Chapter 12 Tax Offsets National Core Accounting Publications

Chapter 12 Tax Offsets © National Core Accounting Publications 1

Dependant Tax Offsets A taxpayer who directly contributes to the maintenance of a resident "dependant" may be entitled to a tax offset not greater than the maximum prescribed tax offset for each class of dependant. © National Core Accounting Publications 2

Dependants A dependant is classified as any one of the following: Spouse - means a married or de facto partner Invalid Relative *- means a taxpayer's child, brother or sister aged 16 years or older and who gets an invalid pension or equivalent rehabilitation allowance, or certified permanently incapacitated * This definition excludes in-laws. © National Core Accounting Publications 3

Dependants Child-housekeeper - means a taxpayer's child (including adopted or step-child) who is wholly engaged in keeping house for the taxpayer Parent - means a parent or parent-in-law of the taxpayer Child - means a taxpayer's child, spouse's child or adopted child under 21 years of age Student - means a taxpayer's child who is aged under 25 and who is a full-time student at school, college or university © National Core Accounting Publications 4

Dependants Where a child or student personally derives more than $1, 785 for a full year then that child or student is not counted as a dependent for tax offset purposes. Note that the invalid relative, child-housekeeper, parent, child and student dependant tax offsets are not directly available. They are notionally retained for the purposes of calculating other tax offset entitlements such as the Housekeeper, Medical expenses and Zone tax offsets. © National Core Accounting Publications 5

Maintaining a Dependant Maintaining a dependant means that a taxpayer has: i. resided with the dependant ii. given the dependant food, clothing, lodging, or iii. helped the dependant to pay for their living, medical or educational costs © National Core Accounting Publications 6

Overseas Dependants A tax offset is not allowed for a dependant who is a nonresident of Australia. However, the dependent spouse and children of a taxpayer are deemed to have the same domicile as the taxpayer. Thus, if a migrant’s spouse and children are overseas waiting to join that taxpayer in Australia, the migrant may be entitled to claim the dependent spouse tax offset. © National Core Accounting Publications 7

Eligibility for Dependency Tax Offsets Eligibility for a dependant tax offset is income tested according to the “income limit for family assistance purposes”. This income testing is based on the adjusted taxable income (ATI) of the taxpayer where the offset is claimed in respect of a spouse, or the combined ATI of the taxpayer and the taxpayer’s spouse where it is claimed in respect of any other class of dependant. The relevant ATI threshold for income testing of the offset is $150, 000 in 2013/14. © National Core Accounting Publications 8

Adjusted Taxable Income (ATI) ATI consists of: taxable income adjusted fringe benefits tax-free pensions or benefits target foreign income reportable super contributions total net investment losses from rental property, shares or managed investment schemes (excluding capital gains or losses) • less • deductible child maintenance expenditure • • • © National Core Accounting Publications 9

Adjusting for ATI Where a dependant derives ATI, the maximum tax offset is reduced by $1 for every $4 by which the ATI exceeds $282. i. e. ATI less $282 4 The ATO prescribes that cents are ignored in the calculation of the ATI adjustment (reduction). © National Core Accounting Publications 10

Types of Dependant Tax Offsets Dependant (Invalid and Carer) tax offset A taxpayer may only receive an amount of the Dependant (Invalid and Carer) Tax Offset if they contribute to the maintenance of their spouse, relative or spouse’s relative, who is genuinely unable to work due to invalidity or carer obligations and who is an Australian resident. © National Core Accounting Publications 11

Types of Dependant Tax Offsets Dependant (Invalid and Carer) tax offset Eligibility A taxpayer may be entitled to this offset for an income year if, during that year, they contributed to the maintenance of an eligible dependant. Eligible Dependants An eligible dependant may include: a taxpayer’s spouse, parent, child (aged 16 years or over), brother or sister (aged 16 years or over) who is genuinely unable to work due to invalidity; the taxpayer’s spouse’s parent, brother or sister (aged 16 years or over), who is genuinely unable to work due to invalidity; or, a taxpayer’s spouse or parent/parent-in-law, who is genuinely unable to work due to carer obligations. © National Core Accounting Publications 12

Types of Dependant Tax Offsets Dependant (Invalid and Carer) tax offset The maximum Dependant (Invalid and Carer) Tax Offset is equal to the highest value existing dependency offset, which is $2, 471 in 2013/14. It is indexed annually in line with the consumer price index. Note that where the dependant’s adjusted taxable income is $10, 166 or more in 2013/14 no offset is available. © National Core Accounting Publications 13

