House of Representatives

New Business Tax System (Consolidation) Bill (No. 1) 2002

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 12 - Pay as you go instalments

Outline of chapter

12.1 This chapter explains the consequential amendments that will be made to the PAYG instalments legislation to ensure the efficient collection of income tax payable by entities that are members of consolidated groups at some point during an income year.

12.2 Unless otherwise noted, the sections referred to in this chapter are sections of Schedule 1 to the TAA 1953.

Context of amendments

12.3 As discussed in Chapter 2 of this explanatory memorandum, the income tax liability single entity rule of the consolidation legislation will provide that an entity, that is a subsidiary member of a consolidated group, will be treated as a part of the head company of that group for the purpose of working out that subsidiary members and the head companys liability to pay income tax. This treatment necessitates changes to the liability of both the subsidiary member and the head company to pay PAYG instalments.

12.4 Amendments are needed to the existing PAYG instalments legislation to ensure that the liability to pay PAYG instalments reflects the assessment liabilities of the members of a mature consolidated group and to make appropriate transitional arrangements for the period prior to a head company of a consolidated group being given an instalment rate worked out from its first assessment as the head company of that consolidated group.

Summary of new law

Rules that will apply to a mature consolidated group (i.e. one where the head company has been given an instalment rate worked out from its first assessment as the head company of that group)

12.5 Generally, the only member of a mature consolidated group liable to pay PAYG instalments will be the head company. The PAYG instalments provisions will apply to a head company of a consolidated group in much the same way as they do to any other company. Head companies will be liable to pay quarterly instalments and will pay using either:

·
the GDP-adjusted notional tax method if the instalment income of the head company in its most recently assessed income year is $1 million or less and it does not choose to pay using the instalment income method; or
·
the instalment income method if the instalment income of the head company in its most recently assessed income year is more than $1 million or it has chosen to use that method.

12.6 When the head company of a consolidated group works out its instalment income for an instalment quarter, it will need to work it out on the basis that each subsidiary member of the group is a part of the head company. That is, the head company will work out its instalment income as if it derives the income or gains arising from transactions carried out by the members of the group.

12.7 Further, the head company will work out its instalment income on the basis that it has the attributes of its subsidiary members. For example, if a subsidiary member of a consolidated group is a partner in a partnership, or a beneficiary of a trust, the head company will be treated as being the partner or beneficiary where that partnership or trust is not itself a member of the group.

12.8 The head company will not be required to include ordinary income arising from intra-group transactions in its instalment income as it will not be assessed on those amounts. This results from treating the subsidiary members of a consolidated group as parts of the head company which, in turn, brings into play the principle that an entity cannot derive income from itself.

12.9 An entity that becomes a subsidiary member of a consolidated group will be liable to pay a PAYG instalment for the instalment quarter (or income year if it is an annual payer) in which it joins the group. However, it will not be liable to pay an instalment for any subsequent quarter (or year) unless it later leaves the group.

12.10 If, at the time the subsidiary member joins the group, it pays its instalments using the instalment income method, its instalment income for the joining quarter will be the ordinary income it derives before joining the group. Any income derived after joining will be treated as if it is derived by, and assessable to, the head company under the income tax liability single entity rule. As it will not be assessable income of the subsidiary member, it will not be instalment income of the subsidiary member.

12.11 If, at the time the subsidiary member joins the group, it pays its instalments using the GDP-adjusted notional tax method, the entity will, for the joining quarter, pay the amount notified by the Commissioner. However, the subsidiary member may choose to vary the amount on the basis of its estimate of its expected tax liability for the income year.

12.12 An entity will become liable to pay PAYG instalments immediately on leaving a consolidated group. The entity will be required to:

·
pay quarterly instalments;
·
use the instalment income method; and
·
use the most recent instalment rate given to the head company before the end of the instalment quarter in which the entity leaves the group.

The entity will continue to pay on the instalment income basis until the first instalment quarter of the first income year that starts after it has been assessed in its own right. It can then determine whether it is eligible to pay instalments annually or quarterly and if it is a GDP-adjusted notional tax payer or instalment income payer under the existing PAYG instalments provisions.

12.13 The Commissioner will have a power to give a head company of a consolidated group a new instalment rate or instalment amount in certain circumstances when there is a change in the membership of a mature consolidated group.

Rules that apply before a head company has been given an instalment rate worked out from its first assessment as a head company

12.14 There are special rules that will apply during the transitional period until the Commissioner gives a head company of a consolidated group an instalment rate that is worked out from its first assessment as the head company of that group.

12.15 In this transitional period, each member of the consolidated group will remain liable to pay instalments as if it were not a member of a consolidated group. This will be so even though each subsidiary member will be treated as a part of the head company of the group for the purposes of determining its income tax liability on assessment.

12.16 When the head company of the group is assessed, it will be entitled to a credit for its own instalments and the instalments payable by each subsidiary member of the group. The amount of the credit arising from a subsidiary members instalments will take account of so much of the subsidiary members instalments and variation credits as are reasonably attributable to:

·
the period during which that subsidiary member is a subsidiary member of the group; and
·
the part of the instalment quarter (or income year) for which the instalment is payable by that subsidiary member that falls within the head companys income year.

12.17 There will also be special rules to deal with variations made by members of the group in this transitional period. Under these rules, a head company of a consolidated group may be liable to a variation penalty in relation to a variation made by a subsidiary member of the group.

Comparison of key features of new law and current law
New law Current law
The head company of a consolidated group will be liable to pay PAYG instalments to meet its tax liabilities on the basis that the subsidiary members of the group are a part of the head company. Each entity is liable to pay PAYG instalments to meet its tax liability.
The head company of a consolidated group will pay instalments quarterly.

Head companies will pay using the GDP-adjusted notional tax method if their instalment income in their most recently assessed income year is $1 million or less unless they choose to pay using the instalment income method. All other head companies will pay using the instalment income method.

Entities that are members of company groups (as defined by reference to a 50% control test) pay instalments quarterly.

Companies pay using the GDP-adjusted notional tax method if their instalment income in their most recently assessed income year is $1 million or less unless they choose to pay using the instalment income method. All other companies pay using the instalment income method.

A quarterly instalment payable by a head company will be due on or before 21 days after the end of the instalment quarter. A quarterly instalment payable by an entity that is a deferred BAS payer is due on or before 28 days after the end of the instalment quarter, or on 28 February for an instalment quarter of which the last month includes all or part of December.

A quarterly instalment payable by an entity that is not a deferred BAS payer is due on or before 21 days after the end of the instalment quarter.

When the head company of a consolidated group works out its instalment income, it will ignore income from intra-group transactions.

The head company will work out its instalment income as if it derives the income or gains arising from the transactions carried out by the subsidiary members of the group as well as its own.

