IV. Zone Allowance

12.53. Persons living in more remote parts of the country may qualify for a concessional deduction in the form of a zone allowance. The availability of the deduction

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depends on residence in one of the specified areas for a minimum period in the year of income.

12.54. As explained in paragraph 12.56, the justification in the Committee's view for the continuance of zone allowances is the need to ensure horizontal equity between persons living in those zones and persons living in other areas: horizontal equity, in this respect, could not be achieved by any feasible measures on the expenditure side of public finance. But this is not to say that present zone allowance arrangements are necessarily satisfactory on all counts. The manner in which the zone boundaries are drawn has attracted criticism; so too have a number of other features, including the use of a deduction rather than rebate of tax, the size of the concession, and the qualifying period of residence.

12.55. Zone boundaries. Any criticism of the existing boundaries must raise questions about the purpose of zone allowances. When the boundaries were first fixed in 1945, such factors as the high cost of living, uncongenial climatic conditions and isolation were taken into account, and these are still referred to in the Act. Two zones, Zone A and Zone B, were delineated in terms of the degree of severity of these factors, Zone A attracting the greater concession. The zones have been changed only once when, in 1956, some areas of the old Zone B were transferred to Zone A. In broad terms Zone A takes in the area above the 26th parallel (except for the central and eastern parts of Queensland) as well as places like Norfolk Island, Macquarie Island, and the Australian Antarctic Territory. Zone B covers the rest of Western Australia (apart from the south-west corner), the more remote parts of South Australia, New South Wales and Tasmania, and the central region of Queensland.

12.56. While the factors taken into account in fixing the boundaries may suggest that the primary purpose of zone allowances is horizontal equity, the allowances also serve to encourage people to move to specified areas, and this appears to have played some part in the decision to introduce the concession. At the time of introduction, in 1945, decentralisation tended to be judged in terms of ‘developing the outback’, without reference to particular areas of the outback deserving of special attention. To the extent that decentralisation remains a purpose of zone allowances, it might be argued that the boundaries should be drawn in such a way as to encourage population movement to carefully selected areas. However, decentralisation policy is not a matter on which the Committee feels able to comment. And the Committee, in any event, has expressed its view elsewhere in the report that tax incentives should not be used as a method of implementing an economic policy unless it can be established that a better method is not available. Hence, giving effect to horizontal equity must continue to be regarded as the primary purpose of zone allowances.

12.57. The Committee is not qualified to advise on how the present zone boundaries might be redrawn to achieve greater equity. A special inquiry is clearly called for.

12.58. Deduction or rebate. The amount deductible was originally set at $80 for Zone A and $40 for Zone B. The Zone A allowance was increased in 1947 to $240 and in 1956 to $360 when the Zone B allowance was raised to $60. In 1958 the Zone A allowance became $540 and the Zone B $90. At the same time an additional concession was introduced equal to a fraction (one-half in the case of Zone A and one-twelfth in the case of Zone B) of total dependant allowances claimed by the taxpayer. The basic element in the allowance has not been adjusted since 1958; however, the additional element tied to dependant allowances has increased with the liberalisation of dependant allowances. Thus the total zone allowance for a married man with two

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dependant children was $839 (Zone A) and $130 (Zone B) in 1958; it is now $956 and $159 respectively.

12.59. In line with the view expressed earlier in this chapter that the value of a concession ought not to vary with the income of the taxpayer, the Committee recommends that the zone allowance be changed from a deduction to a rebate of tax. The present provisions linking the amount of the allowance with concessional deductions for dependants will require some adaptation. There is no difficulty in those cases where the Committee proposes the conversion of the dependant concession to a rebate: here it is simply a matter of a somewhat higher rebate for the person entitled to a zone allowance. The case of minor children is more difficult because it is proposed that the concessional deduction be replaced by an increased amount of child endowment which should be subject to tax. Consistent treatment would require higher child endowment for families qualifying for zone allowances, but this would add to the difficulties of administering child endowment. A higher rebate in recognition of dependent children would be similar in its effect to giving additional child endowment, except that the rebate would not itself be subject to tax.

12.60 The amount of the concession. The amount of the concession depends on the degree of disability associated with living in a zone. The Committee is not competent to measure this disability; but it would point out that, apart from the element tied to dependant deductions, the money amount of zone allowances has not been adjusted since 1958.

12.61. Qualifying period. A zone allowance is available where a person resides in a qualifying area or spends in total more than six months of any year of income in a qualifying area. The primary purpose of the allowance is to give recognition to the disadvantages of uncongenial climate, isolation and high cost of living associated with living in the zone. For this reason, the alternative test in the definition of ‘resident’ of a zone—‘a person who has actually been in that area, whether continuously or not’ for the required period—seems inappropriate: it can apply to a transport worker who permanently resides with his family outside the zone but may in the course of his work be intermittently in the zone for periods which in total amount to the required time. It is therefore recommended that the alternative test be withdrawn.

12.62. Teachers and others, who may reside for ten months in the zone in a calendar year but only for five months in each year of income, are unable to claim the allowance. This unfairness would be lessened by giving a taxpayer the right to elect that his entitlement to a zone allowance be determined by applying the present half-year residence test, not in relation to the year of income, but in relation to a year beginning with the day he starts residing in the area. Under this elective arrangement, the zone allowance would be claimed in the year of income in which the last day of a half-year's residence falls. Thus a taxpayer who takes up residence in a zone on 8 February 1975, and continues to reside there only until 15 December 1975 would, for purposes of qualifying for zone allowance, elect to substitute the year commencing 8 February 1975 for the income year. He would thus qualify for zone allowance in the 1975–76 income year, since 8 August 1975—the end of his half-year period of residence—falls in that year. A taxpayer who so elects would be required to retain the same qualifying year until the termination of the full period of residence to which the election relates. There would need to be an overall limiting provision to preclude more than one zone allowance in an income year.