Analysis of the Revised Tax Reform

June 1999

Overview

The new arrangements for tax reform negotiated between the Prime Minister and the Democrats bring with it some wins for older Australians particularly the improvements to the compensation package but major areas of concern remain.

The main elements of the new tax reforms, and analysis of their implications, as they apply to older Australians follow.

1. Changes to the compensation arrangements

The new compensation arrangements are an improvement on the original offer although fall short of what COTA asked for.

The new offer is:

• The pension will continue to be indexed, and maintained at least at 25 per cent of Male Total Average Weekly Earnings as per current commitments.
  
• A supplement of 4 per cent of the base pension at 1 July 2000 will be indexed and paid on top of the Age Pension.

The price indexation arrangements will be offset by 2 per cent from March 2001 instead of 2.5 per cent as in the original offer - which means that pensioners get to retain 2 per cent rather than just 1.5 per cent as per the original offer, of the 4 per cent. This means that there will be a 2 per cent real increase in the pension and other social security benefits.

We have requested clarification from the Department of Family and Community Services as to what this means in terms of real pension outcomes. Only then, can we consider the adequacy of the new arrangements.

Under the original tax package, the Government estimated that there would be a 2.5 per cent cost of living adjustment for the GST in the first year and 1.9 per cent in the second year for all household groups. COTA questioned whether these estimates applied to older Australians whose spending patterns could be quite different from those of average households due to the very large proportion of their budgets spent on utilities and services (as well as food) compared to average households. These items in the budgets of older people have not attracted wholesale sales tax so there will be no advantage in the switch to a GST system and there will be a real increase of 10 per cent in costs for utilities, services and food that is not fresh or basic.

Further research is required to determine whether the new configuration of the tax package will address COTA's concerns.

2. Exclusion of basic/fresh food from the GST

This is the most controversial part of the new plan and has been widely covered in the media. The issues, canvassed in our press releases, for older people are:

• Older people who are able to travel to supermarkets (generally in a private car), buy significant quantities of fresh/basic food and prepare it themselves will benefit from the fresh/basic food exemption. This will mainly be households where there are economies of scale in buying quantities of basic foodstuffs.
  
• However, 40 per cent of women and 18 per cent of men over 65 live alone. Many of these people receive only the single age pension. This group has been a major concern to COTA in recent years as we have received many reports about their day to day struggle to make ends meet.
  
• For the age pensioner living alone economies of scale are not available. It is precisely the older person living alone who will be buying the quarter or half chicken rather than the whole roast. It is very unlikely that they will be buying an uncooked chicken and roasting it for themselves. We believe there are many examples where a single older person is likely to be buying small quantities of prepared foods, such as salad from a supermarket deli, which is often more cost effective than buying all the raw ingredients to make the salad.
  
• Some older people have limited capacity for buying fresh food and preparing it for themselves. This especially applies to many older men living alone or as carers and people living in boarding houses, rooming houses and private hotels. Cheap meals in food courts, pubs, clubs and McDonalds are significant food outlets for many older people and will attract the GST. (Meals on wheels have been GST free from the outset of the tax plan.)

The fresh/basic food exemption seems to offer most benefit to households of two people or more and least benefit to single person households.

3. Extension of self-funded retirees supplementary bonus to retirees aged 55 and over

This is an important concession that COTA advocated. In the original plan the bonus was only available to people of age pension eligibility age.

The self-funded retirees supplementary bonus is an untaxed bonus now available to people aged 55 and over on 1 July 2000 but not in receipt of a pension who are nevertheless retired and fully self-supporting. It is worth a maximum of $2000 per person phased out between $20,000 and $30,000 of taxable income as a one-off payment. The Government pays $1 for each $1 of net personal income from savings and investments. This is a lump sum payment in lieu of an income supplement of $200 per year for 10 years. The personal income from savings and investments can be assessed for either 1998-99 or 1999-2000.

The original proposal set the eligibility age for this bonus at the age pension eligibility age.

There is also an aged persons savings bonus for all people over 60. There has been no change to the eligibility for this payment. It is a one-off payment of $1000 phased out between incomes of $20,000 and $30,000. It is an untaxed payment to people aged 60 and over who draw some private income from savings and investment including superannuation and annuities. The Government pays $1 for each $1 of net personal income from savings and investments.