Generally, the instalment income of all entities, regardless of whether they are members of a company group, includes intra-group transactions.
An entity that becomes a subsidiary member of a consolidated group will cease to be liable to pay PAYG instalments as from the instalment quarter (or income year) that is subsequent to the quarter (or year) in which it joins the group. Joining a group of companies does not alter the entitys liability to pay PAYG instalments.
An entity that leaves a consolidated group will become liable to pay PAYG instalments for the instalment quarter in which it leaves the group and subsequent quarters. It will be an instalment income payer and will work out its instalments using the head companys instalment rate until the Commissioner gives it an instalment rate from its first assessment in its own right. Leaving a group of companies does not alter the entitys liability to pay PAYG instalments.
The Commissioner will have a power to give a head company of a consolidated group a new instalment rate or instalment amount in certain circumstances when the membership of a group changes. No equivalent.
Special rules will apply in the transitional period for a group (that is until a head company is given an instalment rate worked out from the head companys first assessment as a head company of that group). All members of the consolidated group will continue to be liable to pay PAYG instalments as if they were not members of a consolidated group until that rate is given. No equivalent.

Detailed explanation of new law

12.18 Two new Subdivisions will be inserted into Division 45. [Schedule 4, item 1, Subdivisions 45-Q and 45-R]

12.19 The first new Subdivision will ensure that the single entity rule applies to the members of a consolidated group for the purposes of PAYG instalments. However, this will not occur until the Commissioner has given the head company an instalment rate worked out from the head companys first assessment as a head company. This Subdivision will also contain rules that modify the usual operation of Division 45 insofar as it applies to entities that are members of a consolidated group and deal with changes in the membership of a group. [Schedule 4, item 1, Subdivision 45-Q]

12.20 The second new Subdivision will set out rules that apply to members of consolidated groups during the transitional period commencing when a consolidated group is formed and ending just before the start of the instalment quarter in which the head company of a consolidated group is given an instalment rate worked out from its first assessment as a head company of that group. [Schedule 4, item 1, Subdivision 45-R]

General rules for mature consolidated groups

Application of Subdivision 45-Q to a head company of a consolidated group

12.21 The general rules for consolidated groups will not apply until a head company of a consolidated group has been assessed as a head company for the first time and has been given an instalment rate that is worked out from that assessment. That is, Subdivision 45-Q will start to apply to a head company of a consolidated group for the period that commences on the first day of the instalment quarter of a head company during which the head company is given its initial head company instalment rate. [Schedule 4, item 1, paragraph 45-705(a)]

12.22 The initial head company instalment rate of a head company of a consolidated group is the instalment rate, given to the head company by the Commissioner, worked out on the basis of the head companys first base assessment as a head company. [Schedule 5, item 12, subsection 995-1(1) of the ITAA 1997]

12.23 Subdivision 45-Q will continue to apply to a head company of a consolidated group until the end of the instalment quarter in which the head company ceases to be the head company of the group. [Schedule 4, item 1, paragraph 45-705(b)]

12.24 When Subdivision 45-Q applies to the head company of a consolidated group, the group is referred to in this chapter as a mature group.

Single entity rule

12.25 The single entity rule will be included in the PAYG instalments provisions and will apply for the purposes of that regime. This is necessary as the single entity rule discussed in Chapter 2 does not apply for PAYG instalments purposes. Consequently, while an entity is a subsidiary member of a consolidated group it, and any other subsidiary member of the group, will be taken to be parts of the head company of the group, rather than separate entities, during that period. However, the single entity rule in the PAYG instalments provisions will only start to apply from the start of the instalment quarter during which the Commissioner gives the head company of a consolidated group its initial head company instalment rate. It will continue to apply while Subdivision 45-Q applies to that head company. [Schedule 4, item 1, section 45-710]

12.26 There are several effects of applying the single entity rule for the purposes of PAYG instalments.

12.27 The main effect is to ensure that, while Subdivision 45-Q applies to the head company of a consolidated group, the head company of the group will bear the liability to pay PAYG instalments. Once the single entity rule starts to apply to a particular head company, an entity that is a subsidiary member of that consolidated group at the end of a particular instalment quarter will not be liable to pay an instalment for that quarter. This is necessary because the PAYG instalments provisions do not apply to an entity that is taken to be a part of a head company (see existing section 45-10). However, special rules will apply when:

·
an entity joins a mature consolidated group during an instalment quarter (see paragraphs 12.36 to 12.41); and
·
Subdivision 45-Q begins to apply to the head company of a consolidated group in a particular quarter of the head companys income year and a subsidiary member has an instalment quarter, or income year, that ends before the instalment quarter, or income year, of the head company (see paragraphs 12.67 to 12.69).

12.28 The single entity rules that will apply for PAYG instalments purposes and for income tax liability purposes will also affect how an entity works out its instalment income. This is because:

·
the instalment income of an entity for an instalment period is the ordinary income derived by the entity in that period, to the extent to which that ordinary income is assessable income of the income year that includes that period (see the existing definition of instalment income in section 45-120); and
·
the assessable income of an entity will be determined having regard to the single entity rule that applies for income tax liability purposes.

12.29 Therefore, the instalment income of a head company of a consolidated group for a particular instalment quarter will be the ordinary income that the head company derives in the quarter worked out on the basis that the subsidiary members are parts of the head company. This may mean that the instalment income of the head company is not simply the total of the ordinary income of all the members of the group.

12.30 Further, when the head company is working out whether a particular amount of ordinary income will be its assessable income of the income year that covers a particular instalment quarter, it will do so having regard to the single entity rule that applies for income tax liability purposes.

12.31 The head company will work out its instalment income on the basis that it has the attributes of its subsidiary members. For example, if a subsidiary member of a consolidated group is a partner in a partnership, or beneficiary of a trust, the head company will be treated as being the partner or beneficiary where that partnership or trust is not itself a subsidiary member of the group.

12.32 The single entity rule that applies for income tax liability purposes will also affect how entities that are not head companies work out their instalment income for a particular period. For example, an entity that becomes a subsidiary member of a consolidated group during a particular period will not have any instalment income from the date it joins the group until it leaves the group without immediately becoming a subsidiary member of another mature group. This is because any income it derives during that period will be assessable to the head company of the group and, therefore, will not be instalment income of the entity.

12.33 An entity that ceases to be a subsidiary member of a mature consolidated group, without immediately becoming a subsidiary member of another mature group, may have instalment income in relation to a period, or periods, after it leaves the group.

