Bills Digest No. 18, 2013–14              2 December 2013

Clean Energy (Income Tax Rates and Other Amendments) Bill 2013

Kai Swoboda
Economics Section 

This Bills Digest is one of five that relate to the package of Bills introduced to repeal the carbon price mechanism.

Date introduced: 13 November 2013

House:  House of Representatives

Portfolio: Treasury

Commencement:  The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

The Bills Digest at a glance

Purpose of the Bill

·    The Bill repeals legislated changes to the tax-free threshold, tax rates and tax offsets for individual taxpayers which will otherwise occur from 1 July 2015.

Related measures

·    This Bill forms part of a package of measures to repeal the carbon price mechanism (CPM). The package comprises 11 separate Bills.

Background

·    The CPM is a cap-and-trade emissions trading scheme that began with a three-year fixed price. This fixed price phase led to the scheme being referred to as a ‘carbon tax’. This phase is legislated to end in 2015 when the scheme transitions to a full emissions trading scheme, with links to other carbon markets.

·    The tax changes that the Bill repeals were part of household compensation arrangements as a result of higher expected prices that would flow through the economy with the implementation of the carbon price mechanism (CPM).

·    The currently legislated tax changes from 1 July 2015 provide for an annual tax cut of $228 for taxpayers with a taxable income of between $22,000 and $37,000, with the amount of tax cut declining after this income threshold to $13 for taxpayers with a taxable income of more than $80,000.

Financial implications

·    The Bill has no financial impact over the forward estimates. This is due to the deferral of the tax changes until 2018–19 announced in the 2013–14 Budget by the former Government.

Purpose of the Bill

The purpose of the Clean Energy (Income Tax Rates and Other Amendments) Bill 2013 (the Bill) is to amend the Clean Energy (Income Tax Rates Amendments) Act 2011[1] and the Clean Energy (Tax Laws Amendment) Act 2011[2] so that both Acts have their future operative provisions repealed. Both Acts have provisions already in operation and these would not be repealed. The Bill would thus:

·    repeal an increase in the nominal tax-free threshold from $18,200 in 2014–15 to $19,400 in 2015–16

·    maintain the second personal marginal tax rate at 32.5 per cent rather than increase it to 33 per cent from 2015–16

·    maintain the maximum value of the low income tax offset[3] (LITO) at $445 rather than change the maximum value of the LITO to $300 from 2015–16 and

·    maintain the threshold below which a person may receive LITO at a taxable income of $66,667 and the withdrawal rate at 1.5 per cent, rather than the income threshold increasing to $67,000 and the withdrawal rate falling to 1 per cent from 2015–16.

Structure of the Bill

The Bill contains two Schedules. Schedule 1 amends the Clean Energy (Income Tax Rates Amendments) Act 2011 to repeal the increase in the nominal tax-free threshold and increase in the second personal marginal tax rate. Schedule 2 amends the Clean Energy (Tax Laws Amendments) Act 2011 to maintain the existing income threshold and withdrawal rate for the LITO.

Structure of the broader legislative package

The broader carbon tax repeal package comprises 11 Bills. The purpose of these Bills is to repeal the arrangements implemented by the former Government to establish the CPM.

The CPM is a framework that internalises into the cost of production of certain goods and services, the cost on the economy of greenhouse gas emissions resulting from that production. To create this framework, the architecture for an emissions trading scheme was established. This comprised a period during which carbon prices would be fixed (2012–13 to 2014–15), and a period during which the carbon price would fluctuate with market forces (from 1 July 2015). To support the framework several new government agencies were established. Income tax and social security payments were also changed. This was to compensate households for the expected higher costs of living.

The 11 separate Bills cover five main areas associated with the repeal (Table 1).[4]

Table 1              Broader carbon tax repeal package

Bills

Description

·    Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 (the ‘Main Repeal Bill’)

·    Repeals the Clean Energy Act 2011, the main piece of legislation that established the carbon price mechanism. Also facilitates the collection of liabilities relating to the 2013–14 financial year; introduces new powers for the ACCC and removes assistance to the steel industry by repealing the Steel Transformation Plan Act 2011.

