Save Search

Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
A New Tax System (Personal Income Tax Cuts) Bill 1998



Download WordDownload Word

Bills Digest No. 73   1998-99

 

A New Tax System (Personal Income Tax Cuts) 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 official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Contents

 

Passage History

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

Date Introduced:  2 December 1998

House:  House of Representatives

Portfolio:  Treasury

Commencement:  After the commencement of specified goods and services tax legislation(1) p roposed to commence 1 July 2000

Purpose

The purpose of the A New Tax System (Personal Income Tax Cuts) Bill 1998 (the Bill) is to cut income tax rates and to increase the tax-free threshold for certain taxpayers with dependent children under the Family Tax Assistance initiative.

Background - Tax Reform Package

On 13 August 1998 the Federal Government released its proposals for reform of the Australian tax system(2) of which, a Goods and Services Tax (GST) was the centrepiece.

On 2 December 1998 the Trea surer introduced a raft of 16 bills(3) 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 f inancial 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 paymen t and reporting systems of company tax, provisional tax, PAYE,(4) PPS(5) and RPS(6) by one quarterly tax payment system, PAYG(7)

• introduce a new universal business number system

• move toward an ‘entity’ taxation system which is directed toward the elimi nation 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 leading 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 propose d by the government present sweeping and fundamental changes to the tax 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.(8)

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 remains a legitimate concern for those most vulnerable in the community.

2. Economic restructuring

2.1 Equity

The two basic principles of tax equity are horizontal equity and vertical equity.(9)

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.(10)

These principles underpin much of the discussion relating to the interaction of the taxation system and social welfare function.(11)

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 m akes.

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 t ax, which takes a decreasing proportion of income as income rises.(12)

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’.(13)

2.3 Social security

The community demands a social welfare safety net and indeed a social secur ity system with a substantial degree of integrity, fairness and inherent stability.

It is incumbent upon governments to balance the competing interests of generating revenue to support the social welfare system in such a manner that creates certainty of delivery of functions, while at the same time not overindulging in the execution of tax equity principles to the detriment of providing incentives to work and generate self wealth.

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.(14) 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.(15)

The 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 people 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.’(16)

It appears that there is an increasing proport ion 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 both the rates at which income support and income supplement payments are withdrawn and lessen the tax liability as persons receive or 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.

The Bill seeks to provide for significant personal income tax cuts, which should help to address the problem of the poverty trap.

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 theory 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.’(17)

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

3.2 Government modelling

The estimation method used in the tax reform package is the common price impact across households 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.(18)

3.3 Controversy surrounding accuracy of projections of distributional impacts

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

The following represents 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 any 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 model which allegedly are in conflict with the estimates of impacts relied upon by the government in formulating its compensation package.

• A non-government group(19) 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 take 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 the 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.(20)

An example of the complexity of economic modelling and the subsequent variances in interpretation may be found in the discussion relating to the ana lysis 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 estimates in relation to that analysis were released in November 1998 with the following resultant and divergent commentary.

• The gover nment has stated that the population CPI approach remains the best estimate of distributional impacts, indicating a 1.9 per cent 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.’(21)

• 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.’(22)

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.(23) The Select Committee will examine the economic 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 (Compensation 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.(24)

Background - Taxation

1. Income Tax Assessment Acts 1936 and 1997

For many years the income tax law has been widely criticised for being too difficult to read and understand. The complexity of the law has increased the costs of taxpayer compliance and government administration.

From 1 July 1994 the Tax Law Improvement Project was established to restructure, renumber and rewrite th e income tax law so that it can be more easily understood. The project has taken longer than expected and consequently the Tax Law Improvement Project team has chosen to adopt a ‘progressive replacement’ approach to the rewrite. This means that when an instalment of rewritten law comes into effect, the rest of the existing law (minus those areas that have been rewritten) continues to operate along side the new law.

The existing law is the Income Tax Assessment Act 1936 (ITAA 1936). The new law is the Income Tax Assessment Act 1997 (ITAA 1997).

The ITAA 1997 is organised on a descending hierarchy numbering system of Chapter-Part-Division-Section. Section numbers are cited with two components separated by a dash as in ‘section 43-20’. The first component is the number of the division and the second identifies the section in that division.