Head companies will pay quarterly instalments

12.34 Members of company groups (determined on a 50% ownership/control test) cannot choose to be annual payers under the existing law. Consistently with this, the law will state that the head company of a consolidated group cannot choose to pay annual instalments while Subdivision 45-Q applies to the head company. [Schedule 4, item 1, section 45-720]

Quarterly instalments are due within 21 days

12.35 The quarterly instalments that are payable by a head company of a mature consolidated group will be due on or before 21 days after the end of the instalment quarter. This will be so even if the head company is a deferred BAS payer that is not due to pay its other BAS amounts until 28 days after the end of the quarter. This provision does not affect the due date for paying those other BAS amounts. [Schedule 4, item 1, section 45-715]

Entity becomes a subsidiary member

12.36 The PAYG instalments single entity rule will remove an entitys liability to pay an instalment for an instalment quarter or income year when an entity becomes a subsidiary member of a mature consolidated group during that quarter, or year, if the entity would otherwise be liable to pay an instalment for that instalment period. However, the entity should still be liable to pay an instalment for the quarter, or year, in which it joins the group. This is because the entity will still be liable to pay income tax for the part of the income year during which it is not a subsidiary member of a consolidated group.

12.37 Accordingly, an entity that becomes a subsidiary member of a consolidated group will be liable to pay a PAYG instalment for the instalment quarter (or income year if it is an annual payer) in which it becomes such a member if:

·
Subdivision 45-Q applies to the head company of the consolidated group at any time during that quarter (or year);
·
the entity would have been liable to pay a PAYG instalment had it not become a subsidiary member of that consolidated group; and
·
the entity joins that consolidated group on a day other than the first day of:

-
an instalment quarter in the case of a quarterly payer; or
-
an income year in the case of an annual payer.

[Schedule 4, item 1, subsection 45-755(1)]

12.38 Special rules apply if the joining entity would have been a quarterly payer that pays 4 instalments annually on the basis of GDP-adjusted notional tax and it varies its instalment for the joining quarter and that quarter is not the fourth quarter of the income year for which the entity is liable to pay an instalment. In that case, the joining entity must work out its instalment for the quarter on the assumption that it were the fourth quarter of the income year for which it is liable to pay an instalment. That is, it works out its instalment by subtracting from its estimated benchmark tax the sum of its previous instalments for the income year, if any, and adding back the amount of any variation credit it claimed for a previous quarter of the income year. [Schedule 4, item 1, subsections 45-755(2) and (3)]

12.39 The same assumption applies for working out the acceptable amount of the instalment for the joining quarter when working out a variation penalty in relation to that instalment. [Schedule 4, item 1, subsections 45-755(2) and (4)]

12.40 The entry rule discussed in paragraph 12.37 will apply to an entity that is not a member of a mature consolidated group before entering a mature group or an entity that is, before joining the mature group, the subsidiary member of a consolidated group that is not yet mature. It will also apply to an entity that is the head company of a consolidated group immediately prior to becoming a subsidiary member of another mature group.

12.41 Where an entity becomes a subsidiary member of a consolidated group that is not yet a mature consolidated group the rule in paragraph 12.37 does not apply. All members of a group that is not yet a mature consolidated group are liable to pay instalments under the transitional rules discussed in paragraphs 12.62 to 12.99. Consequently, an entity that becomes a member of such a group will remain liable to pay PAYG instalments for the transitional period if it was already liable to do so.

Entity ceases to be a subsidiary member

12.42 A special rule will provide:

·
that an entity that leaves a mature consolidated group (the exiting entity) becomes liable to pay PAYG instalments; and
·
the basis on which it is liable to pay PAYG instalments.

12.43 It is appropriate for an entity that ceases to be a subsidiary member of a mature consolidated group to become liable to pay PAYG instalments. However, it would not be appropriate for that entity to revert to the instalment rate or payment method that applied prior to it joining the group. Primarily, this is because the instalment rate or GDP-adjusted notional tax amount worked out from an old assessment may no longer be appropriate to the entitys tax attributes on leaving the group and its expected income tax liability for the income year in which it leaves.

12.44 Consequently, an entity will become liable to pay PAYG instalments if it:

·
ceases to be a subsidiary member of a consolidated group during an instalment quarter and Subdivision 45-Q applies to the head company of the group at any time during that quarter; and
·
does not immediately become a subsidiary member of another consolidated group the head company of which is a head company to which Subdivision 45-Q applies.

[Schedule 4, item 1, subsection 45-760(1)] and paragraph 45-760(2)(a)

12.45 The exiting entity will become liable to pay instalments because the PAYG instalments provisions will apply as if the Commissioner gave that entity an instalment rate during the instalment quarter in which it ceased to be a member of the group. It will be liable to pay an instalment for the quarter in which it leaves the group and subsequent quarters because the giving of an instalment rate to an entity triggers that entitys liability to pay instalments under the existing law - see section 45-15. [Schedule 4, item 1, paragraph 45-760(2)(a)]

12.46 Further, the entity will be treated as if it has been given the same instalment rate as the instalment rate most recently given to the head company of the mature consolidated group that it leaves. That will include an instalment rate given to the head company after the entity has left but before the end of the instalment quarter in which it leaves. It will continue using that instalment rate until the Commissioner gives it an instalment rate worked out from an assessment for the income year that includes the day the entity ceased to be a member of the consolidated group. [Schedule 4, item 1, paragraph 45-760(2)(a)]

12.47 The exiting entity will, at the end of the quarter in which it exits the group, be a quarterly payer that pays instalments using the instalment income method. Generally, it will remain liable to pay its instalments on this basis until the end of the last instalment quarter of the income year in which the Commissioner gives it an instalment rate worked out from the assessment of the income year in which it left the group. This means that the entity will not be entitled to pay instalments using any other method until the income year that starts after its first assessment for a post-consolidation period. However, if the Commissioner gives the exiting entity an instalment rate worked out from its first assessment for the income year that includes the day the entity ceased to be a member of the consolidated group, during the first instalment quarter of an income year, it will stop being required to be an instalment income payer under this rule. That will occur immediately before the end of that quarter and the entity will be required to determine the method it uses to work out its instalments under the existing law. [Schedule 4, item 1, paragraph 45-760(2)(b)] and subsection 45-760(3)]

12.48 The exit rule discussed in paragraphs 12.44 to 12.47 will apply to an entity that ceases to be a subsidiary member of a mature consolidated group, for example, because:

·
it ceases to be a 100% subsidiary of the head company of the group; or
·
the group is deconsolidated because the head company of the group ceases to be eligible to be a head company for a reason other than the head company becoming a subsidiary member of another mature consolidated group.

It does not apply to an entity that ceases to be a head company of a consolidated group. Subdivision 45-Q continues to apply to the head company until the end of the quarter in which the deconsolidation occurs and the entity that was the head company continues to be liable to pay instalments.

Commissioners power to work out a higher or lower instalment rate or instalment amount

12.49 Currently, the Commissioner is required to work out the instalment rate and/or GDP-adjusted notional tax amount that is given to an entity having regard to that entitys most recent assessment for its most recent income year.

