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A New Tax System (Compensation Measures Legislation Amendment) Bill 1998



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Bills Digest No. 72   1998?99

 

A New Tax System (Compensation Measures Legislation Amendment) 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 (Compensation Measures Legislation Amendment) Bill 1998

Date Introduced:  2 December 1998

House:  House of Representatives

Portfolio:  Family and Community Services

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

Purpose

The purpose of the A New Tax System (Compensation Measures Legislation Amendment) Bill 1998 (the Bill) is to:

? increase the maximum rate of income support payments provided to socia l security and veterans? pensioners and other social security recipients by 4 per cent (with claw-back provisions relating to 2.5 per cent, which is a pre-payment of future CPI increases)

? increase the income and assets test free areas, and

? reduce the taper rate that applies to income and asset tests.

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 Treasurer 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

? chan ge 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 e xisting taxation payment 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 di rected 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 Ta x) 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 t hat the reforms proposed 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 remain 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 verti cal 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 to be 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 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.

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 im pact 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 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 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 consi derable 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 Labour Party (ALP) appears to have variously supported the approach of the HES model and in more recent times the Monash model(19) which allegedly are in conflict with the estimates of impacts relied upon by the government in formulating its compensation package.

? A non-government group(20) 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.(21)

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 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.?(22)

? 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.?(23)

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.(24) The Select Committee will examine the economic theories, assumptions, calculations, projections, estimates and modelling which underpinned the Government?s proposals for taxation reform.

Please refer to paragraphs 1.1 and 1.2 in Concluding Comments for further discussion of economic modelling and distributional issues.

4. Compensation package Bills

The Bills referred to as the Compensation Package are:

1. A New Tax Syste m (Compensation Measures Legislation Amendment) Bill 1998

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

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

4. A New Tax System (Bonuses for Older Australia ns) Bill 1998 (25)

Main Provisions

The A New Tax System (Compensation Measures Legislation Amendment) Bill 1998 amends three Acts, the Social Security Act 1991 , the Veterans? Entitlements Act 1986 and the N ational Health Act 1953 .

Schedule 1 ? Social Security Act 1991

1. Summary

1.1 Increases to rates and free areas

The Bill proposes, on 1 July 2000, to increase the maximum rate of income support payments in general by an initial 4 per cent (reducing to 1.5 per cent) and to increase the income and assets te st free areas that apply to income support payments by 2.5 per cent.

The Bill also proposes to make changes to the family tax initiative by doubling a person?s provisional fortnightly family tax payment rate. In addition the family allowance income test free area is increased.

1.2 Taper rates

The family allowance income test taper is proposed to be reduced from 50 per cent to 30 per cent.

The pension income test taper is proposed to be reduced from 50 per cent to 40 per cent.

2. Part 1 ? Income support and income supplement payments

2.1 Increase rate by 4 per cent

There are two types of payments made under the Social Security Act 1991 . Those that are specified flat amounts (26)and those that are periodically indexed or adjusted.

2.1.1 Rate increase for flat amounts

The Bill seeks to amend directly those payments that are flat amounts by omitting specific references to dollar amounts and substituting new dollar amounts in their place. (The payments will, thereby, increase by 4 per cent).

The payments adjusted in this manner are:

1. approved payment of work supplement  
 
Items 1 and 2 amend sections 556A and 644AAA

2. employment entry payment  
 
Items 3 to 12 inclusive amend sections 662, 664AAB, 664AB, 664B, 664D, 664F, 664FB, 664H, 664HB and 664J

3. education entry payment  
 
Items 13 to 24 inclusive amend sections 665B, 665F, 665J, 665N, 665V, 665Z, 665ZD, 665ZFB, 665ZH, 665ZM, 665ZR and 665ZV

maternity allowance and maternity immunisation allowance  
 
4. Items 25 to 28 inclusive amend paragraphs 900F(2)(a), 900F(2)(b), 900GA(1)(a) and 900GA(1)(b)

5. pensioner education supplement  
 
Item 30 amends paragraph 1061F(1)(b) 

6. certain armed services widow and widower pensions, and 
 
Items 31 to 33 inclusive amend subparagraph 1064(5)(c)(ii), paragraph 1064(5)(d) and subsection 1064(6) in Pension Rate Calculator A for age, disability, wife pensions and carer payment and of disability wage supplement (people who are not blind) 
 
