Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)
Chapter 1 Reduction in 2009-10 PAYG instalments
Outline of chapter
1.1 Schedule 1 to this Bill amends section 45-405 of Schedule 1 to the Taxation Administration Act 1953 to set the GDP adjustment (GDP adjustment factor) for the 2009-10 income year at 2 per cent (GDP refers to gross domestic product).
1.2 All of the legislative references in this chapter are made to Schedule 1 to the Taxation Administration Act 1953 unless otherwise specified.
Context of amendments
1.3 Under the pay as you go (PAYG) instalments system, taxpayers earning business or investment income pay instalments during the year towards their final tax liability for that income year. Taxpayers may pay their PAYG instalments on the basis of GDP-adjusted notional tax (GDP adjustment method) or on the basis of instalment income. Under either method taxpayers can choose to vary their instalment amounts to more accurately reflect their expected tax liability for the income year.
1.4 The GDP adjustment method is available to the classes of taxpayers listed in section 45-130. These taxpayers are individuals, multi-rate trustees, eligible small business entities and full self-assessment taxpayers with $2 million or less of instalment income for the previous income year or more than $2 million of instalment income for the previous income year and are eligible to pay an annual PAYG instalment but have chosen not to.
1.5 Taxpayers who pay PAYG instalments on the basis of the GDP adjustment method are generally quarterly payers who pay four instalments annually. However, section 45-134 allows primary production businesses and special professionals to pay two instalments a year under the GDP adjustment method.
1.6 A quarterly payer who pays instalments on the basis of the GDP adjustment method will pay the instalment amount determined and advised by the Commissioner of Taxation (Commissioner). The Commissioner works out the amount of the instalments taxpayers pay in accordance with Subdivision 45-L.
1.7 The amount of the instalments payable depends on the taxpayer's GDP-adjusted notional tax which is worked out by the Commissioner under section 45-405. Broadly, the GDP-adjusted notional tax amount is worked out by increasing the taxpayer's adjusted taxable income in the previous year by the GDP adjustment factor, which is generally a ratio representing the rate of nominal GDP growth between the previous two full calendar years.
1.8 The GDP adjustment factor can be unrepresentative of expected profit growth in income years where economic and business conditions change quickly and the expected income of taxpayers changes accordingly. This can cause taxpayers to be required to pay PAYG instalments which are too high compared with their actual income, with the overpaid tax being credited to them after the end of the income year when their final tax liability is assessed.
1.9 For the 2009-10 income year, the GDP adjustment factor calculated under the current law will be around 9 per cent. The amendments will set the GDP adjustment factor at 2 per cent for the 2009-10 income year to align it with the expected increase in the Consumer Price Index for the 2009-10 income year, as forecast in the February 2009 Updated Economic and Fiscal Outlook .
1.10 While taxpayers may vary their instalment amounts calculated and notified by the Commissioner themselves, many are reluctant to do so, as significant underpayments can trigger the general interest charge.
Summary of new law
1.11 The GDP adjustment factor to be used by the Commissioner to work out the GDP-adjusted notional tax amount under section 45-405 will be set at 2 per cent for the 2009-10 income year.
Comparison of key features of new law and current law
|New law||Current law|
|A GDP adjustment factor of 2 per cent will be used by the Commissioner for the 2009-10 income year to calculate GDP-adjusted notional tax under section 45-405.||The GDP adjustment factor (which would otherwise be required to be used by the Commissioner to calculate GDP-adjusted notional tax for the 2009-10 income year under section 45-405) would be around 9 per cent.|
Detailed explanation of new law
1.12 Taxpayers who pay quarterly PAYG instalments on the basis of the GDP adjustment method are required to pay a percentage of their GDP-adjusted notional tax each quarter as worked out under either section 45-400 or section 45-402.
1.13 GDP-adjusted notional tax is calculated by the Commissioner under section 45-405. Broadly, a taxpayer's GDP-adjusted notional tax is calculated by increasing the taxpayer's adjusted taxable income in the previous income year by the GDP adjustment factor to give the adjusted taxable income for the purposes of calculating their notional tax for the current income year.
1.14 The GDP adjustment factor is calculated using the formula in subsection 45-405(3). This formula produces a ratio which generally represents the rate of nominal GDP growth between the previous two full calendar years. Using this formula to calculate the GDP adjustment factor in the 2009-10 income year would produce a GDP adjustment factor of around 9 per cent.
1.15 The amendments will set the GDP adjustment factor to be used by the Commissioner in calculating PAYG instalments for taxpayers who pay quarterly instalments on the basis of the GDP adjustment method at 2 per cent for the 2009-10 income year. The GDP adjustment factor for income years after 2009-10 is to be based on the current methodology. [ Schedule 1, Part 1, items 1 and 2, definition of ' GDP adjustment' in subsection 45-405(3 ), subsection 45-405(6 )]
Example 1.1 Aaron pays quarterly PAYG instalments on business and investment income he earns on the basis of the GDP adjustment method.In the 2008-09 income year Aaron has business and investment adjusted taxable income of $50,000. If the current GDP adjustment factor of 9 per cent is used, then Aaron's PAYG instalments will be calculated using the adjusted taxable income of $54,500 for the 2009-10 income year.However, applying the GDP adjustment factor of 2 per cent will mean that the adjusted taxable income for the 2009-10 income year will be only $51,000 and Aaron's PAYG instalments will be calculated on this lower amount.
1.16 Taxpayers may still vary their quarterly instalments under section 45-112 if they consider their income is expected to be lower or higher than the amount determined by the Commissioner using the 2 per cent GDP adjustment factor.
1.17 In order to avoid inoperative provisions in the tax laws, the provisions that give effect to a 2 per cent GDP adjustment factor for the 2009-10 income year will be automatically repealed on 1 July 2014. [ Schedule 1, Part 2, items 3 to 5 ]
Application and transitional provisions
1.18 The amendments in Part 1 of Schedule 1 commence on the day after the Bill receives Royal Assent and apply for the purposes of working out the amount of an instalment that becomes due on or after the date of commencement. [ Schedule 1, Part 3, item 6 ]
1.19 Instalments for the 2009-10 income year that are due before commencement would be calculated in accordance with the existing law, which would mean a GDP adjustment factor of around 9 per cent would have applied. However, under section 45-400 each instalment amount payable in the income year is worked out based on a set percentage of a taxpayer's GDP-adjusted notional tax reduced by the instalment amounts for the earlier quarters in that income year. This will mean that aggregate instalment amounts payable for the 2009-10 income year will reflect the 2 per cent adjustment calculation.