The ITAA 1997 contains a provision, section 1-3, which is designed to preserve the relevance of existing case law and ATO rulings.

The coexistence of ITAA 1936 and ITAA 1997 often means that amendments to the law necessarily involve amendments to both Acts. That is the case with the Bill.

2. Constitutional framework requires separate tax imposition Acts

The Commonwealth Parliament derives its powers from the Commonwealth of Australia Constitution Act . Its power with respect to taxation is found in section 51, Placitum (ii). Section 55 of the Constitution , also affects the Commonwealth’s power to tax and in particular it states that ‘Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other material shall be of no effect.’

Accordingly it is because of our constitutional framework that the law with regard to tax is contained in separate Acts. The Income Tax Assessment Act 1936 (ITAA36) and the Income Tax Assessment Act 1997 (ITAA97) deal with the subject of tax and its assessment and collection while the Rating Acts(25) impose the actual tax.

Main Provisions

Schedule 1 - Amendment to the Income Tax Rates Act 1986

1. Introduction

Schedule 1 amends the Income Tax Rates Act 1986 which prescribes, in Part II, the rates of income tax payable upon incomes other than incomes of companies, prescribed unit trusts, superannuation funds and certain other trusts.

2. Cut in tax-free threshold and personal income tax rates

The two main criteria for liability to Australian tax are residence a nd source of income. The general scheme of the tax legislation is such that, if a taxpayer is a resident, the taxpayer’s assessable income includes all ordinary income and all statutory income from all sources (whether in or out of Australia). If a taxpayer is a non-resident, the taxpayer’s assessable income generally includes only ordinary and statutory income from all sources in Australia. This general rule is, of course, subject to various exemptions and exceptions.

The rates of tax on the taxable income of resident and non-resident taxpayers are different and the tax-free threshold is not available to non-resident taxpayers.

2.1 Resident taxpayers

Item 14 repeals the table in clause 1 of Part 1 of Schedule 7 and inserts a new table in substitution headed ‘Tax rates for resident taxpayer’. This is set out below.

Tax rates for resident taxpayer

Column 1

For the part of the ordinary taxable income of the taxpayer that:

Column 2

The rate is:

exceeds $6,000 but does not exceed $20,000

17%

exceeds $20,000 b ut does not exceed $50,000

30%

exceeds $50,000 but does not exceed $75,000

40%

exceeds $75,000

47%

The new Table in clause 1 of Part 1 of Schedule 7 increases the tax-free threshold from $5,400 to $6,000. This means that the first $6,000 of taxable income(26) derived by a resident individual will be tax free.

There is also a significant increase in the level of income at which the top marginal rate of 47 per cent takes effect. When combined with further adjustments to the level of income at which the sec ond highest top marginal rate takes effect this should prevent average earners from drifting into the top marginal rates of tax. The table below sets out a comparison of the current and proposed rates of tax.

 

Current scale

New scale

Taxable Income $

Tax rate (%)

Taxable Income $

Tax Rate (%)

0-5,400

0

0-6,000

0

5,401-20,700

20

6,001-20,000

17

20,701-38,000

34

20,001-50,000

30

38,001-50,000

43

50,001-75,000

40

50,001+

47

75,001+

47

2.2 Non-resident taxpayers

Item 15 repeals the table in clause 1 of Part II of Schedule 7 and inserts a new table in substitution, headed ‘Tax rates for non-resident taxpayer’. This is set out below.

Tax rates for non-resident taxpayer

Column 1

For the part of the ordinary taxable income of the  
taxpayer that:

Column 2

The rate is:

does not exceed $20,000

29%

exceeds $20,000 but does not exceed $50,000

30%

exceeds $50,000 but does not exceed $75,000

40%

exceeds $75,000

47%

 

The tax-free threshold is not available to non-residents. The lowest marginal tax rate that c urrently applies and will continue to apply under the proposed changes is 29 per cent, as opposed to the corresponding rate of 17 per cent for residents.

The table below sets out a comparison of the current and proposed rates of tax for non-residents.

