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Tax Legislation Amendment Bill 1992

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House: House of Representatives Portfolio: Treasury

Purpose To legislate for reductions in income tax rates for the period 1994- 5 to 1996- 7.

Background The reductions in income tax rates to be implemented by this Bill were announced by the Prime Minister in the One Nation statement, delivered in February 1992. The reductions will be implemented in two stages and will effect the tax payable on income between $20 700 and $50 000. The reductions are estimated to reduce revenue by $3 200 million in 1994- 5 and $ 5 200 million in 1995- 6. 1 Taxpayers with income of less than $21 000 per year (i.e. those who will receive marginal or no benefit from the proposed reduction in tax rates) comprised 39.59% of those who paid income tax in 1990- 91. This group comprises 51.73% of female income taxpayers and 30.43% of male taxpayers. 2

The decision to legislate for this reduction in income tax rates was announced amid controversy surrounding remarks made in the 1992 Budget speech and concerns about the ability to reduce income tax rates and eliminate the Budget deficit. In the Budget speech the Treasurer stated `If the fiscal position nearer to the time (i.e. 1995- 6) is not stronger than is now projected, the government will consider and implement a number of tax changes to maintain the revenue structure.' 3 Subsequently, changes to enforcement and the fringe benefits tax have been announced.

Compliance Details of the changes to compliance are contained in the Australian Taxation Office's (ATO) paper titled Income Tax Compliance/Enforcement Strategy, dated 15 September 1992. The strategy is expected to increase revenue by $750 million in 1994- 5 and $950 million by 1995- 6. Additional resources for the ATO to improve compliance are estimated to cost $114 million between 1993- 4 and 1995- 6. The strategy will focus on the following areas:

* Large/medium business: Improvements in compliance in this area will centre on the extension of the audit program for the top 100 corporations to the top 600. This will involve the provision of an additional 100 positions. As well, international issues will receive more attention. This program is expected to raise $250 million by 1995- 6.

* Small business: The main area to be targeted in this segment will be the non- reporting of cash receipts. This will be addressed through encouraging small businesses to improve their record keeping and to follow ATO guidelines. The main enforcement method will be increased auditing and legislative standards of record keeping. This measure is expected to raise approximately $350 million per year by 1995- 6.

* Individuals: The main strategy that will apply in this area will be greater information matching, so that information supplied by employers, financial institutions and others will be matched against the taxpayers declarations to a greater degree. Areas to be concentrated on include work related expenses and capital gains tax, and use will be made of increased computer facilities and staff to follow up mis- matched information. These measures are expected to raise at least $350 million by 1995- 6.

Fringe Benefits Tax When introduced, the fringe benefits tax (FBT) was intended to place non- salary benefits received by employees in the same position as salary. However, this has not applied for some time, principally due to a reduction in the company tax rate and the position of bodies exempt from income tax. For companies, the benefit of remunerating by way of fringe benefits occurs as follows: The employee receives benefits equivalent to an after tax increase in salary of $1000. This costs the company an initial $1000, to which is added the FBT of $482 (FBT is levied at the rate of 48.25%). From this amount, the company is entitled to a deduction of $390 (this reflects the company tax rate of 39%), leaving a total cost to the company of $1092 (it should be noted that the FBT is not deductible). The net tax paid is $92 (the amount of FBT less the deduction). Assuming the employee was on the top marginal tax rate, to receive an after tax salary increase of $1000, the net cost to the company would be $1179 and the tax paid $179.

The situation for income tax exempt bodies is similar, but such bodies do not receive a deduction for the payment of the benefit (as they do not pay tax they cannot claim deductions). A large number of government employers are exempt from income tax, e.g. Commonwealth and State public services, local government and most public authorities, and it is expected that `A significant share of the revenue yield of the proposed changes will come from tax exempt government employers'. (In this regard, the distinction between a body being exempt from income tax and from the FBT should be noted. A much smaller number of bodies are exempt from the FBT and this area will not be affected.) The increase in the effective rate of the FBT will increase costs to the States and the Treasurer has foreshadowed that this matter will be discussed at the next Premiers' Conference. 4

To address this situation, the Treasurer announced amendments on 16 September that will place fringe benefits in the same position as salary. This will be achieved by the Taxation Laws Amendment (Fringe Benefits Tax Measures) Bill 1992 (also refer to the Digest for that Bill), which will increase the taxable value of fringe benefits received by 93% and allow deductions for FBT payments. In respect of employees receiving fringe benefits who also pay the highest marginal tax rate, this will place the benefit on the same footing as an increase in salary in respect of revenue returns.

The changes to the FBT are estimated to raise $1525 in 1994- 5, the first year of operation, and $840 million in each of the next two years. 5 The greater increase in revenue occurring in 1994- 5 reflects the situation regarding the deductibility of FBT payments, which will only be deductible in the year following payment.

Main Provisions The Bill will amend various tables in the Income Tax Assessment Act 1936 to reduce certain marginal rates of taxation for 1994- 5, 1995- 6 and 1996- 7 and later years. The amendments will effect the rates for residents and non- residents. The table below shows the reductions.


Taxable Income


Marginal Rates

$5400 - $20700 Current; 1994- 5; 1995- 6; 1996- 7on


$20701 - $38000 Current; 1994- 5; 1995- 6; 1996- 7on 38%; 34%; 32%; 30%

$38001 - $40000 Current; 1994- 5; 1995- 6; 1996- 7on 46%; 43%; 36.5% 30%

$40001 - $50000 Current; 1994- 5; 1995- 6; 1996- 7on 46%; 43%; 41.5% 40%

$50001 + Current; 1994- 5; 1995- 6; 1996- 7on


Non- Residents The marginal rates for non- residents will be the same as for residents with two exceptions. First, tax is payable on all Australian income so that the threshold of $5400 does not apply. Secondly, the marginal rate for taxable income of $1 - $20700 is 29% (as with the lowest marginal rate for residents this will not be altered).

Remarks A number of other options for the expenditure of the funds that will be foregone by the reductions in the rates of income tax for those with incomes above $20 770 may be suggested. They include: * Grants to the States to allow for a significant reduction or elimination of payroll tax. Payroll tax receipts were $5796 million in 1990- 91, 6 compared with the estimated cost of the tax reductions of $5200 million in 1995- 6. This course would be likely to have a greater employment impact and may reduce the leakage to imports that is likely to occur with the proposed tax cuts. * An across the board tax cut or an increase in the tax free threshold so that all income tax payers would benefit. * Increases in spending targeted at disadvantaged groups, such as increases in public housing, assistance to the rural poor and increased health and social security payments. * Using part or all of the tax decrease to finance compulsory employee superannuation contributions. * Reducing public debt. * Increased infrastructure and employment programs.

References 1. Explanatory Memorandum, p. 1. 2. Budget Related Paper No. 3, Income Tax Statistics 1990- 91 Income Year, p. 6. 3. 1992 Budget Speech, p. 13. 4. Treasurer, Statement on Taxation, 16 September 1992, p. 11. 5. Explanatory Memorandum for the Taxation Laws Amendment (Fringe Benefits Tax Measures) Bill 1992. 6. Australian Bureau of Statistics Cat. No. 5506.0, Tax Revenue Australia.

Bills Digest Service 30 September 1992 Parliamentary Research Service his Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1992

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Published by the Department of the Parliamentary Library, 1992.