House of Representatives

Tax Laws Amendment (2012 Measures No. 3) Bill 2012

Income Tax (Seasonal Labour Mobility Program Withholding Tax) Bill 2012

Income Tax (Seasonal Labour Mobility Program Withholding Tax) Act 2012

Tax Laws Amendment (Income Tax Rates) Bill 2012

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Seasonal Labour Mobility Program - final withholding tax

Outline of chapter

1.1 Schedule 1 to this Bill creates a new final withholding tax regime that applies to income derived by non-resident workers participating in the Seasonal Labour Mobility Program (Program) by:

·
inserting Subdivision 12-FC in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) which creates the obligations to withhold amounts;
·
inserting Subdivision 840-S in the Income Tax Assessment Act 1997 (ITAA 1997) which establishes the liability to pay tax on income derived under the Program;
·
inserting Subdivision 840-S into the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act 1997); and
·
making consequential amendments to the Income Tax Assessment Act 1936 (ITAA 1936), the ITAA 1997 and the TAA 1953.

1.2 The formal imposition of income tax, and the establishment of the applicable rate of tax, is provided for by means of the Income Tax (Seasonal Labour Mobility Program Withholding Tax) Bill 2012.

1.3 The changes apply from 1 July 2012.

1.4 All legislative references are to Schedule 1 to the TAA 1953, unless otherwise stated.

Context of amendments

1.5 The Pacific Seasonal Worker Pilot Scheme (Pilot Scheme) was announced in August 2008. It is an important element of the Pacific Engagement Strategy, a whole-of-government strategy to advance Australia's engagement in the Pacific, a key objective announced in the March 2008 Port Moresby Declaration .

1.6 The key objectives of the Pilot Scheme were to:

·
assist Australian horticulturalists to source seasonal workers;
·
encourage both skills transfer between Australia and the Pacific Islands, and remittances home to Pacific Islands; and
·
support Australia's Pacific Engagement Strategy and Pacific Partnerships.

1.7 The Government announced changes to the taxation of participants in the Pilot Scheme in the 2011-12 Budget to:

·
improve remittance outcomes; and
·
address equity concerns raised by high effective tax rates.

1.8 These changes reduced the marginal tax rates for non-resident workers participating in the Pilot Scheme from 29 per cent to 15 per cent for the first dollar of income up to $37,000. All other marginal tax rates for Pacific Seasonal Workers remained unchanged. The new marginal rate applied for the 2011-12 income year only.

1.9 Currently, participants in the Pilot Scheme are subject to tax at the following rates:

2011-12 taxable income Marginal tax rate
$0 - $37,000 15%
$37,001 - $80,000 30%
$80,001 - $180,000 37%
$180,001 and over 45%

1.10 The legislation for these changes was enacted via the Tax Laws Amendment (2011 Measures No. 7) Act 2011 which received Royal Assent on 29 November 2011. The Pilot Scheme will conclude on 30 June 2012.

1.11 On 18 December 2011, the Government announced that the Pilot Scheme would be extended to an ongoing program known as the Seasonal Labour Mobility Program. The Program is effectively a continuation of the Pilot Scheme, with the following exceptions:

·
the number of participating countries has been extended to include East Timor;
·
the Program will be implemented on an ongoing basis in the horticultural sector (as previously), but will also be trialled in the broader agricultural industry (particularly the cotton and cane industries), the fishing industry (particularly aquaculture) and the tourism industry; and
·
the Program will be demand driven but will have a minimum employment period of 14 weeks (with a maximum of seven months in any twelve month period) and workers will be employed on average 30 hours per week.

1.12 The tax changes made under the Pilot Scheme will also be extended as part of the Program. However, the reduced rate of 15 per cent under the ongoing Program will be administered as a final withholding tax, rather than on an assessment basis (as was with the Pilot Scheme). This will reduce the compliance costs for Seasonal Workers participating in the Program by removing the requirement to lodge a tax return (provided they have no other income) and simplify administration for employers and the Australian Taxation Office (ATO).

Summary of new law

1.13 This Schedule implements a final withholding tax rate of 15 per cent to Seasonal Workers in the Program, with effect from the 2012-13 income year.