Items 44 to 46 inclusive amend subparagraph 1065(4)(c)(ii), paragraph 1065(4)(d) and subsection 1065(5) in Pension Rate Calculator B for age and disability support pension and of disability wage supplement (blind people), and 
 
Items 96 and 97 amend paragraphs 1068(3)(d) and 1068(3)(e) in Benefit Rate Calculator B for widow allowance, newstart allowance (18 or over), sickness allowance (18 or over), partner allowance and mature age allowance under Part 2.12B 

7. remote area allowance  
 
Items 38 to 43 inclusive amend point 1064-H2, Table H?remote area allowance which is contained in Pension Rate Calculator A for age, disability support, wife pensions and carer payment and of disability wage supplement (people who are not blind) 
 
Items 47 to 52 inclusive amend point 1065-E2, Table E-remote area allowance which is contained in Pension Rate Calculator B for age and disability support pension and of disability wage supplement (blind people)  
 
Items 55 to 60 inclusive amend point 1066-H2 , Table H-remote area allowance which is contained in Pension Rate Calculator C for bereavement allowance and widow B pension  
 
Items 65 to 70 inclusive amend point 1066A-I2, Table I-remote area allowance which is contained in Pension Rate Calculator D for disability support pension (people under 21 who are not blind) 
 
Items 71 to 76 inclusive amend point 1066B-F2 , Table F-remote area allowance which is contained in Pension Rate Calculator E for disability support pension and of disability wage supplement (people under 21 who are blind) 
 
Items 86 to 88 inclusive amend point 1067G-K2 , Table K-remote area allowance which is contained in Youth Allowance Rate Calculator 
 
Items 93 to 95 inclusive amend point 1067L-F2, Table F-remote area allowance which is contained in Austudy Payment Rate Calculator 
 
Items 100 to 102 inclusive amend point 1068-J3 , Table J-remote area allowance which is contained in Benefit Rate Calculator B for widow allowance, newstart allowance (18 or over), sickness allowance (18 or over), partner allowance and mature age allowance under Part 2.12B 
 
Items 106 to 109 inclusive amend point 1068A-F2 , Table F-remote area allowance which is contained in Parenting Payment (Single) Rate Calculator, and 
 
Items 113 to 115 inclusive amend point 1068B-G2 , Table G-remote area allowance which is contained in Parenting Payment (Partnered) Rate Calculator

2.1.2 Rate increase for periodically indexed or adjusted payments

Item 122 inserts new Division 6 at the end of Part 3.16, which provides for a one-off adjustment of 4 per cent on 1 July 2000 to certain indexed and adjusted payments under the Social Security Act 1991 .

New subsection 1206GA(1) states that the increase specified in new subsection 1206GA(2) applies to an amount, the ?base amount?, that is listed in new Table A . The ?base amount? for the listed payments may be adjusted in accordance with indexation principles between now and the commencement of the new provisions on 1 July 2000. The 4 per cent increase will apply to the base amount as increased by indexation.

The following payments are listed in new Table A and will be the subject of the 4 per cent increase:

1. the maximum basic rate of all pensions, namely age pension, disability support pension, wife pension, carer payment, mature age and mature age partner allowances, bereavement allowance and widow B pension

2. the maximum basic rate of benefits, namely youth allowance, austudy payment, newstart allowance, sickness allowance, widow allowance and partner allowance

3. child disability allowance

4. do uble orphan pension

5. mobility allowance

6. telephone allowance

7. pharmaceutical allowance

8. rent assistance

9. youth disability supplement, and

10. parenting payment (single) and parenting payment (partnered).

Pursuant to new subsection 1206GA(2) the increased amount will be referred to as the ?provisional replacement amount? and this amount will be rounded off using the rounding base set out in new Table A and will become the ?replacement amount?.

2.1.3 Adjustment of CPI indexation for amounts subject to 4 per cent increase

If an amount has been subject to the 4 per cent increase, new section 1206GB applies to modify the way the amount is indexed(27) under Division 2 of Part 3.16 for a period after 1 July 2000.

The 4 per cent increase is made up of two components. The first is a 2.5 per cent advance on future CPI increases that result from the impact of the GST and the second, constitutes a 1.5 per cent real increase in pensions.

New section 1206GB operates to claw-back 2.5 per cent of the 4 per cent increase paid on 1 July 2000 by withholding payment of usual indexation increases after 1 July 2000 until the amount of the 2.5 per cent increase has been recovered.