·    True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2013

·    True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2013

·    Apply consequential amendments required by the Main Bill to recover the value of over allocated free emissions permits that provide assistance to energy intensive trade-exposed activities under the CPM.

·    Customs Tariff Amendment (Carbon Tax Repeal) Bill 2013

·    Excise Tariff Amendment (Carbon Tax Repeal) Bill 2013

·    Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Carbon Tax Repeal) Bill 2013

·    Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment (Carbon Tax Repeal) Bill 2013

·    Ozone Protection and Synthetic Greenhouse Gas (Import Levy) (Transitional Provisions) Bill 2013

·    Repeal provisions that apply an equivalent carbon price to aviation fuel, synthetic greenhouse gases and liquid and gaseous fuels used for certain purposes.

·    Apply transitional arrangements for the import of bulk synthetic greenhouse gases between 1 April and 30 June 2014.

·    Clean Energy (Income Tax Rates and Other Amendments) Bill 2013

·    Repeals personal income tax cuts set to commence on 1 July 2015, and repeals the associated amendments to the low income tax offset.

·    Climate Change Authority (Abolition) Bill 2013

·    Abolishes the Climate Change Authority and the Land Sector Carbon & Biodiversity Board.

·    Clean Energy Finance Corporation (Abolition) Bill 2013

·    Abolishes the Clean Energy Finance Corporation.

The Bills Digest for the Main Repeal Bill includes most of the general background and arguments about the repeal of the CPM.[5] This Bills Digest covers the Bill that repeals legislated income tax cuts that were part of compensation arrangements upon the implementation of the flexible price period from 1 July 2015.

Background

Before the 2013 election, then Opposition leader Tony Abbott pledged that a Coalition Government would, as its first item of business, repeal the CPM. According to Abbott, the 2013 election was a ‘referendum on the carbon tax’, implying that a vote for the Coalition constituted a vote against the CPM.[6] As promised, the newly-elected Coalition Government released exposure drafts of eight repeal Bills on 15 October 2013. Submissions were accepted until 4 November 2013 to allow for the Bills to be introduced into the House of Representatives on the first day of the 44th Parliament.[7] On 13 November 2013, a package of 11 such Bills was introduced.

The carbon price mechanism (CPM)

The CPM requires that any facility with greenhouse gases emissions above an annual threshold must surrender emission permits to the government, where one permit represents one tonne of carbon dioxide equivalent (CO2e)[8] emitted. The annual threshold is 25,000 tonnes of CO2e per facility and applies only to industrial processes, stationary energy, waste, and fugitive emissions. As at 1 November 2013, the scheme imposed obligations to surrender permits on 351 liable entities,[9] accounting for about 60 per cent of Australia’s greenhouse gas emissions.[10]

Domestic aviation, shipping and rail transport, and non-transport use of fuels are included through an equivalent carbon price enacted through separate legislation.[11] Agriculture, forestry and fishing sectors have no liability under the CPM but may participate through a scheme known as the Carbon Farming Initiative (CFI).

Household compensation arrangements under the carbon price mechanism

As part of the original carbon price arrangements, a fixed price period was to apply for the first three years (2012–13 to 2014–15) and then the carbon price was to be set in an emissions trading scheme (ETS) from 1 July 2015. The assumption for the carbon price was for prices to continue to increase over future years, but for a higher one-off increase in 2015–16 with the transition to the ETS (Figure 1).

Figure 1              Australian carbon price as modelled for the CPM package, July 2011, May 2013 and August 2013

Australian Government, Budget strategy and outlook: budget paper no. 1: 2013–14, Canberra, May 2013, p. 2–48, accessed 27 November 2013; Secretary to the Treasury and the Secretary to the Department Finance and Deregulation, Pre-election economic and fiscal outlook 2013, August, 2013, p. 55, accessed 27 November 2013.

