House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)

Chapter 24 Deferral of initial payment of company income tax and consequences for dividend imputation

[Clause: 121, 122, 123, 124, 125, 126, 127, 128, 129]

Overview

Defers the time for the initial payment of income tax for the 1990-91 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies) from the 28th day of the month following balance date to the 15th day of the third month following balance date.

Summary of Proposed Changes

24.1. Part 11 of the Bill will formally defer the time for the initial payment of income tax (IP) for the 1990-91 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies).

24.2. The affected companies are those which have a tax liability of $1,000 or more but less than $400,000 and which pay their tax in two instalments.

24.3. The date for the IP was deferred from the 28th day of the month following balance date to the 15th day of the third month following balance date.

Abbreviations Used in this Chapter

IP = initial payment of company income tax.

FDT = franking deficit tax.

Background to the Legislation

Collection of Tax

24.4. In the 1989-90 Budget, new arrangements for the collection of company tax were announced with the purpose of reducing the timing advantage available to companies compared to other businesses not conducted as companies.

24.5. Companies are required to pay their income tax under one of the following methods, depending on their level of tax liability:

Companies with a tax liability of $20,000 or more

24.6. Companies with a notional tax liability of $20,000 or more (and which do not estimate their liability on income of the relevant year to be less than $20,000) are required to make two payments of tax each year. For a company balancing in June, the IP is due on 28 July following balance date (section 221AP of the Income Tax Assessment Act 1936 (the Act)). The IP is:

•

85% of the notional tax (i.e. the tax payable at the current year rate on the taxable income of the preceding income year (section 221AD));

or

•

85% of the tax which the company estimates will be payable on its taxable income for the income year (subsection 221AQ(1)).

24.7. The balance of the company's total actual tax liability is due on 15 March following the balance date (section 221AZD). If the IP made by a company exceeds the total actual tax liability, the company will receive a refund from the Commissioner unless a debt exists under another taxation law (section 221AZF).

Companies with a tax liability of $1,000 or more but less than $20,000

24.8. Companies with a notional tax liability of $1,000 or more but less than $20,000, or a notional tax of $20,000 or more but which estimate their tax liability for the income year to be in the range $1,000 to $20,000, have two payment options: They may pay in the same way as companies whose tax liability is $20,000 or more (see above notes). Alternatively, they may elect to make a single payment of the total actual tax liability for the income year on 15 December following balance date (section 221AU).

Companies with a tax liability of less than $1,000

24.9. Companies with a tax liability of less than $1,000 are required to make a single payment of their total actual liability for the income year on 15 March following balance date (section 221AT). Examples of when companies and funds fall into this category:

•

no notional tax (such as new companies and those previously non-taxable); or

•

the notional tax is less than $1,000; or

•

the total actual liability for the year of income is estimated to be less than $1,000.

Companies with substituted accounting periods

24.10. As explained above, the possible payment dates are 28 July, 15 December and 15 March for companies whose balance date is 30 June. For companies with substituted accounting periods ending on or before 31 May in lieu of the following 30 June, the corresponding payment dates are the 28th day of the first month and the 15th day of the sixth and ninth months following balance date (subject to 28 January being the earliest required payment date). For late balancing companies the corresponding payment dates are within the same timeframe as for early balancing companies, except that no final payment is due later than 15 June in the year following the year of income (section 221AN).

Transitional arrangements for payments for the 1989-90 income year

24.11. To ease the impact of the new measure in the 1990-91 year (for income earned in the 1989-90 income year), a one year transitional arrangement was introduced. This allowed companies with a notional or estimated liability which was $20,000 or more and less than $400,000 to also elect to pay their full liability in the sixth month after balance date (paragraph 221AU(1)(a)). The vast majority of companies eligible to benefit from this transitional arrangement took up the option, resulting in the payment of tax liabilities in December 1990.

Why change the law?