To say that the 2.5 per cent increase is therefore in compensation for the impacts of the tax reform package could be misleading. It is merely a pre-payment of an indexation amount to take into account the immediate effects of a GST on prices.

It should be noted that certain indexed payments(28) may be ?topped up? in line with increases in Male Total Average Weekly Earnings (MTAWE) where 25 per cent of the annualised MTAWE exceeds the indexed amount.(29) If the trend for MTAWE to exceed the CPI continues(30) it will affect the rate of the claw-back for affected pensions.

The net effect, therefore, of increases to income support payments that are periodically indexed or adjusted is 1.5 per cent.

The intention is that payments will be maintained 1.5 per cent higher than they are now in relation to cost of living increases because the increased payment will be adjusted six monthly in accordance with CPI. The CPI index will purportedly incorporate increased cost of living expenses as a result of the introduction of, among other things, the measures contained in the tax reform package.

The only potential situation where recipients could be disadvantaged would be where prices increased immediately on 1 July 2000 by an amount greater than 4 per cent. Any such increases would not be picked up by indexation until September 2000.

This package also assumes that the CPI index will be a reliable measure of the impact of tax reform measures on the household groups covered by the indexed income support payments. This is not certain because the current CPI weights are not for groups within the population.

2.2 Increase income and assets test free area by 2.5 per cent

The income and assets tests incorporate free areas, which permit a person to have a specified amount of income or assets before income support payments are reduced. Income in excess of the free area results in a reduction of payment at a set rate (the taper).

For some payments such as age pension, disability support pension, carer payment and parenting payment (single) the level of the free area is indexed in accordance with CPI. For others such as youth allowance, newstart allowance and parenting payment (partnered) the free area is not indexed and is therefore increased on an ad hoc basis as the need for adjustment is identified.

Increasing the free area for income and assets tests most immediately assists those currently on reduced rates of payment having income or assets that exceed the free area.(31)

2.2.1 Increase ordinary income test free area by 2.5 per cent

(a) 2.5 per cent increase in additional free areas for dependent children

The following payments are affected by the 2.5 per cent increase in additional free areas:

? advance pharmaceutical allowance 
 
Item 29 amends paragraph 1061F(1)(b)

? age, disability support, wife pensions and carer payment and disability wage supplement (people who are not blind) 
 
Items 34 to 37 amend point 1064-E4

? bereavement allowance and widow B pension 
 
Items 53 and 54 amend point 1066-E4

? disability support pension (people under 21 who are not blind) 
 
Items 61 to 64 amend point 1066A-F3

? youth allowance, effect of parental income on maximum payment rate 
 
Items 78 to 80 amend paragraphs 1067G-F23(a) (b) and (c) and point 1067G-F24

? parenting payment (single) 
 
Items 103 to 105 amend points 1068A-E14 and 1068A-E18

? senior health card taxable income limit 
 
Item 119 amends point 1071-12

(b) 2.5 per cent increase in ordinary income test free area where the specified amount is not the subject of indexation

The following payments are affected by the 2.5 per cent increase in the ordinary income test free area:

? youth allowance 
 
Items 81 to  85 amend paragraphs 106
7G-H29(a) and (b) and points 1067G-H33, 1067G-J4 and 1067G-J5

? austudy 
 
Items 89 to 92 amend points 1067L-D28, 1067L-D32, 1067L-E3 and 1067L-E4

? widow allowance, newstart allowance (18 or over), sickness allowance (18 or over), partner allowance and mature age allowance under Part 2.12B 
 
Items 98 and 99 amend points 1068-G12 and 1068-G16

? parenting payment (partnered) 
 
Items 110 to 112 amend points 1068B-D27, 1068B-D31 and 1068B-D32

? seniors health card taxable income limit 
 
Items 116 to 118 amend point 1071-12

(c) 2.5 per cent increase in ordinary income test free area where the specified amount is indexed

Item 122 inserts new Division 6 which contains new section 1206GC that provides for a one-off 2.5 per cent increase in income (and assets) test free areas on 1 July 2000.

New section 1206GC states that the increase of 2.5 per cent specified in new subsection 1206GC(2) applies to an amount, the ?base amount?, that is listed in new Table A . The ?base amount? for the listed payments may be adjusted in accordance with indexation principles between now and the commencement of the new provisions on 1 July 2000. The 2.5 per cent increase will apply to the base amount as increased by indexation.

