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A new report written by the Grattan Institute makes recommendations to the Federal Government about reducing three tax breaks for older Australians, meaning about $1 billion a year could be saved.

The measures being looked at involve winding back the Seniors and Pensioners Tax Offset (SAPTO), imposing the Medicare Levy more evenly and to provide a Private Health Insurance rebate at the same rate for all Australians.

Why are these tax breaks potentially being targeted by the Government?

The report explains that age-based tax breaks are considered flawed for any justifiable purposes such as increasing workforce participation or preserving adequate retirement incomes for poorer Australians.

They have meant that the proportion of seniors paying tax has almost halved in the last 20 years. Those over 65 pay less tax per household in real terms than seniors did 20 years ago, despite their rising incomes and workforce participation rates.

The current generation of seniors also receive much more than their predecessors from Government spending, particularly on health. Senior households on average receive $32,000 a year from Government more than they contribute in income and sales taxes. In 2004 they only took out about $22,000 a year. For now, federal budget deficits are funding the difference.

Many seniors pay less than younger workers on the same income as a result of SAPTO and a higher Medicare levy income threshold. They also get a higher rebate on their private health insurance than younger workers on the same income.

The tax-free thresholds for seniors and for younger people have diverged over the last 20 years. Seniors do not pay tax until they earn $32,279 a year, whereas younger households have an effective tax-free threshold of $20,542.

Who would be affected if the recommendations are implemented?

The proposed changes would have little effect on the 40 per cent of seniors who receive a full Age Pension. They would mostly affect seniors who are wealthy enough to receive no pension or just a part pension.