In terms of the overall impact on prices, Treasury modelling estimated that the consumer price index (CPI) would increase by 0.7 per cent in 2012–13 with the introduction of the CPM, with a further 0.2 per cent increase in 2015–16.[12]

Impacts of rising prices on most households were designed to be largely offset by a compensation package that consisted of lifting the tax-free threshold and additional social security payments for eligible persons and households. The then Government claimed that households would receive a combination of increased payments or tax cuts worth an average of $10.10 per week[13] and that nine out of 10 Australian families would receive assistance.[14]

Of the compensation provided to households, the changes to income tax rates and thresholds accounted for $8 billion of the $15.4 billion of assistance provided to low-to middle-income households.[15]

‘Nominal’ and ‘effective’ tax-free thresholds and tax rates

Income tax thresholds and tax rates are set out in numerical values in the Income Tax Rates Act 1986 (ITRA). However, these nominal values can be affected by the application of various tax offsets (also referred to as rebates) that taxpayers may be eligible for. Taking account of these offsets, taxpayers may face different effective thresholds in the assessment of their taxable income.

One important tax offset in the application of the tax-free threshold is the low income tax offset (LITO). As the LITO in 2012–13 is available to all individuals below a specified taxable income threshold ($66,667), it creates an effective tax free threshold at a point higher ($20,542) than the nominal threshold ($18,200). With the maximum LITO ($445) withdrawn at a rate of 1.5 per cent for those with a taxable income of more than $37,000, all taxpayers up to the maximum threshold ($66,667) face an effective tax rate this is different to the nominal tax rates that apply in the absence of the LITO (Figure 2).

Figure 2              Effective marginal tax rates (EMTRs) including LITO and the Medicare levy for an individual (2010–11 and 2012–13)

Source: Australian Government, Tax reform: next steps for Australia, Tax forum discussion paper, Canberra, 2011, p. 10, accessed 27 November 2013.

Income tax changes implemented as part of the Clean Energy Future package

The major changes to income tax arrangements as part of the Clean Energy Future package were to:

·    increase the nominal tax-free threshold from $6,001 to $18,201 from 2012–13 and then to $19,401 from
2015–16

·    reduce the Low Income Tax Offset (LITO) from $1,500 to $445 from 2012–13 and then to $300 from 2015–16, with changes to the withdrawal thresholds and rates and

·    increase the marginal tax rate for those earning between $37,000 and $80,000 from 30 per cent to 32.5 per cent in 2012–13 and then to 33 per cent from 2015–16.

A summary of these changes in presented in Table 2.

Table 2              Changes to income tax scales and the low income tax offset related to the implementation of the CPM

2011–12

2012–13

2015–16

Threshold ($)

Marginal rate

Threshold ($)

Marginal rate

Threshold ($)

Marginal rate

1st rate

6,001

15%

18,201

19%

19,401

19%

2nd rate

37,001

30%

37,001

32.5%

37,001

33%

3rd rate

80,001

37%

80,001

37%

80,001

37%

4th rate

180,001

45%

180,001

45%

180,001

45%

Effective tax-free threshold

16,000

20,542

20,979

Low income tax offset

1,500

4% withdrawal rate from 30,000

445

1.5% withdrawal rate from 37,000

300

1.0% withdrawal rate from 37,000

Source: Australian Government, Securing a clean energy future: the Australian Government’s climate change plan, op. cit., p. 42.

The effect of these income tax changes was to deliver an annual tax cut of at least $300 for taxpayers with a taxable income of between $18,000 and $68,000 in 2012–13 (Figure 3). When the second round of changes were to be implemented in 2015–16, an annual tax cut of $228 would have been received by taxpayers with a taxable income of between $22,000 and $37,000, with the amount of tax cut declining after this income threshold.

Figure 3              Tax cuts arising from proposed changes to income tax scales and the low income tax offset, by
level of taxable income

Source: Parliamentary Library estimates.

Changes proposed by the former Labor Government

Changes to the original clean energy future package made in mid-2012 implemented a one-way link to the European Union (EU) ETS. In the face of a significant fall in carbon prices in the EU ETS in 2012 and early 2013, the former Labor Government announced, as part of the 2013–14 Budget, that the income tax cuts scheduled to commence on 1 July 2015 would be deferred ‘due to revisions in carbon price projections from 2015-16 onwards’.[16] This measure was estimated to have a gain to revenue of $1.5 billion over the forward estimates period to 2016–17.

This policy change was not legislated, however it has already been included in the budget estimates.