Types of Dependant Tax Offsets Spouse tax offset The dependent spouse tax offset can only be claimed by a taxpayer who contributes to the maintenance of a spouse who was born on or before 30 June 1952. In this situation, the spouse tax offset is claimed rather than the Dependant (Invalid and Carer) Tax Offset. Since 1 July 2012 taxpayers with a dependent spouse born on or after 1 July 1952 are not eligible for the dependent spouse tax offset. © National Core Accounting Publications 14

Illustrations: Dependant (Invalid and Carer) tax offset (a) Cersei maintained her brother Jaime who was genuinely unable to work due to invalidity and who received $8, 000 from a Disability Support Pension. (b) Debbie and Davos are married and Davos had an ATI of $170, 000 in 2013/14. Debbie, aged 35, does not work as she cares for her mother who receives an invalidity service pension. © National Core Accounting Publications 15

Illustrations: Dependant (Invalid and Carer) tax offset (c) Eddard has a dependent spouse, aged 25, with no ATI who is a full-time student. (d) Fritz and Felicity have a daughter Anne, aged 18, who received a disability support pension of $5, 282. Felicity does not work as she cares for Anne and she has no ATI. © National Core Accounting Publications 16

Illustrations: Dependant Spouse tax offset (e) Ahab has a dependent spouse, aged 65, who had ATI of $1, 500. They have no dependent children. (f) Bron has a dependent spouse, aged 84, who had $11, 000 ATI. They have no dependent children. © National Core Accounting Publications 17

Types of Dependant Tax Offsets Notional Housekeeper and Child-housekeeper tax offsets For the 2012/13 income year and beyond, the Housekeeper and Childhousekeeper tax offsets have been notionally retained only for the purposes of calculating the zone and overseas forces tax offsets. All other taxpayers may no longer receive a tax offset in respect of a housekeeper or child-housekeeper, as they may not meet the requirement of maintaining a dependant who is genuinely unable to work. © National Core Accounting Publications 18

Types of Dependant Tax Offsets Beneficiary tax offset Recipients of certain Commonwealth Government payments may be eligible for a Beneficiary tax offset. The maximum level of tax offset is determined according to the taxpayer’s age, marital status, place of residence, and if there are dependant children. © National Core Accounting Publications 19

Net Medical Expenses Tax Offset (NMETO) The NMETO may be available to a taxpayer whose “net eligible medical expenses” exceed a threshold (CPI adjusted limit). Persons with adjusted taxable incomes above the MLS threshold ($88, 000 for single taxpayers and $176, 000 for couples or families in 2013/14) face an increased threshold before being able to claim the medical expenses tax offset. © National Core Accounting Publications 20

Net Medical Expenses Tax Offset (NMETO) Adjusted taxable income below the MLS threshold For 2012/13 the medical expenses tax offset was calculated as follows: (Net Eligible Medical Expenses less CPI adjusted limit*) x 20% Adjusted taxable income above the MLS threshold For 2012/13 the medical expenses tax offset was calculated as follows: (Net Eligible Medical Expenses less $5, 000*) x 10% Note: * the 2012/13 thresholds of $2, 120 and $5, 000 are used for illustrative purposes as the 2013/14 thresholds had not been released at the time of preparation of these slides. © National Core Accounting Publications 21

Net Medical Expenses Tax Offset (NMETO) Transitional arrangements Only those taxpayers who claimed the NMETO for the 2012/13 income year will be eligible for the NMETO for the 2013/14 income year if they have eligible out of pocket medical expenses above the relevant thresholds. Similarly, only those who claim the NMETO in 2013/14 may be eligible for the NMETO in 2014/15. © National Core Accounting Publications 22

Net Medical Expenses Tax Offset (NMETO) Eligible medical expenses • • Doctors Chemists Hospital Dental Optical Nursing home Therapeutic treatment (provided referred by a doctor) © National Core Accounting Publications 23

Net Medical Expenses Tax Offset (NMETO) Not eligible medical expenses • Expenses incurred on vaccinations prior to an overseas trip (e. g. typhoid or cholera) would not be considered eligible medical expenses. • Medical and dental services and treatments that are solely cosmetic in nature do not qualify for the medical expenses tax offset. Ineligible medical expenses are payments for a cosmetic operation for which a Medicare benefit is not payable. • Payments for private health insurance, funeral expenses, ambulance subscriptions and charges, and travel and accommodation expenses associated with medical treatment are also not classified as medical expenses for tax offset purposes. • Funeral expenses. • Travel and accommodation expenses associated with medical treatment. • Ambulance charges and subscriptions. • Payments for chemist-type items made to retail outlets or health food stores, and payments to chemists for baby needs, toilet requisites, cosmetics, non-prescribed vitamins and health foods. © National Core Accounting Publications 24