Curr ent scale

New scale

Taxable Income $

Tax rate (%)

Taxable Income $

Tax Rate (%)

0-20,700

29

0-20,000

29

20,701-38,000

34

20,001-50,000

30

38,001-50,000

43

50,001-75,000

40

50,001+

47

75,001+

47

3. Increase in Family Tax Assistance

The object of Divis ion 5 is set out in section 20A of the Income Tax Rates Act 1986 , which states that the Division provides for family tax assistance by way of an increased tax-free threshold for certain taxpayers with dependent children.

Sections 20C and 20D provide for the increase in tax-free threshold provided that the taxpayer’s taxable income is less than the relevant income ceiling for the year of income. As mentioned below in paragraph 4, Item 16 of the Bill increases the standard tax-free threshold from $5,400 to $6,000 for the purposes of sections 20C and 20D.

3.1 Doubling the family assistance increase in the tax-free threshold for Part A and Part B Family Tax Assistance

Essentially the standard tax-free threshold is increased where the taxpayer is entitled to Family Tax Assistance.

There are two types of Famil y Tax Assistance. The first, known as Part A benefit, applies where there is at least one dependent child and the family income is less than $70,000 (increasing by $3,000 for each dependent child after the first). Where this applies the standard tax-free threshold for one member of a couple or for a sole parent is currently increased by $1,000 for each dependent child.

The second type of assistance, known as Part B benefit, provides an additional benefit directed at families with one primary breadwinner and at least one dependent child under 5 years. Where it applies, the standard tax-free threshold is currently further increased by an amount of $2,500.

The amounts of  $1,000 and $2,500 are to be doubled to $2,000 and $5,000 respectively under proposed amen dments to subsections 20C(2) and 20D(2), inserted by Items 5 and 10 .

The amendments do not take effect, of course, until the commencement of the legislation, which is proposed to be 1 July 2000. Until then subsections 20C(2) and 20D(2) will continue to have effect to provide the family tax assistance by way of increasing the tax-free threshold for eligible taxpayers at the current rates.

Items 2 and 7 amend paragraphs 20C(1)(b) and 20D(1), which refer to the 1996/97 income year, to ensure that the increase in the tax-free threshold for that income year is not affected by the proposed amendments.

3.2 Amendments to reflect the lower income tax rates that will be introduced from 1 July 2000

Item 11 repeals the table in subsection 20E(2) and inserts a new table in substitution headed ‘Tax rates for resident taxpayer’. The amended table contains lower rates of tax to reflect the lower income tax rates that will be introduced from 1 July 2000. Please refer to paragraph 2.1 above.

If the adjusted tax-free threshold of a taxpayer to whom, apart from subsection 20E(2), section 20C or 20D would apply, exceeds $20,000, sections 20C and 20D do not apply but section 20E(2) applies to replace the new table in clause 1 of Part 1 of Schedule 7 by the new table appearing below.

This is essentially a special rule that applies in those rare cases where the effect of the normal rules would be to push the taxpayer’s tax-free threshold beyond $20,000, ie the new point at which the proposed 17% marginal tax rate increases to a proposed 30%. In such a case, the taxpayer is not taxable on the first $20,000 of taxable income, and is taxed at 13% (instead of 30%) on the balance of the taxable income up to the amount of the tax-free threshold which would have applied if the normal rules applied. Thereafter standard rates apply.

 

Tax rates for resident taxpayer

Column 1

For the part of the ordinary taxable income of the  
taxpayer that:

Column 2

The rate is:

exceeds $20,000 but does not exceed the adjusted tax-free threshold

13%

excee ds the adjusted tax-free threshold but does not exceed $50,000

30%

exceeds $50,000 but does not exceed $75,000

40%

exceeds $75,000

47%

 

 

The table below sets out a comparison of the current and proposed rates of tax. ‘ATFT’ means adjusted tax-free thres hold.

