Income tax

53. There are two principal Commonwealth Acts governing income tax in Australia: the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth).[58]

54. In general, individuals face the same tax requirements regardless of their activities or status. There are two key departures from this approach, one of which is age-based taxation evident through available tax offsets such as the Senior Australians Tax Offset.[59] This means that people of different ages may have different average tax rates for the same level of income.[60]

55. As recognised by the Tax Review, the imposition of income tax, together with reductions in income support payments (‘transfers’) as people earn more income, reduces the financial rewards from work, which may make work less attractive.[61] Higher tax rates can act to reduce incentives to work since people have a smaller marginal gain from employment. However, others may work more to achieve a certain target level of income that they consider adequate for their needs.[62]

Effective Marginal Tax Rate

56. An Effective Marginal Tax Rate (EMTR) is the percentage of additional income lost due to the withdrawal of means-tested benefits (such as social security payments) and additional income tax payable as a result of working. A higher EMTR may discourage mature age persons from seeking to work. For example, research has found that one in five pensioners who wanted to work declined part-time employment opportunities because it would cause a reduction in pension entitlements.[63] The Tax Review suggested that ‘one of the most effective ways to improve financial incentives … is to set effective tax rates that support part-time work’.[64]

57. However, as noted in the Tax Review, some people may not change their work effort in response to a higher EMTR.[65] Other factors may have a greater influence on a person’s decision to work or not to work, such as the cost of child care, lack of public transport, absence of support services and poor health.[66] External factors such as these are beyond the scope of this Inquiry.

58. Calculation of a person’s EMTR is very complex due to the number of factors that contribute to it, including means testing, Work Bonus and tax offsets. There may be circumstances where a person decides not to work as it is simply too complex to determine whether it would be more financially advantageous to work or not. Therefore, the complexity of the tax-transfer system itself could act as a barrier to work.

Question 6. In what ways, if any, can the complexity of the tax-transfer system be minimised to remove barriers to mature age participation in the workforce?


59. 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.[67] An amount of income will not form part of a person’s assessable income if exempt.[68] Tax offsets (or rebates)[69] are not deducted from the assessable or taxable income but from a person’s computed tax to determine the final tax payable.[70]

60. Most social security payments are assessable, with a portion of the payment exempt.[71] 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).[72] Only supplementary amounts of these payments, such as rent assistance, are exempt if a person is of Age Pension age or over.[73] Similar exemptions apply for certain Veterans’ Entitlement Act and war-time compensation payments.[74] The Tax Review recommended that, to improve simplicity, all pensions should be tax exempt.[75]

Question 7. In what ways, if any, do the tax exemptions for social security payments affect mature age participation in the workforce?


61. In certain circumstances, tax offsets (or rebates) are available to reduce or eliminate the tax assessable on pensions and benefits. Tax offsets are subtracted from the tax calculated on a person’s taxable income.[76]

62. A number of offsets are available for persons of Age Pension age depending on their particular circumstances. These include: the Senior Australians Tax Offset; the Pensioner Tax Offset and the Low Income Tax Offset. These tax offsets are designed to encourage workers to delay retirement and/or to make a more gradual transition into retirement by effectively increasing the returns from work.[77]

63. Certain low income aged pensioners and self-funded retirees are entitled to the Senior Australians Tax Offset (SATO).[78] The SATO increases the effective tax-free threshold for people of Age Pension or Veterans Service Pension age.[79]

64. Certain social security or veterans affairs pensioners may be eligible for a separate offset, commonly referred to as the Pensioner Rebate or Pensioner Tax Offset.[80] This offset may apply to a person whose ‘rebate income’[81] falls below a certain threshold and includes the Age Pension or another listed income support payment.[82] However, a person cannot claim the Pensioner Tax Offset if he or she is entitled to the SATO.[83] From July 2012, the Pensioner Tax Offset will be merged with the SATO to create the Senior Australians Pensioner’s Tax Offset.[84]

65. A non-refundable Mature Age Worker Tax Offset is available to taxpayers, aged 55 years or over by 30 June of the relevant year, who have net income from working of less than $63,000. It provides a maximum offset of $500.[85] Only net income from working is eligible for the offset. Accordingly, taxpayers with only superannuation, social security benefits, rental income, interests or dividends will not be eligible. This offset is also aimed at encouraging older workers to remain working or to rejoin the workforce.

66. Other tax offsets that may be available to mature age workers include the Low Income Tax Offset[86] and the Beneficiary Rebate.[87]

67. The Tax Review recommended that, to simplify the income tax system, these tax offsets should be removed as separate components of the system and incorporated into the personal income tax rates scale.[88] However, this may also remove incentives to work for those eligible for the offsets.

Question 8. A number of tax offsets are available to encourage mature age participation in the workforce including the Senior Australians Tax Offset, Pensioner Tax Offset, Low Income Tax Offset and the Mature Age Worker Tax Offset.

