Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon. John Dawkins, M.P.)Prescribed Payments System (PPS) simplification
Summary of proposed amendments
Purpose of amendment: To reduce the amount of paperwork involved in the administration of the Prescribed Payments System (PPS). The changes will make it easier for taxpayers to comply with their tax obligations.
Under the proposed amendments:
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- payers will report payments made, during a year of income, on an annual instead of the present monthly basis;
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- payees may complete a new Payee Declaration. Also payees may elect to have a higher percentage deducted from prescribed payments than is currently permitted; and
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- the current deduction variation certificate, deduction exemption certificate and reporting exemption arrangements will be modified.
Date of Effect: The amendments will apply on or after 1 January 1993 except for those relating to deduction variation certificates which will apply on or after 1 July 1992.
The Government introduced the PPS in 1983 to collect tax at source from certain prescribed payments for labour and services in the building and construction and other specified industries made on or after 1 September 1983.
Householders who enter into building or construction projects worth more than $10,000 are eligible paying authorities (subsections 221YHA(3) & (4)) and must report payments made in connection with the project on a monthly basis. However, unlike other PPS payers those householders are not required to deduct tax.
The current legislative framework uses the term "eligible paying authority" (subsection 221YHA(4)) to describe payers who have obligations under the legislation. The term "paying authority" is defined in subsection 221YHA(1).
Householders making prescribed payments under contracts less than $10 000 are paying authorities but not eligible paying authorities.
The term "payer" in this chapter in relation to PPS obligations will mean eligible paying authorities including householders making prescribed payments under contracts greater than $10 000.
A payer making a prescribed payment is required to deduct tax from the payment at the prescribed rate of 20% (subregulation 128(1)). Where the payee fails to complete a deduction form, the payer is required to deduct tax at the highest marginal tax rate plus medicare levy. The payer is also required to send the tax deducted together with other information including reconciliation forms to the Commissioner monthly. These and other duties of payees are set out in section 221YHD.
The Commissioner may issue a deduction variation certificate (section 221YHP) where special circumstances exist so that tax at a rate lower than 20% can be deducted. The payee is currently required to apply for a new variation certificate annually.
The Commissioner may issue a deduction exemption certificate (section 221YHQ) where certain circumstances exist and where the payee satisfies certain tests which include having a good compliance record. The certificate is usually valid for three years and entitles the payee to receive prescribed payments without the deduction of tax.
Payees who have obtained a deduction exemption certificate are currently entitled to apply for a reporting exemption (section 221YHR). A reporting exemption is generally valid for three years and frees payees from having their payments reported.
The amendments proposed will ease the administrative burden on payers, payees and the Australian Taxation Office (ATO) and reduce the amount of paperwork involved under the proposed arrangements.
For example, there were in excess of 140,000 deduction variation certificates in force on 30 June 1992 which, until the changes were announced by the Treasurer on 1 July 1992, were reviewed annually. Further, there are 6 million deduction forms used per annum.
The administrative requirements placed on PPS payers under the current system (through monthly reporting and reconciliation) are considerably greater than the comparable requirement for their PAYE counterparts.
Explanation of proposed amendments
The proposed simplification of the PPS requires the introduction of new definitions and the deletion of current definitions (section 221YHA) which are no longer required [clause 16] .
The new terminology in relation to amounts deducted from prescribed payments is explained later in the Chapter. The main modifications to the PPS arrangements concern the manner in which payers and payees are identified. Under the amendments proposed, information currently obtained from the deduction forms will be obtained from the new payee declaration.
Who can make a payee declaration?
On or after 1 January 1993, payees other than:
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- those dealing with householders; and
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- payees who have approval to quote a reporting exemption number
may make a payee declaration in respect of prescribed payments to be received [new subsections 221YHB(1), (2), (4) and paragraph 221YHQ(1A)(b)] .
How is a payee declaration made?
In order to make a payee declaration, a payee must complete the new payee declaration form and give it to the payer [new subsections 221YHB(1) & (4)] .