The Government's rationale for setting the levels of both these bonus payments remains unclear and so it remains difficult to assess the adequacy of the arrangements. Further work is required in this area.

4. GST assistance scheme for low income persons

There are no details on this but the Government information paper says:

The Commonwealth will establish a scheme to provide assistance to low income persons who identify themselves as outside the income tax and social security systems and therefore ineligible for the compensation provided in this package. Eligible persons will be able to apply to receive capped payments to offset the price effects of the GST.

There may be a number of self-funded retirees who will be eligible for assistance under this program.

5. Public housing rents to be protected under CSHA.

This is another important improvement to the package which COTA advocated.

As rents for public housing are pegged to a percentage of the pension - between 20 and 25 per cent across the States and Territories - any increase in pension such as compensation for the GST will result in part of the increase (ie 20 to 25 per cent of the increase) being absorbed by state government housing authorities.

The Government has promised to negotiate a deal through the Commonwealth/State Housing Agreement to prevent this from occurring so that pensioners in public housing will retain the full pension increase.

6. Review of adequacy of compensation.

The Government has promised an independent review of the "integrity" of the compensation package in 2003.

This is welcome as it was a major COTA recommendation.

The question remains, however, as to whether 2003 is too long to wait in order to commence a review. At least three years will have lapsed between the implementation of the new tax system and the outcomes of the review. A lot of hardship could be experienced in this three years. Presumably it will then take some time for any ameliorative measures to come on stream.

Given the significance of the reforms, a review process should begin after the first year.

7. S2 Medicines GST free

This is an important amendment to the original plan. S2 medicines are those sold only in pharmacies. COTA supported the Pharmacy Guild's recommendations that S2 medicines be GST free. S2 medicines include medicated cough mixtures and ear drops with anti-biotics.

8. Public health goods to be GST free.

This is a useful measure but what will be defined as a public health good is yet to be determined. Sunscreen and folate supplements have been mentioned explicitly but presumably there is a long list waiting in the wings. We will need further advice on this.

9. Appropriately qualified naturopaths, acupuncturists etc. to be GST free

It is useful that alternative medical treatments are GST free. The extent to which older people use alternative therapies is not known. The Government's briefing paper does not say whether pills and potions sold by health food shops and the naturopaths will attract a GST. Details of this proposal are still to be refined.

10. Adult education and training

Adult education and training related to employment related skills will be GST free. This is commendable.

It is disappointing though that forms of education that are not employment related will be hit by the GST. Life long learning should be encouraged!!!

11. Commonwealth - State Financial Relations

The original tax plan was to include a revolution in Commonwealth-State Financial Relations. However, much of the plan has been delayed and some parts scrapped.

The States were to obtain all the GST revenue to replace Financial Assistance Grants (FAGs).

It is not at all clear what the shake out of the new arrangements will be for States and Territories.

The implementation dates for abolishing a couple of the bank fees that affect older people have been deferred - 1 July 2001 for financial institutions duty and 1 July 2005 for the bank account debits tax.

The bank account debits tax affects older people with cheque accounts.

12. Income tax cuts

The revised tax arrangements reduce the income tax cuts for higher income earners.

Proposed income tax scales

Current scale taxable income	Current tax rate %	Tax scale for the old proposal	Tax rate old proposal %	Tax scale for the new proposal	Tax rate new proposal %
$0-5,400	0	$0-6,000	0	$0-6,000	0
$5,401-20,700	20	$6,001-20,000	17	$6,001-20,000	17
$20,701-38,000	34	$20,000-50,000	30	$20,000-50,000	30
$38,001-50,000	43			$50,000- $60,00	42
$50,001	47	$50,001-75,000	40	$60,001-$75,000	47
		$75,001	47	$75,000+	47

13. Charitable sector

The information available says that the Government will assist charitable and not for profit organisations to adjust to the introduction of the GST in several ways, including:

• Establishing a charities/not for profit consultative committee immediately within the ATO to develop rulings well in advance of the introduction of the GST, to better inform these organisations as to how they will be impacted;
• Establishing ATO teams to assist the sector to implement the GST
• In the light of developments with the above, and before 1 July 2000, there will be further consultations as necessary between the Government and the Australian Democrats on the GST impact on charities or any problems arising in the application of rulings to charities.

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