12.50 Changes in the composition of a mature consolidated group could significantly alter the head companys expected tax liability for a year. This could also mean that the instalment rate or GDP-adjusted notional tax amount worked out from a head companys most recent assessment is not an appropriate basis from which to work out the head companys instalments.

12.51 For example, the head company of one consolidated group - the take-over head company - may acquire the head company of another consolidated group - the target head company. Further, the most recently assessed tax liabilities of the 2 head companies may be quite similar but their instalment rates may be very different. For instance, the take-over head companys rate might be relatively low because its instalment income for its most recent assessment is large, while the target head companys rate might be high because its instalment income for its most recent assessment is quite small. (Broadly, an entitys instalment rate is worked out by dividing its tax for its most recent year, with some adjustments, by its instalment income for that year.)

12.52 In a case like that outlined in the previous paragraph, the instalments payable by the take-over head company would probably fall short of the take-over head companys expected tax liability. Applying its relatively low instalment rate to the relatively small additional instalment income that it derives as a result of acquiring the target head companys group, would result in instalments falling short of its increased tax liability.

12.53 In the converse of the situation discussed in paragraph 12.51, that is, a high instalment rate head company acquiring a low instalment rate head company, the instalments payable by the take-over head company could far exceed its expected tax liability.

12.54 The Commissioner does not currently have any power to calculate a higher, or lower, instalment rate or GDP-adjusted notional tax amount for an entity if the Commissioner believes the instalments payable using a head companys latest instalment rate or amount will be too high or low. Under the changed arrangements flowing from the consolidations regime, such a power will be necessary to address the increased chance of consolidated groups significantly over or under-paying their instalments as a result of material changes in the membership of a consolidated group.

12.55 Consequently, the Commissioner will be given a subjective power to work out a higher, or lower, instalment rate or GDP-adjusted notional tax amount to ensure that the objects of the PAYG instalments regime are given effect. The Commissioner will be able to exercise this power if:

·
there has been a change in the membership of a mature consolidated group because one or more entities become, or cease to be, subsidiary members of the group; and
·
having regard to the statutory object of the PAYG instalments regime (which includes ensuring the efficient collection of income tax by minimising the amount payable, or refundable, on assessment), the Commissioner is of the opinion that it would be reasonable to work out a higher, or lower, instalment rate or GDP-adjusted notional tax amount.

[Schedule 4, item 1, subsections 45-775(1) and (2)]

12.56 The higher, or lower, instalment rate or amount that the Commissioner works out will be the rate or amount that, in the opinion of the Commissioner, is reasonable. In working out whether a rate or amount is reasonable, the Commissioner must have regard to the change in membership of the group and the object of the PAYG instalments regime. [Schedule 4, item 1, subsection 45-775(3)]

12.57 The Commissioner will be able to exercise this power at any time during an income year. This will be so even if the head company of a consolidated group varies its instalment rate or estimates its benchmark tax for the year prior to the membership change, or after that change but before the Commissioner has exercised the power in respect of that change in the group.

12.58 Any higher, or lower, rate or amount will be relevant for working out the GIC to which the head company may be liable in respect of a variation. This is consistent with the existing law. Currently, an instalment rate or GDP-adjusted notional tax amount worked out from an assessment that occurs after an entity has varied is taken into account in working out any variation penalty.

12.59 Whether or not the head company of a consolidated group is given a higher, or lower, instalment rate or GDP-adjusted notional tax amount, the head company will be entitled to vary its rate or amount under the existing law.

12.60 The Commissioners decisions made in the exercise of the power will be reviewable in the normal way under the Administrative Decisions (Judicial Review) Act 1977 .

12.61 It is expected that the Commissioner will exercise this power only when the membership change alters the head companys anticipated tax liability in a material way. In many situations, the entry of a new subsidiary member to the group or the exit of an existing subsidiary member will be appropriately addressed by applying the groups existing instalment rate to its increased, or decreased, instalment income.

Transitional period rules

12.62 The rules discussed in paragraphs 12.21 to 12.61 will only apply once the Commissioner gives a head company of a consolidated group its initial head company instalment rate. Special rules will apply in the transitional period from a groups date of consolidation until the start of the instalment quarter of a head company of a consolidated group in which it is given its initial head company instalment rate by the Commissioner.

12.63 It is anticipated that the transitional period will affect the first 2 income years of a consolidated group. This can be seen from the definition of consolidation transitional year which will be, for a member of a group, an income year of that member:

·
during all or part of which the head companys choice to consolidate has effect; and
·
which is either the year in which the Commissioner gives the head company its initial head company instalment rate or the year that ends immediately before that year.

[Schedule 5, item 8, subsection 995-1(1) of the ITAA 1997]

Liability for instalments

12.64 As explained in paragraph 12.25, the single entity rule will only start to apply to a consolidated group for PAYG instalments purposes from the start of the instalment quarter in which the head company of that group is given its initial head company instalment rate. This means that, prior to the giving of the initial head company instalment rate, the members of a consolidated group will continue to be liable to pay PAYG instalments as if they were not members of a consolidated group. No special rules are needed to ensure an entity is liable to pay an instalment because of the way Subdivision 45-Q will operate.

12.65 However, a rule is needed to ensure that an instalment payable by such a member in the transitional period is worked out in an appropriate way. This is because, under the existing law, an entitys instalment income for a period is so much of the ordinary income it derives in that period as will be assessable income of the income year that includes that period. If a subsidiary member were to apply this definition in a quarter in which it is a member of the group for the whole quarter, it would not have any instalment income because its ordinary income will be assessable to the head company.

12.66 Consequently, when an entity that is a member of a consolidated group works out its instalment income for a particular instalment quarter or income year, or part of that quarter or year, it will ignore the fact that its ordinary income will not be included in its assessable income. That is, it will ignore the operation of the single entity rule that applies for income tax liability purposes. For example, it will include in its instalment income, an amount derived from an intra-group transaction even though such income is not assessable to it or to the head company. This will not produce an incorrect result as the entitys instalment rate, being worked out from an assessment for an income year when the entity was not a member a consolidated group, will also take account of intra-group transactions that occurred in that income year. [Schedule 4, item 1, section 45-855]

Special liability rule for group members with different instalment periods

12.67 The single entity rule for PAYG instalments will start to apply to a consolidated group from the start of the instalment quarter of the head company of a consolidated group in which the head company is given its initial head company instalment rate. This will mean that the single entity rule will start to apply to a particular subsidiary member of a consolidated group part way through its instalment quarter or income year in some cases where that member has a different income year from the head company and is, therefore, liable to pay instalments in respect of different periods from the head company. Without a special rule, no entitys instalment would take account of instalment income derived in the period from the start of the subsidiary members instalment quarter, or year, to the day on which Subdivision 45-Q started to apply to the head company of the group.

