House of Representatives

Taxation Laws Amendment (Self Assessment) Bill 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Chapter 5 Interest

Key Features

This chapter deals with the requirements for taxpayers to pay interest in those cases where any amounts of income tax are underpaid or paid late. The key features are:

·
taxpayers will be required to pay interest on all debit amendments issued as a result of an underpayment of tax;
·
taxpayers will be required to pay interest (in addition to a late payment penalty) on all income tax payments made after the due date;
·
the existing late payment penalty will be reduced from the present 20% per annum to 8% per annum to complement the new interest system;
·
interest paid to the ATO will be deductible for all taxpayers;
·
the rate of interest payable by taxpayers will be set periodically by reference to the weighted average yield for 13 Week Treasury Note tenders plus 4%, and will normally be adjusted on a six monthly basis.

Summary of Proposed Amendments

The Bill gives effect to changes announced in section 7 of the August 1991 information paper entitled 'Improvements to Self Assessment - Priority Tasks'.

The amendments proposed by the Bill will provide for interest to be paid by taxpayers in relation to the underpayment or late payment of income tax and will make associated changes to late payment penalty. These amendments will affect existing provisions dealing with late payment penalty and interest on underpayments and will introduce new provisions dealing with the payment of interest by taxpayers in specific situations.

The Bill will amend the ITAA to give effect to the new interest provisions and to separate interest and penalties. The rate of interest is to be based on market rates and the Bill will make interest paid to the ATO deductible to all taxpayers.

Interest will be payable by taxpayers in circumstances where penalties now apply for late payment and understatement of taxable income (where this results in an underpayment of tax) and in those cases of non-culpable underpayment of tax where interest is now payable. The payment of statutory interest in circumstances where penalty provisions now apply for late payment of tax or understatement of taxable income (and hence underpayment of tax), is to be complemented by changes to the penalty provisions. See Chapter 4.

The Bill applies to all income taxpayers. However, in recognition that full self assessment arrangements presently apply to some taxpayers (ie., companies and superannuation funds) a number of provisions in the Bill deal specifically with these taxpayers.

Explanation of Proposed Amendments

Interest for underpayment of tax

A taxpayer will be liable to pay interest where an amendment of an assessment increases the tax liability of the taxpayer. Interest will apply regardless of whether the increase in tax liability also attracts penalty under the penalty provisions of Part VII of the ITAA as modified by the penalty provisions contained in this Bill. [section 170AA - Clause 21]

The existing section 170AA provides for the payment of interest by a taxpayer where an amendment of an assessment is made increasing the taxpayer's liability. However, by virtue of subsection 170AA(2), this requirement to pay interest on an underpayment of tax does not extend to taxpayers who are liable to pay additional tax by way of penalty imposed under the penalty provisions contained in Part VII of the ITAA. This is because the existing penalty provisions have been administered to include a per annum component to compensate the Revenue for not having the funds for the relevant period. The new penalty provisions do not seek to compensate the Revenue for the time value of money, but rather, penalise specified culpable behaviour. See Chapter 4.

The new subsection 170AA(1AA) will ensure that interest is payable where an assessment is amended irrespective of whether the taxpayer is liable to a penalty under Part VII. Similarly, interest will apply where a determination is amended even where penalty is payable. [subsections 170AA(1AA), 170AA(2) - Subclauses 21(a) and (b)]

The existing subsection 170AA(2), which prevents interest under subsection 170AA(1) being imposed where additional tax under Part VII has been imposed, will be deleted.

Under the existing subsection 170AA(3), interest can be imposed on a taxpayer, a partner or a trustee in cases where an amended assessment is made increasing the liability of the taxpayer, the partner or the trustee to additional tax. This subsection will be amended to reflect changes made by the new penalty provisions of the Bill. As a result of the repeal of section 223 [Clause 27], the reference to subsections 223(2) and 223(4) in paragraph 170AA(3)(b) will be changed to reflect the new special rules under which a partner or trustee may be liable to pay additional tax under Part VII. The reference to subsection 223(2) in subparagraph 170AA(3)(b)(ii) will be changed to 'sections 226N, 226P or 226Q'; and the reference to subsection 223(4) in subparagraph 170AA(3)(b)(iii) will be changed to 'sections 226R, 226S or 226T'. [Subclauses 21(c) and 21(d)]