Net Medical Expenses Tax Offset (NMETO) Eligible dependants For medical expenses tax offset purposes the definition of "dependant" means: • the spouse of the taxpayer. • a child of the taxpayer under 21 years of age. • any person for whom the taxpayer is entitled to a dependency tax offset or a child or student in respect of whom the taxpayer qualifies for a notional dependants tax offset of at least $1. © National Core Accounting Publications 25

Net Medical Expenses Tax Offset (NMETO) Net eligible medical expenses: Medical expenses paid - Reimbursements from medical/hospital benefits funds = Net eligible medical expenses © National Core Accounting Publications 26

Illustration: Calculation of NMETO S. Icke is single and had eligible medical expenses of $3, 950. She received refunds of $1, 525 from Medibank Private, a private health insurance fund. Health cover payments to Medibank Private were $1, 300. Her adjusted taxable income was $70, 000. S. Icke previously claimed the NMETO in the 2012/13 income year. Required: Calculate the Medical expenses tax offset. Solution: Net eligible medical expenses = $2, 425 (i. e. 3, 950 – 1, 525) Therefore, the Medical expenses tax offset is: (2, 425 – 2, 120) x 20% = $61 © National Core Accounting Publications 27

Illustration: Comprehensive – NMETO A resident taxpayer incurred the following medical expenses during the year ended 30 June 2014. Medical Practitioner $ 860 Chemist expenses – Cough mixtures 98 – Toilet paper 48 – Prescription medicines 127 – Condoms 176 Dental expenses – Fillings and extractions 990 – Dentures (purchased from a dental mechanic) 680 Medibank Private health insurance premium 824 Private Hospital bed and room charges 2, 850 Home nursing visits during recovery from hospital treatment 260 Naturopath (self initiated by taxpayer) 180 Wig (used by taxpayer during cancer chemotherapy) 155 Approved Nursing Home fees (in respect of grandfather) 5, 600 © National Core Accounting Publications 28

Illustration: Comprehensive – NMETO Other Information: • Refunds from Medibank Private were $2, 800. • All expenses, with the exception of nursing home expenses, were incurred by the taxpayer in respect of himself, his spouse and child (aged 15). • The wig was prescribed by a doctor. Required: Calculate the Medical Expenses tax offset. © National Core Accounting Publications 29

Illustration: Comprehensive – NMETO Solution: Medical Practitioner Chemist expenses – Cough mixtures – Prescription medicines Dental expenses – Fillings and extractions – Dentures (purchased from a dental mechanic) Private Hospital bed and room charges Home nursing visits during convalescence Wig (used by taxpayer during cancer chemotherapy) less Medibank Private refunds Net Eligible Medical expenses Therefore, the Medical Expenses tax offset is: (3, 220 – 2, 120) x 20% = $ 860 98 127 990 680 2, 850 260 155 6, 020 2, 800 3, 220 $220 © National Core Accounting Publications 30

Zone Tax Offset A tax offset is available to taxpayers who are residents of specified remote areas of Australia Zone A and Zone B. Zone A comprises areas where factors of isolation, uncongenial climate and high living costs are more pronounced, while Zone B comprises areas less badly affected. The tax offset for Zone A residents is higher than for Zone B residents. © National Core Accounting Publications 31

Zone Tax Offset © National Core Accounting Publications 32

Zone Tax Offset Amount of Zone tax offset The Zone tax offset comprises two parts: a fixed amount, and a percentage of a base amount © National Core Accounting Publications 33

Zone Tax Offset Amount of Zone tax offset Fixed amount Percentage of base amount Zone A $338 50% Zone B $57 20% $1, 173 50% Special area - Zone A or B © National Core Accounting Publications 34

Zone Tax Offset Base amount The base amount is made up of certain tax offsets to which the taxpayer is entitled, plus notional tax offsets. A notional tax offset is an offset to which the taxpayer would be entitled to if it was still allowable. The Zone tax offset base amount includes tax offsets to which the taxpayer is entitled for the income year for: • Dependant (Invalid and Carer) © National Core Accounting Publications 35

Zone Tax Offset Base amount The Zone tax offset base amount also includes: • • • Notional “with child” spouse Notional invalid relative Notional parent Notional sole parent Notional child-housekeeper or housekeeper © National Core Accounting Publications 36

