Commonwealth Numbered Regulations - Explanatory Statements

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INCOME TAX REGULATIONS (AMENDMENT) 1993 NO. 288

STATUTORY RULES 1993 No. 288

Issued by Authority of the Treasurer

Income Tax Assessment Act 1936

Income Tax Regulations (Amendment)

Subsection 221C(1) of 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 under the system known as the pay-as-you-earn (PAYE) system. Subdivision 2 of Division 2 of Part 7 of the Income Tax Regulations sets out the prescribed rates of tax instalment deductions to be deducted from the salary or wages of employees.

The bulk of the regulations prescribe the rates at which PAYE tax instalments are to be deducted from salary or wages received by employees on or after 15 November 1993. This will give effect to the new personal income tax rate scales.

The changes to the rates of deduction will also give effect to the 1993-94 Budget announcement to increase the level of the low income thresholds below which Medicare levy will not be payable by an individual, a married couple or a sole parent in the 1993-94 financial year.

The present deductions made by employers from the salary or wages of employees reflect the Medicare levy thresholds which applied for 1992-93. The new low income thresholds for Medicare levy purposes for 1993-94 are as follows -

•       the single person threshold is to be $12,688 (at present $11,887) with "shading in" in the range $12,689 to $13,643;

•       the family income threshold (base amount) is to be $21,366 (at present $20,070); and

•       the additional amount applied for each dependant child under 16 or dependant student in calculating the family income is unchanged at $2,100.

The tax rates reduction and the Medicare low income threshold changes will be achieved by amending regulations 70, 72 and 73 of the Income Tax Regulations and by repealing the existing Schedule 3 to the Income Tax Regulations and substituting a new Schedule 3. The Schedule contains a series of tables specifying the values of components to be used in a formula from which an employee's weekly tax instalment amount will be calculated and takes account also of the Medicare levy imposed by the Medicare Levy Act 1986.

The amendments to regulation 80 are to facilitate the removal of concessional tax treatment that presently applies to certain lump sum payments in respect of unused annual and long service leave made on termination of employment.

The amendment to regulation 82 is to increase the rate of deduction from certain lump sum in arrears payments, called "eligible lump sums" in the relevant section (s. 159ZR) of the Act, from 22.25 per cent to a rate of 22.4 per cent. The higher rate updates the rate of deduction prescribed, as is the case with regulation 80, to incorporate the increase in the Medicare levy from 1.25 per cent to 1.4 per cent.

Details of the amending regulations are set out in the Attachment.

ATTACHMENT

Details of Income Tax Regulations Amendments

Commencement

By subregulation 1.1 the amending Regulations come into operation on 15 November 1993.

Amendment

Subregulation 2.1 states that the Income Tax Regulations are amended as set out in the amending Regulations.

Regulation 70 (Interpretation)

Subregulation 3.1 amends the definition of the term "weekly family income threshold" in subregulation 70(1) of the Income Tax Regulations by adjusting the numerator and denominator in the formula that is part of the term. The term is used in relation to an employee who has declared in a Medicare levy variation declaration that he or she has a dependent spouse or one or more dependent children.

The term "weekly family income threshold" is the weekly equivalent of the family income threshold that may be used to determine a taxpayer's liability to Medicare levy when an assessment for the year of income is made. In effect, an employee's '"weekly family income threshold" amount is the maximum amount the employee who declares a dependant for Medicare levy purposes may earn in a week or part of a week before having an amount of Medicare levy included in his or her weekly tax instalment deductions.

The amount of "weekly family income threshold" is the amount rounded to the nearest cent, calculated in accordance with the formula

The component A is the family income threshold in relation to the employee as determined by section 8 of the Medicare Levy Act 1986. The denominator in the formula is to be changed to 52. The change is as a consequence of this threshold now being above the point where the annual leave loading is assumed to be $320. Without this change employees tax deductions would be less than required.