The following payments are listed in Table A and will be the subject of the 2.5 per cent increase in the ordinary income test free area:

1. age, disability support, wife pensions, carer payment and disability wage supplement (people who are not blind)

2. bereavement allowance and widow B pension

3. disability support pe nsion (people under 21 who are not blind)

4. youth allowance, effect of parental income on maximum payment rate

5. parenting payment single

6. family allowance maintenance income

2.2.2 Increase asset test free area by 2.5 per cent

Item 122 inserts new Division 6 which contains new section 1206GC that provides for a one-off 2.5 per cent increase in (income) and assets test free areas on 1 July 2000.

New section 1206GC states that the increase of 2.5 per cent specified in new subsection 1206GC(2) applies to an amount, the ?base amount?, that is listed in new Table B . The ?base amount? for the listed payments may be adjusted in accordance with indexation principles between now and the commencement of the new provisions on 1 July 2000. The 2.5 per cent increase will apply to the base amount as increased by indexation.

The following payments are listed in Table B and will be the subject of the 2.5 per cent increase in the assets test free area:

1. care receiver

2. widow allowance, newstart allowance, sickness all owance and partner allowance

3. parenting payment

4. mature age allowance

5. sickness allowance

6. special benefit

7. age, disability support, wife pensions, carer payment and disability wage supplement (people who are not blind)

8. bereavement allowance and widow B pension

9. disability support pension (people under 21 who are not blind)

10. parenting payment (single) and parenting parent (partnered)

3. Part 2 - Family assistance

3.1 Family tax initiative

Generally those persons who receive family allowan ce (and certain other persons) are entitled to claim a family tax payment if the person has at least one dependent child.

A person?s rate of family tax payment for a financial year is calculated in accordance with the rate calculator in Part 3.8 of the Social Security Act 1991 .

A person?s rate of family tax payment is a fortnightly rate. It consists of the sum of a person?s fortnightly Part A and Part B rates of payment. There is an income test for each of Part A and Part B payments, whereby a person?s rate of family tax payment will be nil if they do not satisfy the test.

The proposed amendments seek to double the provisional Part A and B rates of payment. Item 127 amends point 1070-B1 to increase the amount multiplied by the lowest marginal rate of tax from $1,000 to $2,000. Likewise Item 128 amends point 1070-B2 to increase the amount from $2,500 to $5,000.

3.2 Family allowance income test free area increased

Family allowance is subject to an income test. The income test contains an income free area that specifies the amount of income a person can have before the family allowance payment is reduced.

Items 123 to 125 repeal the current income free area provisions and substitute point 1069-H28 which simply states that a person?s income free area is $28,200.

Previously the income free area was calculated by adding the basic free amount ($21,660) and the additional amount for each dependent child ($624 for each child after the first). References to additional amounts have been deleted in favour of a single income free area.

3.3 Reduction in taper for family allowance income test from 50 per cent to 30 per cent

The Bill proposes to reduce the family allowance income test taper from 50 per cent to 30 per cent.(32) Accordingly Item 126 amends point 1069-H32 to state that the reduction for income will be ?Fortnightly income excess  x  0.3?.

Basically the family allowance income test incorporates a free area which, as with all other income test free areas in the Act, permits a person to receive a specified amount of income before payment is reduced. Income in excess of the free area results in a reduction of payment at a set rate. This is called the taper. At the present time for family allowance the rate of payment is reduced by 50 cents for every dollar over the free area. This will reduce to 30 cents in the dollar for every dollar over the free area if the Bill is passed.

3.4 Consequences of family assistance measures

The three initiatives in respect of family assistance, namely doubling the provisional family tax initiative payment, increa sing the family allowance income test free area and reducing the taper for the family allowance income test from 50 per cent to 30 per cent should:

? realise direct and immediate financial assistance to those families with incomes in excess of the free are a amount who are currently on reduced payments

? provide incentive and encouragement to those on the maximum rate of payment to increase family income and thereby (when combined with personal income tax cuts(33)) ease the problem of the poverty trap

? allow greater access to entitlement to the family allowance due to the increase in the income test free area, the reduction in the taper and consequently the raising of the income test cut-off limits.