To ensure that interest will be payable by relevant entities (ie., companies and superannuation funds) from the prescribed due date for lodgment of the original return and payment of tax to the issue date of the notice of amended assessment, section 170AA is to be amended. Subparagraph 170AA4(a)(i) will be amended to only apply to taxpayers who are not relevant entities [subparagraph 170AA(4)(a)(i) - Subclause 21(e)]. For relevant entities, the Bill will insert a new subparagraph which provides that the period in respect of which interest is to be paid in relation to an amended assessment is to commence on the day on which the relevant entity is required to make a payment under section 221AZD(b), or would have been required to make such a payment but for the fact that no amount of income tax is payable or the amount of income tax specified in the return does not exceed the initial payment. [subparagraph 170AA(4)(a)(ia) - Subclause 21(f)]

The existing paragraph 170AA(4)(b) and subsection 170AA(7), which specify the rate at which interest is to be calculated, are being amended so that the rate or rates of interest to be used when calculating interest under section 170AA will be ascertained in accordance with the new section 214A. [paragraph 170AA(4)(b) - Subclauses 21(g) and (h)]

The existing subsection 170AA(6) contains a number of provisions which are required to enable interest to be calculated in cases where an assessment is issued to a taxpayer subsequent to an earlier notice advising the taxpayer that the taxable income of the taxpayer for the year of income was nil or that no tax was payable on the taxable income. Through the amendments being made to subsection 170AA(7), the Bill will ensure that in respect of relevant entities with nil taxable income or no tax payable for a year of income, the Commissioner is deemed to have served a notice to the effect that the taxable income of the taxpayer for the year of income is nil or that no tax is payable. In addition, the Bill also provides that in respect of such a notice for relevant entities, the due date of the notional assessment is to be the day that would have applied under subparagraph 170AA(4)(a)(ia). This change ensures that when interest is payable by a relevant entity under section 170AA, the commencement date of the period in which interest applies in respect of a particular year of income will be the same for all taxpayers, regardless of whether interest in being imposed in an original or amended assessment. [subsection 170AA(7) - Subclause 21(h)]

The existing power of remission in section 170AA(11) will apply to interest payable under section 170AA.

Interest and penalty for late payment of tax

Section 207 of the ITAA currently imposes additional tax, by way of a 20% per annum late payment penalty, when any amount of tax remains unpaid after the time when it became due and payable. This section is being amended to provide for the separate imposition of penalty and interest when tax is paid late. Instead of the existing 20% per annum late payment penalty payable under section 207, a taxpayer will be required to pay both:

·
a penalty for not paying an amount of tax by the prescribed or notified due date for payment; and
·
interest at the statutory rate, to compensate the Revenue for being denied use of the funds for the period since the due date for payment.

Section 207 is being amended to reduce the late payment penalty to 8%, and a new section is being inserted requiring a taxpayer who is liable to pay the penalty to also pay interest at the rate prescribed under section 214A. [sections 207 and 207A - Clauses 23 and 24]

Penalty for late payment of tax

The penalty for late payment is to be changed to 8% per annum of the amount unpaid. It will still be calculated from the time when the tax became due and payable. This penalty is due on a daily basis while any amount of tax that is due for payment remains unpaid. [section 207 - Subclause 23(a)]

For taxpayers who are not on full self assessment, the late payment penalty and interest is to be payable on any amount of income tax or provisional tax paid after the due date for payment specified in a notice of assessment or other notice issued to the taxpayer by the ATO.