A further change to the CPM was proposed prior to the 2013 election to bring forward the flexible price period from 1 July 2015 to 1 July 2014.[17]

Committee consideration

Senate Standing Committee on Environment and Communications

The 11 Bills, including this one, have been referred to the Senate Standing Committee on Environment and Communications for inquiry and report by 2 December 2013. Details of the inquiry are at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications.[18]

The reasons given for referral were:

The Carbon Tax has significantly impacted Australian households and businesses. The Committee will review the Bills and report to the Senate on: costs to households and businesses from Labor's Carbon Tax; and the impact of the Carbon Tax on business costs including mining, manufacturing and small business.

…

To ensure proper scrutiny of these Bills and their impact on Australia's efforts to tackle climate change and carbon pollution.[19]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing, the Senate Standing Committee for the Scrutiny of Bills has not reported on the Bill.

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights has not yet reported on the Bill. As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[20] The Government considers that the Bill is compatible because it does not raise any human rights issues.

Policy position of non-government parties/independents

The policy positions of non-government parties/independents on the broader carbon tax repeal package is summarised in the Bills Digest for the Main Repeal Bill.[21]

Financial implications

The Explanatory Memorandum notes that the financial impact of the Bill is nil over the forward estimates (2013–14 to 2016–17).[22] The nil cost over the forward estimates is due to the budget already including a deferral of the higher tax-free threshold and LITO changes from 2015–16 to 2018–19 as announced in the 2013–14 Budget.[23]

Key issues and provisions

The changes to 2015–16 income tax arrangements were legislated by the Clean Energy (Income Tax Rates Amendments) Act 2011 and Clean Energy (Tax Laws Amendments) Act 2011. In order to prevent these changes taking place from 1 July 2015, these Acts need to be amended. Textually the Bill is very simple. It removes the outstanding commencement provisions, and the Part to which the commencement provisions would otherwise apply (in both cases this is Part 2 of Schedule 1 of the relevant Act). Under both Acts the commencement date was to have been 1 July 2015.

Threshold and marginal rates changes

Income tax thresholds and marginal tax rates are prescribed in the Income Tax Rates Act 1986 (ITRA).[24] Part 2, Schedule 1 of the Clean Energy (Income Tax Rates Amendments) Act 2011 amended the ITRA from 1 July 2015 to lift the definition of the tax-free threshold from $18,200 to $19,400 and to increase the marginal tax rate for those earning more than $37,000 but not more than $80,000 from 32.5 per cent to 33 per cent. The Bill would repeal the changes.

Low income tax offset changes

Part 2 of Schedule 1 of the Clean Energy (Tax Laws Amendments) Act 2011 amended the Income Tax Assessment Act 1936[25] from 1 July 2013 to provide for an increase in the threshold for the LITO from $66,667 to $67,000 and provides for a reduction in the value of the maximum LITO rebate from $445 to $300 and a reduction in the taper rate from 1.5 cents for every dollar above $37,000 to 1.0 cents for every dollar above $37,000. Once again the Bill would repeal these changes.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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ISSN 1328-8091

[1].              Clean Energy (Income Tax Rates Amendments) Act 2011, accessed 28 November 2013.

[2].              Clean Energy (Tax Laws Amendments) Act 2011, accessed 28 November 2013.

[3].              The LITO is a tax offset that effectively lifts the nominal tax-free threshold for eligible tax payers (those with a taxable income of less than $66,667). The LITO is not a fixed amount. Rather, those with a taxable income up to $37,000 are eligible for the maximum amount ($445) and those with a taxable income of between $37,000 and $66,667 face a reduction from the maximum amount (withdrawal rate) of $1.50 for every $1 earned above $37,000.

[4].              The Library will produce five separate Bills Digests covering these 11 Bills. These will cover (1) the Main Repeal Bill and the Bills relating to the true-up levy short fall, (2) the repeal of the equivalent carbon price arrangements, (3) the abolition of the CCA and the Land Sector Carbon & Biodiversity Board, (4) the abolition of the CEFC and (5) the repeal of the personal income tax cuts scheduled to commence from 1 July 2015 (this Digest). Each of these Bills Digests will be available from the Library’s Bills Digests alphabetical index 2013–14, accessed 28 November 2013.