4. Part 3 ? Reduced taper for pensions

4.1 Reduction from 50 per cent to 40 percent

Certain income support payments are subject to income tests. These tests incorporate a free area which permits a person to receive a specified amount of income before the payment is reduced. The amount of the rate of reduction is called the taper.

The Bill proposes to reduce the taper for the payments specified below from 50 per cent to 40 per cent. That is, instead of the payments reducing by 50 cents for every dollar over the free area, they will reduce by 40 cents for every dollar over the free area.

1. age, disability support, wife pensions, carer payment and disability wage supplement (people who are not blind) 

Item 129 repeals the point and substitutes new point 1064-E10

2.  bereavement allowance and widow B pension 
 
Item 130 repeals the formula and substitutes a new formula in point 1066-E8

3. disability support pension (people under 21 who are not blind) 
 
Item 131 repeals cells table items 1,2 and 3, column 3 and substitutes new cells at point 1066A-F9

4. parenting payment (single) 
 
Item 132 repeals the formula and substitutes a new formula in point 1068A-E20

Schedule 2 ? Veterans? Entitlements Act 1986

1. Summary

Essentially the amendments to the Veterans? Entitlements Act 1986 mirror the amendments to the Social Security Act 1991 .

1.1 Increases to rates and free areas

The Bill proposes, on 1 July 2000, to inc rease the pensions and allowances paid to veterans by an initial 4 per cent (reducing to 1.5 per cent) and to increase the income and assets test free areas that apply to income support payments by 2.5 per cent.

1.2 Taper rates

The pension income test and rent assistance taper are proposed to be reduced from 50 per cent to 40 per cent.

1.3 Increase in certain pensions

The Bill proposes, on 1 July 2000, to increase certain pensions that were preserved at frozen rates in the early 1970?s and mid 1980?s by 4 p er cent.

2. Part 1 ? Increase to rates and free areas

2.1 Increase rate by 4 per cent

There are two types of payments made under the Veterans? Entitlements Act 1986 . Those that are specified flat amounts and those that are periodically indexed or adjusted.

2.1.1 Rate increase for all flat amounts

The Bill seeks to amend directly those payments that are flat amounts by omitting specific references to dollar amounts and substituting new dollar amounts in their place.

The payments adjusted in this manner are:

1. non-indexed component of war widow pension and war widower pension 
 
Item 1 amends paragraph 30(1)(b)

2. funeral benefit 
 
Items 6 to 8 inclusive amend subsection 98B(2) , paragraph 99(4)(a) and subsection 100(2)

3. decoration allowance 
 
Item 9 amends subsection 102(4)

4. Victoria Cross allowance 
 
Item 10 amends subsection 103(4)

5. entry education payment 
 
Item 11 amends subsection 118AAC(2)

6. annual ceiling rate of service pension or income support supplement 
 
Items 16 to 18 inclusive amend points SCH6-A4 and SCH6-A5

7. remote area allowance 
 
Items 24 to 31 amend the Table G-remote area allowance at point SCH6-G2

2.1.2 Rate increase for periodically indexed payments

Item 32 inserts new sections 198G to 198M , which provide for a one-off adjustment of 4 per cent on 1 July 2000 to certain indexed payments under the Veterans? Entitlements Act 1986 .

New subsection 198G(1) states that the increase specified in new subsection 198G(2) applies to an amount, the ?base amount?, that is listed in new Table A . The ?base amount? for listed payments may be adjusted in accordance with indexation principles between now and the commencement of the new provisions on 1 July 2000. The 4 per cent increase will apply to the base amount as increased by indexation.

The following payments are listed in new Table A and will be the subject of the 4 per cent increase:

1. all disability pensions, namely general, intermediate, special and war-caused injury or disease pensions

2. war widow pension and war widower pension

3. orphan pensio n

4. clothing allowance

5. attendant allowance

6. recreation transport allowance

7. telephone allowance

8. service pension maximum basic rates, and

9. rent assistance

Pursuant to new subsection 198G(2)(b) the increased amount will be referred to as the ?provisional replacement amount? and this amount will be rounded off using the rounding base as set out in new Table A and will become the ?replacement amount?.

2.1.3 Adjustment of CPI indexation for amounts subject to 4 per cent increase

If an amount has bee n subject to the 4 per cent increase new section 198H applies to modify the way the amount is indexed under Division 18 of Part IIIB for a period after 1 July 2000.

