Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Chapter 6 Deferral of Initial Payments of Company Tax for 1991-92
Clauses: 76,77,78,79,80,81,82,83, and 84
Defer the initial payment of income tax for the 1991-92 income year for 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 28th day of the month following balance date.
Deferral of Initial Payments of Company Tax for 1991-92
Deferral of Initial Payments of Company Tax for 1991-92
Summary of the proposed amendments
6.1. Part 3 of the Bill will formally defer the time for the initial payment of income tax (IP) for the 1991-92 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies).
6.2. The affected companies will be those which have a tax liability of $1,000 or more but less than $400,000, and which balance after 31 December 1991, and pay their tax in two instalments.
6.3. The date for the IP will be deferred from the 28th day of the month following balance date to the 28th 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
6.4. In the Economic Statement of 26 February 1992, similar arrangements to those introduced for the 1990-91 income year for the collection of company tax were announced. The purpose of the new arrangements is to provide relief for small companies by extending the due date for the IP.
6.5. 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
6.6. 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(sections 221AD, 221AQ and 221AP) is:
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- 85% of the notional tax (i.e. the tax payable at the current year rate on the taxable income of the preceding income year);
- or
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- 85% of the tax which the company estimates will be payable on its taxable income for the income year.
6.7. 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
6.8. 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
6.9. 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).
Companies with substituted accounting periods
6.10. 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 the final payment is due no later than 15 June in the year following the year of income (section 221AN).
6.11. In the Economic Statement of 26 February 1992, the Government announced similar deferral arrangements for the 1991-92 income year as were introduced for the 1990-91 income year. The due date for the initial payment of company tax will be deferred for nine weeks for the 1991-92 income year.
Franking account credits and debits for initial payment of tax
6.12. 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). Further, a franking debit arises where a refund of tax which gave rise to a franking credit, is made (section 160APYBA).
6.13. Special credits and debits arise to life assurance companies to exclude from the franking account, debits and credits in respect of statutory fund income allocated to participating policy holders (sections 160APVBA and 160AQCD).
The Existing Law for Franking Deficit Tax (FDT)
6.14. 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)).
6.15. 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 (section 160ARU). This date is three days later than the due date for the IP (see above).
The IP reduces the FDT payable under the current law
6.16. 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
6.17. 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 by reference to 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 of Part III of the Act (Life Assurance Companies).
Current franking account debits for reduced FDT
6.18. 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
6.19. The due date for payment of FDT will not change as a result of Part 3 of the Bill. However, payments of FDT will affect the amount of the IP otherwise due.
Explanation of the Amendments
Nine Week Deferral of IP for 1991-92 Income Year
6.20. The Bill will modify the operation of the Income Tax Assessment Act 1936 (the Act) by extending the time for the affected companies ( see Summary of Proposed Changes), to pay the IP from the 28th day of the month after balance date to the 28th day of the third month after balance date. For companies which balance on 30 June 1992, this means the due date for the IP will be deferred from 28 July to 28 September 1992. [Clause 77]
6.21. As mentioned above, a company's FDT is due on the last day of the month following balance date. For companies balancing in June 1992, payment of FDT is required on 31 July 1992.
6.22. Therefore, under the deferral arrangements, FDT will be 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.
6.23. This reduction of the IP will not in any way affect the calculation of FDT due or franking credits and debits to be made in the franking account.
When will the FDT reduce the IP?
6.24. The IP will be reduced or made unnecessary where a company:
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- makes an estimate of its tax due for the purposes of determining the amount of its IP; and
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- is liable, under the deferral arrangements, to make an IP not later than the 28th day of the third month following balance date; and
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- will pay FDT before giving a notice estimating its taxable income for 1991-92. [Subclause 78(1)]
What if the IP does not exceed the FDT?
6.25. Where the IP due does not exceed the FDT paid, a company will not be required to make the IP. [Subclause 78(2)]
Example 1
6.26. Consider a company which will balance in June 1992 and pay $30,000 FDT on 31 July 1992. If the company's IP due on 28 July will be $25,000, the FDT liability of $30,000 will be reduced to $5,000 under the existing rules. However, under the deferral arrangements, as $30,000 FDT will have already been paid on 31 July, no IP will be due on 28 September.
What if the IP will be greater than the FDT?