12.68 Therefore, although this is not expected to happen very often, a subsidiary member will be liable to pay an instalment for the instalment quarter (or income year if it is an annual payer) in which the single entity rule starts to apply to the head company of the consolidated group if:

·
the subsidiary member would, but for the operation of the Subdivision 45-Q, be liable to pay an instalment for the instalment quarter, or income year, during which Subdivision 45-Q starts to apply to the head company of the group; and
·
that subsidiary members instalment quarter or income year ends before the end of the instalment quarter or income year of the head company during which Subdivision 45-Q starts to apply to the head company.

[Schedule 4, item 1, subsections 45-860(1) and (2)]

12.69 Once the subsidiary member is liable to pay an instalment for the instalment quarter, or income year, in which Subdivision 45-Q starts to apply to the head company of the group, the subsidiary member will work out its instalment for that quarter or year using certain assumptions. First, it will only need to work out its instalment income for the period from the start of its quarter or year to the day on which Subdivision 45-Q starts to apply to the head company of the group. Second, consistent with section 45-855, it will disregard the operation of the income tax liability single entity rule for that period. That is, its instalment income will be the ordinary income it derives in that period, regardless of the fact that that income will not be included in its assessable income. [Schedule 4, item 1, subsection 45-860(3)]

Example 12.1: Member having a different instalment period Company A, the head company of a consolidatable group, chooses to consolidate the group as from 1 July 2002. It is a 30 June balancing entity, but one subsidiary member, Company SM5, has a substituted accounting period ending on 30 April.The Commissioner gives Company A its initial head company instalment rate (worked out from its 2002-2003 assessment) on 20 March 2004. Therefore, Subdivision 45-Q starts to apply to Company A on 1 January 2004.Prior to the day on which Subdivision 45-Q starts to apply to Company A, both Company A and SM5 are quarterly instalment payers that use the instalment income method.SM5 will be liable to pay an instalment for its instalment quarter ending 31 January 2004. However, that instalment will be payable for the period from 1 November to 31 December 2003 and will be worked out from the ordinary income SM5 derives in that period. The income earned by SM5 from 1 January 2004 will be taken into account by Company A in working out its instalment for the quarter ending 31 March 2004.

Credits for instalments on assessment

12.70 Under the existing law, the PAYG instalments that are payable by an entity for an income year are credited against that entitys assessment for that year under section 45-30. However, the credit for instalments payable by a subsidiary member of a consolidated group for a consolidation transitional year for that entity are allocated between:

·
a head companys assessment in respect of a period when the subsidiary member was a member of a consolidated group; and
·
any separate assessment of the subsidiary member for its consolidation transitional year in respect of a period when it was not a member of a consolidated group.

[Schedule 4, item 1, section 45-865]

12.71 A head company of a consolidated group will be entitled to a credit for instalments payable by an entity that is a subsidiary member of that group at any time during the head companys consolidation transitional year. This credit will be in addition to the credit to which the head company is entitled for its own instalments under section 45-30. For example, if a group consists of the head company and 3 subsidiary members, the head company will be entitled to a credit for instalments payable by each of those 3 subsidiary members. [Schedule 4, item 1, subsection 45-865(1)]

12.72 A head company will be entitled to credits after the Commissioner:

·
makes an assessment of the income tax the head company is liable to pay for a consolidation transitional year for the head company; or
·
determines that the head company is not liable to pay tax on its taxable income or that it has no taxable income for that year.

This is consistent with existing section 45-30. [Schedule 4, item 1, subsection 45-865(1)]

12.73 The amount of the credit to which a head company is entitled in respect of a particular subsidiary member is worked out by:

·
totalling each instalment payable by that subsidiary member; and
·
subtracting any variation credits claimed by it,

to the extent to which those instalments and variation credits are reasonably attributable to that head companys assessment for a consolidation transitional year. [Schedule 4, item 1, subsection 45-865(2)]

12.74 To determine how much of an entitys instalment is reasonably attributable to a head companys assessment, it will be necessary to work out how much of the instalment quarter (or income year) for which the instalment is payable falls within:

·
the head companys consolidation transitional year; and
·
the period during which the entity is a subsidiary member of the consolidated group.

[Schedule 4, item 1, paragraph 45-865(2)(a)]

12.75 For a variation credit, the attribution must also be made taking account of the factors identified in the previous paragraph. However, it is necessary to examine more than just the instalment quarter for which the credit is claimed in making that attribution. For an instalment income payer, the period to be considered is the previous instalment quarters of the income year. For a GDP-adjusted notional tax payer, the period is the quarter for which the variation credit is claimed and the preceding quarters of the income year. The difference in approach arises because of differences in the way variation credits are worked out by instalment payers using these different methods. [Schedule 4, item 1, paragraph 45-865(2)(b)]

12.76 It should be noted that section 45-865 may also apply in allocating the instalment payable by an entity for a particular instalment period between 2 or more head companies, if that entity was a member of more than one consolidated group during that period.

12.77 Once part of a subsidiary members instalment or variation credit has been taken into account in working out the credit to which a head company is entitled on assessment, that amount cannot be taken into account in working out the subsidiary members credit under section 45-30 for any income year. [Schedule 4, item 4, subsection 45-30(4)]

Example 12.2: Head companys credit for instalments of a subsidiary member HC is a 30 June balancing entity that chooses to consolidate on 1 July 2002. On 1 December 2002, HC acquires a new subsidiary member, SM5, which is a 30 April balancing entity. For PAYG instalments purposes, SM5 is a quarterly payer that pays on the basis of instalment income and has been given an instalment rate of 10% by the Commissioner. It pays the following instalments after becoming a member of the group:

Quarter ending Instalment payable Variation credit claimed
31 January 2003

(Q3 of its 2002-2003)

$10,000

(10% of $100,000)

N/A
30 April 2003

(Q4 of its 2002-2003)

$6,400

(8% of $80,000)

$6,000

(2% of $300,000)

31 July 2003

(Q1 of its 2003-2004)

$10,000

(10% of $100,000)