The 4 per cent increase is made up of two components. The first is a 2.5 per cent advance on future CPI increases that result from the impact of the GST and the second, constitutes a 1.5 per cent real increase in pensions.

New section 198H operates to claw-back 2.5 per cent of the 4 per cent increase paid on 1 July 2000 by withholding payment of usual indexation increases after 1 July 2000 until the amount of the 2.5 per cent increase has been recovered.

Please refer to comments contained in this digest under Schedule 1, at paragraph 2.1.3, for additional comment on this issue.

2.2 Increase seniors health card annual limit by 2.5 per cent

Currently a person is eligible for a seniors health card if, among other things, they satisfy the income test. The test is based on taxable income following amendments made in the 1998 Budget Measures Legislation Amendment (Social Security and Veterans? Entitlements) Act 1998 .

A person?s seniors health card income limit is set out in a Table in section 118ZAA-11. It comprises of an amount per year plus an additional amount per year for each dependent child of the person.

Items 12 to 15 amend point 118ZAA-11 , Seniors Health Card Income Table Limit, to increase the amounts specified in the table by 2.5 per cent.

2.3 Increase in income and asset tests free area by 2.5 per cent

2.3.1 Increase in ordinary/adjusted income free area for service pensions and income support supplement by 2.5 per cent

Service pension means an age service pension, an invalidity service pension and a partner service pension.

(a) 2.5 per cent increase in additional free areas for dependent children

Items 19 to 22 inclusive amend point SCH6-E6 to increase by 2.5 per cent the additional amount for each dependent child. The additional amount is added to the basic free area amount to produce a person?s total ordinary/adjusted income free area.

(b) 2.5 per cent increase in ordinary/adjusted income free area for service pensions and income support supplement

Item 32 inserts new section 198J that provides for a one-off 2.5 per cent increase in the ordinary/adjusted income free area for service pensions and income support supplement on 1 July 2000.

(c) 2.5 per cent increase in income/assets reduction limit for the purposes of calculating entitlement to treatment at departmental expense

A veteran who is receiving an age or invalidity service pension is eligible to be provided with treatment at departmental expense for any injury suffered, or disease contracted by the veteran provided he or she satisfies certain criteria. Section 53E(1) states that a veteran remains eligible for treatment even though the veteran?s rate of service pension is either income or assets reduced provided that the reduction does not exceed the income/assets reduction limit applicable to the veteran.

New section 198L amends section 53E(2) and provides for a one-off 2.5 per cent increase on 1 July 2000 in the income/assets reduction limit that applies in relation to determining eligibility for entitlement to treatment at departmental expense.

New section 198L states that the increase of 2.5 per cent specified in new subsection 198L(2) applies to an amount, the ?base amount?, that is specified in columns 3 (basic reduction) and 5 (additional reduction) of the Table in subsection 53E(2) . The ?base amount? may be adjusted in accordance with indexation principles between now and 1 July 2000. The 2.5 per cent increase will apply to the ?base amount? as increased by indexation.

3. Part 2 ? Taper rates

3.1 Reduction in rent assistance reduction rate from 50 per cent to 40 per cent

Rent assistance is an amount that may be added to the maximum basic rate to help cover the cost of rent for recipients of service pensions and income support supplement.

If a person, who is in receipt of a service pension, or a partner of such a person, receives disability pension, the amount of rent assistance may be reduced.

In order to calculate the rent assistance reduction amount a person?s disability pension income excess (that amount over the free area) is currently halved. The taper is therefore 50 cents for every dollar over the free area.

Item 33 amends point SCH6-C13 to state that a person?s disability pension income excess is multiplied by 0.4. Thus the taper is proposed to be 40 cents for every dollar over the free area.

3.2 Reduction in taper from 50 per cent to 40 per cent

The service pension and income support supplement are subject to ordinary/adj usted income tests. These tests incorporate a free area, which permits a person to receive a specified amount of income before payment is reduced. The amount of the rate of reduction is called the taper.

The Bill proposes to reduce the taper for service pensions and income support supplement from 50 per cent to 40 per cent. That is, instead of the payments reducing by 50 cents for every dollar over the free area, they will reduce by 40 cents for every dollar over the free area.

To achieve this Item 34 repeals existing subpoint SCH6-E11(1) and substitutes new subpoint SCH6-E11(1) .