24.12. In the current economic situation, it could be onerous for companies with a notional or estimated tax liability of $1,000 or more and less than $400,000 to make the 85% IP for the 1990-91 income year in the month following balance date. This is because, in most cases, the IP would have been required on 28 July 1991 only seven months after the payment of full liability in respect of the 1989-90 income year (see above notes on the transitional arrangement for that year). Extending the due date for the IP of tax for these companies will ease this burden.

Franking account credits and debits for initial payment of tax

24.13. Credits in excess of debits to a company's franking account enable franked (tax paid) dividends to be paid to shareholders.

24.14. When a company makes an IP, a franking credit for the adjusted amount of that IP arises on the day it makes its IP (section 160APMA).

24.15. When a company tax assessment is made, a franking credit arises to the company for the adjusted amount of the assessment (section 160APNA). To prevent a double credit for the IP (i.e. when it is paid and on assessment), a franking debit arises where the amount of an IP is applied by a company against tax assessed or refunded (section 160APYA).

24.16. Special credits and debits arise to life assurance companies to account for the concessional tax treatment they receive under Division 8 of Part III of the Act (sections 160APVA and 160AQCD).

The Existing Law for Franking Deficit Tax (FDT)

24.17. A company which pays franked dividends in excess of its franking credits in a given year may be liable to pay an amount of FDT. This is essentially a payment required to make good the amount imputed to shareholders which exceeds the amount available to be imputed. The amount of FDT to be paid is calculated based on the amount of the franking deficit and the company tax rate (subsection 160AQJ(1)).

24.18. FDT must be paid on the last day of the month following balance date. For companies balancing in June, payment of FDT is due on 31 July. This date is three days later than the due date for the IP (see above).

Current penalties for excessive franking deficit

24.19. Where a company's franking deficit exceeds its franking credits for a year by more than 10%, and the franked amount of a dividend paid by the company was more than the required franking amount, the company is liable to pay a penalty. This penalty is by way of additional tax and is equal to 30% of the FDT payable (section 160ARX).

The IP reduces the FDT payable under the current law

24.20. The payment of FDT may be reduced or made unnecessary by the IP (if any) payable by a company where that IP is based on an estimate made by the company. Accordingly, where the FDT due does not exceed the IP, no FDT is payable by the company. Where the FDT due exceeds the IP, the company need only pay the excess (subsection 160AQJ(2)).

Current special rules for life assurance companies

24.21. The reduced amount of FDT required to be paid by life assurance companies as a result of the IP differs from that payable by other companies. The FDT amount payable by life assurance companies is calculated on 80% of the fund component of the company (subsection 160AQJ(2)). The fund component is that part of the taxable income that is subject to concessional tax treatment under Division 8 Part III of the Act (Life Assurance Companies).

Current franking account debits for reduced FDT

24.22 If the FDT due does not exceed the IP, a franking debit equal to the adjusted amount of the FDT arises (paragraph 160APYC(a)). If the FDT due exceeds the IP, a franking debit equal to the adjusted amount of the IP arises (paragraph 160APYC(b)).

Deferral arrangements will affect FDT payments

24.23. The due date for payment of FDT will not change as a result of Part 11 of the Bill. However, payments of FDT will affect the amount of the IP otherwise due.

Explanation of the Amendments

Seven Week Deferral of IP for 1990-91 Income Year

24.24. On 13 June 1991 the Government announced that it would defer the time for certain companies to pay their IP.

24.25. The companies affected by this deferral are those companies:

•

whose 1990-91 income year ended after 30 April 1991;

•

whose notional or estimated tax liability for the 1990-91 income year was $1,000 or more but less than $400,000; and

•

who will pay their tax in two instalments (an IP and a final payment).

24.26. The Bill will modify the operation of the Income Tax Assessment Act 1936 (the Act) by extending the time for these companies to pay the IP from the 28th day after balance date to the 15th day of the third month after balance date. For companies which balanced on 30 June 1991, this meant the due date for the IP was deferred from 28 July to 15 September 1991. [Clause 122]

FDT Reduces the IP

24.27. As mentioned above, any FDT due by a company was still due on the last day of the month following balance date. For companies balancing in June 1991, any payment of FDT was required on 31 July 1991.