Zone Tax Offset Base amount • Notional dependent children/student as follows: q each student aged under 25 years q first non-student aged under 21 years q other non-students aged under 21 years (includes pre-school age children) © National Core Accounting Publications $376 $282 37

Illustration: Calculation of Zone Tax Offset Bakka Bourke resided in a special area of Zone A for nine months during the year of income. He wholly maintained his wife and two dependent student children aged 10 and 15. His wife had ATI of $850, and the 15 year-old had $500 income from investments. His wife is eligible for FTB Part B. Required: Calculate the Zone tax offset entitlement for Bakka Bourke. Solution: Notional “with child” Spouse tax offset maximum is $2, 815 less ATI reduction (850 – 282) 4 Notional Dependent children/students tax offset 10 year-old child 15 year-old child less ATI reduction 376 – (500 – 282) 4 Therefore, the Zone tax offset is: $1, 173 plus 50% x ($2, 673 + $698) = $2, 859 $ 2, 815 142 2, 673 $ 376 322 698 Note: The taxpayer is not entitled to a Dependant (Invalid and Carer) tax offset. © National Core Accounting Publications 38

Mature Age Worker Tax Offset A mature age worker tax offset is available to taxpayers born before 1 July 1957 who satisfy the following two conditions: • the taxpayer is aged at least 55 years at the end of the income year, and • net income from working is less than $63, 000 (for the year ended 30 June 2014). © National Core Accounting Publications 39

Mature Age Worker Tax Offset Net income from working includes: • Net personal services income (e. g. wages, fees, salary) • Net business income • Reportable fringe benefits Net income from working excludes: • ETP’s and Superannuation benefits • Unused leave lump sum payments • Passive income (dividends, interest, annuities, royalties, capital gains, rental income) • Social security benefits © National Core Accounting Publications 40

Mature Age Worker Tax Offset For 2013/14 the Mature Age Worker tax offset is calculated as follows: Net Income from working Tax Offset amount $0 - $9, 999 5% of net income from working $10, 000 - $53, 000 $53, 001 - $62, 999 $500 reduced by %% for each dollar of net income from working in excess of $53, 000 $63, 000 + Nil © National Core Accounting Publications 41

Illustration: Mature Age Worker Tax Offset Khang, aged 58, derived gross wages of $40, 000 and had a reportable fringe benefit of $15, 000 for the year ended 30 June 2014. Required: Calculate Khang’s mature age worker tax offset. Solution: The Mature Age Worker tax offset is: 500 less (5% x (55, 000 – 53, 000)) = $ 400 © National Core Accounting Publications 42

Private Health Insurance Tax Offset The Private Health Insurance tax offset is a fully refundable tax offset allowed to eligible taxpayers who have taken out appropriate private health insurance. It can be taken either as a tax offset or as a direct reduction to the amount of the premium paid to the health insurer. It is income tested against three income tier thresholds. © National Core Accounting Publications 43

Private Health Insurance Tax Offset The 2013/14 income tier thresholds are as follows: No Tier 1 Tier 2 Tier 3 Singles $88, 000 or less $88, 001 102, 000 $102, 001 136, 000 $136, 001 or more Families $176, 000 or less $176, 001 204, 000 $204, 001 272, 000 $272, 001 or more Tax Offset percentage Aged under 65 Aged 65 -69 30% 20% 10% 0% 35% 25% 15% 0% Aged 70 or over 40% 30% 20% 0% © National Core Accounting Publications 44

Illustration: Calculation of Private Health Insurance Tax Offset Candy Floss, aged 25 and single, paid $1, 500 in gross premiums for private health insurance with Medibank Private for the year ended 30 June 2014. She elected not to take the reduced premium option. Her taxable income was $90, 000 for 2013/14. Required: Determine the income tier and calculate the Private Health Insurance tax offset. Solution: The income tier is Tier 1 as income for surcharge purposes is $90, 000 The Private Health Insurance tax offset is: 1, 500 x 20% = $300 © National Core Accounting Publications 45

Senior and Pensioner Tax Offset (SAPTO) A taxpayer may be eligible for a SAPTO if they meet all of the following conditions: • condition one – age • condition two – eligibility for Commonwealth age pension or similar payments • condition three – taxable income threshold, and • condition four – not in prison © National Core Accounting Publications 46

