Commonwealth Numbered Regulations - Explanatory Statements

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INCOME TAX REGULATIONS (AMENDMENT) 1996 NO. 133

STATUTORY RULES 1996 No. 133

Issued by the Authority of the Assistant Treasurer

Income Tax Assessment Act 1936

Income Tax Regulations (Amendment)

Subsection 221C(1) of the Income Tax Assessment Act 1936 (the Act) authorises the making of regulations to prescribe rates of deductions to be made by employers from the salary or wages of employees for the purpose of enabling collection of income tax from employees by instalments. The procedure is known as the pay as you earn (PAYE) system. Subdivision 2 of Division 2 of Pan 7 of the Income Tax Regulations sets out the prescribed rates of tax instalment deductions to be deducted from salary or wages of employees.

The amendments give effect to changes contained in the Medicare Levy Amendment Act 1996 and the Income Tax Assessment Amendment Act 1996. The changes are to raise revenue in connection with an agreed scheme between the Commonwealth and the States and Territories to remove certain guns from the community. The amendments will apply for the 1996-97 year of income only.

The Medicare levy payable by salary or wage earners is collected under the PAYE system as set out in the Income Tax Regulations. Hence, a number of these regulations require amendment to reflect the changes. In addition, a number of new regulations have been inserted to give effect to the decision to make members of the Defence Force liable to pay a proportion of the Medicare levy.

The amendments will:

*       increase the Medicare levy from 1.5% to 1.7% when determining the rate of tax instalment deductions to be made from the salary or wages and eligible termination payments of taxpayers generally;

*       increase the tax instalment deductions in respect of Defence Force members to take account of their liability to pay the proportion of the full Medicare levy equivalent to a rate of 0.2%; and

*       make two minor technical amendments to sub-regulation 71(3).

A detailed explanation of the amendments is attached.

ATTACHMENT

DETAILED NOTES ON THE AMENDING REGULATIONS

Commencement

Regulation 1 - provides that the amendments commence on 1 July 1996.

Amendment

Regulation 2 - provides that the regulations amend the Income Tax Regulations.

Regulation 70 (Interpretation)

Regulation 3 - inserts a new formula in the definition of the "shading out point". Effectively, the amendment adjusts the denominator of the formula contained in the definition to provide for the new Medicare levy rate of 1.7%. The "shading out point" is defined in subregulation 70(1) of the Income Tax Regulations. The "shading out point" in relation to an employee is the maximum amount the employee may cam in a week or part of a week before the full Medicare levy rate (or the reduced rate for members of the Defence Force) is incorporated in his or her weekly tax instalment deduction amount.

Regulation 71 (Income tax instalment amounts)

Subregulation 4.1 - inserts references to new paragraphs 72A(1)(c) and 72A(1)(C) into regulation 71. Regulation 71 prescribes the amounts of PAYE instalment deductions that are to be deducted from an employee's salary or wages, The regulation contains a formula that applies various factors and amounts as act out in Schedule 3 to the weekly earnings of the employee.

Subregulations 4.2 and 4.3 - these subregulations insert 4 new paragraphs into subregulation 71(3). New paragraphs (aa) and (ab) are inserted into the meaning of component "A" and new paragraphs (ha) and (hb) are inserted into the meaning of component "C" of the formula in subregulation 71(3). The formula operates to provide the amount of dollars and cents to be deducted as tax instalments from an employee's weekly earnings. The various meanings of components "A" and "C" are applied in the various circumstances that may be applicable to an employee. They detail which table. factors and amounts contained in Schedule 3 are to be used for the purposes of the formula. Two new tables (Table 1A and 1B) have been inserted into Schedule 3 to provide factors and amounts for the purposes of new paragraphs applicable to members of the Defence Force etc.

Subregulations 4.4 and 4.5 - these provide for technical amendments to be made to the meaning of component "C" in the formula in subregulation 71(3) by amending paragraph 71(3)(n) and inserting new paragraph 71(3)(o). The amendments correct a minor error in the formula where regulation 81 applies and slightly reduce the amounts of tax instalments to be deducted. Employers already base their calculations on the correct application of the formula.

Regulation 72 (Rate of deductions - employee claiming general exemption only and employee, not being a prescribed person, claiming general exemption and Medicare levy variation)

Regulation 5 - amends Regulation 72 which operates to determine the rate of deductions to be made from the weekly earnings of most employees. that is, those who claim the general exemption (which reflects the tax free threshold of $5,400) and who are liable for the full rate of Medicare levy. It also applies where an employee is entitled to a reduced rate of levy because of the shading in of the full levy rate for employees with families.

Subregulation 5.1 - inserts a reference to new regulation 72A (which applies special Medicare levy rates to members of the Defence Force, etc) to indicate that those persons are not subject to regulation 72.

Subregulations 5.2 and 5.3 - these amendments change from $263 to $266 the amount of weekly earning that reflect the upper Medicare levy shading in threshold for individual taxpayers.

Subregulations 5.4 and 5.5 - these amendments change the formula in paragraphs 72(2)(b) and 72(2)(c), which apply where an employee is entitled to a full or partial reduction, because of the family exemption and the shade in thresholds, in the amount of Medicare. levy otherwise payable, to reflect the change in Medicare levy rate from 1.5% to 1.7%.