N/A
Note: The variation credit for the 30 April 2003 quarter assumes that SM5 derived $100,000 in each of its previous instalment quarters.
Some part of SM5s instalments may be credited to HCs assessment for HCs 2002-2003 income year (i.e. the year ending 30 June 2003) as that is a consolidation transitional year for HC. SM5s quarter ending 31 January 2003 This instalment will need to be apportioned because SM5 was not a member of the consolidated group for the whole of this quarter.The part of the instalment that is reasonably attributable to the HCs 2002-2003 income year can be determined by apportioning the instalment on a time basis. For the period during which SM5 is a subsidiary member of the consolidated group - the period 1 December 2002 to 31 January 2003 - the amount reasonably attributable to HCs 2002-2003 assessment on that basis is 62/92 of $10,000, which is $6,739. SM5s quarter ending 30 April 2003 All of the instalment of $6,000 payable by SM5 for this quarter will be taken into account for HCs assessment credit because SM5 was a member of the group for the entire instalment quarter and all of the quarter falls within HCs 2002-2003 income year.Some part of the variation credit SM5 claimed for this quarter will have to be taken into account to work out the credit to which HC is entitled. This is because some of the variation credit is reasonably attributable to the head company assessment as SM5 was a member of the consolidated group for part of the earlier instalment quarters of its consolidation transitional year.The part of the 31 January 2003 variation credit that is reasonably attributable to HCs 2002-2003 income year can be determined by apportioning the credit on a time basis. For the period during which SM5 is a subsidiary member of the consolidated group - the period 1 December 2002 to 31 January 2003 - the amount reasonably attributable to HCs 2002-2003 assessment on that basis is 62/276 of $6,000, which is $1,347. SM5s quarter ending 31 July 2003 This instalment will need to be apportioned because part of the period for which the instalment is payable falls outside HCs 2002-2003 income year.The part of the instalment payable for the quarter ending on 31 July 2003 that is reasonably attributable to the head companys 2002-2003 income year can be determined by apportioning the instalment on a time basis. For the part of the instalment quarter that falls into HCs 2002-2003 income year - the period 1 May to 30 June 2003 - the amount reasonably attributable to HCs assessment on that basis is 61/92 of $10,000, which is $6,630.The balance of SM5s instalment ($3,370) will be credited to HCs 2003-2004 assessment if SM5 continues to be a subsidiary member of the consolidated group for the rest of its instalment quarter ending 31 July 2003. HCs 2002-2003 assessment credit HC will be entitled to a credit of $18,422 against its 2002-2003 assessment for the instalments payable by SM5. That amount is the sum of $6,739, $6,400 and $6,630 for the instalments payable by SM5, minus $1,347 for SM5s variation credit.

How to deal with variations during the transitional period

12.78 The existing PAYG instalments regime penalises an entity that varies an instalment rate or amount and, as a result, pays too little towards its assessed tax. The variation penalty rules take account of both the total instalments payable for the year and the timing of those instalments. They are based on the GIC and entities are allowed a 15% margin for error.

12.79 Special rules will apply for working out whether a head company of a consolidated group is liable to the GIC for a consolidation transitional year. The rules will ensure that both the total instalments payable for the year and the timing of those instalments are taken into account and will allow a 15% margin for error.

Head company liable for the GIC

12.80 A head company of a consolidated group will be liable to pay the GIC for an instalment quarter of a consolidation transitional year if:

·
any member of the consolidated group has varied its instalment for:

-
that quarter; or
-
if the members instalment quarters differ from the head companys - the last instalment quarter of the member that finishes before the end of that particular quarter of the head company (called the equivalent quarter); and

·
the sum of the instalments payable by the members of the group for the quarter (and any equivalent quarters of the members) reduced by any variation credits claimed by those members is less than 85% of one-quarter of the head companys benchmark tax for that consolidation transitional year.

[Schedule 4, item 1, subsections 45-870(1) and (4)]

12.81 To work out the amount of the instalments payable, or variation credits claimed, by a subsidiary member during a particular quarter, only so much of those amounts as is reasonably attributable to a period in the head companys consolidation transitional year during which it was a subsidiary member will be taken into account. [Schedule 4, item 1, subsection 45-870(3)]

Amount on which GIC is imposed

12.82 A method statement will prescribe how to work out the amount on which the GIC is imposed for a particular instalment quarter of the head company. [Schedule 4, item 1, subsection 45-870(2)]

12.83 As with determining if a head company is liable to the GIC, it will be necessary to:

·
take account of only so much of an instalment or variation credit as is reasonably attributable to a period in the head companys consolidation transitional year during which the entity was a subsidiary member; and
·
if the subsidiary members instalment quarters differ from the head companys - take account of the instalments payable, or variation credits claimed, for an equivalent instalment quarter of the member.

[Schedule 4, item 1, subsections 45-870(2) to (4)]

12.84 The existing variation penalty provisions of the PAYG instalments regime ensure that the amount on which the penalty is imposed for a particular instalment does not exceed the lesser of the amount that would have been payable for that instalment had the entity:

·
not varied; or
·
worked out its instalment using its benchmark instalment rate (in the case of instalment income payers) or benchmark tax (in the case of GDP-adjusted notional tax payers).

12.85 The amount on which a head company will be liable to pay the GIC will be worked out similarly for a consolidation transitional year. In these circumstances, the amount on which the GIC is imposed for a particular instalment quarter of a head companys consolidation transitional year will be determined by reference to the lesser of:

·
the sum of all the instalments that would have been payable by the members of the group had no member varied; and
·
the amount that would have been payable by the head company if it had been required to pay one quarter of its benchmark tax as its instalment for that quarter.

[Schedule 4, item 1, subsection 45-870(2), steps 1 and 2 of the method statement]

12.86 The lesser of those 2 amounts will be reduced by the sum of the instalments actually payable by all the members of the group reduced by any variation credits claimed by them. If the result is positive, the GIC is imposed on that amount. [Schedule 4, item 1, subsection 45-870(2), steps 3 and 4 of the method statement]

12.87 As with the existing variation penalty rules:

·
the GIC is payable for each day in the period that starts on the due date for the particular instalment of a head companys consolidation transitional year and ends on the due date for payment of that head companys assessed tax [Schedule 4, item 1, subsection 45-875(1)] ;
·
the Commissioner must notify the head company in writing of the GIC that is payable [Schedule 4, item 1, subsection 45-875(2)] ;
·
the GIC is payable within 14 days of that notice [Schedule 4, item 1, subsection 45-875(2)] ;
·
if the GIC is not paid in full within 14 days, any shortfall will itself be subjected to GIC for late payment [Schedule 4, item 1, subsection 45-875(3)] ; and
·
the Commissioner may remit the GIC in whole or part, if the Commissioner is satisfied that there are special circumstances that make it fair and reasonable to do so [Schedule 4, item 1, subsection 45-875(4)] .