Current scale

New scale

Taxable Income $

Tax rate (%)

Taxable Income $

Tax Rate (%)

20,700-ATFT

14

20,000-ATFT

13

ATFT-38,000

34

ATFT-50,000

30

38,000-50,000

43

50,000-75,000

40

50,000+

47

75,000+

47

4. Consequential amendments

Item 16 amends a range of provisions which refer to definitions of tax-free threshold, adjusted tax-free threshold, tax-free threshold increase, section 20C tax-free threshold increase and section 20D tax-free threshold increase by omitting ‘$5,400’ wherever occurring and substituting ‘$6,000’.

Many of these amendments relate to definitions contained in Division 5-Family tax assistance: increased tax-free threshold for certain taxpayers with dependent children.

Item 17 also amends the provisions relating to family tax assistance. Wherever occurring in subsection 20E(1) the figure ‘$20,700’ is omitted and the figure ‘$20,000’ is substituted in its place. This primarily affects the replacement rates that take effect where the adjusted tax-free threshold exceeds the specified amount. The specified amount has been lowered from $20,700 to $20,000 at which time the part of the ordinary taxable income that exceeds $20,000 but does not exceed the adjusted tax-free threshold will be subject to tax at the rate of 13 per cent. Please refer to paragraph 3.2 above for additional information relating to the amendments proposed to subsection 20E(2).

Schedule 2 - Consequential amendments of Other Acts

1. Income Tax Assessment Act 1936

Item 1 of Schedule 2 amends the definition of ‘tax free threshold increase’ in subsections 23AF(17E) and 23AG(5B) by omitting $5,400 wherever occurring and substituting $6,000.

These subsections refer to exemption of eligible income in relation to earnings from a foreign source and approved overseas projects. Income that is exempt under sections 23AF and 23AG is taken into account in calculating Australian tax payable on other income derived by the taxpayer. Accordingly the definitions of ‘tax free threshold increase’ which appear in the calculation process are amended to ensure consistency in relation to the quantum of the tax-free threshold.

Similarly, Item 1 also amends paragraph 221YDA(1)(g) and subparagraph 221YDA(2)(a)(iv) by omitting $5,400 wherever occurring and substituting $6,000. These paragraphs refer to variation of provisional tax by self-assessment and will apply to the 2000-2001 year of income and later years.(27)

As previously noted, the tax reform plan included measures to replace the existing taxation payment systems, including provisional tax, by one quarterly tax payment system, PAYG, by 1 July 2000. Perhaps some uncertainty as to the actual timing of the introduction of the proposed changes to replace provisional tax has caused the government to make amendments to provisions that will be repealed.

2. Income Tax Assessment Act 1997

Section 388-55 concerns the entitlement to the Landcare and Water Facilit y Offset. Essentially if a taxpayer can deduct capital expenditure incurred on landcare operations or on facilities to conserve or convey water, they may be able, depending on the amount of their taxable income, to choose a tax offset, instead of a deduction, for up to $5,000 of the expenditure incurred on each of those things. The offset is available to taxpayers whose taxable income for the income year currently would have been $20,700 or less. Item 2 amends paragraph 388-55(2)(a) to delete reference to the amount of $20,700 and substitute the amount of $20,000. This is consistent with proposed amendments relating to in the Income Tax Rates Act 1986 as outlined in this Bill, which amend the level of income at which the new lowest marginal rate of tax cuts out.

Section 388-60 considers the amount of the tax offset for an income year and is currently calculated on the basis of 34 per cent of expenditure incurred. The threshold and offset rate are based on the current income tax rates scale and therefore have been amended to maintain consistency with the proposed new rates scale. Accordingly, Item 3 amends paragraphs 388-60(1)(a) and (b) by substituting ‘30%’ for ‘34%’.

Schedule 3 - Application - Timing

1. Application of amendments to the 2000-2001 income year and later years

The amendments made by the Bill will generally apply to assessments for the 2000-2001 income year and later years.

The exceptions are some technical amendments to Division 5 (concerning family tax assistance) to omit the word ‘taxpayers’ a nd substitute the word ‘taxpayer’s’.

In addition, Item 1(2) provides that the amendments to section 221YDA apply for the purposes of working out amounts of provisional tax (including instalments) payable for the 2000-2001 income year and later years.

