Issue
Is the post-June 1983 taxed element of an eligible termination payment (ETP) received by the taxpayer's spouse included in the taxpayer's family income for the purposes of calculating the Medicare levy payable under section 251S of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. The post-June 1983 taxed element of an ETP received by the taxpayer's spouse is not included in the taxpayer's family income for the purposes of calculating the Medicare levy payable under section 251S of the ITAA 1936.
Facts
The taxpayer is married.
Their spouse's taxable income included a taxed element of a post June 1983 component of an ETP.
The taxpayer's spouse was over 55 years of age.
Their spouse's post-June 1983 taxed element of an ETP was below the relevant low rate threshold and therefore taxed at 0%.
Reasons for Decision
Section 5 of the Medicare Levy Act 1986 (MLA) imposes a Medicare levy which is payable in accordance with Part VIIB of the ITAA 1936.
The amount of Medicare levy payable by a person who has a spouse or dependants is governed by section 8 of the MLA.
Subsection 8(1) of the MLA provides that where a taxpayer is married on the last day of the income year and their family income does not exceed the relevant family income threshold, then no levy is payable by the taxpayer.
The family income of a person who is married on the last day of the income year is defined, in subsection 8(5) of the MLA, to mean the sum of the taxable income of the married person and the taxable income of their spouse.
Where the same expressions are used in the MLA and Part VIIB of the ITAA 1936, unless the contrary intention appears, the expressions have the meanings provided in Part VIIB of the ITAA 1936 (subsection 3(4) of the MLA).
Section 251S of the ITAA 1936 provides that the Medicare levy is based on the taxpayer's taxable income for the year, subject to the modification by subsection 251S(1A) of the ITAA 1936.
The maximum rate of income tax applicable to a post-June 83 component of an ETP may be limited by way of a tax offset under Subdivision AAA of Division 17 of Part III of the ITAA 1936. Section 159SA of the ITAA 1936 allows a tax offset to ensure that any post-June 1983 taxed element of an ETP received by a taxpayer aged 55 and over for a particular income year, up to a certain threshold, is taxed at 0%.
Subsection 251S(1A) of the ITAA 1936 essentially modifies the general meaning of 'taxable income' for Medicare levy purposes to exclude from taxable income any taxed element of the post-June 83 component of an ETP which qualifies for a zero rate of tax.
The Explanatory Memorandum which introduced subsection 251S(1A) of the ITAA 1936 in the Taxation Laws Amendment (Superannuation) Bill 1989 explains that the: new subsection 251S(1A) will ensure that any taxed element of the post-June 83 component of an ETP which qualifies for a zero rate of tax and, therefore, is free of tax, will also not be subject to the Medicare levy.
The MLA does not express a contrary intention to include in 'taxable income' any portion of an ETP on which a tax offset under section 159SA of the ITAA 1936 will effectively reduce the primary rate of tax to 0%.
Consequently, the meaning of taxable income for the purposes of subsection 8(5) of the MLA carries over from Part VIIB of the ITAA 1936. This meaning applies to the taxable incomes of a taxpayer and their spouse in order to calculate the taxpayer's family income under subsection 8(5) of the MLA.
The taxpayer's spouse is over 55 years of age and received a post-June 1983 taxed element of an ETP which was below the relevant low rate threshold limit for the income year. Therefore, the taxpayer's spouse is entitled to a tax offset under section 159SA of the ITAA 1936 which in effect reduces the rate of tax payable on this ETP amount to 0%.
Therefore the post-June 1983 taxed element of the ETP is excluded from the spouse's taxable income for Medicare levy purposes.
Accordingly, the taxpayer's family income, being the sum of their taxable income and their spouse's taxable income for the purposes of determining their Medicare levy liability, does not include their spouse's post-30 June taxed element of an ETP.