Chapter 2 - Implementation of the levy


Chapter 2 - Implementation of the levy

Details of the levy

2.1        The temporary flood and cyclone reconstruction levy will be implemented by minor amendments to the Income Tax Assessment Act 1997, the Income Tax Rates Act 1986 and the Income Tax (Transitional Provisions) Act 1997.[1]

2.2        The changes introduce a one-year progressive flood and cyclone reconstruction levy in the form of additional income tax.[2] Taxpayers liable to pay the levy will be required, after working out their income tax liability for a year, to pay additional income tax for the 2011-12 financial year.

2.3        It is expected that the implementation of the temporary levy will raise $1.8 billion.[3]

Rate of the levy

2.4        As the levy is progressive, it ensures that taxpayers with a greater capacity to pay will contribute more to the rebuilding effort. Taxpayers with taxable income less than $50,000 will not be liable to the levy.[4]

2.5        The Income Tax Rates Amendment (Temporary Flood and Cyclone Reconstruction Levy) Bill 2011 introduces a new section into the Income Tax Rates Act 1986 that will specify the rate of the levy and the income thresholds from which it applies.

Rate of temporary flood and cyclone reconstruction levy

Item

For the part of the taxable income of the taxpayer that:

The rate is:

1

exceeds $50,000 but does not exceed $100,000

0.5%

2

exceeds $100,000

1%

Source: Income Tax Rates Amendment (Temporary Flood and Cyclone Reconstruction Levy) Bill 2011, lines 12-13, p. 3.

2.6        Appearing before the committee, Treasury explained the likely effects of the levy for the average taxpayer:

Mr Willcock—...it needs to be borne in mind that what we are talking about is a one-year temporary levy and for people whose income is between $50,000 and $100,000 that levy will mean a 0.5 per cent increase in the income tax they will pay and for people above $100,000 it will mean a one percentage point increase. In looking at what behavioural responses that one-year small increase in tax liability will have, I would be cautious in saying that that is going to have significant impacts and people will change behaviours significantly one way or the other. I would be cautious in assuming that people would take, if you like, a lot of action to minimise their liability, although if they do have some one-off payment of a large form of taxable income they may well think about the management of their affairs to ensure that they can cope with that. But in the ordinary course, if a person is a wage and salary earner and they enter this year with the wage and salary that they have right now, I do not imagine they will have a lot of behavioural responses.

...we are not talking about for many people a large hit to their income, especially at levels between $50,000 and $100,000. We are talking about a fairly small weekly effect to income levels. On that basis, I would be surprised if a lot of people engaged in a lot of behavioural change.

Mr O’Connor—To support my colleague on that, looking at the Prime Minister’s press release of 27 January 2001 we see the example that a person on earnings of $68,125 will pay $1.74 per week.

Mr Willcock—That [$68,125] is effectively average adult annual earnings.[5]

2.7        Treasury drew the committee's attention to information published by the Prime Minister which calculates the weekly flood levy for a range of taxable income levels up to $200,000:

Taxable income
($)

Weekly flood levy
($)

50,000 or less

0.00

55,000

0.48

60,000

0.96

65,000

1.44

70,000

1.92

75,000

2.40

80,000

2.88

90,000

3.85

100,000

4.81

110,000

6.73

120,000

8.65

130,000

10.58

140,000

12.50

150,000

14.42

160,000

16.35

170,000

18.27

180,000

20.19

200,000

24.04

Source: The Hon Julia Gillard MP, Prime Minister, Rebuilding after the floods, Media Release, 27 January 2011, Attachment 3.

