Tax offsets - what they doSpouse, Child-Housekeeper tax offset
Dependant tax offsets - spouse
Reduce the spouse rebate by the Parenting Allowance payments received
Dependant tax offsets - child housekeeper
Notional offsets for a Child under 16 or a student under 25
Before starting this topic, you should have studied assessable income and the deductions allowed in arriving at taxable income.
Once taxable income has been calculated we refer to the rates of tax set out in the Income Tax (Rates) Act to find the amount of tax, which will be imposed, on the taxable income.
However, the taxpayer may not be required to pay all this tax.
The Assessment Act makes provision for tax offsets to be allowed against the gross tax, thereby reducing the liability of the taxpayer.
You may have encountered some of these already if you have been filling in the income sections of the return form but we will now look at the dependant tax offsets
Dependant spouse offset ($1340 but add $112 to get $1452 if spouse cares for child)Dependant child housekeeper offset ($1340 but add $266 to get $1606 if spouse cares for child)
So far we have referred to the taxpayer as a male. (we have largely used the expressions 'him' and 'he'). This has been solely to save space and reading time.
A dependent spouse can be either male of female.
Does a taxpayer have to be legally married to claim the spouse tax offset?
Refer to section 159H(3)
Prior to the 1985 year, it was considered necessary that the marriage be a legal one, but section 159H(3) relaxes this requirement-it says that...
Where man and woman have lived together as husband and wife on a bona fide domestic basis ... Then they will be treated as if they were legally married
Can a taxpayer claim two tax offsets? (one for a defacto spouse-one for a spouse) with whom he/she no longer lives)
The answer is a definite '
NO!'Section 159J (5A, 5B & 5C) spell out the rules
Section 159J(5A) says if a taxpayer is entitled to more than one tax offset entitlement then the lower of the tax offsets is allowed.
Section 159J(5B) allows higher tax offset if special circumstances apply. For example, if a separated spouse with whom the taxpayer is no longer living is earning more than a defacto spouse with whom taxpayer is currently living.
If one spouse has a separate net income which precludes a tax offset then no tax offset for either spouse , unless special circumstances apply. (We will look at how the amount of separate net income affects the tax offset shortly)
Answer this question….
A taxpayer supports his defacto wife and contributes to the maintenance of his legal wife, for half the year, until she enters a defacto relationship. Which of the following will be allowed:
1.Tax offsets for both 'wives'
2.Tax offset for defacto wife
3.Tax offset for 'legal' wife
Refer section 159J(5A) - taxpayer is allowed the smaller of the 2 possible tax offsets.
If one of the spouses earns too much income to qualify for the tax offset then no tax offset at all will be allowed
Answer this question….
A taxpayer marries half way through the year.
Can he claim the full amount of the rebate in respect of his spouse?
Yes No
See the topic on partial tax offsets for more details
Reduce the spouse rebate by the Parenting Allowance government assistance payments
The rebate you can claim is affected by the amount of government assistance you have received through the social security system. You are required to reduce the spouse rebate claim by the amount of Parenting Allowance you have received.
So what is Parenting Allowance?
The following information is reproduced from the Department of Social Security web page (
http://www.dss.gov.au)The Federal Government announced in the 1997-98 Budget that Sole Parent Pension and Parenting Allowance would be replaced by a new Parenting Payment from 20 March 1998. This payment is available to both partnered and lone parents caring for children, thereby providing assistance on the basis of parenting responsibilities rather than marital status. Basic conditions of eligibility
Member of a couple (only one member of the couple can receive the payment)
Dependent child under 16 in care
Residential qualifications
Must be an Australian resident AND
Present in Australia at time of claim
Can be paid for up to 13 weeks of a temporary absence provided claimant was in Australia for at least 13 weeks prior to departure
Available to newly arrived migrants after 104 weeks in Australia (some exemptions may apply)
Basic rates and method of payment
Maximum. rate $290.10 (higher if illness-separated couple, or partner in gaol),comprising:
basic Parenting Allowance $65.10 per fortnight
additional Parenting Allowance $225.00 per fortnight
Pharmaceutical Allowance ($2.70 or $5.40) payable to some allowees aged 60 or more
Education Entry Payment of $200 may be available paid fortnightly on the same payday as Family Payment
Rent Assistance/Residential Care Allowance paid with Family Payment where eligible. See Family Payments
Income Test
See Income test for Parenting Allowance, but note that:
partner's excess income (if any) is applied first, and only to additional Parenting Allowance
maximum reduction of Parenting Allowance due to partner income is the amount of additional Parenting Allowance only
different rules apply where either member of a couple receives a pension
Basic Parenting Allowance is not assets tested
Additional Parenting Allowance is assets tested:
homeowners see Assets test for homeowners
non-homeowners see Assets test for non-homeowners
You will find the definition of child housekeeper in section 159J(6)
Child housekeeper means
the child of a taxpayer ...
who is wholly engaged in keeping house for the taxpayer
The tax offset probably belongs to a different age when convention demanded that the eldest daughter devoted her life to caring for her parents.
Note the absence of a reference to caring for 'children'.
286 less 282 = 4 ... Divide 4 by 4 = 1
What amounts are included in separate net income?
In a word - just about
everything!Section 159J(6) contains a rather 'bitty' definition, which says some items are included, and some items are not, but does not provide any general rule.
