ATPF minutes, February 2009

6. PAYG instalment relief

Member's questions

We would like to discuss the Tax Office administration of the government's decision to cut the PAYG instalment payable for the 31 December 2008 quarter by 20%.

We are particularly concerned to work with the Tax Office to avoid the costs of potentially unnecessary reverse work flows in administering this initiative.

For instance, we are aware of circumstances where the Tax Office has notified tax agents of their clients whom the Tax Office believes are entitled to the 20% reduction. It is not clear, however, how the Tax Office will administer this initiative in instances where a tax agent is also aware of other clients entitled to the PAYG reduction who are not on a Tax Office list of the tax agent's eligible clients and who take advantage of the PAYG instalment reduction.

Will the Tax Office be undertaking compliance/verification activities in these circumstances to substantiate a taxpayer's entitlement to claim the PAYG instalment reduction? If so, what will these compliance/verification activities involve?

Comments provided by RTPWG

The Tax Office has provided responses to the questions raised by the RTPWG following the ATPF meeting.

Melbourne RTPWG

Members confirmed that this policy was very confusing and were very unclear on how and when to apply this.

Tax Office response

Information has been placed on the Tax Office website which clarifies the entities that are eligible for PAYG instalment reduction and how the Tax Office will administer the measure prior to the enactment of the law. It also provides answers to the more frequently asked questions and addresses the current top five issues raised by tax professionals. PAYG instalment essentials can be accessed via www.ato.gov.au

The tax agent and business portals also have a key update link to this information.

It was also noted that members felt this initiative was 'useless' for them as in their experience their clients would rather pay the full amount when due rather than try to find the money at a later date.

The PAYG instalment amounts worked out by the Tax Office are required to include a 'gross domestic product (GDP) adjustment' so that the instalments payable during the income year more accurately reflect an entity's expected income tax liability. The GDP adjustment was increased to 8% for the 2008-09 income year, however, due to the current economic environment it is likely that the PAYG instalment amounts worked out for this income year will exceed many entities' expected income tax liability.

When the law supporting the PAYG instalment reduction is enacted it will provide a permanent 20% reduction to the PAYG instalment amount for the quarter that includes 31 December 2008 for eligible small business entities. The government has taken this action so the instalment liability for this quarter more accurately reflects small businesses' average actual profit growth in the current economic environment. It also minimises costs to taxpayers who may have otherwise considered varying their PAYG instalment downwards.

Tasmania RTPWG

General consensus was that there were some significant gaps in both client understanding of this initiative and the practical administration by the Tax Office. Members felt that there were ambiguities in the media release, that there was limited information available, and that tax practitioners would deal with the brunt of the complaints from their clients.

Overall members saw the initiative as being of minimal benefit - clients have always had the option to amend/vary an activity statement each quarter - albeit with risk of penalty for underestimation.

Tax Office response

When enacted, the law supporting the PAYG instalment reduction will provide that amounts worked out for quarters following the quarter that includes 31 December 2008 will be worked out as if no reduction had occurred. Ignoring the 20% reduction for the quarter that includes 31 December 2008 will ensure that the reduction is not clawed back through the subsequent instalment amounts in the same income year.

Administration

• There will be an increased number of issues once 2008 returns are lodged and clients have to pay the wash-up amounts. Practitioners felt this reduction may actually increase debt issues - particularly as the economic downturn had worsened since the announcement.
• Practitioners are incurring both actual costs in dealing with the issues arising from this policy announcement, as well as flow on consequences in terms of meeting their lodgment program.

Tax Office response

Tax practitioners may request additional time to lodge documents for client's registered on their current client listing. All lodgment deferral requests submitted should be considered in conjunction with Chapter 55 of the ATO Receivables Policy. Tax practitioners should request lodgment deferrals through the Lodgment deferral form on Tax agent request for additional time to lodge on www.ato.gov.au

The Tax Office is also investigating, through the Lodgment program in 2009-10, additional options that will further assist agents in meeting their lodgment obligations.

Letters

• There was some confusion surrounding the lists of eligible clients sent to practitioners - some had received a list of clients, and others had not. There was uncertainty whether the list only included clients whose postal address for activity statement purposes was care of the agent; or whether it included all clients regardless of their mailing address.