Timing of the levy

2.8        The proposed changes detailed in the bills that will introduce the levy will also ensure its temporary nature. They do this by clearly identifying in their provisions that the levy only applies to the 2011-12 financial year and through the inclusion of sunset clauses.[6]

2.9        When appearing before the committee, representatives from the Treasury and the Australian Taxation Office described the importance of the quick passage of the bills:

...if the legislation were passed by the parliament relatively speedily it would then mesh with the normal annual cycles that the ATO has leading up to the next tax year in terms of the development of withholding schedules and making other administrative arrangements. It means, for example, that when it comes to, say, software developers—the intermediaries between the tax arrangements that are enacted by the parliament and the employers and employees who are subject to tax obligations—they will have more time to prepare their software packages in a way that reflects these arrangements. It will mean that all that will be sorted by the ATO and by software developers in a timely way. So, come 1 July, it will be possible for employers dealing with wage and salary earners and the tax obligations that they may have—which employers are an intermediary of through the withholding arrangements—will have the two withholding schedules. The relevant individual will simply go to their employer and say, ‘I should be under this withholding schedule rather than that.’ Then through the rest of the year there will be no more bother for them—they will have that one engagement with the employer and the rest should flow.[7]

...I echo my colleague Mr Willcock’s comments that timely passage of the bill is of immediate importance to the administration so that we can commence that work. We have been working already on the implementation of the announced levy...given the short time frame for the proposed implementation, we have been very busy trying to work out just how this can be implemented. But we are confident that, assuming passage of the legislation, the implementation will be fine to proceed.[8]

2.10      The ATO explained that until the bills become law through receiving Royal Assent, they are not able to give specific direction to taxpayers; however behind the scenes they have initiated the work that will be required to support the changes.

Senator XENOPHON—Is it anticipated that the website will contain user-friendly information so that people, if they are going to be subject to an exemption, can apply for it? Is it anticipated that there will be some user-friendly information on the website or that officers will be able to provide that information by any hotline or by your regular telephone advisory service?

Mr O’Connor—Yes, certainly. I reiterate that time and passage is required until it is the law, and until then there is nothing we can do. But certainly we are working to develop our TaxPack information, scripting for call centres and information on the website.[9]

Collecting the levy

2.11      As the levy will be generally collected through the pay as you go withholding system for salary and wages, it is anticipated that, for the majority of taxpayers, their flood levy liability will have been satisfied by the additional amounts withheld by their employer.

Senator XENOPHON—Will most flood levy liability be paid in full through additional PAYG withholding requirements? In how many instances do you expect the commissioner will have to take collection action?

Mr O’Connor—I do not have the numbers of the expectations of any recovery action. You are probably pretty much on the money in relation to the withholding requirements from salary and wages...[10]

2.12       In those circumstances where the amounts withheld are insufficient, a taxpayer is not subject to the pay as you go withholding system, or a taxpayer has additional investment income that needs to be taken into account, they will be required to pay the outstanding levy amount. In such circumstances, if refundable tax offsets would have resulted in a refund (tax credit) for a taxpayer, the bill will enable the Commissioner to retain those amounts and apply them against the levy liability.[11]

2.13      When questioned about this aspect of the levy's administration, Tax Office representatives assured Senators that should there be unique circumstances where retaining a refund would cause hardship for the taxpayer in question that they may request that their refund not be withheld.

Senator XENOPHON—The bills enable the Commissioner of Taxation to withhold a tax refund credit that would otherwise be payable to a taxpayer to offset a flood levy liability. If, for some reason, a taxpayer who has a flood levy liability is facing some financial difficulty, will they be able to request that their refund not be offset?

Mr O’Connor—There are certainly provisions within the law...which provide for hardship provisions.

Senator XENOPHON—...they will be the same hardship provisions that apply generally?

Mr O’Connor—Generally I would suggest that.

Mr Willcock—Certainly, the...legislative design is such as to piggyback off all of the existing discretions and powers that the commissioner has.[12]

Exemptions

2.14      In announcing the levy the Prime Minister explained that the levy would not be payable by low income earners as a result of the $50,000 taxable income threshold.[13]

2.15      In addition to those excluded from the levy, the bill also ensures individuals affected by the recent natural disasters will not be required to pay the levy.[14] It does this through the inclusion of a legislative instrument making power which enables the Minister to specify that the levy provisions do not extend to individuals who are a member of a specific class of individuals. The Minister is restricted in his ability to specify classes of individuals who will not be liable for the levy by proposed subsection 4-10(3) of the levy bill which requires that a class of individuals can only be specified if that class was affected by an Australian natural disaster between 1 July 2010 and 30 June 2012.[15]