4. Part 3 ? Frozen payments increased by 4 per cent

4.1 Pensions payable under the Veterans? Entitlements (Transitional Provisions and Consequential Amendments) Act 1986

The pensions listed below were preserved at their frozen rates in the transition to the Veterans? Entitlements Act 1986 by relevant sections of the Veterans? Entitlements (Transitional Provisions and Consequential Amendments) Act 1986.

? service pension payable to certain war widows

dependent?s pension payable to a partner or child of an incapacitated veteran, and

? without adequate means of support (AMS) pensions

Item 35, subsection (1) increases the rate of these pensions where they are still being paid by 4 per cent on 1 July 2000.

4.2 Rounding

Subsection (2 ) provides that AMS pensions and dependent?s pensions will be rounded to the nearest cent. Service pensions payable to war widows will be rounded to the nearest 10 cents.

Schedule 3 ? National Health Act 1953

1. 4 per cent increase to flow through to domiciliary nursing care benefit

Item 1 repeals existing subsection 58G(2) and inserts new subsection 58G(2) that specifies that the domiciliary nursing care benefit (DNCB) is payable at the same fortnightly rate as the rate of child disability allowance under subsection 967(1) of the Social Security Act 1991 . It also retains the Minister?s discretion to pay the DNCB at a higher rate.

The child disability allowance is one of the payments included in the 4 per cent increase proposed to take effect on 1 July 2000. (Refer to Schedule 1, paragraph 2.1.2 of this digest). Thus the 4 per cent increase will be passed on to the DNCB by virtue of the fact that it is linked to the child disability allowance.

Concluding Comments

1. Distributional impacts

1.1 Impartial and external third party analysis of competing claims

Given the important nature of distributional impacts to the integrity of the compensation package it is critical that any examinatio n of the underpinning economic modelling be above reproach.

For this reason, consideration might be given to engaging a party external to the political process, one that is seen to be impartial, to assess the data put forward by the government and interested parties in a critical and fair manner. The aim would be to test the accuracy of the government?s estimates and therefore the credibility of the compensation package.

1.2 CPI weights for groups within the population

The government, as mentioned previously, has relied upon the population CPI model to produce its estimates relating to the impacts of change associated with the reform package. The CPI does not include indexes for subgroups of the population.

The ABS has committed itself to produce sets of CPI weights for different groups (yet to be determined) within the population. In November 1997, the ABS released an information paper(34) setting out key decisions following the latest CPI review. It indicated(35) that:

In recognition of the widespread interest in the extent to which rates of change in the cost of living vary across different groups in the community, the ABS will compile and publish analytical indexes specifically designed to measure changes in living costs for a range of population subgroups. These indexes will be published at approximately annual intervals.

It is interesting to note that submissions to the CPI Review Advisory Group presented mixed views on the need for indexes for subgroups within the population. The reasons were quite vari ed and are set out in the information paper distributed by the ABS. The outcome is, however, to publish indexes for subgroups in the population for analytical purposes.

One of the issues raised for discussion during the review concerned a study undertaken by the ABS in 1992 (ABS 1992a) (and updated in ABS (1993) and Higgins (1995)) which showed that an experimental index constructed to reflect the quite different expenditure patterns of age pensioner households displayed little variation from the CPI over an extended period of time (0.1 index points over 11 years). There were, however, differences in index movements when shorter periods were examined.(36)

Accordingly, it may be a useful insight into the accuracy of the government?s figures in relation to short term impacts of the GST if CPI weights for groups within the population were available. Unfortunately the first such indexes are not expected to be p ublished until 2000.(37)

2. Compensation at 4 per cent a misnomer; actual increase is 1.5 per cent above CPI

The commentary that suggests that income support payments are to be increased by 4 per cent in compensation for the effects of the GST, may be misl eading to a certain extent. This is due to the fact that 2.5 per cent of the 4 per cent increase is merely a prepayment of indexation, which will be clawed back.

It is accurate to say that the fact of a pre-payment in itself may be compensatory but this is only to the extent that it is paid earlier than it would have otherwise been due and payable. It would be inaccurate to suggest it provided any compensatory effect other than to correct a time delay between potential price increases and indexation payment increases.

The real increase to the income support payments is the 1.5 per cent increase, which will not be clawed back and which will continue to be incorporated in the payments as they are increased by indexation in the future.

3. Naming of GST bills

Fr om 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.

