Net medical expenses tax offset is phasing out – July 2014

Draft legislation was introduced in the 2013 budget to phase out the net medical expense tax offset (NMETO), which has finally been passed into law. It means that the offset will disappear by the end of the 2018-19 income year, with some interim transitional arrangements put in place between now and July 1, 2019.

Part of the transitional regime includes that only those who claimed NMETO in 2012-13 will be eligible to claim the offset in the 2013-14 income year. Similarly, only those who claimed the NMETO in 2013-14 will be able to claim it in the 2014-15 income year.

All other taxpayers (those who made no previous claims) will be restricted to out-of-pocket expenses exceeding the relevant thresholds for specific expenses, including disability aids, attendant care or aged care only (more details on this to follow).

The NMETO for the 2012-13 income year allowed an offset of 20% of net medical expenses that are over $2,120 for:

• single taxpayers with adjusted taxable income* of $84,000 or less, and
• families with a combined adjusted taxable income* of $168,000 or less.

For taxpayers with income over these thresholds in the 2013 income year, the offset is 10% of net medical expenses over $5,000. (*Note: The term adjusted taxable income includes the taxpayer’s taxable income plus other specific amounts, such as reportable fringe benefits and certain investment losses.)

The phase out of the NMETO will occur through two sets of transitional arrangements, as follows:

• Category A: From the 2013-14 income year until the end of the 2018-19 income year — taxpayers can only claim the NMETO for medical expenses that meet both of the following conditions:

o   the current definition and eligibility requirements, and

o   relate to disability aids, attendant care or aged care.

• Category B: For the 2013-14 and 2014-15 income years — taxpayers will be eligible to claim the full range of medical expenses (as defined currently) but only if they have received an amount of the NMETO in the previous income year from this full range claim (or in both 2012-13 and 2013-14 in respect of claims in the 2014-15 income year).

Note: Under the ‘Category A’ rules, the terms ‘disability aids’, ‘attendant care’ and ‘aged care’ are specifically defined under the amendments.  Ask this office for examples of such expenditure as contained in the explanatory memorandum to the bill which was enacted.

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