24.28. Therefore, under the deferral arrangements, FDT was paid before the IP, rather than after the IP as would normally be the case. Accordingly, the Bill provides for the IP for companies estimating their tax payable to be reduced or made unnecessary by any prior payment of FDT. This ensures that the same total of FDT and IP is paid under both the existing arrangements and the deferral arrangements.

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24.29. This reduction of the IP does not in any way affect the calculation of FDT due or franking credits and debits to be made in the franking account.

When did the FDT reduce the IP?

24.30. The IP was reduced or made unnecessary where a company:

•

made an estimate of its tax due for the purposes of determining the amount of its IP; and

•

was liable, under the deferral arrangements, to make an IP not later than the 15th day of the third month following balance date; and

•

paid FDT before giving a notice estimating its taxable income for 1990-91. [Subclause 123(1)]

24.31. Where the IP due did not exceed the FDT paid, a company was not required to make the IP. [Subclause 123(2)]

Example 1

24.32. Consider a company which balanced in June 1991 and paid $30,000 FDT on 31 July 1991. If the company's IP due on 28 July was $25,000, the FDT liability $30,000 would have been reduced to $5,000 under the existing rules. However, under the deferral arrangements, as $30,000 FDT has already been paid on 31 July, no IP was due on 15 September.

What if the IP was greater than the FDT?

24.33. Where the IP due exceeded the FDT paid, a company was only required to pay the difference between the IP and the FDT. [Subclause 123(3)]

Example 2

24.34. Assuming $30,000 FDT was paid on 31 July 1991 as in example 1 and the company's IP due was $50,000 on 15 September 1991. Under the deferral arrangements, the IP was offset by the FDT paid and reduced to $20,000. Under the existing arrangements, the company would have paid $50,000 in total (i.e. an IP on 28 July of $50,000, and no FDT on 31 July because of the existing offset rules).

New special offset arrangements apply for life assurance companies

24.35. Special provisions are required to ensure that life assurance companies pay the same total amount of FDT and IP under the deferral arrangements as they would have under the existing arrangements.

24.36. Where the amount of the IP due does not exceed the FDT paid plus 80% of the fund component (defined as the eligible fund component in subclause 123(6)), the life assurance company is required to pay an amount equal to the eligible fund component on the due date for the IP. [Subclause 123(4)]

24.37. Where the amount of the IP due exceeds the FDT paid plus the fund component, the life assurance company is required to pay the difference between the IP due and the FDT paid. [Subclause 123(5)]

A reduced amount of IP does not affect the calculation of certain thresholds

24.38. The amount of the IP is used to calculate the thresholds which determine whether a company (balancing in June) can:

•

pay its income tax in one payment on 15 March (i.e. where its tax liability is less than $1,000) (section 221AU); or

•

pay its tax :

-

in two payments, an IP on 28 July and a final payment on 15 March (i.e. where its tax liability is between $1,000 and $20,000); or

-

elect to make one payment on 15 December (section 221AT).

24.39. Any reduction or elimination of an IP by a prior payment of FDT as described above does not apply for the purposes of calculating these thresholds. [Clause 124]

Credits where the IP is Reduced by FDT

24.40. Under the existing rules, a company is given credit against any tax assessed for the full amount of an IP made by the company.

24.41. Where the IP made by a company was reduced, either partly or fully, under the deferral arrangements by a payment of FDT, the company will be given credit against tax assessed as though no reduction has been made. This will ensure that companies are in no way disadvantaged by the deferral arrangements. [Clause 125]

24.42. Where an IP was made unnecessary by a prior payment of FDT, the credit arose when the company notified the Commissioner of its estimated income tax liability (described as a "paragraph 221AQ(1)(a) notice" in the Bill). [Subclause 125(1)]

24.43 . Where an IP was reduced by a prior payment of FDT, the credit arose when the reduced payment was made. [Subclause 125(2)]

Franking Credits and Debits where FDT is Paid

24.44. As explained in the Background section above, payments of IP and FDT give rise to credits and debits to a company's franking account. Franking account credits enable franked dividends to be paid to shareholders.