1.14 This rate only applies to holders of a Special Program Visa (subclass 416) who are employed by 'approved employers' under the Program.

1.15 Subdivision 12-FC imposes an obligation on an entity (payer) to withhold amounts from payments of salary, wages, commission, bonuses or allowances paid to employees under the Program.

1.16 The final withholding tax only applies to salary, wages, commission, bonuses or allowances derived by employees under the Program. Other Australian sourced income remains assessable. Subdivision 840-S of the ITAA 1997 imposes a liability to Seasonal Labour Mobility Program withholding tax (SLMP withholding tax).

Comparison of key features of new law and current law

New law Current law
A final withholding tax of 15 per cent applies to each dollar of income derived by workers participating in the Program. Pacific Seasonal Workers' lowest marginal tax rate of 15 per cent applies from the first dollar of income up to $37,000. All other tax brackets are subject to the normal non-resident tax rates.
Workers under the Program do not have to lodge an income tax return unless they earn other Australian sourced income. Workers under the Pilot Scheme have to lodge an income tax return.

Detailed explanation of new law

Obligation to withhold under the Program

1.17 Subdivision 12-FC imposes an obligation on an entity (payer) to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an employee under the Program.

1.18 An entity (payer) must withhold an amount from salary, wages, commission, bonuses or allowances it pays to individuals that are non-resident workers who hold a Special Program Visa (subclass 416) and who are employed by 'approved employers' under the Program. [Schedule 1, item 10, section 12-319A]

1.19 The amount to be withheld is a final SLMP withholding tax of 15 per cent worked out under the Taxation Administration Regulations 1976 .

1.20 To encourage compliance, an entity (payer) is not entitled to a deduction for payments of salary, wages, commission, bonuses or allowances that it has paid to the extent that it fails to withhold an amount, or after withholding the amount, fails to pay the amount to the Commissioner of Taxation (Commissioner). [Schedule 1, item 4, subsection 26-25A(1) of the ITAA 1997]

1.21 An entity (payer) can deduct salary, wages, commission, bonuses or allowances to the extent that the SLMP withholding tax has been paid for that income year. [Schedule 1, item 4, subsection 26-25A(2) of the ITAA 1997]

Example 1.1 Tevita derived a wage of $100. The amount of SLMP withholding tax to be withheld is $15 (that is, 15 per cent of $100). Charles, the payer, instead withheld an amount of $12 (80 per cent of the amount that should have been withheld). Charles paid the $12 to the Commissioner by the due date. Charles is entitled to claim a deduction of $80 (12/15 × $100) only of the wages paid (that is, to the extent that the Seasonal Labour Mobility Program (SLMP) withholding tax has been paid).

Who is liable to the Seasonal Labour Mobility Program withholding tax?

1.22 Subdivision 840-S of the ITAA 1997 provides the rules for determining if there is a liability to SLMP withholding tax.

1.23 Broadly, the liability for SLMP withholding tax is imposed on foreign residents who hold a Special Program Visa (subclass 416) (the employee) in respect of amounts of salary, wages, commission, bonuses or allowances paid to them under the Program. However, the employee is entitled to a credit equal to the amount of SLMP withholding tax withheld by the payer. [Schedule 1, item 5, sections 840-900 to 840-905 of the ITAA 1997, item 20, section 18-33]

1.24 The applicable rate of tax is provided for in the Income Tax (Seasonal Labour Mobility Program Withholding Tax) Bill 2012.

Example 1.2 Following on from Example 1.1, Tevita is liable for the $15 SLMP withholding tax. She receives a credit for the $12 withheld by the payer Charles. Tevita remains liable for the $3 withholding tax that was not withheld by Charles due to a clerical error (that is, 20 per cent of $15).

Amounts on which SLMP withholding tax is imposed are non-assessable and non-exempt income

1.25 An amount on which there is a liability to pay SLMP withholding tax is non-assessable non-exempt income of an individual. [Schedule 1, item 5, section 840-915 of the ITAA 1997]

1.26 This is consistent with the purpose of the new SLMP withholding tax regime to impose a final rate of withholding tax on income subject to SLMP withholding tax.