For taxpayers who are on full self assessment (relevant entities) the late payment penalty and interest is to be payable on any amount paid after the prescribed due date for payment. In the case of amounts payable on assessment, the late payment penalty and interest is to apply to any amount of tax paid after the due date for lodgment of the return for the relevant year of income. To give effect to this requirement, the Bill provides that for late payment purposes, tax under paragraph 221AZD(b) is to be taken to be due and payable on the due date for the furnishing of the return for the relevant year of income. [paragraph 207(1AA)(a) - Subclause 23(b)(a)]

For the purposes of calculating late payment penalty and interest for relevant entities, the amount of tax that is taken to be due under section 221AZD is to be the amount of income tax specified in the tax return for the relevant income year, reduced by any credits or offsets allowed within the meaning of subsection 221AZE(6). [paragraph 207(1AA)(b) - Subclause 23(b)(b)]

This change is required to avoid the situation of an amount for a relevant entity being technically overdue between the due date for lodgment of the return and the actual date of lodgment, even though no amount is ultimately payable as a result of being offset by credits, eg., deductions from prescribed payments, which do not arise until an assessment is made. In cases where a return is lodged late, the assessment is deemed to be made on the date of lodgment.

Under the existing subsection 207(1B), where a judgment debt carries interest, the penalty otherwise payable for late payment under section 207 is reduced by the amount of the judgment debt interest. Under the new interest arrangements, judgment debt interest is only to be offset against the interest imposed by the new section 207A(1) and not against the penalty imposed by the existing section 207. The Bill gives effect to this new requirement by changing subsection 207(1B) to delete all references to the penalty under section 207 being offset by any judgment debt interest. [Subclause 23(c)]

The existing subsection 207(3) makes it clear that for the purpose of calculating late payment penalty for the late payment of tax, an outstanding amount of 'tax' includes any additional tax imposed under Part VII of the ITAA. This will continue to be the case, but given the changes being made by this Bill to separate penalties and interest, it is necessary to include interest under section 170AA and additional tax under Part VII. [Subclause 23(d)]

Interest for late payment of tax

Interest at the statutory rate is also to be paid on any amount of tax unpaid, calculated in the same manner as late payment penalty under section 207, from the time when the tax became due and payable. The interest will be due on a daily basis while any amount of tax that is due for payment remains unpaid. [subsection 207A(1) - Clause 24]

For relevant entities, as explained above, in determining the amount of tax that is to be subject to interest for late payment, the tax specified under section 221AZD in a return is to be reduced by any offsets or credits allowed within the meaning of subsection 221AZE(6). [subsection 207A(2) - Clause 24]

With respect to the late payment of franking deficit tax, the amendments made to subsection 160ARW(2) [Schedule 3 - Subclause 33(3)] provide that late payment penalty under section 207 is only to apply from 30 days after the issue of an amended assessment advising that an additional amount of franking deficit tax is payable. However, interest (under the new section 207A) for the late payment of franking deficit tax is to accrue from the day on which franking deficit tax is due and payable in accordance with the existing section 160ARU (ie., from 1 month after the end of the franking year). As the existing subsection 160ARW(2) causes section 207 penalty to accrue at a reduced rate from that date until 30 days after the amended assessment, the amended provision effectively continues the existing policy of the law. Section 207A contains a technical subsection to ensure that in those cases where subsection 160ARW(2) applies to an amount, interest under section 207A is calculated from the earlier date. [subsection 207A(3) - Clause 24]

Under the existing subsection 207(1A), the Commissioner has the power to remit late payment penalty where he is satisfied that there are special circumstances that contributed to the delay in payment of the tax in which, having regard to those circumstances, it would be fair and reasonable to remit all or part of the penalty.

Similarly, in respect of the interest associated with the late payment of tax, there will be a need for a provision to allow the Commissioner to remit the interest in those cases where there are special circumstances which make it fair and reasonable for the interest to be remitted.

However, as distinct from the remission of late payment penalty, interest is only to be remitted in very exceptional cases, given that it represents compensation to the Revenue for the time value of money for the period that the Revenue has been denied use of the funds. Thus in contrast to the remission provision for late payment penalty, which has regard to exceptional circumstances that contributed to the delay in payment of the tax, the remission provision in respect of interest will be more limited. The Bill provides a provision identical to the existing remission provision in respect of section 170AA interest, which allows the Commissioner to remit interest in those cases where there are special circumstances which make it fair and reasonable for the interest to be remitted. [subsection 207A(4) - Clause 24]

As mentioned above, where a judgment debt carries interest, any interest payable under the new section 207A is to be offset by the amount of the judgment debt interest. [subsection 207A(5) - Clause 24]