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

Regulation 4 amends regulation 72 of the Income Tax Regulations. Regulation 72 operates to determine the rate of deductions to be made from an employee's weekly earnings where

•       the employee claims the general exemption (the exemption from deduction on the salary or wages of a week that do not exceed $98) only, including an employee who may also be exempt from Medicare levy (a "prescribed person") but who has not furnished a Medicare levy variation declaration under regulation 86 in which the employee claims exemption from the levy (paragraph 72(1)(c)); or

•       the employee, not being a prescribed person, claims the general exemption and furnishes a Medicare levy variation declaration claiming exemption in whole or in part from the levy because he or she has a dependant (paragraph 72(1)(d)).

Paragraph (1)(c) of regulation 72 applies where paragraph (1)(d) does not apply, i.e., where the employee has not furnished a Medicare levy variation declaration or where the employee has furnished a variation declaration and the employee's relevant amount of earnings is less than $225 (to be increased by these regulations) or is equal to or greater than the "shading out point" in relation to the employee. The tax instalment amount is calculated using the formula in subregulation 71(3), and the components for the formula relevant to paragraph 72(1)(c), as set out in Table 1 of Schedule 3.

The "shading out point" in relation to an employee is the maximum amount the employee may earn in a week or part of a week before full Medicare levy, or in the case of a "prescribed person" half levy, is incorporated in his or her weekly tax instalment deduction amount. It is calculated in accordance with the definition of that expression in subregulation 70(1).

Paragraph (1)(d) of regulation 72 applies when an employee, not being a prescribed person, furnishes a Medicare levy declaration form to his or her employer and the relevant amount of earnings of the employee is within the Medicare levy shadingin range for the employee. That is, the employee's earnings are not less than $225 but less than the employee's "shading out point". The tax instalment amount is the amount calculated in accordance with paragraph (1)(c) reduced by the Medicare levy adjustment amount determined under subregulations 72( 2) and (3).

Paragraphs (2)(a) and (2)(b) of regulation 72 operate to remove from the amount of the tax instalment deductions calculated for subparagraph 72(1)(d)(ii) an amount of Medicare levy already included in the instalment deductions by the operation of the formula in regulation 71. The removal is necessary in these instances because the level of the weekly earnings is below the Medicare levy threshold (i.e., the weekly family income threshold). Paragraph (2)(c) operates to shade-in the levy when the weekly earnings of the employee are just above the level of the weekly family income threshold.

Subregulation 4.1 makes the necessary amendments to subparagraph 72(1)(d)(ii) and paragraphs 72(2)( a) and 72(2)(b) of the Income Tax Regulations to account for the new 1993-94 low income threshold for individuals above which the Medicare levy is included in instalment deductions. The amendments substitute references to threshold amounts determined on the basis of the new Medicare levy thresholds.

Corresponding increases to reflect the 1993-94 Medicare levy thresholds are reflected in components in items numbered 2, 3, 4, 5, 6 and 7 in Table 1 of the new Schedule 3 to be inserted in the Income Tax Regulations by regulation 9 of the amending Regulations.

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

Regulation 5 amends regulation 73 of the Income Tax Regulations. Regulation 73 prescribes the tax instalment amount for an employee who is a prescribed person (that is, a person exempt from Medicare levy) and who claims the general exemption; and furnishes a Medicare levy variation declaration to his or her employer under regulation 86 in which the employee declares

•       that he or she is exempt from Medicare levy by virtue of being a "prescribed person" with no dependants or with dependants who are also prescribed persons; or

•       that he or she has a dependant who is not a "prescribed person" and the employee is entitled to full or partial relief from the levy.

Paragraph (c) of subregulation 73(1) applies where the employee has no dependants for Medicare levy purposes or has one or more dependants, each of whom is also a "prescribed person". Where paragraph (c) applies, the tax instalment amount is calculated using the formula in subregulation 71(3), and the components for the formula relevant to paragraph 73(1)(c) as set out in Table 2 of Schedule 3.

Paragraphs (d) and (e) of subregulation 73(1) apply where an employee has a dependent spouse who is not a "prescribed person" or one or more dependent children who are not prescribed persons. By paragraph (e) where the employee's relevant amount of earnings is less than $380 (to be increased by these regulations) or is equal to or greater than the ' "shading out point" in relation to the employee, the tax instalment amount is calculated by using the formula and the components shown in Table 3 of Schedule 3. By the operation of the formula specified, no Medicare levy is included in the tax instalment amount for earnings less than $380 and where the relevant amount of earnings exceeds the employee's "shading out point", levy at half the 1.4 per cent rate is included.