New Regulation 72A (Rate of deductions - Members of the Defence Force etc.)

Regulation 6 - New regulation 72A is necessary to provide for the special rates of Medicare levy to apply from 1 July 1996 to members of the Defence Force and persons who are relatives of, or otherwise associated with, members of the Defence Force who are entitled to free medical treatment in respect of every incapacity, disease or disabling condition.

Prior to 1 July 1996, Defence Force members etc were prescribed persons and were not liable to pay Medicare levy. Their rates of tax instalments were calculated under regulation 73 which applied to 0 prescribed persons. Their status as prescribed persons is removed from 1 July 1996. However, they are not required to pay the full 1.7% rate of Medicare levy as imposed by regulation 72. Consequently, a new regulation is required to set the rates of tax instalment deductions which contain the rates of Medicare levy now applicable to members of the Defence Force etc.

New subregulation 72A(1) provides for the rate of tax instalments that are to he deducted from the salary or wages of a person to whom section SA of the Medicare Levy Act 1986 applies (that is, members of the Defence Force and other persons U mentioned above) where the person has furnished a general exemption declaration and a Medicare levy variation declaration to his or her employer.

A person to whom section 8A applies may be liable for Medicare levy at a rate of 0.2% (1.7% x 2/17 = 0.2%) or, where the person has a dependant who is not entitled to free medical treatment, 0.95% ((1.7% x 2/17)/2 + (1.70%/2) = 0.95%). The various shading in thresholds that apply generally (that is $12,870 and $13,913 for individuals and $21,718 and $23,735 for families (ignoring adjustments for dependent children)) also apply to these persons.

New paragraph 72A(1)(c) applies where neither new paragraph 72A(1)(d), (e) or (f) applies. Effectively, it applies to a member of the Defence Force: who does not have dependants or has a dependant that is entitled to free medical treatment. It provides for the rate of tax instalments of such a person to be determined in accordance with regulation 71 (ace paragraphs (aa) and (ha) of subregulation 71(3)). The effect of this paragraph when combined with regulation 73 and Table 1A is that a Medicare levy rate of 0.2% is paid.

New paragraph 72A(1)(d) applies where a member of the Defence Force has a dependant who is entitled to free medical treatment and, because of his or her level of family income, would be entitled to a reduction in the amount of levy payable through the application of the family income thresholds used to shade in the full rate of levy payable. The paragraph operates in conjunction with subregulation 72A(2) to determine the rate of deductions to be made from the relevant amount of earnings of the employee. The effect of this paragraph when combined with regulation 71, subregulation 72A(2) and Table 1A is that no Medicare levy is paid or, where family income is in the shade out range, it is paid at the rate which reflects an amount of Medicare levy determined by 2/17ths of 20% of the excess over the threshold.

New paragraphs 72A(1)(e) and (f) operate in a similar manner to new paragraphs 72A(1)(c) and (d), however, they apply where the employee has a dependant who is not a prescribed person or is a person who is not entitled to the free medical treatment provided to relatives of members of the Defence Force. In these circumstances, Defence Force members are liable to pay the full rate of Medicare levy for one half of the year of income plus, for the 1996-97 year of income, the reduced rate of 0.2% for the remainder of the financial year. The amount of tax instalments to be deducted is calculated in accordance with regulation 71 (see paragraphs (ab) and (hb) of subregulation 71(3)).

The effects of these paragraphs am basically the same as for paragraphs 72A(1)(c) and (d) except that various Medicare levy rates am used because the employee is liable for full Medicare levy for half of a financial year (because a dependant is not entitled to free medical treatment). The rate for paragraph 72A(1)(e) is 0.95% while the rate for paragraph 72A(1)(f), where levy is payable is 1/2 of 20% of the excess over the threshold + 1/2 of 2/17ths of 20% of the excess.

New subregulation 72A(2) operates to provide the Medicare adjustment amount for the purposes of paragraph 72A(1)(d). Paragraphs 72A(2)(a), (b) and (c) operate with paragraph 72A(1)(d) to provide that the relevant employee will not pay the Medicare levy where relevant weekly earnings are under $266 or between $266 and $411 (or the figure adjusted because of dependent children). or will pay a reduced amount (as indicated above) where earnings am within the family shade out range. The formulae in subregulation 72A(2) reflect the rate of Medicare levy involved with members of the Defence Force etc and the shade out thresholds that generally apply (see earlier).

New subregulation 72A(3) operates in a similar manner to new subregulation 72A(2) to provide the Medicare levy adjustment amounts for the purposes of paragraph 72A(1)(f). Paragraph 72A(3)(a) applies to reduce Medicare levy to nil where relevant weekly earnings are under $449. Paragraph 72A(3)(b) applies to reduce Medicare levy to nil where the employee's earnings are over 5449 but under the threshold applicable for the number of children dependent on the employee. Paragraph 72A(3)(c) applies to reduce the Medicare levy where weekly earnings are in the shade out range for family incomes.

New subregulation 72A(4) operates in a similar manner to existing subregulations 72(3) and 73(3) to round amounts to 5 or 10 cents.

