the 3 agencies. There is no additional information in relation to how this may operate but the drafting of the provisions in subclauses 16 , 30 and 44 would enable such a payment mechanism to be employed.

10. Review

Should a review of any decision in relation to a determination in respect of a bonus payment arise it will be dealt with under the procedures contained in the legislation applicable to the relevant agency. That is, pursuant to the Social Security Act 1991 , the Veterans’ Entitlements Act 1986 or the Taxation Administration Act 1953

11. Part 5 - Bonus payments not income

11.1 Bonus payments not income under the Social Security Act 1991 or the Veterans Entitlements Act 1986

Pursuant to clause 55 a bonus payment under Part 2 , 3 or 4 is taken not to be income for the purposes of the Social Security Act 1991 or the Veterans’ Entitlements Act 1986 .

11.2 Bonus payments exempt income under the Income Tax Assessment Act 1997

The A New Tax System (Income Tax Laws Amendment) Bill 1998 proposes amendments to the Income Tax Assessment Act 1997 to ensure that bonus payments made to an individual under the proposed A New Tax System (Bonuses for Australians) Act 1998 will be exempt from income tax. The bonus payments will also be treated as ‘excluded exempt income’ for the purposes of the carry forward loss provisions.

Concluding Comments

1. Dissaving

There are basically two categories of persons who d issave(32). Those persons for whom dissaving is not a permanent occurrence and those who are at a stage in their life-cycle where they are dissaving. This latter category would principally be senior Australians.

The Bill provides for a savings bonus to help maintain the value of savings and retirement income of certain of those senior Australians.

The issue is whether the data provided by the government is sufficiently transparent to enable analysis of the adequacy of the bonus payment to compensate the issue of dissaving upon the introduction of the GST. The question of adequacy of compensation may be considered in terms of monetary value and scope of application.

2. Adequacy of adjustments to ‘ordinary income’ for Family and Community Services and Veterans’ Affairs customers to ensure consistency of entitlement to bonus payments with ATO clients

Due to the different methods of calculating the income upon which enti tlement to bonus payments is based, one may expect considerable attention will be paid in coming weeks to the examination of the differences in outcomes between the application of the relevant income provisions in Parts 2 , 3 and 4 .

It is beyond the scope of this publication to critically examine and compare the outcomes of the income provisions but it is appropriate to mention the potential for anomalies to occur.(33)

It appears that the government has sought to adopt the tri-agency approach in an effort to allow individuals to contact the particular agency they normally deal with. One possible unfortunate consequence of such an approach may be unavoidable differences in the calculation of income by different agencies, that is,  like cases may not be treated alike.

3. Qualification requirements for self-funded retirees supplementary bonus component will affect people receiving part-payment pensions

A person is qualified for the self-funded retirees supplementary bonus component if, among other things, he or s he has not received certain disqualifying pensions or benefits(34) during the period 1 April 2000 to 1 July 2000.

A person who receives a part pension or benefit is therefore, ineligible for the self-funded retirees supplementary bonus component of the bonus payment.

This may have the effect of precluding persons who receive small amounts of pension or benefit payments from receiving the additional bonus of up to $2,000.

Presumably consideration has been given to this possibility and to the fact that some people may give consideration to terminating receipt of benefits during the disqualifying period (1April 2000 to 1 July 2000) in order to satisfy eligibility criteria for the self-funded retirees bonus component of the bonus payment.

Please direct detailed questions to Peter Yeend and Dale Daniels, Social Policy Group, Information and Research Services

Endnotes

 

1. The A New Tax System (Goods and Services Tax) Act 1998 ; the A New Tax System (Goods and Services Tax Administration) Act 1998 ; the A New Tax System (Goods and Services Tax Imposition - Excise) Act 1998 ; the A New Tax System (Goods and Services Tax Imposition - Customs) Act 1998 ;and the A New Tax System (Goods and Services Tax - General) Act 1998.

2. Costello (Higgins-Treasurer), A New Tax System (Bonuses for Older Australians) Bill 1998 , second reading speech, Hansard , 2 December 1998, p 866

3. Treasurer, Tax Reform - not a new tax - a new tax system ; Tax Reform Plan, 13 August 1998, Commonwealth of Australia

4.  Seven GST Bills : A New Tax System (Goods and Services Tax) Bill 1998; A New Tax System (Goods and Services Tax Transition) Bill 1998; A New Tax System (Goods and Services Tax Administration) Bill 1998; A New Tax System (Goods and Services Tax Imposition-General) Bill 1998; A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1998; A New Tax System (Goods and Services Tax-Excise) Bill 1998; A New Tax System (End of Sales Tax) Bill 1998; and  
 
Nine Non-GST Bills : A New Tax System (Aged Care Compensation Measures Legislation Amendment) Bill 1998; A New Tax System (Australian Business Number) Bill 1998; A New Tax System (Australian Business Number Consequential Amendments) Bill 1998; A New Tax System (Income Tax Laws Amendment) Bill 1998; A New Tax System (Bonuses for Older Australians) Bill 1998; A New Tax System (Compensation Measures Legislation Amendment) Bill 1998; A New Tax System (Fringe Benefits Reporting) Bill 1998; A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998 and A New Tax System  ( Personal Income Tax Cuts) Bill 1998

5. Pay As You Earn

6. Prescribed Payments System

7. Reportable Payments System

8. Pay As You Go

9. Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition, p 80.

10. Harding A, National Centre for Social and Economic Modelling, University of Canberra, ANU Public Policy Program Public Seminar Series on ‘Rethinking Economic Structuring’ , ANU, 21 September 1998, p 1.

11. Ibid., p 1.

12. The social welfare function provides a criterion for choosing between different economically efficient states, Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition, p 380.

13. Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition, pp 333 and 349.

14. Harding A, National Centre for Social and Economic Modelling, University of Canberra, ANU Public Policy Program Public Seminar Series on ‘Rethinking Economic Structuring’ , ANU, 21 September 1998, p 5.

15. Poverty may be defined as the situation facing those in society whose material needs are least satisfied. Poverty exists not merely because incomes are low, but also because the needs of certain low-income households are high. Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition, p 319.

16. Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition, p 379.

17. Ibid., p 320.

18. Hargreaves C, Economic Modelling Bureau of Australia, ForMAT: Forum on Modelling Australian Taxation , http://www.anu.edu.au/emba/ForMAT

19. Camahan Dr M, Commonwealth Treasury, Does Demand Create Poor Quality Supply: A Critique of alternative distributional analyses , 1998, Commonwealth of Australia, p 10.

20. ‘MONASH, a descendant of ORANI, has been built at Monash University by the Centre of Policy Studies (CoPS) and the IMPACT project. In building MONASH, the objective of the CoPS/IMPACT team was to provide an enhanced replacement of ORANI for policy analysis and forecasting. Like its predecessor, the primary focus of MONASH is on the microeconomy.’ Malakellis M and Dixon P, The Economic Implications of an Improvement in Labour Productivity: Comparative dynamic results from the MONASH Model , pp 159-191.  
 
See also A Comparison of the Economy-Wide Models of Australia , EPAC Commission Paper No. 2, edited by Colin Hargreaves, Australian Government Publishing Service, October 1994.

21. Melbourne Institute of Applied Economic and Social Research, University of Melbourne, the Brotherhood of St Laurence and the Committee for Economic Development of Australia, Understanding Behavioural Responses to Tax and Transfer Changes: A Survey of Low Income Households , Melbourne Institute Working Paper Series, Working Paper No 15/98

22. Camahan Dr M, Commonwealth Treasury, Does Demand Create Poor Quality Supply: A Critique of alternative distributional analyses , 1998, Commonwealth of Australia, p 10.

23. Georgiou, MP, Matters of Public Importance, Goods and Services Tax, Families and Pensioners , House Hansard, 3 December 1998, p 1054.

24. Crean S, MP, HES Data Confirms Labour’s fears over the GST’s Unfairness , Media Release, The Hon Simon Crean MP, 11 November 1998

25. Select Committee on a New Tax System; Community Affairs References Committee; Employment, Workplace Relations, Small Business and Education References Committee; and Environment, Communications, Information Technology and the Arts References Committee

26. The other three Bills are dealt with in separate Bills Digests

27. ATO refers, of course, to the Australian Taxation Office, which is confirmed, not by the definition of ‘ATO’, but by way of reference to the ‘Commissioner’ as the ‘Commissioner of Taxation’ in the definitions in Part 4 , clause 33 .

28. Presumably the amount of ordinary income attributable to savings and investments for a qualifying year is worked out in accordance with the provisions in the Social Security Act 1991 . There is no actual definition of savings and investment income in the Act. It refers instead to a broad definition of ‘ordinary income’ in section 8(1) which states that ordinary income means income that is not maintenance income or an exempt lump sum.  
 
Income means consideration, personal earnings, moneys or profits, earned, derived or received by a person together with periodical payments or benefits by way of gift or allowance. 
 
There are some amounts that are excluded from the meaning of income, which are set out in subsections 8(4), (5), (7A) and (8). For example, subsection 8(7A) states that a return on a person’s investment in a superannuation fund, an approved deposit fund, a deferred annuity or an ATO small superannuation account is not income if the person has not reached pension age or started to receive a pension or annuity out of the fund. 
 
Section 9 sets out the financial assets and income streams definitions. It includes definitions of financial asset, financial investment and income stream.

29. ‘Disqualifying payment’ pursuant to definitions clauses 4 and 33 means a service pension, a carer service pension or an income support supplement as defined in the Veterans’ Entitlements Act 1986 together with a social security pension (other than a bereavement allowance) and a social security benefit as defined in section 23(1) of the Social Security Act 1991 .  
 
Social security pension means an age pension, a disability support pension, a wife pension, a carer payment, a pension PP(single), a widow B pension, disability wage supplement, a mature age partner allowance or a special needs pension. 
 
Social security benefit means a widow allowance, youth allowance, austudy payment, newstart allowance, sickness allowance, special benefit, partner allowance, a mature age allowance, benefit PP (partnered) and parenting allowance (other than non-benefit allowance).

30. Refer endnote 28

31. Refer endnote 29

32. Dissaving means consumption in excess of income. Dissaving is financed either by the running down of assets or by borrowing and results in a reduction of net worth. Bannock, Baxter & Davis, The Penguin Dictionary of Economics , Penguin Reference, Fourth Edition,  
p 117.

33. A couple of examples that underscore the different definitions of income which will apply to Family & Community Services and Veterans’ Affairs customers and ATO clients are: 
 
The definition of ordinary income in the Social Security Act 1991 includes an amount a person is taken to receive on financial assets by virtue of the operation of Division 1B. The amount does not represent the actual interest received on the investment but is rather a deemed return on investments of 5 per cent. This is a major difference to the definition of taxable income within the meaning of the Income Tax Assessment Act 1997 which includes an amount of interest received by or accrued to a resident. 
 
Taxable income is generally defined as assessable income minus all general and specific deductions. Such deductions will include all normal business expenses including depreciation on plant and annual deductions under the capital works provisions in relation to a rent-producing property. The Social Security Act 1991 does not provide for deductions in relation to expenditure incurred on building and structural improvement to a rental property.  

34. Refer endnote 29

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