The existing subsection 207(2) makes it clear that the Commissioner may sue for recovery of any tax unpaid as soon as the tax becomes due and payable, notwithstanding that a person is liable to pay additional tax by way of penalty when an amount of tax remains unpaid. This subsection will continue to operate in respect of penalty imposed under section 207. This Bill will insert a similar subsection in respect of interest imposed under the new section 207A. [subsection 207A(6) - Clause 24]

A provision similar to that contained in the existing subsection 207(3) in respect of penalty for late payment is also required in respect of interest for late payment. The Bill gives effect to this requirement by making it clear that interest for late payment can be imposed under the new section 207A on an amount of tax that can include interest or penalty imposed under section 170AA or Part VII of the ITAA. In other words, if the balance payable for an assessment, which includes interest under section 170AA or penalty under Part VII, or both, is not paid in full by the due date, penalty under section 207 and interest under the new section 207A can be imposed on the total tax outstanding. [subsection 207A(7) - Clause 24]

Interest rates

Where a taxpayer is required to pay interest under section 170AA or 207A, the rate at which interest is to be calculated in respect of any specific period of time is the statutory rate of interest applicable to a given period of time. Given that interest is meant to compensate the Revenue for the time value of money, the rate at which interest is to be paid by taxpayers, which is based on market rates, will be varied periodically to reflect interest rate movements in the market.

The rate of interest that is to apply for a given period of time will be published in the Gazette by the Commissioner before the rate takes effect. A new interest rate will normally be published to apply for a six month period, commencing on 1 July and 1 January each year.

The rate at which interest is to be calculated in respect of any period falling within the first six months in a financial year is the weighted average yield set at the last tender for the 13 Week Treasury Note before the end of April preceding the financial year, increased by 4 percentage points. [subsection 214A(3) - Clause 25]

This is best illustrated by an example. If the weighted average yield for the last weekly tender for the 13 Week Treasury Note before the end of April 1992 was 7.0%, the rate to be used in calculating interest under section 170AA or 207A in respect of the six month period commencing on 1 July 1992 would be 11%.

Similarly, the rate at which interest is to be calculated in respect of any period falling within the last six months in a financial year is the weighted average yield set at the last tender for the 13 Week Treasury Note before the end of October in that financial year, increased by 4 percentage points. [subsection 214A(4) - Clause 25]

While a new rate will normally be set to apply from the commencement of the standard six month period, it is possible during lengthy periods of stable interest rates for the rate set for a particular six month period to be used for a further six month period. [subsection 214A(5) - Clause 25]

In situations where the interest rate in relation to a six month period would not differ by more than one percentage point from the interest rate for the preceding six month period, it is possible for the earlier rate to be used for a further period. In such cases, the Treasurer must determine that the rate for the preceding period will be the rate that will apply for the new period. [subsection 214A(6) - Clause 25]

For example, if the rate for the six month period commencing on 1 July 1992 was 11% and the new rate (based on the weighted average yield set at the last weekly tender for the 13 Week Treasury Note before the end of October 1992) would have been 11.8%, the Treasurer could determine that 11% should continue as the rate to be used for the six month period commencing on 1 January 1993. On the other hand, if the new rate would have been 10.2%, the Treasurer could determine that 11% should continue to be used for a further six month period.

The above provisions [subsections 214A(5) and 214A(6)] are designed to avoid administrative difficulties associated with changing the rate of interest too frequently. This is particularly relevant for taxpayers who are on full self assessment, as they would be expected to calculate the amount of any interest payable by them when any tax is paid late. However, while seeking to minimise the number of changes in interest rates, there is a need to protect the Revenue in situations where there are large movements in interest rates over a short period of time. In these situations, the Bill allows the Treasurer to determine that a new rate of interest is to apply for a certain period, based on the weighted average yield set at the last weekly tender for the 13 Week Treasury Note for a month other than the relevant April or October. [subsection 214A(5) - Clause 25]

In setting a rate of interest that is to apply to a particular period, the rate is to be limited to a maximum of one decimal place. To give effect to this requirement, the Bill provides that the rate must be rounded upwards to one decimal place. [subsection 214A(7) - Clause 25]

For example, if the rate based on the weighted average yield set at the last weekly tender for the 13 Week Treasury Note before the end of April was 10.95%, the rate for the next period would be set at 11%. On the other hand, if the rate was 10.94% instead of 10.95%, the rate would be set at 10.9% and not at 11.0%.

