Commonwealth of Australia Explanatory Memoranda

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TAX LAWS AMENDMENT (MEDICARE LEVY AND MEDICARE LEVY SURCHARGE) BILL 2004

2002-2003-2004

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

TAX LAWS AMENDMENT (MEDICARE LEVY AND MEDICARE LEVY SURCHARGE) BILL 2004

EXPLANATORY MEMORANDUM

(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)

Table of contents

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Medicare levy and Medicare levy surcharge low income thresholds

This bill amends:

• the Medicare Levy Act 1986 to:

− increase the Medicare levy low income thresholds for individuals and families. The dependent child/student component of the family threshold will also be increased. The increases are in line with movements in the consumer price index (CPI); and

− increase the Medicare levy low income threshold for pensioners below age pension age so that they do not have a Medicare levy liability where they do not have an income tax liability;

• the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to:

− increase the Medicare levy surcharge low income threshold in line with movements in the CPI.

Date of effect: The increased Medicare levy and Medicare levy surcharge low income thresholds apply from the 2003-2004 year of income and later years of income.

Proposal announced: This measure was announced in the 2004-2005 Budget. It was also announced in the Minister for Revenue and Assistant Treasurer’s Press Release No. C033/04 of 11 May 2004.

Financial impact: This measure has a cost to revenue of $41 million in 2004-2005 and $21 million each year in the period from 2005-2006 to 2007-2008.

Compliance cost impact: Compliance costs will be negligible.

Chapter 1
Medicare levy and Medicare levy surcharge low income thresholds

Outline of chapter

1.1 This bill amends the Medicare Levy Act 1986 (MLA 1986) and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to increase the Medicare levy low income threshold amounts (threshold amounts) for individuals, families and pensioners below age pension age. It also increases the phase-in limits as a result of the increased threshold amounts.

Context of amendments

Medicare levy low income thresholds

1.2 The MLA 1986 provides that no Medicare levy is payable for low income individuals and families where taxable income or combined family taxable income does not exceed stated threshold amounts. The family income threshold increases by a set amount per child. The Medicare levy shades in at a rate of 20 cents in the dollar where the taxable income or combined family taxable income exceeds the threshold amounts.

Medicare levy surcharge low income threshold

1.3 A Medicare levy surcharge (the surcharge) of 1% applies on taxable income in certain cases where taxpayers do not have private patient hospital cover (sections 8B to 8G of the MLA 1986). The surcharge of 1% also applies to reportable fringe benefits in certain cases where taxpayers do not have private patient hospital cover (sections 12 to 16 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999). However, a family member who would otherwise be liable for the surcharge is not required to pay the surcharge where the total of that person’s taxable income and reportable fringe benefits do not exceed the individual low income threshold amount. Unlike the Medicare levy, there is no shading-in of the surcharge above the threshold amount.

Summary of new law

1.4 The measure amends:

• subsections 3(1) and 8(5) to (7) of the MLA 1986 to raise the threshold amounts and phase-in limits for individuals, families and pensioners who are under age pension age;

• paragraphs 8D(3)(c) and 8G(2)(c) and subparagraphs 8D(4)(a)(ii) and 8G(3)(a)(ii) of the MLA 1986 to raise the threshold below which a family member is not required to pay the surcharge on taxable income; and

• paragraphs 15(1)(c) and 16(2)(c) of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to raise the threshold below which a family member is not required to pay the surcharge on reportable fringe benefits.

Detailed explanation of new law

Medicare levy low income thresholds

1.5 This bill proposes to increase the low income thresholds for individuals and families for the 2003-2004 year of income and subsequent years of income. The increases are in line with movements in the consumer price index (CPI).

1.6 Section 7 of the MLA 1986 states that no levy is payable where a taxpayer has a taxable income at or below the applicable threshold amount as specified in subsection 3(1).

1.7 The individual threshold amount specified in paragraph (c) of the definition of the ‘threshold amount’ in subsection 3(1) of the MLA 1986 is to be increased from $15,062 to $15,529. [Schedule 1, item 6]

1.8 The level of the ‘family income threshold’ referred to in subsections 8(5) to (7) of the MLA 1986 is to be increased from $25,417 to $26,205 [Schedule 1, items 7, 9 and 10]. The family income threshold is to be increased by a further $2,406 instead of the previous figure of $2,334 for each dependent child or student [Schedule 1, item 8].

1.9 This bill also proposes to increase the threshold amount for pensioners below age pension age for the 2003-2004 year of income and subsequent years of income. The increase ensures that such pensioners do not have a Medicare levy liability where they face no income tax liability.

1.10 The threshold amount for pensioners who are under age pension age specified in paragraph (b) of the definition of the ‘threshold amount’ in subsection 3(1) of the MLA 1986 is to be increased from $17,164 to $18,141. [Schedule 1, item 5]

Phase-in limit

1.11 Section 7 of the MLA 1986 also provides that the Medicare levy applies at a reduced rate to taxpayers with taxable incomes above the threshold amount but not more than the phase-in limit specified in subsection 3(1). The rate of the Medicare levy payable in these circumstances is limited to 20% of the excess over the threshold amount that is relevant to the particular person.

1.12 The phase-in limit for individuals contained in paragraph (c) of the definition of ‘phase-in limit’ in subsection 3(1) of the MLA 1986 is increased from $16,283 to $16,788. [Schedule 1, item 4]

1.13 The phase-in limit for pensioners who are under age pension age specified in paragraph (b) of the definition of ‘phase-in limit’ in subsection 3(1) of the MLA 1986 is increased from $18,555 to $19,611. [Schedule 1, item 3]

1.14 There is no phase-in limit stated in the MLA 1986 for families as the figure changes with the number of dependants. Instead, subsection 8(2) of the MLA 1986 contains a formula that limits the levy payable by persons with families to 20% of the amount of family income that exceeds their family income threshold. This range is increased for dependants as indicated in Table 1.1.

1.15 The increased Medicare levy low income threshold amounts and phase-in ranges for the 2003-2004 year of income and subsequent years of income are as shown in Table 1.1.

Table 1.1: 2003-2004 Medicare levy low income threshold amounts and shading-in ranges

Medicare levy surcharge low income threshold

1.16 References to the individual low income threshold amount of $15,062 in the Medicare levy surcharge provisions (in sections 8D and 8G of the MLA 1986) in respect of surcharge on taxable income are also being increased to $15,529. [Schedule 1, items 11 to 14]

1.17 References to the individual low income threshold amount of $15,062 in the Medicare levy surcharge provisions (in sections 15 and 16 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999) in respect of surcharge on reportable fringe benefits are also being increased to $15,529. [Schedule 1, items 1 and 2]

Application and transitional provisions

1.18 The amendments are to apply for the 2003-2004 year of income and later years of income. [Clause 4]

Index

Schedule 1: Medicare levy and Medicare levy surcharge low income thresholds