Regulation 73 (Rate of deductions - employee, being a prescribed person, claiming general exemption and Medicare levy variation)

Subregulations 7.1 and 7.2 - these amendments change from $444 to $449 the amount of weekly earnings that reflect the upper Medicare levy shade out threshold for family taxpayers.

Subregulations 7.3 and 7.4 - these amendments are also consequential to the change of Medicare levy rate from 1.5% to 1.7%. The formulae in paragraphs 73(2)(b) and (c) have been amended so that they apply the new rate.

New regulation 74A - Rate of deductions - member of the Defence Force etc. claiming a rebate in respect of a dependent

Regulation 8 - this regulation inserts new regulation 74A into the Income Tax Regulations. It operates in the same manner as existing regulation 74 but specifically to members of the Defence Force etc to provide a reduction in the amount of tax instalments deducted from a member's salary or wages where the member has lodged a declaration claiming a concessional rebate in respect of a dependant (together with a claim for the general exemption). The formulae in both regulations uses the total concessional rebate entitlement and effectively provides the amount by which tax instalments are to be reduced.

The separate regulation has been inserted to provide for the special circumstances of members of the Defence Force etc not being prescribed persons and being subject to regulation 72A.

Regulation 77 (Rate of deductions - employee who has not furnished a declaration)

Regulation 9 - inserts reference to new regulations 72A and 74A into regulation 71 to make that regulation operate in circumstances other than those to which regulations 72A and 74A (and the other regulations already mentioned) apply.

Regulation 79 (Rate of deductions where employee is a resident of a zone area)

Regulation 10 - inserts a reference to new regulations 72A and 74A into regulation 79 which provides for the tax instalments otherwise payable to be reduced by the amount determined under regulation 79 in relation to the employee's entitlement to a zone rebate.

Regulation 80 (Rate of deductions-employee in receipt of retirement amounts

Regulation 11 - changes the number of cents used to multiply with a retirement amount to which regulation 80 applies in order to determine the rate of tax instalments to be deducted from the retirement amount. The change reflects the change in the rate of Medicare levy from 1.5% to 1.7%.

Regulation 92 (Rate of deductions where eligible lump sum is Included)

Regulation 12 - this amendment is similar to the one contained in regulation 11 except that it applies to regulation 82 which deals with the number of cents to be multiplied with an eligible lump sum amount (these amounts constitute certain arrears of Wary or wages received in a lump sum).

Regulation 86 (Furnishing of Medicare levy variation declaration)

Regulation 13 - inserts new subregulation 86(2A). The subregulation applies to relieve members of the Defence Force from having to lodge new Medicare levy variation declarations merely because of the present changes that are to operate for the 1996-97 year of income only. Effectively, it deems those m whom it applies to have lodged Medicare levy variation declarations for the purposes of subregulation 86(2) where a member had previously lodged such a declaration under subregulation 86(1). It applies where a member lodged a declaration that had effect before or from the first pay period in July 1996 and has not ceased to have effect as at 1 July 1996.

Regulation 87 (Certain members of Defence Force to be deemed to have furnished Medicare levy variation declaration)

Regulation 14 - this amendment inserts new regulation 87 to replace the existing regulation.

Existing regulation 87 operates with existing subregulations 86(1)(a) and (b). Effectively, it provides that, where a member of the Defence Force has not lodged a Medicare levy variation declaration, the member is doomed to have furnished such a declaration claiming relief from onehalf of the Medicare levy. The regulation operates to ensure that members do not pay the full rate of Medicare levy because they have not lodged the appropriate declaration. It provides for them to pay the higher of the two rates that could be payable by members of the Defence Force.

New regulation 87 maintains the concept, but it does not now operate with subregulation 86(1) because of the removal of members as being prescribed persons.

Regulation 93 (Effect of certificate)

Regulation 15 - inserts references to new regulations 72A and 74A to provide that certificates issued by the Commissioner of Taxation under regulation 92 arc effective in determining the rate of tax instalments under new regulation 72A.

Regulation 99 (Rates of deduction - ETP)

Subregulations 16.1 and 16.2 - these provide for the changes in Medicare rate to be reflected in the table in subregulation 98(1). The amendments change the year of income to which Column 4 applies and increase the rates in that column by 0.2% (other than the zero rate).

Schedule 3 (Table to be used in calculation of income tax instalment amounts in relation to employees)

Regulation 17 - replaces all the current tables in Schedule 3 with new tables. The new tables generally provide for the change in Medicare levy rate from 1.5% to 1.7%. Two completely new tables have also been included that are relevant only to members of the Defence Force etc (Table 1A and Table 1B). These 2 tables reflect the special rates of Medicare levy payable by those persons and are relevant only for the purposes of new paragraphs 72A(1)(c) and (c).

Application

Regulation 19 - provides that the amendments made by these regulations apply for the 1996-97 year of income only. This is because the increase to 1.7% in the rate of Medicare levy and the application of that change to members of the Defence Force etc (as contained in the Medicare Levy Amendment Act 1996 and the Income Tax Assessment Amendment Act 1996) apply only for that year.