4. No reduction in the taper for newstart allowance and other allowance income support payments

Recipients of certain allowance payments, such as newstart allowance and youth allowance, will benefit from a 2.5 per cent increase in the inco me and assets test free areas associated with those payments, however, they will not be receive benefits associated with a reduction in the taper rate.

The taper rates for allowance income support payments are ?progressive? in the sense that they commence at 50 per cent and increase to 70 per cent for every dollar of income in excess of the income free area and additional specified income level.

A reduction in the taper rate for pensions and family allowance is an integral component of the package of measures introduced by government to combat ?poverty traps?.(38)

The failure to reduce the taper for certain allowance income support payments appears inconsistent with the approach adopted by government with respect to other payments. Recipients of allowance income support payments, such as newstart allowance, are equally susceptible to poverty traps and incentives in the same way as other pension recipients.

Historically, the income testing arrangements for pensions have been more generous than that for allowance income support payments both in terms of higher free areas and gentler taper rates.  This difference has its origins in pensions being aimed at long-term income support, as opposed to allowance payments being for short-term, temporary assistance, ie. for, in most cases, persons returning to full-time work.  The allowance test with a lower free area and a two-stepped taper is designed to encourage employment participation and to withdraw assistance at an appropriate rate, as employment earnings increase. There are elements of fundamental conflict in designing income tests in terms of addressing the problems of poverty traps and in also providing targeted levels of assistance.  To address poverty traps, free areas could be comparatively high and taper rates moderate, thereby making the withdrawal of assistance gradual.  However, this may create dependency problems.

 

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

Endnotes

 

1. Section 1-2 of the A New Tax System (Goods and Services Tax) Act 1998 ; section 2 of the A New Tax System (Goods and Services Tax Imposition ? Excise) Act 1998 ; section 2 of the A New Tax System (Goods and Services Tax Imposition ? Customs) Act 1998 ; section 2 of the A New Tax System (Goods and Services Tax ? General) Act 1998 ; and section 2 of the 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. ?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.

20. 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

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

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

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

24. 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

25. The latter 3 Bills are dealt with in separate Bills Digests.

26. Flat amount payments are those that are not indexed but are rather increased on an ad hoc basis as the need for adjustment is identified.

27. Part 3.16 of the Social Security Act 1991 provides for the indexation, in line with CPI, of the amounts specified in the CPI Indexation Table in section 1191. 
 
Pensions and benefits are indexed twice yearly on 20 March and 20 September. Allowances such as youth allowance, family allowance and austudy are indexed once a year on 1 January. Payments do not always increase.

28. Age pension, disability support pension, disability wage supplement, widow pension, widow B pension, parenting payment (single), carer payment, bereavement allowance and wife pension. Other allowance type income support payments are only indexed to cost of living increases.

29.  Social Security Act 1991 , section 1195

30. In the 8 years to September 1998, the cost of living as measured by the Consumer Price Index has gone up by 17.4 per cent (Source: ABS 6401.0) whilst average weekly full-time adult ordinary time earnings have risen by 36.0 per cent over the same period (Source: ABS 6302.0).

31. As of June 1997, 32.6 per cent of age pensioners were on a reduced rate of payment due to the effects of either the income or assets tests. Department of Social Security Customers ? a statistical overview , June 1997, p 5.

32. When originally introduced the family allowance income test taper was 25 per cent. That is family allowance payment was reduced by 25 cents for every dollar over the free area.

33 Refer to the Bills Digest in respect of the A New Tax System (Personal Income Tax Cuts) Bill 1998.

34 McLennan, Australian Statistician, Information Paper: Outcome of the 13 th Series Australian Consumer Price Index Review , Australian Bureau of Statistics, Catalogue No. 6453.0, 12 November 1997

35 Ibid., p 7.

36 McLennan, Australian Statistician, Information Paper: Issues to be Considered During  the 13 th Series Australian Consumer Price Index Review , Australian Bureau of Statistics, 9 May 1997, Catalogue No. 6451.0, p 24.

37 McLennan, Australian Statistician, Information Paper: Introduction of the 13 th Series Australian Consumer Price Index , Australian Bureau of Statistics, 1998, Catalogue No. 6454.0, p 4.

38 Refer to clause 2.3 Social Security , page 4 of this Bills Digest for additional information in relation to the poverty trap

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13 January 1999

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Information and Research Services

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