Concluding Comments

1. Naming of GST bills

From a practical perspective, the titles of all GST Bills appear to be unnecessarily lengthy and indeed cumbersome. The words ‘A New Tax System’ could be deleted from each title without affecting the relevance of the title to the particular piece of legislation. Presumably the title has been used to make it easier for the Parliament to identify those Bills which form part of the GST package. The use of lengthy titles may, however, cause some problems for practitioners who will be referring to the legislation in later years.

2. Advantage to middle Australia

The proposed personal income tax cuts appear to be openly more beneficial to middle Australia(28) than the low income earners. It would seem that middle Australia is the group that has been most affected by the bracket creep(29) in recent years and therefore to combat and reverse this trend the median area of the income tax rates scale required more significant attention.

It would be inaccurate to suggest that low income earners do not derive benefit from the tax cuts and equally misleading to ignore other tax reform package proposal measures that more directly affect low income earners. Having said that, however, the intro duction of the GST necessarily raises questions pertaining to the distributional impacts of the tax. The accuracy of the estimates of the impact of the totality of changes will affect low income earners to a more significant extent than middle to high income earners. The key issue for the compensation package appears, therefore, to be the accuracy of the projected distributional impacts of the entire tax reform package. For additional information in relation to other compensation measures please refer to the Bills Digests for the Bills mentioned on pages 7 and 8 of this Digest.

Endnotes

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

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

3.  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.

4. Pay As You Earn.

5. Prescribed Payments System.

6. Reportable Payments System.

7. Pay As You Go.

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

9. 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.

10. Ibid., p 1.

11. 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.

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

13. 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.

14. 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.

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

16. Ibid., p 320.

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

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

19. 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.

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

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

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

23. 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.

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

25. CCH 1998 Australian Master Tax Guide, paragraph 1-150: 
 
The
Rating Acts impose the actual tax on taxable income as determined under ITAA 1936 or ITAA 1997. The rates are declared and imposed under a number of different Acts. The most important Acts are: 
 
- The Income Tax Rates Act 1986 and the Income Tax Act 1986 which together declare and impose income tax on all categories of taxpayers - individuals, trustees, companies, superannuation funds, ADF’s and PSTs. 
- The Medicare Levy Act 1986 which imposes the Medicare levy on individuals and sets out the amount of levy payable. 
 
In addition, other Commonwealth Acts impose tax but in particularly specialised circumstances. These include the Income Tax (Bearer Debentures) Act 1971 , the Income Tax (Withholding Recoupment) Act 1971 , the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 , the Income Tax (Securities and Agreements)(Withholding Tax Recoupment) Act 1986 , the Income Tax (Franking Deficit) Act 1987 , the Income Tax (Fund Contributions) Act 1989 , the Taxation (Interest on Non-resident Trust Distributions) Act 1990 , the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Act 1991 , the Superannuation Contributions Tax Imposition Act 1997 and the Termination Payments Tax Imposition Act 1997.

26. Taxable income equals assessable income minus deductions. There is no definition of ‘income’ in the ITAA 1936 or ITAA 1997 and therefor e assessable income consists of income according to ordinary concepts and other amounts which are specifically included under provisions of the legislation, including net capital gains. Deductions allowed are those characterised as general or specific, 1998 Australian Master Tax Guide , CCH, p 15.

27. CCH 1998 Australian Master Tax Guide, p 1245: 
 
Provisional tax is an anticipatory tax based on the assumption that the taxable income of the current year will not be less than that of the preceding year (as inc
reased by the provisional tax uplift factor).  
 
Provision is made for taxpayers who anticipate that their taxable income for the current year will be more or less than that of the preceding year to apply for the variation and recalculation of their provisional tax (section 221YDA). The recalculation is made by applying current year rates and rebates to the estimated taxable income.

28. The definition of ‘middle Australia’ is controversial. For a discussion on this please refer to an article by Gittins R, We’re piggies in the middle , The Sydney Morning Herald, 26 August 1998, p 13.

29. Bracket creep is the effect of inflation increasing an individual’s income which causes the individual to move into a higher tax bracket.

 

image

Contact Officer

Lesley Lang

18 Ja nuary 1999

Bills Digest Service

Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament.  While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document. IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.