The new form is similar to the employee declaration form (section 202C) on which employees may give information to employers which is relevant in ascertaining the amount of PAYE tax instalments to be deducted from payments made. As with the employment declaration, the new PPS payee declaration will enable the payee's tax file number (TFN), as well as details of deduction variation and deduction exemption certificates to be given to the payer so that the correct PPS deductions can be made from prescribed payments [new subsection 221YHB(3)] .
How long does the declaration stay in force?
A payee declaration will remain in force for 1 year after the last payment is made by the payer to the payee. This will avoid the situation of the payer not knowing whether an earlier declaration made by that payee is still in force. A payee declaration can also cease if the payee makes another payee declaration or quotes a reporting exemption number to the payer [new paragraphs 221YHB(5)(a),(b) & (c)] .
To parallel the employment declaration arrangements (section 202CA), it is proposed that the Commissioner may, by notice published in the Gazette, determine that all or some classes of payee declarations cease to be in force [new paragraph 221YHB(5)(d)] . Payee declarations will also cease where TFN information is not provided to the payer within 28 days after the making of a declaration [new subsection 221YHB(6)] .
A payee declaration will also cease if the Commissioner notifies the payee that he is:
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- satisfied that the TFN in the declaration provided has been cancelled or it is not the payee's TFN; and
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- not satisfied that the payee has a TFN
[New subsections 221YHB(8) & (9)]
Consistent with the existing arrangements for employment declarations (subsection 202CE(3) and paragraph 202F(1)(c)), decisions of the Commissioner under new subsection 221YHB(8) can be objected to [clause 28] .
What if the payee's TFN is incorrectly stated in the declaration?
When this occurs and the Commissioner is satisfied that the payee has a TFN, the Commissioner may notify the payer who has the declaration with the incorrect TFN of the correct TFN [new subsection 221YHB(10)] .
What is the payer to do when a payee declaration is received?
The obligations for payers, when given a payee declaration, are set out in new section 221YHC.
For example, on receiving a declaration, the payer is required to sign and retain a copy. The payer is also required to write the payee's TFN on the declaration if subsequently given by the payee. The payer will be required to send the declaration to the Commissioner within the forwarding period. The forwarding period for payee declarations is similar to the term used for employee declarations (section 202CD). That is, generally 28 days after the payee gives the declaration to the payer or longer when the payee's TFN is not stated on the declaration [new subsections 221YHC(1) & (2)] .
The payer is also required to retain the declaration until the second 1 July after the declaration ceases to be in force [new paragraph 221YHC(1)(e] .
New terminology in relation to amounts to be deducted
The amendments proposed for prescribed payments made on or after 1 January 1993 will replace the existing terms that describe the amount or percentage to be deducted from prescribed payments.
The current prescribed rate of 20% (subregulation 128(1)), applicable when a deduction form is properly furnished, will be called the "ordinary percentage". The rate of 48.25% (subregulation 128(2)) which is currently deducted when the payee's deduction form is not completed properly, for example when the payee's TFN is not provided, will be called the"non-declaration percentage" [clause 16] .
Under the proposed arrangements, the new payee declaration form will be the mechanism whereby the payee's TFN is provided to the payer.
What is a higher deduction percentage election?
A payee who has made a payee declaration may give a higher deduction percentage election form to a payer at any time before a payment is made [new subsections 221YHR(1) and (2)] .
A higher deduction percentage election form is a document in which the payee elects the percentage to be deducted from one or more specified payments, or all payments made before a specified date [new subsection 221YHR(3)].
Where a higher deduction percentage election is in force in relation to a payment when it is made, the payer must deduct the percentage of the payment stated in the election form [new subsection 221YHD(5)].
Consistent with the other record keeping requirements, the payer must retain a copy of the higher deduction election percentage form for a period of 5 years [new subsection 221YHR(7)]. A payee may at any time cancel the election by advising the payer in writing [new subsection 221YHR(5)].
Deductions where there is a payee declaration in force
Where a payee declaration is in force, a payer, other than a householder, will be required to make a deduction at the ordinary percentage from prescribed payments made to a payee [new subsections YHD(1) & (2)] .
What if the payee is the holder of a deduction variation certificate?