Tax Office response

In mid January 2009, we sent letters to eligible businesses who had an instalment due date on or before 21 January 2009 - for example, small businesses that report and pay GST on a monthly basis. Tax agents were issued with a letter containing a list of their eligible clients.

In early February 2009, we sent letters to eligible businesses with an instalment due date on or before 28 February 2009 (note as the due date falls on a long weekend in some states, the lodgment and payment deadline has been extended to 3 March 2009 Australia wide). Agents will again receive a letter with a list of eligible clients. Agent's lists will not include clients who, according to our records, receive their activity statement/instalment notice at their own address.

Eligibility

• There was uncertainty around client eligibility for the reduction.
• Some limited information on eligibility was available on the Tax Office website however it appears that the Tax Office is not applying the eligibility rules consistently - an example was cited of two partners in the same situation - one had been deemed eligible for the reduction and one was not.

Tax Office response

Generally, entities eligible for the reduction are those that:

• pay their PAYG instalments quarterly on the basis of the Commissioner calculated amount notified on an activity statement or instalment notice, and
• are a small business entity for the 2007-08 or 2008-09 income year - that is, they are carrying on a business and their aggregated turnover is less than $2 million, or
• are in receipt of income from a partnership or trust that is a small business entity for the 2007-08 or 2008-09 income year.

Therefore, a partner is not eligible for the reduction if they do not pay their PAYG instalments on the basis of the Commissioner calculated amount notified on an activity statement or instalment notice - for example, the partner is not eligible where they pay their PAYG instalments on the basis of their instalment income.

Client accounts

• It was noted that clients who had taken advantage of the 20% reduction for the December quarter, and paid 80% of their instalment, still have the remaining 20% showing as outstanding on their accounts. How is this going to be treated?
• Advice has been to not make an adjustment on the activity statement due to the 20% reduction - is the Tax Office going to change the numbers and post the reduced amount on the clients account? What will happen to the clients account after 31 March 2009?
• Is there to be a separate posting on the activity statement for the discount? This would be a preferred option for tax practitioners to be able to easily identify clients who had taken advantage of the discount.

Tax Office response

The Tax Office is progressively working through the accounts of the entities that we have identified as eligible for the reduction in order to make the appropriate adjustment to their PAYG instalment amount.

Entities that are requesting a refund of the extra 20% PAYG instalment payment are being actioned first. The Tax Office has put measures in place to ensure that no action is taken to recover the extra 20% PAYG instalment amount prior to the account adjustment.

There will not be a separate posting that specifically identifies the PAYG instalment reduction. The Tax Office will adjust the account by cancelling the 100% PAYG instalment amount posting and replacing it with a posting equal to 80% PAYG instalment amount.

• Alternatively, where a client has paid the December quarter in full will the Tax Office apply the discount anyway (if the client is eligible) and use the remaining monies (that is, the 20% discount) to offset other debt?
• There was potential for confusion - and that explanation of accounts would get 'messy' where amounts were already outstanding on the account - would offsetting occur? There was a time and cost factor in handling client queries.
• How will agents be readily able to determine the PAYG instalment credits available to clients at the end of the 2009 financial year?

Tax Office response

When the legislation supporting the PAYG instalment reduction is enacted, the reduction is mandatory and the Tax Office must reduce the PAYG instalment amount notified for the quarter that includes 31 December 2008 for eligible small business entities.

Generally, unless an entity requests a refund of the extra 20% PAYG instalment payment, the amount will be treated as a voluntary payment and will be applied to their income tax account in anticipation of the income tax liability.

Where an entity has other outstanding tax debts, the extra 20% payment will usually be applied against those tax debts.

When an income tax assessment is made for an income year, a taxpayer is entitled to a credit equal to the total of their PAYG instalments payable for that income year. Entities that have been identified as eligible for the reduction will have their PAYG instalment for the December 2008 quarter reduced by 20%. You will only be entitled to a credit equal to the total of the December 2008 reduced instalment amount and the other PAYG instalments payable for the 2008-09 income year.