The legislative instrument

2.16      Treasury officials advised the committee that a draft of the legislative instrument has been released for consultation. It identifies those individuals who will be exempt from the levy as being:

(a)         Recipients of an Australian Government Disaster Recovery Payment;

(b)        Individuals affected by a disaster declared under the Natural Disaster Recovery and Relief Arrangements (NDDRA); and

(c)         New Zealand citizens holding special category visas who are not eligible for an Australian Government Disaster Recovery Payment despite meeting the eligibility requirements.[16]

2.17      Evidence collected throughout the course of the inquiry suggests that it would be impossible to target the levy to a complete level of accuracy without causing unnecessary complexity for what is a short application timeframe. The three classes of individuals identified in the legislative instrument however seek to achieve the most appropriate balance.

2.18      Senator Xenophon raised some concerns that individuals who have suffered lesser known disasters, such as the Stockport floods in South Australia who have also lost their homes, may be liable to the levy.[17]

2.19      In response to the concerns raised, Mr Willcock of the Treasury explained that if those areas of South Australia have been the subject of a declaration made under the NDRRA and at least one of the following conditions were satisfied:

  • the individual was seriously injured; or
  • an Australian was killed and that Australian was an immediate family member of the individual; or
  • the individual's principle place of residence was destroyed or sustained major damage; or
  • the individual was unable to gain access to their principle place of residence for at least 24 hours; or
  • they were stranded in their principle place of residence for at least 24 hours,

they would be covered by item 2 of the legislative instrument.[18]

2.20      Mr Robinson from Treasury confirmed that those individuals to whom Senator Xenophon referred would be exempt from the levy:

I am not familiar with the exact region you were talking about, but I can tell you that, according to the Disaster Assist website, for the severe weather situation in South Australia in early December 2010 NDRRA assistance was declared for the local government areas of the Clare Valley, the Gilbert Valley, Loxton, Waikerie, mid Murray and the Barossa.[19]

Unintended consequences

2.21      The temporary flood and cyclone reconstruction levy will be payable on an individual's taxable income. As a result there has been some concern that there will be unintended consequences for taxpayers in receipt of a superannuation lump sum, redundancy payout or other lump sum payment during the 2011-12 financial year if that payment would be included in their taxable income. Treasury and Tax Office representatives confirmed that this may be the case:

Senator XENOPHON—My final question relates to one that was raised with me by the timber worker from the south-east of South Australia who works for the Kimberly-Clark mill. He is likely to lose his job shortly and will be getting a redundancy package. A couple of hundred people have lost their jobs, unfortunately. The question that is being asked on behalf of those workers is: will redundancy payments intended to tide you over for a probable period of significant uncertainty be subject to the levy?

Mr Willcock—...the general proposition is that people pay the levy on taxable income above $50,001. The question then arises: what is the status of the particular redundancy payment that any individuals might receive in 2011-12—that is, to what extent do those payments amount to taxable income? That is not necessarily a straightforward issue. Some sort of golden handshake or other arrangements involve money that is taxable income and some do not. Where money comes to a person and is taxable income, then just as that taxable income will incur the Medicare levy and personal tax liabilities it will also incur the flood levy.

Senator XENOPHON—You can see the point of those workers who will be losing their jobs. They do not think it is fair that they pay a levy on their redundancy payout rather than on their ordinary taxable income.

...

Mr O’Connor—From the Australian Taxation Office’s point of view, the question of equity, which I understand, is really a question that goes to policy. As Mr Willcock said, if the individual payment is taxable income then, as the bill is currently drafted, yes, it will be subject to the levy.[20]

2.22      They suggest however that the rate of the levy is not large and therefore for both complexity and equity reasons exemptions of these payments in calculating taxable income for the purposes of liability to the flood levy are questions of policy.[21] It may be difficult to draft provisions to exempt payments such as redundancy payments without unintentionally excluding taxpayers with highly variable incomes yet who should be liable for the levy, or creating additional layers of complexity.

Navigation: Previous Page | Contents | Next Page