Where a payee states a deduction variation certificate number and a deduction variation certificate percentage in the payee declaration, and the payer reasonably believes the certificate is in force, the payer must deduct the deduction variation certificate percentage (see definition in subsection 221YHA(1)) of the payment unless the payee has made a higher deduction percentage election in respect of the payment [new subsection 221YHD(3)] .
What if the payee is the holder of a deduction exemption certificate?
Where a payee states a deduction exemption certificate number in the payee declaration, and the payer reasonably believes the certificate is in force, the payer must not deduct anything from the payment unless the payee has made a higher deduction percentage election in respect of the payment [new subsection 221YHD(4)] .
Example
The holder of a deduction variation certificate stating a deduction variation certificate percentage of 5% (or the holder of a deduction exemption certificate) may make a higher deduction percentage election to have a rate of 15% deducted from all payments made between 1 January 1993 and 30 June 1993 to build up sufficient credit to offset the tax payable on assessment.
Deductions where no payee declaration
A payer, other than a householder, is required to deduct the non-declaration percentage of the payment where a payee declaration is not in force and the payee has not quoted an in force reporting exemption number when the payment is made [new section 221YHDA] .
Payers (other than householders) reporting etc obligations
New section 221YHDC replaces the current reporting requirements for payers, other than householders. To reduce repetition in the legislation, new subsection 221YHDC(1) introduces the concept of a reportable payment as a prescribed payment made by an eligible paying authority (other than a householder) to a payee who has not quoted a reporting exemption number. The current reporting requirements are in sections 221YHAA to 221YHD inclusive which the Bill proposes to repeal [Clause 17] .
On or after 1 January 1993, a payer will still be required to send to the Commissioner all amounts deducted from prescribed payments no later than 14 days after the end of the month to which the payment relates [new subsection 221YHDC(2)]. However, the existing monthly reconciliation form will not be required under the proposed arrangements and will be replaced with the new remittance advice form which must accompany amounts sent to the Commissioner [new subsection 221YHDC(4)] .
Annual obligations for non-owner-builders
Payers, other than owner-builders must, unless the payee has quoted an in force reporting exemption number, no later than 14 July after the end of the financial year:
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- complete and sign a payment summary form in respect of payments in relation to which the payer is not an owner-builder; and
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- copy the form and make reasonable efforts to give the form to the payee [new paragraph 221YHDC(5)(a)] .
Example
It would be considered reasonable if the payer was to post the payment summary to the address stated on the payee declaration or the address stated on an invoice prepared by the payee where there is no payee declaration in force.
Those payers are also required no later that 14 August after the end of the financial year to send to the Commissioner a copy of the payment summary form together with a completed and signed reconciliation statement in respect of payments made to all payees [new paragraph 221YHDC(5)(b)] .
Obligations for owner-builders
Payers who are owner-builders in relation to payments made under a contract and the project is not completed at the end of the financial year are subject to the same reporting requirements as non-owner-builders explained above [new subsection 221YHDC(6)] .
In relation to projects completed during the year of income, the same information described above is to be provided within 6 weeks after completion of the project [new subsections 221YHDC(7) and (8)] .
Which records must payers other than householders retain?
Payers, other than householders, must retain a copy of documents they send to the Commissioner for at least 5 years after the end of the financial year to which the prescribed payments to which they relate were made [new subsection 221YHDC(9)] .
Can a payer extend the reporting time?
Yes. The Bill proposes to retain the existing provision (paragraph 221YHD(2)(a)) whereby, the Commissioner advises the payer in writing that an extension is granted [new subsection 221YHDC(11)] .
Can a payer vary the reporting requirements?
Yes. As with the existing provisions (paragraph 221YHD(2)(b)), where the payee has made a payee declaration quoting an in force deduction exemption certificate to the payer and the Commissioner advises the payer in writing that they may vary some or all of the reporting requirements [new subsection 221YHDC(12)] .
Proposed new section 221YHDD replaces the current reporting arrangements for householders which are also contained in existing sections 221YHAA to 221YHD inclusive which the Bill proposes to repeal [clause 17] .
Where a payee enters into a contract with a householder, and the payee has not quoted an in force reporting exemption number to the householder, the payee must give the householder a householder payment summary form, with the payee part completed, before the first prescribed payment is made [new subsections 221YHDD(1) & (2)] .