Example 12.3: Head companys liability to GIC on shortfall in quarterly instalment Companies A, B, C and D are members of a consolidated group of which Company A is the head company. The group was consolidated on 1 July 2002 and each entity is a member of the group for all of the head companys consolidation transitional year.Companies A, B and C are quarterly payers who pay using the instalment income method. Company D is a quarterly payer who pays on the basis of GDP-adjusted notional tax.In quarter 3, Company C varies its instalment rate under section 45-205. Company D varies its instalment by estimating its benchmark tax under paragraph 45-112(1)(b). In quarter 4, Companies C and D again work out their instalments based on those variations.The following table summarises the position of the group for the consolidation transitional year:

Company Instalment rate/GDP-adjusted notional tax amount Amount of instalment and/or credit for quarter 1 Amount of instalment and/or credit for quarter 2 Amount of instalment and/or credit for quarter 3 Amount of instalment and/or credit for quarter 4
Co. A (head company) 15% $15,000

($100,000 * 15%)

$15,000

($100,000 * 15%)

$15,000

($100,000 * 15%)

$15,000

($100,000 * 15%)

Co. B

(subsidiary member)

10% $100,000

($1,000,000 * 10%)

$100,000

($1,000,000 * 10%)

$80,000

($800,000 * 10%)

$80,000

($800,000 * 10%)

Co. C

(subsidiary member)

8% $160,000

($2,000,000 * 8%)

$160,000

($2,000,000 * 8%)

$90,000

($1,500,000 * 6%)

$80,000 credit

($4,000,000 2%)

$90,000

($1,500,000 * 6%)

Co. D

(subsidiary member)

$100,000 $25,000

(25% * $100,000)

$25,000

(50% * $100,000 less instalment for quarter 1)

$5,000 credit

(75% * $60,000 less instalments for quarters 1 and 2)

$15,000

(100% * $60,000 less instalments for quarters 1 and 2 plus credit for quarter 3)

Company As benchmark tax for the consolidation transitional year is $1,100,000. Head companys liability to the GIC for quarter 3 As both Companies C and D varied in quarter 3, Company A is liable to pay the GIC if the sum of instalments payable by the members of the group for quarter 3, reduced by credits claimed by those members for that quarter, is less than 17/80 of its benchmark tax for the consolidation transitional year.The sum of instalments payable by the members of the group for quarter 3 is $185,000. This is reduced to $100,000 by the credits totalling $85,000 claimed by Companies C and D. 17/80 of Company As benchmark tax of $1,100,000 is $233,750. As the amount of $100,000 is less than $233,750, Company A is liable to GIC for quarter 3.The amount on which the GIC is payable will be worked out using the method statement in subsection 45-870(2) as follows:

Step 1:
¼ of $1,100,000 = $275,000.
Step 2:
$15,000 + $80,000 + $120,000 + $25,000 = $240,000.
Step 3:
($15,000 + $80,000 + $90,000 + $0) - ($80,000 + $5,000) = $100,000.
Step 4:
$240,000* - $100,00 = $140,000.

*
The result of step 2 is less than the result of step 1.

The GIC is payable on the amount of $140,000 for quarter 3, for the period from the due date for the quarter 3 instalment to the due date for payment of Company As assessed tax. Head companys liability to the GIC for quarter 4 As both Companies C and D varied in quarter, 4, Company A is liable to pay the GIC if the sum of instalments payable by the members of the group for quarter 4, reduced by credits claimed by those members for that quarter, is less than 17/80 of its benchmark tax for the consolidation transitional year.The sum of instalments payable by the members of the group for quarter 4 is $200,000. This is not reduced because no variation credits were claimed by Companies C and D in that quarter. 17/80 of Company As benchmark tax of $1,100,000 is $233,750. As the amount of $200,000 is less than $233,750, Company A is liable to GIC for quarter 4.The amount on which the GIC is payable will be worked out using the method statement in subsection 45-870(2) as follows:

Step 1:
¼ of $1,100,000 = $275,000.
Step 2:
$15,000 + $80,000 + $120,000 + $25,000 = $240,000.
Step 3:
$15,000 + $80,000 + $90,000 + $15,000 = $200,000.
Step 4:
$240,000* - $200,00 = $40,000.

*
The result of step 2 is less than the result of step 1.

The GIC is payable on the amount of $40,000 for quarter 4, for the period from the due date for the quarter 4 instalment to the due date for payment of Company As assessed tax.

Subsidiary members liable for GIC

12.88 A subsidiary member of a consolidated group may also be subject to variation penalties in respect of its variations if it is assessed as a separate entity in relation to its consolidation transitional year. These penalties will be raised under the existing PAYG instalments provisions as modified by the rules discussed in paragraphs 12.89 to 12.99.

Instalment income payers

12.89 For instalment income method payers that vary, a GIC penalty is payable if the varied instalment rate chosen by the entity is less than 85% of its benchmark instalment rate - see subsection 45-230(1). In general terms, the GIC is imposed on an amount worked out by multiplying the entitys instalment income for the variation quarter by the lower of the entitys benchmark instalment rate and the most recent instalment rate given to the entity by the Commissioner by the end of the variation quarter - see subsection 45-230(2). But variation credits also need to be taken into account to work out the amount on which the GIC is imposed.

12.90 To the extent to which an entity is assessed on the income of the part of its consolidation transitional year when it was not a subsidiary member of a consolidated group, the entity may be liable to the GIC in respect of a varied instalment rate. This liability will arise under the existing law without the need for any modification - that is, it will be liable to the GIC penalty if its varied instalment rate is less than 85% of its benchmark instalment rate.

12.91 However, the amount on which the GIC is imposed will be worked out under the existing law as modified by a new subsection. That new subsection will ensure that only so much of the instalment income of the variation quarter as is reasonably attributable to the part of that quarter when the entity was not a subsidiary member of the consolidated group is taken into account. It will also apply in relation to the instalment income of any earlier instalment quarters in respect of which a variation credit is claimed. [Schedule 4, item 9, subsection 45-230(2A)]

GDP-adjusted notional tax payers

12.92 For GDP-adjusted notional tax payers that vary, a GIC penalty is payable if the entitys estimated benchmark tax is less than 85% of its benchmark tax - see existing subsection 45-232(1).

12.93 The amount on which the GIC is imposed is worked out by reducing the acceptable amount of the instalment by the actual amount of the instalment. The actual amount of an instalment is defined as the amount actually payable by the entity, or if the entity claimed a variation credit in a particular quarter, that credit expressed as a negative amount. Broadly, the acceptable amount of an instalment for a quarter is the lesser of the amount that would be payable if the instalment was worked out using the lesser of the Commissioners notified GDP-adjusted notional tax amount or the entitys benchmark tax - see existing subsections 45-232(2) and (3).

12.94 To the extent to which an entity is assessed for the part of a consolidation transitional year when it was not a subsidiary member of a consolidated group, the entity may be liable to the GIC in respect of its estimate of its benchmark tax.