6.27. Where the IP due will exceed the FDT paid, a company will be required to pay the difference between the IP and the FDT only. [Subclause 78(3)]
Example 2
6.28. Assume $30,000 FDT will be paid on 31 July 1992 as in Example 1 and the company's IP due will be $50,000 on 28 September 1992. Under the deferral arrangements, the IP will be 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).
Special offset arrangements apply for life assurance companies
6.29. As for the 1990-91 income year, 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.
6.30. 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 78(4)]
6.31. Where the amount of the IP due will exceed the FDT to be paid plus the fund component, the life assurance company will be required to pay the difference between the IP due and the FDT paid. [Subclause 78(5)]
A reduced amount of IP does not affect the calculation of certain thresholds
6.32. The amount of the IP is used to calculate the thresholds which determine whether a company (balancing in June) can:
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- pay its income tax in one payment on 15 March (i.e. where its tax liability is less than $1,000) (section 221AU); or
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- pay its tax :
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- 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
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- elect to make one payment on 15 December (section 221AT).
6.33. Any reduction or elimination of an IP by a prior payment of FDT as described above will not apply for the purposes of calculating these thresholds. [Clause 79]
Credits where the IP is Reduced by FDT
6.34. Under the existing rules, a company is given credit against any tax assessed for the full amount of an IP made by the company.
6.35. Where the IP made by a company will be 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 had been made. This will ensure that companies are in no way disadvantaged by the deferral arrangements. [Clause 80]
6.36. Where an IP will be made unnecessary by a prior payment of FDT, the credit will arise when the company notifies the Commissioner of its estimated income tax liability (described as a "paragraph 221AQ(1)(a) notice" in the Bill). [Subclause 81(1)]
6.37. Where an IP will be reduced by a prior payment of FDT, the credit will arise when the reduced payment is made. [Subclause 81(2)]
Franking Credits and Debits where FDT is Paid
6.38. 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
6.39. The deferral arrangements are not intended to affect the amount of the franking account credits and debits that arise under sections 160APMA, 160 APVBA, 160APYBA, 160APYC and 160AQCD. They are also not intended to affect the liability for FDT and the consequential offset allowable under section 160AQK.
6.40. 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 81 and 82]
Examples
6.41. In the examples used above and assuming the deferred IP is made on 28 September 1992, the franking account will be credited on that day for the adjusted amounts for $25,000 (Example 1) and $50,000 (Example 2). The debits on that day will be 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
6.42. 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 will reduce the FDT otherwise payable. [Clause 82]
6.43. A reduction in FDT under Clause 82 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.
6.44. The Bill also prevents a company from gaining a refund for the reduction in FDT [Clause 83]. If a company was able to gain a refund in these circumstances, it would pay less tax than under the existing arrangements.
6.45. For the same reason, the operation of the FDT reduction provision as a result of the deferral arrangements, will not give rise to a franking credit under section 160APQA, where an FDT offset entitlement under sections 160AQK or 160AQKA is reduced.
Changed timing for franking credits and debits
6.46. Franking credits and debits that arise because of an IP or payment of FDT arise when the company made its IP. Where, because of a prior payment of FDT, a company will not be required to make an IP, the credits and debits will arise when the company gives the Commissioner its estimate of tax due (i.e. its paragraph 221AQ(1)(a) notice). [Subclause 81(1)]
Commencement date
6.47. The amendments made by Part 3 will commence from the date that the Bill receives the Royal Assent. However, the amendments retrospectively affect payments of company tax for the 1991-92 income year. This retrospectivity does not disadvantage companies and is concessional in nature.
Clauses involved in the proposed amendments
Clause 76: provides for the interpretation of certain terms used in Part 3 of the Bill.
Clause 77 : provides for the deferral of the IP for affected companies to the 28th day of the third month following balance date.
Clause 78 : is called the IP offset provision and 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 79 : provides that any reduction of an IP by clause XX does not affect the calculation of the thresholds that determine how a company will pay its income tax liability.
Clause 80 : provides that, where an IP is reduced under clause 78, 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 81 : 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 82 : is called the FDT reduction provision and 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 83: prevents a refund of FDT as a result of the notional increase in the IP for the purposes of Clause 82 .
Clause 84: prevents an additional franking account credit being given if a reduced FDT offset arises from the operation of Clause 82 .