The IP is notionally increased for franking account and FDT purposes

24.45. The deferral arrangements are not intended to affect the amount of the franking account credits and debits that arise under sections 160APMA, 160APVA, 160APYA, 160APYC and 160AQCD. They are also not intended to affect the liability for FDT and consequential offset allowable under section 160AQK.

24.46. To ensure this result, the Bill provides that, for these purposes, the amount of the IP will be taken to be the amount that would have been paid if the IP had been made before any FDT was due. For FDT purposes, this notional increase has a consequential affect on the FDT liability. [Clauses 126 and 127]

Examples

24.47. In the examples used above and assuming the deferred IP was made on 15 September, the franking account was credited on that day for the adjusted amounts for $25,000 (Example 1) and $50,000 (Example 2). The debits on that day were the adjusted amounts for $25,000 (Example 1) and $30,000 (Example 2). These are the franking account credits and debits that would have been made under the existing arrangements when the IP was paid and the FDT was offset.

The notional increase in the IP does not affect liability for FDT

24.48. This notional increase in the IP will ensure the FDT and franking account credits and debits are not affected by the deferral. Accordingly, as explained above, a notional increase in the IP for franking account purposes reduced the FDT otherwise payable. [Clause 127]

24.49. A reduction in FDT under clause 127 will reduce the franking additional tax payable (section 160ARX of the Act). If the Commissioner had made an assessment as to additional tax payable (section 160ARL of the Act) before the reduction, a refund of the excess franking additional tax can be requested under section 160ARR of the Act.

24.50. The Bill also prevents a company from gaining a refund for the reduction in FDT [Clause 128] . If a company was able to gain a refund in these circumstances, it would pay less tax than under the existing arrangements.

24.51. For the same reason, the notional increase in the IP and consequent reduction in FDT will not give rise to an extra franking account credit under section 160APS for a reduced offset under sections 160AQK and 160AQKA. [Clause 129]

Changed timing for franking credits and debits

24.52. Franking credits and debits that arose because of an IP or payment of FDT arose when the company made its IP. Where, because of a prior payment of FDT, a company was not required to make an IP, the credits and debits arose when the company gave the Commissioner its estimate of tax due (i.e. its paragraph 221AQ(1)(a) notice). [Subclause 126(1)]

Commencement date

24.53. The amendments made by Part 11 will commence from the date that the Bill receives the Royal Assent. However, the amendments retrospectively affect payments of company tax for the 1990-91 income year. This retrospectivity does not disadvantage companies and is concessional in nature.

Clauses involved in the proposed amendments

Clause 121 : provides for the interpretation of certain terms used in Part 11 of the Bill.

Clause 122 : provides for the deferral of the IP for affected companies to the 15th day of the third month following balance date.

Clause 123 : provides for the amount of the IP to be made by a company to be reduced by the amount of any prior payment of FDT.

Clause 124 : provides that any reduction of an IP by clause 123 does not affect the calculation of the thresholds that determine how a company will pay its income tax liability.

Clause 125 : provides that, where an IP is reduced under clause 123, the credit to be allowed to the company against tax assessed is to be equal to the amount of the IP as though no reduction had been made.

Clause 126 : provides that, for franking credit and debit purposes, the amount of the IP is to be equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 127 : provides that, for franking account and FDT purposes, the FDT due by a company is to be calculated on the assumption that the amount of the IP is equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 128 : prevents a refund of FDT as a result of the notional increase in the IP for the purposes of clause 127.

Clause 129 : prevents an additional franking account credit being given as a result of the notional increase in the IP for the purposes of clause 127.