12.95 Several modifications to existing section 45-232 will operate in working out whether an entity is liable to pay the GIC and the amount on which it will be imposed. [Schedule 4, item 10, subsection 45-232(7)]

12.96 The first modification applies where a provision of section 45-232 refers to an entitys benchmark tax. Instead of using the entitys actual benchmark tax in applying such a provision, the amount used will be the amount worked out by converting the entitys actual benchmark tax to an annual figure. This modification applies to determine whether an entity is liable to pay the variation penalty. It is necessary because the existing law assumes that the entitys assessment relates to a full years tax liability and when an entity varies for a consolidation transitional year it must still estimate its benchmark tax as if it were not a member of a consolidated group. This is so even though its actual tax liability will only relate to the period when the entity is not a member of a consolidated group. [Schedule 4, item 10, subsection 45-232(8)]

12.97 The second modification applies where a provision refers to the acceptable amount of an instalment for a particular quarter for the entity and is relevant to determining the amount of the variation penalty. In these cases, the amount used is so much of the acceptable amount worked out under the existing law as is reasonably attributable to the part of that quarter or earlier quarters when the entity was not a subsidiary member of the consolidated group. [Schedule 4, item 10, subsection 45-232(9)]

12.98 The third modification applies where a provision refers to the actual amount of an instalment for a particular quarter for the entity and is also relevant to determining the amount of the variation penalty. In these cases, the amount used is so much of the actual amount worked out under the existing law as is reasonably attributable to the part of that quarter or earlier quarters when the entity was not a subsidiary member of the consolidated group. [Schedule 4, item 10, subsection 45-232(10)]

12.99 The second and third modifications discussed in paragraphs 12.97 and 12.98 are necessary to ensure that the amount of the penalty is appropriate to the period when the entity was not a member of the consolidated group. Otherwise the amount would be too high.

Application and transitional provisions

12.100 No special application provisions have been prepared for the consequential amendments to the PAYG instalments regime. As with other provisions of this bill, the rules dealing with PAYG instalments will apply from 1 July 2002.

12.101 The way the members of a particular consolidated group will move from paying separate instalments to a single instalment for the group payable by the head company has been described in paragraphs 12.62 to 12.99. It should be noted that the provisions discussed in those paragraphs will apply whenever a new consolidated group is formed.

Consequential amendments

12.102 The amendments described in this chapter are the main consequential changes that need to be made to the PAYG instalments regime so that it can operate consistently with the single entity rule of the consolidations regime and with the object of the PAYG instalments regime. However, there are other consequential amendments to be made to the TAA 1953 and the dictionary to the ITAA 1997. They are discussed in Tables 12.1 and 12.2 respectively.

Table 12.1: Consequential amendments to the TAA 1953
Schedule 4, item no. Provision amended Explanation
2 8AAB(5) Subsection 8AAB(5) contains an index of provisions of Acts other than the ITAA 1936 that impose a liability to the GIC. Items 17E to 17H of the table to that subsection list provisions of the PAYG instalments regime that impose GIC.

The table will be amended to insert references to sections 45-870 and 45-875 which will impose GIC in relation to a consolidation transitional year for a head company of a consolidated group. [Schedule 4, item 2]

3 Note 1 to 45-15 Note 1 to section 45-15 states that an instalment rate that the Commissioner gives an entity under subsection 45-15(1) is worked out under section 45-320.

This note will be amended to reflect the fact that the Commissioner will have a power to work out an instalment rate for the head company of a consolidated group in a different way under section 45-775 when the composition of a group changes. [Schedule 4, item 3]

5, 6 45-61(2) Section 45-61 sets out the due date for the payment of quarterly instalments.

A new note will be inserted to refer to section 45-715 which states when a head company of a consolidated group must pay its quarterly instalments. The existing note will be numbered as note 1. [Schedule 4, items 5 and 6]

7 45-120(1) Subsection 45-120(1) defines instalment income.

A new note will be added explaining that the definition of instalment income will be affected by sections 45-855 and 45-860 for a member of a consolidated group in the transitional period after the formation of the group but before the head company of the group is given its initial head company instalment rate. [Schedule 4, item 7]

8 45-140(1) Subsection 45-140(1) states who may pay annual instalments.

A new note will be added to explain that a head company of a consolidated group cannot be an annual payer because of section 45-720. [Schedule 4, item 8]

11 45-320(1) Subsection 45-320(1) states how the Commissioner must work out an instalment rate for an entity.

This subsection will be amended to reflect the fact that the Commissioner will have a power to work out an instalment rate for the head company of a consolidated group in a different way under section 45-775 when the composition of a group changes. [Schedule 4, item 11]

12 45-330(2A) Section 45-330 states how an entitys adjusted taxable income is worked out. An entitys notional tax is worked out from its adjusted taxable income and an entitys notional tax is used to work out its instalment rate.

The adjusted taxable income of an entity is generally worked out by subtracting from its assessable income for its base year (which is, in general terms, the most recent income year that has been assessed):

·
any net capital gain included in assessable income;
·
all deductions other than tax losses; and
·
any tax losses carried forward to the next income year.

This calculation will be modified for an entity that is, or has been, a head company of a consolidated group. This is because, under the primary consolidations rules, there is a limit on the amount of tax losses a head company can deduct, at least insofar as those tax losses are losses transferred to the head company under Subdivision 707-A of the ITAA 1997.

To ensure that the adjusted taxable income is correctly calculated, the calculation will take account of the lesser of any tax loss deducted in the base year and the amount of any tax loss that is carried forward to the next year. [Schedule 4, item 12]

This rule will effectively operate when the tax loss to be carried forward to the next income year exceeds the amount of tax losses that can reasonably be expected to be deducted in that year. That would occur when rules of the consolidations regime limit the amount of losses that an entity can deduct. For example, the available fraction, limits the amount of losses transferred under Subdivision 707-A that an entity can deduct.

13 45-405(1) Subsection 45-405(1) states how the Commissioner must work out the GDP-adjusted notional tax amount for an entity.

This subsection will be amended to reflect the fact that the Commissioner will have the power to work out a GDP-adjusted notional tax amount for the head company of a consolidated group in a different way under proposed section 45-775 when the composition of a group changes. [Schedule 4, item 13]

Table 12.2: Consequential amendments to the ITAA 1997
Schedule 5, item no. Provision amended Explanation
8 995-1(1) A new defined term, consolidation transitional year, will be inserted into the dictionary for the ITAA 1997 as the dictionary also applies for the purposes of Schedule 1 to the TAA 1953. The consolidation transitional year for a member of a consolidated group is an income year of that member that satisfies both of the following:

·
the consolidation of the group has effect for all or part of that income year; and
·
either:

-
the year is the income year during which the head company of the consolidated group is given its initial head company instalment rate; or
-
the year is the income year that ends before the year in which the head company is given its initial head company instalment rate.

[Schedule 5, item 8]

12 995-1(1) A new defined term, initial head company instalment rate,will be inserted into the dictionary for the ITAA 1997 as the dictionary also applies for the purposes of Schedule 1 to the TAA 1953. The initial head company instalment rate of a head company of a consolidated group means the instalment rate given to the head company of that group by the Commissioner that is the first rate worked out from the head companys first assessment as the head company of that group. [Schedule 5, item 12]


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