Paragraph (e) of subregulation 73(1) applies where the employee's relevant amount of earnings is within the range where Medicare levy is shaded-in. The tax instalment amount is the amount calculated as if paragraph (d) applied. By the operation of the formula specified in regulation 71, Medicare levy is included in the tax instalment deductions at the relevant level of earnings and it is necessary to make a reduction to shade-in the levy.

Subregulations (2) and (3) of regulation 73 set out the basis for the calculation of the Medicare levy adjustment amount (the reduction) referred to in paragraph 73(1)(e) in much the same way as the Medicare levy adjustment amount is calculated in accordance with subregulations 72(2) and (3) (see earlier notes for an explanation of the operation of those subregulations). The formulae in paragraphs (a), (b) and (c) of subregulation 73(2) allow for the operation of sections 8 and 9 of the Medicare Levy Act 1986 that provide for levy to shade-in for an employee who is not a "prescribed person".

Regulation 5 makes the necessary amendments to paragraphs 73(1)(e), 73(2)(a) and 73(2)(b) of the Income Tax Regulations to account for the new. 1993-94 low income family threshold. The amendments omit references to the 1992-93 weekly equivalent Medicare levy thresholds and substitute references to the threshold amounts determined on the basis of the new Medicare levy thresholds.

Corresponding increases to reflect the 1993-94 Medicare levy thresholds are reflected in components in items 2, 3, 4, 5, 6 and 7 in Table 3 of the new Schedule 3 to be inserted in the Income Tax Regulations by regulation 9.

Regulation 80 (Rate of deductions-employee in receipt of certain retirement amounts etc.)

Subregulation 6.1 omits paragraphs 80(b) and (c) and replaces them with paragraphs reflecting the payments of lump sums in respect of unused annual and long service leave paid on termination of employment that will continue to be subject to concessional tax treatment. These payments are those accrued up to 17 August 1993 and payments to taxpayers who terminate their employment by reason of a bona-fide redundancy, invalidity or as part of an approved early retirement scheme.

Lump sum payments of unused annual and long service leave accrued after 17 August 1993, that are not paid in respect of bona-fide redundancy, invalidity or as part of an approved retirement scheme, will be taxed at the taxpayer's marginal rate (deduction of instalments determined using the approach shown in new regulation 80A by regulation 7.

Subregulation 6.2 omits the words "payments of" from regulation 80. This is purely a technical drafting amendment that does not affect the function of the regulation.

Subregulation 6.3 updates the rate of deduction prescribed by regulation 80 to incorporate the increase in the Medicare levy from 1.25 per cent to 1.4 per cent.

New regulation 80A (Rate of deductions-employee in receipt of retirement amounts etc, not included in regulation 80)

Regulation 7 inserts a new regulation (regulation 80A) that prescribes the method of calculation of tax instalments to be deducted from lump sum payments of unused annual and long service leave accrued after 17 August 1993, that are not paid in respect of bona-fide redundancy, invalidity or as part of an approved retirement scheme (i.e. no longer subject to concessional tax treatment, therefore not included in regulation 80, and now taxed at the taxpayer's marginal rate).

The method calculates tax instalment deductions on a lump sum paid as if the lump sum were paid over the whole year, rather than as a lump sum in a single pay period, so that the amount deducted is more appropriate to the increased taxable income (including the lump sum) of the taxpayer upon his or her assessment.

Regulation 82 (Rate of deductions where eligible lump sum is included)

Subregulation 8.1 omits the rate of 22.25 cents from Regulation 82 and replaces it with a rate of 22.4 cents. This amendment is to increase the rate of deduction from certain lump sum in arrears payments, called "eligible lump sums" in the relevant section (s. 159ZR) of the Act. The higher rate updates the rate of deduction prescribed, as is the case with regulation 80, to incorporate the increase in the Medicare levy from 1.25 per cent to 1.4 per cent.