With the rate of interest to apply in different periods of time being subject to periodic review, there is a requirement that the rate to apply in respect of a given period be published before the rate can come into effect. The Bill provides that before a new rate comes into effect, the Commissioner must publish the new rate for a particular period in the Gazette. [subsection 214A(8) - Clause 25]

Deduction for interest payments

Where a taxpayer is required to pay interest under section 170AA or 207A for the underpayment or late payment of tax, the taxpayer will be able to claim a deduction for the interest expenditure.

The Bill will amend subsection 51(5) of the ITAA to allow all taxpayers to claim a deduction for any interest expenditure that consists of interest under section 170AA or 207A. That is, all taxpayers, not just business taxpayers, will be able to deduct from assessable income, interest paid under these sections to the ATO. This will remove the present lack of symmetry in the tax treatment of interest paid to the ATO and interest paid by the ATO. The deduction will be able to be claimed in the income year in which the interest expenditure is incurred. [subsection 51(5) - Clause 16]

Other changes

Further amendments to the ITAA are set out in Schedule 3 to the Bill. These changes deal with the amendment of a number of existing provisions that extend the scope of section 207 or extend their own scope by referring to section 207.

Given the changes made by this Bill to impose interest on late payments under the new section 207A and the amendments to section 170AA to enable interest to be imposed on all underpayments (even where penalty under Part VII of the ITAA is imposed) it is necessary to amend a number of existing provisions that make reference to additional tax under section 207 or Part VII.

These amendments are necessary to ensure that interest under the new section 207A and the amended section 170AA is also included, as applicable, in the relevant existing provisions that make reference to additional tax under section 207 of Part VII. [Subclause 33(3)]

Application of interest provisions

The amendments to section 51 made by this Bill will only apply to interest paid under sections 170AA or 207A in respect of assessments in respect of the 1992-93 year of income and all subsequent years of income. [subsection 34(1) of the Self Assessment Act - Subclause 34(1)]

The amendments of section 170AA made by this Bill will only apply to assessments in respect of the 1992-93 year of income and all subsequent years of income. This means that for most taxpayers the new provisions will apply to the underpayment of tax in respect of the income year commencing on 1 July 1992. However, in the case of taxpayers who have adopted an accounting period which commences prior to 1 July 1992 in lieu of the year of income commencing on 1 July 1992, the new provisions will apply to any underpayment of tax in respect of the accounting period adopted in lieu of the year of income commencing on 1 July 1992. For example, for a taxpayer whose 1991-92 year of income ended on 30 April, the new provisions will first apply to the year of income commencing on 1 May 1992. [subsection 34(4) of the Self Assessment Act - Subclause 34(4)]

Similarly, the amendments of section 207 and 207A made by this Bill will only apply to late payments of tax in respect of the 1992-93 year of income and all subsequent years of income. [subsection 34(5) of the Self Assessment Act - Subclause 34(5)]

The amendment of section 160ARW(2) made by this Bill will only apply to the late payment of tax in respect of a franking year commencing on or after 1 July 1992. [subsection 34(5) of the Self Assessment Act - Subclause 34(5)]

In the case of the late payment of provisional tax, including instalments of provisional tax, the new provisions will only apply to the late payment of provisional tax in respect of the 1993-94 year of income and all subsequent years of income. For most taxpayers, this will be provisional tax that is due after 1 July 1993. [subsection 34(6) of the Self Assessment Act - Subclause 34(6)]

Amendment of Interest on Underpayments Act

The Bill inserts a new subsection into section 3 of the Interest on Underpayments Act to make it clear that any interest that is payable under the ITAA that is a tax is imposed by the Interest on Underpayments Act. Any interest that is payable under the ITAA that is not a tax is not imposed by the Interest on Underpayments Act. [subsection 3(2) of the Interest on Underpayments Act - Clause 38]


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