Senior and Pensioner Tax Offset(SAPTO) Condition one • • For the 2013/14 income year, a taxpayer will satisfy the age condition if on 30 June 2014, if they were: a male aged 65 years or more a female aged 64. 5 years or more a male veteran or war widower aged 60 years or more, or a female veteran or war widow aged 59. 5 years or more © National Core Accounting Publications 47

Senior and Pensioner Tax Offset (SAPTO) Condition two A taxpayer will satisfy this condition if at any time during the year if they were receiving a Commonwealth of Australia government age pension or allowance from the Department of Veterans’ Affairs. © National Core Accounting Publications 48

Senior and Pensioner Tax Offset (SAPTO) Condition three For 2013/14 the income thresholds are: SAPTO 2013/14 Rebate income Eligibility condition Threshold - max tax Above threshold offset applies no longer eligible Single and rebate income was less than: Couple and the combined rebate income of taxpayer and spouse was less than: Couple and at any time during the year they had to live apart due to illness or because one of was in a nursing home and the combined rebate income of the couple was less than: $32, 279 $57, 948 $50, 119 $83, 580 $62, 558 $95, 198 No change to the maximum tax offset values or the reduction rate applied for every $1 over the maximum rate threshold up to the cut-off threshold. © National Core Accounting Publications 49

Senior and Pensioner Tax Offset (SAPTO) Condition four A taxpayer must not have been in prison for the whole of the income year. © National Core Accounting Publications 50

Senior and Pensioner Tax Offset (SAPTO) The amount of the SAPTO available depends on the personal circumstances and the amount of rebate income of a taxpayer. If the taxpayer has a spouse, the calculation of the actual entitlement is based on individual income, even though eligibility for the SAPTO is dependent on both the taxpayer’s and the spouse’s combined rebate income. Category Single Each partner of a couple living apart due to illness or in a nursing home 2014 income 2014 cut-off income Maximum threshold * SAPTO $32, 279 $50, 119 $2, 230 $28, 974 $41, 790 $1, 602 $31, 279 $62, 558 $2, 040 © National Core Accounting Publications 51

Medicare Levy and SAPTO The Medicare Levy threshold amount for senior Australians who are eligible for the SAPTO in the 2013/14 income year is $32, 279. The Medicare Levy phase-in limit for senior Australians who are eligible for the SAPTO is $37, 975. Taxable Income Rate of Medicare Levy $0 to $32, 279 0% $32, 280 to $37, 975 10% of the difference between taxable income and $32, 279 (i. e. “shading-in”) $37, 976 and above 1. 5% of taxable income © National Core Accounting Publications 52

Illustration: Senior Medicare Levy Threshold Annie, a single resident taxpayer, aged 77, receives the Age pension and has investment income. Her taxable income in 2013/14 was $34, 000. She qualifies to receive the Senior and Pensioner tax offset. Required: Calculate the Medicare Levy for Annie. Solution: The Medicare Levy is $172. 10. i. e. (34, 000 less 32, 279) x 10% = $172. 10. © National Core Accounting Publications 53

Part-Year Tax Offsets Pro-rata calculations are made where a person is a dependant for part of an income year. e. g. due to marriage, death, divorce, child ceasing to be a full-time student under 25, resident for only part of the year. Any income derived by the dependant before becoming classified as a dependant does not form part of the ATI when adjusting the maximum tax offset. © National Core Accounting Publications 54

Illustration: Calculation of Part-Year Tax Offset Jack and Jill married on 1 January 2014. They have no dependent children and Jill derived $200 per month for the entire year. Jill’s date of birth was 15 November 1950. Required: Calculate Jack’s spouse tax offset for 2013/14. Solution: Therefore, the Spouse tax offset is: Maximum $2, 471 x 6/12 less ATI reduction (200 x 6) – 282 = $229. 50 4 (ignore cents in result) © National Core Accounting Publications $ 1, 236. 00 229. 00 1, 007. 00 55

Limit on Tax Offsets The sum of tax offsets allowed to a taxpayer cannot exceed the amount of tax (excluding Medicare Levy) otherwise payable by the taxpayer. © National Core Accounting Publications 56

Illustration: Limit on Tax Offsets Herbie has $30, 000 taxable income (PAYG tax withheld $1, 000). He is eligible to claim full tax offsets for maintaining his father and an invalid relative who are both genuinely unable to work due to invalidity. Required: Calculate tax payable (including all entitlements) for the current income year. © National Core Accounting Publications tax offset 57

Illustration: Limit on Tax Offsets Solution: Note: The above tax offsets are non-refundable, meaning that the tax offsets in excess of the amount of tax on taxable income are lost. © National Core Accounting Publications 58