(a) In what ways, if any, might these offsets be improved to encourage participation?

(b) The Australia’s Future Tax System Review recommended that these tax offsets be removed. What disincentives would this create for mature age participation in the workforce?

Question 9. What other changes, if any, should be made to income tax laws to remove barriers to mature age participation in the workforce and other productive work?

[58] There are also two sets of regulations: the Income Tax Regulations 1936 (Cth) and the Income Tax Assessment Regulations 1997 (Cth). Generally, these regulations prescribe how certain parts of ITAA36 and ITAA97 are to be implemented. The Taxation Administration Act 1953 (Cth) (TAA), and the regulations made under it, contain provisions dealing with the administration of the tax laws by, and the powers of, the Australian Taxation Office (ATO). Other Commonwealth Acts also impose tax in special circumstances. These include the A New Tax System (Ultimate Beneficiary Non-Disclosure Tax) Act (No 1) 1999 (Cth), the General Interest Charge (Imposition) Act 1999 (Cth), the Family Trust Distribution Tax (Primary Liability) Act 1998 (Cth), the Income Tax (Franking Deficit) Act 1987 (Cth), the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Act 1991 (Cth), the Superannuation Contributions Tax Imposition Act 1997 (Cth) and the Termination Payments Tax Imposition Act 1997 (Cth).

[59] The second is through occupation and sector-specific benefits, such as income exemptions for certain defence force and foreign income: The Treasury, Australia’s Future Tax System: Consultation Paper (2008), 45.

[60] Ibid, 83.

[61] The Treasury, Australia’s Future Tax System: Architecture of Australia’s Tax and Transfer System (2008), 239.

[62] FaHCSIA, Pension Review Report (2009), 18.

[63] The Australian Institute for Social Research, Experience Works: The Mature Age Employment Challenge (2009), prepared for National Seniors Australia; National Seniors Productive Ageing Centre, Ageing and the Barriers to Labour Force Participation in Australia (2011), prepared for Consultative Forum on Mature Age Participation, 25.

[64] The Treasury, Australia’s Future Tax System: Final Report (2010), 9.

[65] Ibid, 17.

[66] D Trewin, Towards a Stronger, More Equitable and Efficient Tax-Social Security System: Overview of the Castles Tax and Social Security Roundtable (2012), Academy of the Social Sciences, 5.

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

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

[69] The term ‘tax offset’ is a generic term used in Ibid to describe what in Income Tax Assessment Act 1936 (Cth) are called ‘rebates’ and ‘credits’.

[70]Income Tax Assessment Act 1997 (Cth) s 4-10.

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

[72] Ibid s 52-10.

[73] Ibid s 52-15.

[74] Ibid s 768–105.

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

[76]Income Tax Assessment Act 1997 (Cth) s 4-10. In contrast, a deduction is subtracted from assessable income in calculating the taxable income on which tax is payable.

[77] The Treasury, Australia’s Future Tax System: Retirement Income Consultation Paper (2008), 37–38.

[78]This offset is officially described in the legislation as the ‘low income aged persons rebate’: Income Tax Assessment Act 1936 (Cth) s 160AAAA.

[79] Unused amounts of SATO can be transferred between partners up to the point where the maximum combined offset amount has been used.

[80]Income Tax Assessment Act 1936 (Cth) s 160AAA(1), (2). The Pensioner Tax Offset is available to recipients of specified payments made under the Social Security Act 1991 (Cth)and the Veterans’ Entitlements Act 1986 (Cth).

[81] Rebate income is defined as the sum of a person’s taxable income, reportable superannuation contributions, total net investment loss and adjusted fringe benefits total for the year of income: Income Tax Assessment Act 1936 (Cth) s 6.

[82] Bereavement Allowance; Carer Payment; Disability Support Pension (tax payers of age pension age); Mature Age Allowance (if first received before 1 July 1996); Parenting payment (single); widow B pension; age service pension; income support supplement; invalidity service pension (taxpayers of age pension age); partner service pension; mature age partner allowance; or wife pension. Income Tax Regulations 1936 (Cth) reg 151.

[83] Section 63-10(1) of the Income Tax Assessment Act 1997 (Cth) sets out the order of priority for offsets.

[84]Clean Energy (Tax Laws Amendment) Act 2011 (Cth).

[85]Income Tax Assessment Act 1997 (Cth) ss 61-555 to 61-570. The maximum offset has been $500 since it became available on 1 July 2004: The Treasury, Australia’s Future Tax System: Architecture of Australia’s Tax and Transfer System (2008), 70.

[86]Income Tax Assessment Act 1936 (Cth) ss 159H, 159N.

[87] Ibid s 160AAA(1), (3). Payments that entitle a taxpayer to the rebate include certain social security payments such as Newstart Allowance and Widow Allowance.

[88] The Treasury, Australia’s Future Tax System: Final Report (2010), Rec 5.