These changes do not affect an individuals assessable or taxable income. However, they do affect the income tests for a range of benefits and obligations.

The ATO is writing directly to around 240,000 taxpayers whose latest income tax return suggests that they could be directly affected by the new income tests. The letters describe the new income tests, what the taxpayer can do and where to seek more information. The ATO suggests that “some of your clients may receive these letters and call to seek your assistance.” Good Luck!!

Overview
From 1 July 2009, new income tests will be applied to the way a taxpayer’s income is calculated when determining their eligibility to receive certain tax offsets and some government benefits and/or their liability to pay others.

The new income tests do not alter the income tax thresholds or the way their assessable or taxable income is calculated.

However, the income tests may affect the amount of tax they are liable to pay.

The test and their income components

There are a number of income test. These include:

[  ]  Adjustable taxable income
[  ]  Rebate income;
[  ]  Income test for mature age workers tax offset;
[  ]  Income test for super benefits;
[  ]  Income for (Medicare Levy) surcharge purposes;
[  ]  Income test for Higher Education Loan Programme and Student Financial Supplement Repayments.

Each income test uses different income components and is used in different circumstances.

Each of the tests is described below. The following are direct excerpts from an information sheet on the ATO’s Website.

Adjusted taxable income (ATI)

From the 2009/10 income year, your adjusted taxable income will be used to calculate your eligibility for the following offsets and, if eligible, the amount of your offset:

[  ]  Dependant spouse tax offset;
[  ]  Housekeeper tax offset;
[  ]  Child-housekeeper tax offset; and
[  ]  Parent, spouse’s parents or invalid relative tax offset.

This new income test will replace the existing $150,000 taxable income test for the claimant, and the separate net income test for the dependant.

Both Centerlink and the Child Support Agency use ATI in their assessments.

The following income componants ate used to calculate your adjusted taxable income:

[  ]  Taxable income;
[  ]  Adjusted fringe benefits (reportable fringe benefits x 0.535);
[  ]  Tax-free pensions or benefits;
[  ]  Target foreign income (income from overseas not reported in your tax return);
[  ]  Reportable super contributions;
[  ]  Total net investment losses (includes both net financial investment losses and net rental property losses);
Less
[  ]  Deductible child maintenance expenditure;

Rebate income
From the 2009/10 income year, your rebate income will be used to calculate your eligibility for the following offsets:
[  ]  Senior Australian tax offset; and
[  ]  Pensioner tax offset.

The following income components are used to calculate your rebate income. Your:

[  ]  Taxable income;
[  ]  Adjusted fringe benefits (reportable fringe benefits x 0.535);
[  ]  Total net investment losses (includes both net financial investment losses and net rental property losses); and
[  ]  Reportable super contributions.

Income test for mature age worker tax offset
From the 2009/10 income year, reportable employer super contributions are added to the existing components of the ‘net income from working’ test.

Therefore, the following income components, referred to as your ‘net income from working’, are now used to calculate your eligibility for the Mature aged worker tax offset. Your:

[  ]  Salary or wages;
[  ]  Allowances, earnings, tips and directors fees;
[  ]  Business and attributed personal services income;
[  ]  Assessable farm management withdrawal amounts;
[  ]  Total reportable fringe benefits amounts (as shown on your payment summary);
[  ]  Reportable employer super contributions (as shown on your payment summary).

Income tests for super
From the 2009/10 income year, reportable employer super contributions are added to the current tests when determining eligibility and entitlement for the  following:

[  ]  Spouse super contributions tax offset;
[  ]  Government super co-contribution; and
[  ]  Deductions for personal super contributions (i.e., when applying the 10% test).

Income for (Medicare Levy) surcharge purposes
Income for surcharge purposes is used if you or your dependants do not have an appropriate level of private patient hospital cover and are not exempt from paying the Medicare levy.

The following income components are used to calculate your income for (Medicare levy) surcharge purposes:

[  ]  Taxable income (including the net amount on which family trust distribution tax has been paid);
[  ]  Exempt foreign employment income (if your taxable income is $1 or more);
[  ]  Reportable fringe benefits (as reported on your payment summary);
[  ]  Total net investment losses (includes both net financial investment losses and net rental property losses);
[  ]  Reportable super contributions;
Less
[  ]  If you are aged 55 to 59 years old, any taxed element of a superannuation lump sum, other than a death benefit, which you received that does not exceed your low rate cap.

The income for surcharge purposes is used to calculate whether you have exceeded the Medicare levy surcharge threshold. Income for surcharge purposes is only used to determine if you are liable to pay. It is not used to calculate how much surcharge you pay.

Income test for Higher Education Loan Programme (HELP) and Student Financial Supplement Support Scheme repayments
If you have an accumulated HELP or financial supplement debt, your repayment income will determine when you commence repayment and the amount of your repayment.

From the 2009/10 income year, reportable super contributions and total net investment losses will be included in the calculation determining your repayment income.

Your repayment income is calculated using the sum of the following income components as provided in your income tax return:

[  ]  Taxable income;
[  ]  Total net investment losses (includes both net financial investment losses and net rental losses);
[  ]  Any exempt foreign employment income amounts you receive;
[  ]  Reportable super contributions; and
[  ]  The reportable fringe benefits amount shown on your annual PAYG payment summary.

Changes to the 2009/10 tax return
The ‘I’ Return contains quite a number of changes for the 2009/10 financial year including 13 new labels. For more information go to the ATO website at ato.gov.au/individuals/content.asp?doc=/content/00217372.htm&page=3&H3.

Defined terms
What are adjusted fringe benefits?
An adjusted fringe benefit is a reportable fringe benefit amount ‘grossed down’. If you have any reportable fringe benefits, they will appear on your payment summary.

The Tax Office will automatically reduce any amounts that appear on your payment summary to the adjusted amount.

To calculate your adjusted fringe benefit amount. Use the following formula:

Adjusted fringe benefits = reportable fringe benefits amount x 53.55

What is target foreign income?
Target foreign income is foreign income you receive from sources outside Australia.

You will need to calculate this in Australian dollars. It does not include any amounts you have already included in your assessable income or any foreign income received in the form of a fringe benefit.

If you received amounts of target foreign income throughout the income year, use the exchange rate applicable on 1 July of that year to convert foreign amounts to Australian dollars.

Examples of target foreign income include:

[  ]  Gifts or allowances of money from any foreign source on a regular basis, including regular money or gifts received from relatives living overseas;
[  ]  An overseas pension or benefit that is not assessable income;
[  ]  Income received by residents employed outside Australia whose foreign employment income is not assessable income in Australia/