From 1 January 1993, it is proposed that householders will no longer be required to report to the Commissioner on commencement and completion of a construction project and on a monthly basis. Instead, householders will be required to report to the Commissioner only once on completion of the project.
The proposed amendments will require householders to complete the householder part of the householder payment summary form and send it to the Commissioner within 6 weeks after the completion of the project. If the payee has not completed the payee's part of the householder payment summary form, the householder should try to fill out as much information as they can in relation to that part before sending the form to the Commissioner [new subsections 221YHDD(4) & (5)] .
How long should householders retain records?
A householder should retain a copy of the householder payment summary form for the payee for period of 6 months after the end of the financial year in which the project was completed unless the payee requested and was given the copy before the end of the 6 months [new subsections 221YHDD(6) & (7)] .
Deduction Variation certificates
Under the existing law a payee can apply to the Commissioner for a deduction variation certificate where special circumstances exist. A deduction variation certificate enables a payee to have tax deducted from prescribed payments at a rate lower than the prescribed rate of 20%. A payee must apply for a deduction variation certificate annually. The circumstances necessary for the issue of existing certificates are specified in Income Tax Ruling IT2448.
Under the proposed amendments, a deduction variation certificate issued on or after 1 July 1992 will remain in force indefinitely unless it is subsequently revoked [new subsection 221YHP(4) and subclause 31(6)] .
The circumstances which must be satisfied before a deduction variation certificate will be granted are detailed in new paragraph 221YHP(2) .
Example
A payee applies to the Commissioner for a deduction variation certificate under section 221YHP as amended. The payee's expected annual income from all sources for the year of income is $50,000 of which $10,000 will be PPS income in respect of 6 months PPS work. Further the payee has complied satisfactorily with tax obligations for the 12 month period prior to application [new paragraph 221YHP(2)(b)] .
In this situation, the payee's deduction variation certificate percentage will be 15% (assuming a tax rate of 20% for income in excess of $5,400), being the tax rate applicable to the payee's annualised PPS income ($20,000) and assuming the payee's assessable income for the year consisted only of PPS income [new paragraph 221YHP(2)(a)] .
When the circumstances giving rise to the issue of a deduction variation certificate are no longer applicable the certificate may be revoked (section 221YHS). An example would be where the rate contained in the certificate no longer reflects the taxpayer's PPS circumstances.
Deduction exemption certificates
The Commissioner currently has discretion (section 221YHQ) to issue a deduction exemption certificate where certain circumstances exist and the where the payees satisfies certain tests including a good compliance record. The certificate is usually valid for 3 years.
Under the proposed law a deduction exemption certificate issued on or after 1 January 1993 will remain in force until it is revoked [new subsection 221YHQ(8)] . A certificate remains in force regardless of whether the payee is granted an approval to quote a reporting exemption number after the certificate is issued.
It is also proposed to remove the tests in subparagraph 221YHQ(2)(a)(iv) as they relate to future events which could not be reasonably be ascertained given the indefinite nature of the certificate [paragraph (c) in clause 24] .
A deduction exemption certificate issued prior to 1 January 1993 which is still in force on 1 January 1993 will run its course unless it is revoked [subclause 31(7)] .
Under the existing law, a payee who has obtained a deduction exemption certificate under section 221YHQ is entitled to a reporting exemption under section 221YHR.
The payee may either furnish a reporting exemption declaration to each payer or alternatively, by application to the Commissioner quote a reporting exemption number to each payer. A reporting exemption is generally valid for three years and ceases to be in force when the deduction exemption certificate expires or is revoked.
Payees who are the holders of reporting exemptions are absolved from completing deduction and other PPS forms. Payers are not required to deduct tax or report payments made where the payee furnishes a reporting exemption declaration or quotes a reporting exemption approval number.
Under the proposed amendments, clauses 24 and 25 will result in the reporting exemption provisions in section 221YHR being combined with the existing deduction exemption certificate provisions in section 221YHQ under existing section 221YHQ as amended.
As with the existing law, a payer will not be required to make deductions from prescribed payments made to a payee who has a reporting exemption.