The 'PAYG Instalments report 2009' provides details of the amount of the PAYG instalment credit entitlement for each income year and can be access via the Tax Agent Portal (the portal).

North Queensland RTPWG

• Many practitioners were not emphasising the measure, as many clients did not need to adjust the first two quarters.
• Practitioners feel that the 3rd and possibly 4th quarters are expected to be worse than the first two quarters.
• Many clients who are eligible won't take up the offer.
• Practitioners felt that the onus was on them to remain vigilant and review the situation for each client.
• Some practitioners would continue to vary the rate of instalments if deemed necessary for a client.

Tax Office response

The Tax Office has already written to small business entities identified as being eligible for the PAYG instalment reduction, either directly or via their tax agent for those entities whose PAYG instalment mailing address is their agent's address.

Entities eligible for the reduction are those that:

• pay their PAYG instalments quarterly on the basis of the Commissioner calculated amount notified on an activity statement or instalment notice, and
• are a small business entity for the 2007-08 or 2008-09 income year, that is, they are carrying on a business and their aggregated turnover is less than $2 million, or
• are in receipt of income from a partnership or trust that is a small business entity for the 2007-08 or 2008-09 income year.

The Tax Office was not able to identify prior to the mail out all eligible entities, for example, where their aggregated turnover for the 2006-07 income year was $2 million or more and an assessment had not been made for the 2007-08 income tax return by the date that we generated the December 2008 quarter activity statements or instalment notices (that is1 December 2008).

Tax agents are encouraged to contact the Tax Office on 13 72 86 FKC 1 4 1 in relation to clients that have not been identified as being eligible and who they believe are eligible. This will ensure that the Tax Office records are adjusted so that the client does not receive a demand notice in relation to what otherwise would appear as a payment for less than the full amount of their PAYG instalment obligation.

When the legislation supporting the PAYG instalment reduction is enacted, the Tax Office must reduce the PAYG instalment amount notified for the quarter that includes 31 December 2008 for eligible small business entities - that is, the reduction is mandatory.

Prior to the enactment of the legislation, the Tax Office is anticipating the law by making an adjustment to the running balance account of all entities that we have identified as eligible for the reduction. We will reduce the amount of the PAYG instalment for the December 2008 quarter that we have allocated to their account by 20%. This action is necessary so that we are able to pay refunds to those entities that have already paid 100% of the PAYG instalment amount previously notified by the Tax Office and request a refund of the extra 20% payment.

However, where an entity pays the full PAYG instalment amount and does not request a refund, we will treat the extra 20% amount as a voluntary payment towards their income tax liability.

The Tax Office will perform a basic check to confirm the entity's eligibility before reducing their PAYG instalment amount. The check will ensure that entities should not be excluded from receiving the reduction because they:

• have an annual turnover of $2 million or more for each of the two income years before the 2007-08 or 2008-09 income year
• have varied the Commissioner calculated PAYG instalment amount for the December 2008 quarter or they have already varied the PAYG instalment amount in a previous quarter for the 2008-09 income year
• pay only two instalment amounts annually as notified by the Commissioner on their business activity statement (BAS) (that is, they are a two instalment payer)
• work out their PAYG instalments on the basis of their instalment income (Option 2 on the BAS), or
• are not in business (such as an individual with only investment income).

The Tax Office does not have plans to commence any compliance activity specifically focussed on the PAYG instalment reduction initiative. However, an entity's reduction entitlement may be reviewed as part of the usual compliance activities.

Meeting discussion

The Tax Office advised that the process currently in place for the 20% Instalment relief is in anticipation of the legislation obtaining royal assent.

A member acknowledged it is a Treasury policy however the Tax Office is advising that the 20% reduction is mandatory. Is the 20% mandatory as many clients had advised them they are going to make full payment?

Members asked when the letters went out advising tax practitioners which clients were eligible for the 20% reduction. Members also raised concerns about people who may under pay.

Members also asked what amount will be raised on the RBA, the 80% or 100% and suggested providing messages to tax practitioners advising them when the accounts have been adjusted so they can confirm clients eligible for the reduction received it.