Separate net income does not include
:family allowance
family payment advance
non-benefit parenting allowance
benefit parenting allowance to the extent it is exempt from tax
non-benefit parenting payment (partnered)
benefit parenting payment (partnered) to the extent it is exempt from tax
maternity allowance
maternity immunisation allowance
child disability allowance
domiciliary nursing care benefits
Separate net income for children (no rebate is allowed - but you may have to show that a rebate would have been allowed if such a rebate existed. Sound a bit Monty Pythonesqe? Don't worry - these notional rebates, and the uses to which they are put, will be explained later)
Separate net income does not include scholarship, bursary, exhibition or prize to provide tuition, books, equipment, etc
But it does include government assistance provided in the form of maintenance or accommodation for educational purposes, other than the government assistance payments listed above
Government assistance paid under the Assistance for Isolated Children Scheme will be separate net income of the child if, and only if, it is paid for the maintenance and accommodation of a child aged 16 years or more.
An American millionaire supports his parents in an Australian retirement home.
He derives rental income from an Australian property.
Can he claim a dependants tax offset in respect of his parents (who have no other income)? Hint - refer to section 159H(1)
Section 159H(1) says that the
tax offsets described in sections 159H to 159Z (subdivision A) apply if, and only if, the taxpayer is a resident.
The
dependant must also be a resident.Section 159J(1) states that where a person contributes to the maintenance of a dependant specified in section 159J(2),
and that dependant is a resident then he is entitled to a tax offset.Section 159J(3) empowers the Commissioner to allow only so much of the tax offset as is 'reasonable in the circumstances.'
In practice this is done on a proportionate basis
For example, if a taxpayer contributes to the maintenance of a dependant during only half of the year, then he is allowed only half the tax offset.
Answer this question….
A taxpayer supports his estranged wife and their 12 year old student son for 3 months of the year after which time she is supported by a defacto husband.
He can claim 1/4 of the spouse rebate in respect of his estranged wife
Yes No
3 months = quarter of year so he can claim 1/4 of the full rebate
Answer this question….
Taxpayer immigrates with dependent spouse in December - no children. He can claim half of the full spouse rebate ( hint - refer section159J(3)<aa>)
Yes No
Answer this question….
Taxpayer and brother jointly support their mother for the full year so he can claim half the full rebate (Hint - refer section 159J(3)<b>).
Yes No
Tax offset will be divided equally between the brothers
Answer this question….
Taxpayer marries widow with 6 year old daughter half way through year. He can claim half the full spouse rebate. (Hint - refer section 159J(3)<c> and <e>.)
Yes No
The taxpayer must state both the period of support and the separate net income of the dependant.
Until 1976 the Commissioner allowed the taxpayer to treat a dependant as not being 'wholly maintained' during any income earning period during the year.
Take the case of a wife who worked for 6 months and earned $1,000,000.
Obviously no tax offset would be allowed on the basis of a calculation of the separate net income.
However, if she was treated as having maintained herself during the period she was earning income, then the taxpayer could claim half the tax offset on the basis that she was wholly maintained for the 6 months she was not working. (Sec 159J(3)<a>)
This all stopped in 1976 with the introduction of section 159J(5).
Section 159J(5) says that where a taxpayer and one of the dependants listed in section 159J(2) reside together, then the taxpayer is presumed to have been supporting that dependant during the period they resided together.
So ... If they lived together while the wife was earning her million dollars, the husband supported her for the full year and must calculate his tax offset on the basis of her separate net income.
Answer this question….
Taxpayer's wife takes up temporary work for 6 months of the year and earns $10,000. Though they lived together during the full year, his wife was supporting herself during the time she was employed.
Taxpayer claims he supported her for half the year and claims he should allowed half the full rebate. Can the taxpayer claim half the rebate?
Yes No
No - refer section 159J(5)
Notional dependant tax offset for
Child under 16 or
student under 25
Is a tax offset allowed for a child?
The answer is 'yes' and 'no'.
Section 159J(2) provides for a tax offset of
$376 for a first child and
$282 for subsequent children (these are referred to as class 3)
$376 is allowed for any student child (class 4).
But section 159J(1A) says that a taxpayer is not entitled to a tax offset in respect of persons in class 3 (children) or class 4 (students) after 1976.
Section 159J(1A) was introduced in 1976 as part of a package in which the family allowance was increased and the dependent children tax offset was axed. (An example of Caesar giving and taking away)
But why not just remove classes 3 & 4 from the list in section 159J(2)?
Why complicate things by leaving them in and contradicting what is said in section 159J(2) by section 159J(1A)?
As you will learn, there are a number of concessional tax offsets which depend upon the circumstances which would make the taxpayer eligible for a child/student tax offset if section 159J(1A) did not exist.
It was considered easier (back in 1976) to leave classes 3&4 in section 159J(2) but not to allow any tax offset.
For this reason they are known as notional tax offsets.
We will examine such a case now.
Section 159J(1B) says:
if the taxpayer would have been allowed a child/student tax offset ...were it not for section 159J(1A) ... and...
If he is entitled to a tax offset for either a spouse (class 1) or a child housekeeper (class 2)
Then the amount shown as for the rebate in section 159J(2) is to be treated as if it was a higher amount.
So if the taxpayer is supporting dependent children, then his spouse tax offset is increased to an amount higher than that shown in the table in section 159J (2).
Children & students
The term 'child' is defined in section 6 to include
adopted,
step and
ex-nuptial child
of a taxpayer.
The child must be aged between 0 and 16 years.
Student is defined in section 159J(6) - a student must be
Less than 25
Receiving full time education at a school, college or university
The Commissioner takes the view that a child younger than 3 years cannot be 'educated' and so imposes an age limit of 3 years on a 'student'.
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