1.27 It is also consistent with the approach adopted in Division 11A of Part III of the ITAA 1936, which (except in some limited cases) makes dividends, interest and royalties that are subject to withholding tax not assessable and not exempt income of a person (under section 128D of the ITAA 1936).

1.28 Making the income non-assessable and non-exempt income of an individual ensures that:

·
the amounts upon which the tax is imposed are not assessable under any other provision of the income tax law in the hands of an individual; and
·
deductions (in respect of expenses relating to the derivation of that income) cannot be claimed as no relevant amount is included in assessable income (refer to subsection 8-1(2) of the ITAA 1997).

When is SLMP withholding tax payable?

1.29 SLMP withholding tax is due and payable at the end of 21 days after the end of the income year in which the employee derived the income to which the tax relates. An employee derives the income when they receive the salary or wages. [Schedule 1, item 5, subsection 840-910(1) of the ITAA 1997]

What happens if the SLMP withholding tax remains unpaid?

1.30 Once due and payable, the SLMP withholding tax becomes a debt due to the Commonwealth. The Commissioner may give a notice of the amount of the SLMP withholding tax due and the date on which that tax became due and payable. This is consistent with the approach adopted in relation to other final withholding taxes in Division 11A of Part III of the ITAA 1936. [Schedule 1, item 5, subsection 840-910(3) of the ITAA 1997]

1.31 If the SLMP withholding tax remains unpaid, a liability for the general interest charge arises from the date upon which the liability was due to be paid. The general interest charge is calculated on the unpaid SLMP withholding tax and any accumulated general interest charge from the date the SLMP withholding tax was due to be paid until the last day on which the SLMP withholding tax and general interest charge thereon remains unpaid. [Schedule 1, item 5, subsection 840-910(2) of the ITAA 1997]

1.32 The general interest charge is worked out under Part IIA of the TAA 1953.

1.33 The Commissioner may make a determination of the amount of SLMP withholding tax payable from the salary, wages, commission, bonuses or allowances paid to employees under the Program. The ascertainment of an amount of SLMP withholding tax is not an assessment. [Schedule 1, item 5, subsection 840-910(4) of the ITAA 1997]

1.34 The production of the Commissioner's notice of the amount of SLMP withholding tax or a certified copy by the Commissioner is conclusive evidence that the notice and its particulars has been given, except on review or appeal under Part IVC of the TAA 1953. [Schedule 1, item 5, subsection 840-910(5) of the ITAA 1997]

1.35 A person who is dissatisfied with the Commissioner's notice may object to the notice in the manner set out in Part IVC of the TAA 1953. [Schedule 1, item 5, subsection 840-910(6) of the ITAA 1997]

What happens if SLMP withholding tax is overpaid?

1.36 The SLMP withholding tax is overpaid when an entity has withheld more than the 15 per cent SLMP withholding tax. If the SLMP withholding tax is overpaid, the Commissioner must refund the overpaid amount of SLMP withholding tax to the employee. The employee is not entitled to a credit under section 18-33 for the overpaid amount. [Schedule 1, item 5, section 840-920 of the ITAA 1997]

How is SLMP withholding tax discharged?

Credit for amounts withheld

1.37 An individual (employee) that has a liability to SLMP withholding tax is entitled to a credit which is used to offset their liability where:

·
their ordinary or statutory income includes salary, wages, commission, bonuses or allowances; and
·
all or part of an amount is withheld from payments of salary, wages, commission, bonuses or allowances that are paid to an employee under Subdivision 12-FC.

[Schedule 1, item 20, section 18-33]

1.38 This crediting provision is based on existing crediting provisions that apply in the case of dividends, interest and royalties and the managed investment trust withholding tax.

1.39 The first requirement for a credit is that the individual's ordinary or statutory income includes salary, wages, commission, bonuses or allowances. Although the imposition of SLMP withholding tax will result in the amount being non-assessable non-exempt it can still be described as ordinary or statutory income within the meaning of the ITAA 1997.

1.40 The second requirement for a credit is that an amount is withheld from payments of salary, wages, commission, bonuses or allowances paid to an employee under Subdivision 12-FC.

1.41 The amount withheld and therefore the amount available to be credited from a particular payment of salary, wages, commission, bonus or allowance may be greater than or less than the amount of the SLMP withholding tax liability that arises in respect of that payment.