[5].              A Talberg, K Swoboda, J Tomaras and P Pyburne, Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 [and] True-up Shortfall Levy (General) (Carbon Tax Repeal) Bill 2013 [and] True-up Shortfall Levy (Excise) (Carbon Tax Repeal) Bill 2013, Bills digest, 16, 2013–14, Parliamentary Library, Canberra, 2013, accessed 2 December 2013.

[6].              T Abbott (Leader of the Opposition), Address to the National Press Club, Election 2013, transcript, 2 September 2013, p. 5, accessed 31 October 2013. The speech emphasised the carbon tax, referred to the referendum concept, and dealt with a range of issues.

[7].              Department of the Environment, ‘Repealing the Carbon Tax - call for public comment’, Department of the Environment website, accessed 31 October 2013.

[8].              Carbon dioxide equivalent is the amount of carbon dioxide (CO2) and/or non–CO2 greenhouse gases that equal the global warming potential of an equivalent amount of CO2 over a given timeframe, usually 100 years.

[9].              Clean Energy Regulator (CER), ‘LEPID for 2012–13 financial year as at 29 November 2013’, CER website, accessed 30 November 2013.

[10].              Clean Energy Regulator (CER), ‘About the carbon pricing mechanism’, CER website, viewed 30 November 2013.

[11].              An equivalent carbon price is applied to aviation fuel by the Excise Tariff Act 1921 and the Customs Tariff Act 1995. An equivalent carbon price is applied to synthetic greenhouse gases by the Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Act 1995 and the Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Act 1995. An equivalent carbon price is applied to taxable fuels used for certain purposes through a reduction in the Fuel Tax Credit by the Fuel Tax Act 2006.

[12].              Treasury, Strong growth, low pollution: modelling a carbon price, Treasury, 10 July 2011, p. 8, accessed 21 October 2013.

[13].              Australian Government, Securing a clean energy future: the Australian Government’s climate change plan, July 2011, p. 39, accessed 25 November 2013.

[14].              J Macklin (Minister for Families, Housing, Community Services and Indigenous Affairs), ‘Second reading speech: Clean Energy (Household Assistance Amendments) Bill 2011’, House of Representatives, Debates, 13 September 2011, p. 9858, accessed 25 November 2013.

[15].              Explanatory Memorandum (Revised), Clean Energy Bill 2011, p. 40, accessed 28 November 2013. Bills Digests for the Bills to implement compensation arrangements for eligible individuals under the original clean energy future package include: P Yeend and L Buckmaster, Clean Energy (Household Assistance Amendments) Bill 2011, Bills Digest, 58, 2011–12, Parliamentary Library, Canberra, 2011, accessed 14 October 2013 and K Swoboda, Clean Energy (Income Tax Rates Amendments) Bill 2011 [and] Clean Energy (Tax Laws Amendments) Bill 2011, Bills Digest, 65, 2011–12, Parliamentary Library, Canberra, 2011, accessed 21 October 2013.

[16].              Australian Government, Budget measures: budget paper no. 2: 2012–13, Commonwealth of Australia, Canberra, 2013, p. 24, accessed 25 November 2013.

[17].              K Rudd (Prime Minister), Australia to move to a floating price on carbon pollution in 2014, media release, 16 July 2013, accessed 13 November 2013.

[18].              Senate Standing Committee on Environment and Communications, Inquiry into the Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 [Provisions] and related Bills, The Senate, Canberra, 2013, accessed 28 November 2013.

[19].              Selection of Bills Committee, Report No. 9 of 2013, The Senate, Canberra, 14 November 2013, pp. 8 and 9, accessed 15 November 2013.

[20].              The Statement of Compatibility with Human Rights is at page 6 of the Explanatory Memorandum, Clean Energy (Income Tax Rates and Other Amendments) Bill 2013, accessed 25 November 2013.

[21].              A Talberg, J Tomaras and K Swoboda, op. cit.

[22].              Explanatory Memorandum, Clean Energy (Income Tax Rates and Other Amendments) Bill 2013, op. cit., p. 5.

[23].              Australian Government, Budget measures: budget paper no. 2: 2012–13, op. cit.

[24].              Income Tax Rates Act 1986, accessed 28 November 2013.

[25].              Income Tax Assessment Act 1936, accessed 29 November 2013.