7.14 Another issue raised in the Issues Paper was tax exemptions for social security payments.[16] By way of background, tax is levied on the taxable income of a taxpayer derived during the income year. Taxable income is calculated by deducting all allowable deductions from the taxpayer’s assessable income.[17] An amount of income will not form part of a person’s assessable income if exempt.[18]

7.15 Most social security payments are assessable, with a portion of the payment exempt.[19] A tax exemption applies to Disability Support Pension (if the recipient is under Age Pension age), Wife Pension (if both spouses are under Age Pension age), and Carer Payment (if the carer and care receiver are under Age Pension age).[20] Only supplementary amounts of these payments, such as rent assistance, are exempt if a person is of Age Pension age or over.[21] Similar exemptions apply for certain Veterans’ Entitlement Act 1986 (Cth) and war-time compensation payments.[22]

7.16 In the Issues Paper, the ALRC asked if tax exemptions for social security payments affect mature age participation in the workforce.[23] Several stakeholders considered that these tax exemptions may deter workforce participation. COTA considered that they ‘probably act as a disincentive to move from income support to paid employment’—however it considered that this should be ameliorated by the July 2012 increase to the tax-free threshold.[24] The Superannuated Commonwealth Officers’ Association Inc considered that this disincentive may particularly affect mature age carers.[25] The Australian Industry Group stated that exemptions ‘generally raise disposable income and reduce the imperative to earn income’.[26]

7.17 The Tax Review recommended that, to improve simplicity, all income support and supplementary payments should be tax exempt.[27] It further stated that taxing these payments can interfere with their main objective ‘to increase poor households’ real income’.[28]

[16] The ALRC asked whether these exemptions affect mature age workforce participation: Question 7.

[17] Assessable income consists of ordinary and statutory income: Income Tax Assessment Act 1997 (Cth)
s 6-1(1).

[18] Ibid s 6-15(2); 6-20(1).

[19] Ibid ss 52-5 to 52-40.

[20] Ibid s 52-10.

[21] Ibid s 52-15.

[22] Ibid s 768-105.

[23] Question 7.

[24] COTA, Submission 51.

[25] Superannuated Commonwealth Officers Association, Submission 14.

[26] It also stated that exemptions may raise EMTRs: Australian Industry Group, Submission 37.

[27] The Treasury, Australia’s Future Tax System: Final Report (2010), rec 4.

[28] Ibid, pt 2, vol 1, 28.