1.42 If the credit to which an individual is entitled is insufficient to fully discharge the individual's SLMP withholding tax liability in respect of that payment, the individual will have a debt to the Commonwealth remaining due and payable and subject to the general interest charge (see Example 1.2). Further discussion of the application of the general interest charge can be found in paragraphs 1.31 to 1.32. [Schedule 1, item 5, sections 840-905 and 840-910 of the ITAA 1997]

1.43 A payer who fails to withhold an amount or part thereof under section 12-319A as required may be liable to a penalty to withhold under sections 16-30 or 16-35.

Credits for administrative penalties

1.44 If an entity (payer) fails to withhold SLMP withholding tax in respect of a payment they make to an employee, they become liable to an administrative penalty equal to the amount of SLMP withholding tax not withheld. If the penalty is not paid by the date due and payable, a general interest charge may be applied.

1.45 When the entity (payer) makes a payment of all or part of the administrative penalty and any resulting general interest charge, the entity (employee) liable to the SLMP withholding tax in respect of the amount upon which the penalty was imposed is entitled to a credit.

1.46 The amount of the credit is calculated to provide the employee with a credit equal to the sum of the penalty and general interest charge paid, capped at the amount of the SLMP withholding tax liability (and any resulting general interest charge) that arose for the employee in respect of the original payment. Capping the amount of the credit ensures that the employee will not receive a refund of the general interest charge paid by the payer.

1.47 This is achieved by crediting the employee with the lesser of:

·
the amount of the penalty paid plus any general interest charges paid by the payer (as appropriate); and
·
the amount of the SLMP withholding tax liability and any accrued general interest charges of the employee.

[Schedule 1, item 22, paragraphs 18-35(1AA)(a) to (c)]

1.48 This is consistent with the approach adopted in respect of the management investment trust withholding tax.

Example 1.3 Barry Pty Ltd (payer), paid Eloni a wage of $1,000. Barry Pty Ltd failed to withhold an amount of $150 (as required under section 12-319A) from wages he paid to Eloni. Therefore, Barry Pty Ltd had to pay a penalty of $150 plus a general interest charge of say $10, creating a total liability for the payer of $160.At the end of 21 days after the end of the income year, Eloni's liability to SLMP withholding tax is $150 and as amounts have not been withheld from her payment she will not receive a credit under section 18-33. Eloni will be charged with general interest of $5 from the date the SLMP withholding tax is payable, making a total of $155.Barry Pty Ltd subsequently makes a payment of $110 (penalty of $100 plus general interest charge of $10). (Barry Pty Ltd can recover the penalty from Eloni under section 16-195.) Eloni is entitled to a credit (under subsection 18-35(1AA)) equal to the lesser of the payment of the penalty, including the general interest charge that the payer paid ($160), and her liability and her general interest charge ($155). Eloni will receive a credit of $155. This is offset against her outstanding SLMP withholding tax and general interest charge liability of $155.

1.49 The amount of the credits that the employee is entitled to receive is reduced by:

·
credits for amounts withheld by the payer in respect of that payment under section 18-33; and
·
prior credits generated from part payment of the penalty under subsection 18-35(1AA).

[Schedule 1, item 22, paragraph 18-35(1AA)(d)]

Example 1.4 Following on from Example 1.3, assume at the time of making the payment of wages to Eloni, Barry Pty Ltd withheld an amount of $50. Barry Pty Ltd incurs an administrative penalty of $100 for failing to withhold (under section 16-30). Barry Pty Ltd subsequently incurs a general interest charge of $10.Barry Pty Ltd subsequently pays $110 (penalty of $100 and general interest charge of $10).The amount of SLMP withholding tax and general interest charge that Eloni is liable for is $155 (sections 840-905 and 840-910 of the ITAA 1997).The credit that Eloni will receive is the lesser of:

·
$110 (the amount paid by Barry Pty Ltd); and
·
$105 (SLMP withholding tax liability less other listed credits):

-
$155 (the SLMP withholding tax liability plus general interest charge incurred by Eloni); minus
-
$50 (the credit for the amount withheld under section 18-33).