Under the proposed law a taxpayer may, on or after 1 January 1993, apply to the Commissioner separately for approval to quote to payers a reporting exemption approval number [new paragraph 221YHQ(1)(b)] .
The payee will be required to meet the same tests as applicants for deduction exemption certificates . If the payee satisfies the tests the Commissioner must notify the payee in writing of the approval to quote a specified reporting exemption number and the period to which the approval is in force [new paragraph 221YHQ(1A)(b)] .
An approval to quote a reporting exemption number will remain in force for the period, not exceeding 3 years, specified in the approval unless the Commissioner revokes the approval [new subsection 221YHQ(9) & new section 221YHSA] .
Example
There would be nothing to prevent the holder of a deduction exemption certificate applying under new paragraph 221YHQ(1)(b) for approval to quote a reporting exemption number. Further, as discussed above, the deduction exemption would continue to be in force until it is revoked.
How does a payee quote a reporting exemption number to a payer?
A payee who is the holder of an approval to quote a reporting exemption number will be required to notify the payer, in writing, of the reporting exemption number and the day on which the approval ends [new subsection 221YHQ(10)] .
Example
A payee may wish to include the reporting exemption approval number on an invoice sent to the payer during the period in which the approval is in force or alternatively, the payee may advise the payer in a separate advice before any payments are made.
How long does the payer retain the notification for?
Under the proposed arrangements, a payer (other than a householder) will be required to retain a copy of the notification of the reporting exemption approval number for 5 years after the financial year in which the notification expires. For householders, the retention period will be 1 year [new subsection 221YHQ(11)] .
Revocation of approval to quote a reporting exemption number.
Section 221YHS currently permits the Commissioner to revoke a deduction exemption certificate or a deduction variation certificate at any time. These certificates are within the definition of 'prescribed certificate' in subsection 221YHA(1).
Proposed new section 221YHSA will permit the Commissioner to revoke an approval to quote a reporting exemption number. For example, the Commissioner may revoke an approval where a payee did not comply with any of their obligations under an Act administered by the Commissioner.
What happens to reporting exemptions which were granted before 1 January 1993?
Where a payee has given a payer a reporting exemption declaration prior to 1 January 1993 under the existing subsection 221YHR(1) the declaration will remain in force until the declaration expires [subclause 31(8)] .
An existing reporting exemption approval number granted prior to 1 January 1993 under subsection 221YHR(5) will remain in force in the manner specified by the Commissioner until the approval expires or is revoked [subclause 31(9)] .
In addition to the amendments explained in this chapter, the Bill also contains several amendments, of a minor technical nature. These amendments were required in the restructure of the PPS provisions. For example, existing section 221YHB covers the provision of information to the Commissioner by householders and eligible paying authorities other than householders.
In the proposed amendments, new section 221YHB deals with the making of payee declarations. It was therefore necessary to retain some of the section 221YHB provisions under the new arrangements. For example, the requirement for eligible paying authorities to notify the Commissioner within 14 days after entering a contract under which they are liable to make a prescribed payment is contained in new section 221YHDB . The Bill also ensures that existing notifications are not affected by the amendments proposed [subclause 94(3)] .
New section 221YHDE contains the existing provisions in subsection 221YHB(10) which require "issuing authorities" to provide to the Commissioner details of construction permits issued.
A further illustration is in the area of offences currently applicable when payers do not comply with their statutory obligations. Existing subsections 221YHB(11) and 221YHD(3) contain the penalties applicable when payers fail to meet their obligations. Under the restructured provisions, the duties of the different categories of payers (owner-builders and other payers) are separated and carry their own penalty provisions. For example see, new subsections 221YHDB(2), 221YHDC(3) & (9) and 221YHDD(3) .
Other amendments not explained in the chapter but described in the section of this Explanatory Memorandum concerning Clauses involved in the proposed amendments include:
| Interim notices | Clause 14 |
| Credits in respect of deductions | Clause 18 |
| Failure to pay amounts deducted to the Commissioner | Clause 19 |
| Failure to furnish deduction forms | Clause 20 |
| Remission of certain amounts | Clause 21 |
| Persons liability discharged from making deductions | Clause 22 |
| Offences | Clause 23 |