Senate

Taxation Laws Amendment Bill (No. 2) 1994

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

HECS - Inclusion in provisional tax calculation.

Overview

16.1 This Bill will amend Division 3 of Part VI of the Income Tax Assessment Act 1936 to include a Higher Education Contribution (HEC) assessment debt in provisional tax calculations.

Summary of proposed amendments

Purpose of amendments

16.2 To provide for the inclusion of a HEC assessment debt in provisional tax calculations [Clause 93].

Date of effect

16.3 Calculation of provisional tax (including instalments) payable for the 1994-95 and later years of income [Clause 96].

Background to the legislation

16.4 The Government announced in the 1993-94 Budget on 17 August 1993 that HEC assessment debts will be recovered through the provisional tax and pay-as-you-earn (PAYE) arrangements for the 1994-95 and later years of income. These amendments only relate to the provisional tax arrangements. The income tax regulations will be amended to reflect the increased PAYE deductions to recover HEC assessment debts.

16.5 At present, the calculation for provisional tax does not have regard to accumulated HEC debts and the resultant HEC assessment debts. For the 1994-95 and later years of income, HEC debts will be recovered through the provisional tax arrangements. Provisional taxpayers with HEC assessment debts will continue to pay those debts after PAYE taxpayers.

16.6 The Higher Education Funding Legislation Amendment Act 1993 amended the Higher Education Funding Act 1988 and inserted new subsection 106U(4). Subsection 106U(4) enables the calculation of provisional tax in Division 3 of Part VI of the Income Tax Assessment Act 1936 to include a HEC assessment debt. This approach is consistent with the existing legislation which requires a HEC assessment debt to be treated as income tax assessed.

Explanation of the amendments

16.7 Division 3 in Part VI of the Assessment Act provides for the calculation of provisional tax. Section 221YCAA details the calculations and assumptions made in determining the amount of provisional tax for a particular year. The following explanation will assume the particular year is 1994-95. At present, provisional tax for 1994-95 will be determined by:

·
applying the 1994-95 income tax rates and medicare levy to the preceding year's (1993-94) taxable income as uplifted by the provisional tax uplift factor; and then
·
reducing the resultant tax payable by rebate and other credit entitlements in 1993-94, adjusted as appropriate.

16.8 These amendments [Clause 94] will insert new paragraph 221YCAA(2)(ca) into Division 3 to enable HEC assessment debts, as calculated under the Higher Education Funding Act 1988, to be included in the calculation of provisional tax (including instalments) payable for the 1994-95 and later years of income.

16.9 The Bill also proposes to insert new subsection 221YDA(9) into the Act so that a HEC assessment debt is taken into account in situations where a taxpayer elects to vary their provisional tax under section 221YDA [Clause 95].

Examples

16.10 The four examples below demonstrate how the calculation of provisional tax for the 1994-95 year will have regard to HEC assessment debts. The following notes may assist:

·
Where a provisional taxpayer's 1993-94 assessment includes a HEC assessment debt, the accumulated HEC debt which is subject to the 1994-95 provisional tax calculation will be the accumulated debt on 1 June 1994 reduced by the HEC debt included in the 1993-94 assessment.
·
The following table shows the HEC repayment rates (as a percentage of taxable income) assumed for the 1994-95 financial year:

Taxable income HEC contribution
$26 852 or less Nil
$26 853 - $30 516 3%
$30 517 - $42 722 4%
$42 723 or more 5%

Example 1.

16.11 In the 1993-94 financial year, Carolyn earned salary or wage income only, and had an accumulated HEC liability on 1 June 1994 of $6,000. Carolyn's 1993-94 PAYE deductions were $2000. Carolyn will be required to pay provisional tax for the 1994-95 financial year (under sections 221YAB and 221YA) because:

·
the shortfall in PAYE tax instalments deducted in the 1993-94 year of income; and
·
the tax payable for 1993-94 ($12,304) less credited amounts ($2,000);

were both $3,000 or more.

16.12 Carolyn's 1994-95 provisional tax, based on provisional income of $44 000, will be calculated as follows:

(i)
tax payable on provisional income of $44,000 $11 522
(ii)
medicare levy ($44,000 x 1.4%) $616
(iii)
provisional HEC assessment debt ($44,000 x 5%) $2 200

less adjusted credit for tax attributed to salary* ($2 331)

1994-95 provisional tax $12 007

* The credit for PAYE deductions allowed in the provisional tax calculation under subsection 221YC(1A) will be (2 000 x 14,338) / 12 304. The amount $14 338 is the sum of (i) to (iii) above and represents the provisional tax payable, including medicare and HEC assessment debts for 1994-95.

Example 2.

16.13 In the 1993-94 financial year, Helen earned salary or wage income and interest income. Unlike Carolyn in Example 1, Helen's PAYE tax instalments were in accordance with the prescribed rates and there was no shortfall. Helen also had an accumulated HEC liability on 1 June 1994 of $6 000. Her provisional income for the 1994-95 financial year was $38 500 which consisted of $33 000 in salary or wages and $5 500 in interest income.

16.14 Helen's 1994-95 provisional tax, based on provisional income of $38 500, will be calculated as follows:

tax payable on provisional income of $38 500 $9 157
medicare levy (1.4% of $38 500) $539
provisional HEC assessment debt (4% of $38 500) $1 540
less PAYE credit (on $33 000 salary or wages) ($9 024)
1994-95 provisional tax $2 212

The HEC contribution of $1540 less a HEC contribution of 4% of $33 000 included in $9 024 results in a net HEC contribution for provisional tax of 4% of ($38 500 - $33 000), or $220.

Example 3.

16.15 In the 1993-94 financial year, Lucy earned only business income under the prescribed payments system (PPS). Following Lucy's 1993-94 assessment, her accumulated HEC liability was $400 and her provisional income for the 1994-95 financial year was $44 000. Lucy ceased her studies in 1992.

16.16 Lucy's 1994-95 provisional tax, based on provisional income of $44 000, will be calculated as follows:

tax payable on provisional income of $44 000 $11 522
medicare levy (1.4% of $44 000) $616
provisional HEC assessment debt* $400
less provisional PPS credits (8 800)
1994-95 provisional tax $3 738

*The amount of $400 included in the 1994-95 provisional tax calculation represents the lesser of the calculated HEC assessment amount (5% of $44 000 or $2 200) and the outstanding HEC liability ($400).

Example 4.

16.17 In the 1993-94 financial year, Michael's income was made up of 50% salary or wage income and 50% untaxed business income. He had an accumulated HEC liability on 1 June 1994 of $6 000 and provisional income for the 1994-95 financial year of $44 000.

16.18 Michael's 1994-95 provisional tax, based on provisional income of $44 000, will be calculated as follows:

tax payable on provisional income of $44 000 $11 522
medicare levy (1.4% of $44 000) 616
provisional HEC assessment debt (5% of $44 000)* $2 200
less PAYE credits (on $22 000 salary or wages) ($3810)
1994-95 provisional tax $10 528

* As Michael's provisional salary or wage income for 1994-95 (of $22 000) is below the level at which the HEC is deducted, the provisional tax calculation will include a HEC assessment debt on the total provisional income.


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