1.50 If all or part of the amount of penalty or general interest charge paid by the entity (payer) liable to the administrative penalty is subsequently remitted by the Commissioner, the amount of the credit available to the employee liable to the SLMP withholding tax is reduced and the Commissioner must pay the amount of penalty or general interest charge remitted to the entity (payer) Xliable to pay the penalty. [Schedule 1, items 23 to 26, paragraphs 18-35(2)(a) and (c) and (3)(a) and (c)]

1.51 The entity (payer) liable to pay the administrative penalty is entitled to recover the amount of the penalty, capped at the SLMP withholding tax liability, from the employee liable to that tax. [Schedule 1, item 16, paragraph 16-195(1)(ab)]

Example 1.5 Following on from Example 1.4, assume Eloni pays the outstanding $105 SLMP withholding tax liability before Barry Pty Ltd pays the $110 penalty and general interest charge. Assume the Commissioner subsequently remits $110 of the penalty and general interest charge paid by Barry Pty Ltd.Eloni is liable to SLMP withholding tax of $150 plus $5 general interest charge.Eloni will receive a credit for:

·
$50 (the amount paid by Barry Pty Ltd);
·
$100 cash payment of SLMP withholding tax made by Eloni; and
·
$5 cash payment of general interest charge.

Eloni receives a credit of $5 (under subsections 18-35(1AA) and 18-35(2)). The credit is the lesser of Barry Pty Ltd's payment of $110 and Eloni's liability of $105 ($155 - $50 = $105). The $105 credit is reduced by the amount of credit that is remitted of $100 thereby producing a $5 credit for Eloni which will produce a $5 refund. ($105 - $100 = $5).Barry Pty Ltd was required to withhold $150.

·
Barry Pty Ltd withheld $50 (the amount paid by Barry Pty Ltd);
·
paid $100 penalty; and
·
paid $10 general interest charge.

Barry Pty Ltd received $100 remitted penalty from the Commissioner. Barry Pty Ltd has no outstanding liability.

Application and transitional provisions

1.52 Subdivision 12-FC applies to salary, wages, commission, bonuses or allowances paid on or after 1 July 2012. [Schedule 1, item 11]

1.53 Subdivision 840-S of the ITAA 1997 applies to income derived on or after 1 July 2012. [Schedule 1, item 7, section 840-905 of the IT(TP) Act 1997]

Consequential amendments

1.54 Many consequential amendments result from inserting Subdivision 12-FC into Schedule 1 of Division 12 of the TAA 1953. This ensures the cross referencing of Subdivision 12-FC, sections 26-25A and 12-319A in items in the table, inserting notes, heading changes, and cross referencing of subsection 18-35(1AA). [Schedule 1, items 1, 3, 9, 12 to 19, 21 and 23 to 26, subsection 170(10AA) (after item 5 in the table) of the ITAA 1936, section 12-5 (item headed ' employees' in the table), item 22D in the table in subsection 10 - 5(1) (after item 22C in the table), subsection 15-10(2), subsection 15-15(1), note 3A to subsection 15-15 (1) (after note 3), paragraphs 16-153(1)(a) and 16-195(1)(ab), section 18-1, subsection 18-10(1), group heading before section 18-30, section 18-35 (heading), and paragraphs 18-35(2)(a) and (c ), ( 3)(a) and (c) in Schedule 1 to the TAA 1953]

1.55 Many consequential amendments also result from inserting Subdivision 840-S into Division 840 of the ITAA 1997. This ensures the cross referencing of SLMP withholding tax in the items in the table. [Schedule 1, items 2, 8, 27 and 28, section 11-55 (item in the table headed ' foreign aspects of income taxation') of the ITAA 1997, item 18A in the table in subsection 8AAB(4) (after item 18 in the table) and item 39AA in subsection 250-10(2) (after item 39A in the table) and subsection 340-10(2) in Schedule 1 to the TAA 1953 (after paragraph (d) of item 6 in the table, column headed ' Provision(s)']

1.56 A definition of 'Seasonal Labour Mobility Program withholding tax' is inserted into the Dictionary in Division 995-1 of the ITAA 1997. [Schedule 1, item 6, definition of ' Seasonal Labour Mobility Program withholding tax' in subsection 995-1(1)]


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