Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
Payments of interest on overpayments and early payments
9.1 The Bill will widen the circumstances in which interest is paid to taxpayers who overpay their income tax and provide for interest to be paid to taxpayers who pay their income tax early.
Purpose of the amendments
9.2 To provide compensation, in the form of interest, to taxpayers who overpay their income tax or who pay their income tax before the due date for payment.
Date of effect
9.3 The proposed amendments will generally apply to certain specified overpayments identified, and early payments made, on or after 1 July 1994 in respect of income tax for the 1993-94 year of income and later years.
Overpayments of income tax
9.4 Interest is already payable under the Taxation (Interest on Overpayments) Act 1983 (the Overpayments Act) on certain overpayments of tax. The types of tax covered are described in the definition of "relevant tax" in subsection 3(1) of the Overpayments Act. They include income tax, fringe benefits tax, sales tax and other taxes administered by the Commissioner of Taxation.
9.5 An overpayment of income tax will arise where the amount of tax previously assessed and paid by the taxpayer is found to be excessive. Tax assessed is the amount of tax payable on taxable income or, in the case of certain trustees, the amount of tax payable on net income. Tax assessed can also be the amount of additional tax ascertained under one of the penalty provisions in Part VII of the Income Tax Assessment Act 1936 (the Tax Act) or the amount of interest ascertained under section 102AAM of the Act.
9.6 A reduction in the amount of tax assessed can only be made by amending the assessment. This reduction in the liability under an assessment is a credit amendment. There will be an overpayment in any case where an amount in excess of the reduced amount of tax has already been paid. The overpayment would be refunded or credited against other obligations at the time the taxpayer is given notice of the amended assessment. Overpayments resulting from credit amendments may qualify for interest under the existing provisions of the Overpayments Act.
9.7 There are a number of instances, apart from those involving credit amendments, where an overpayment of tax may occur. For example, an overpayment of income tax may be identified when the Commissioner credits in payment of tax assessed amounts collected under various advance tax collection schemes such as the salary and wages tax instalment deduction scheme, the prescribed payments scheme, the arrangements for payment of provisional tax and the company instalment arrangements. The law generally requires that these overpayments be refunded to the taxpayer or credited against other liabilities of the taxpayer. This is usually done at the time a notice of assessment for the year of income, or a notice advising that no tax is payable, is sent to the taxpayer.
9.8 An overpayment could also occur where amounts paid under a PAYE scheme are for some reason credited some time after an original assessment of tax payable has been made. Amounts might be credited late, for example, where a taxpayer initially overlooks to include a group certificate with the tax return for a year but lodges the group certificate later, after the assessment has been made. Overpayments of tax may also arise when a claim for foreign tax credits is lodged after the assessment is made. These overpayments must also be refunded or credited against other outstanding debts. In some cases this will be done at the time the assessment is amended. This would occur, for example, where taxable income is increased to include additional income disclosed in a late group certificate but the tax instalment deductions shown on the certificate exceed the tax on the income. In other cases the amount of the overpayment will simply be refunded or credited against other liabilities, as required, without any amendment.
9.9 Overpayments may also arise where there are refunds of company instalments, provisional tax and certain other advance payments. They may also arise where certain penalties related to income tax are remitted after having been paid. For example, if a person had paid a late payment penalty that was later remitted, wholly or in part, there would be an overpayment to the extent of the amount remitted.
9.10 This Bill will provide for interest to be paid, in certain circumstances, on the overpayments described in paragraphs 9.7, 9.8 and 9.9. The types of overpayment described in paragraphs 9.7 and 9.9 will generally qualify for interest where a request for refund of the overpayment is not processed with 30 days. In these cases interest will be paid for the period commencing 30 days after the day when the request for refund was made and ending on the day when the refund was made. Where the overpayment is ascertained when the Commissioner credits amounts paid in advance, whether paid under an advance tax collection scheme or paid separately by the taxpayer, at the time an original assessment is made, the taxpayer's return will be taken to be a request for refund.
9.11 The overpayments in paragraph 9.8 will generally qualify for interest because the relevant advance tax collection scheme amounts should properly have been credited at the time the tax for the year of income was first assessed. Because these late creditings are similar to credit amendments, the interest period will be the same as for credit amendments.
9.12 There are some overpayments of income tax, identified by a credit amendment or the crediting of an amount, which may not qualify for interest or which will qualify for a limited amount of interest. These overpayments arise in an international context where a downward correlative adjustment is made by Australia to relieve international double taxation which has arisen as a result of a foreign tax administration making a transfer pricing or profit/expense allocation adjustment. These exceptions and limitations are discussed in more detail at paragraphs 9.62 9.67.
Overpayments under advance tax collection schemes
9.13 Although amounts collected under the various advance tax collection schemes in anticipation of a tax liability may often exceed the final amount of tax payable, an overpayment does not result until the amounts collected are credited in payment of the tax assessed. It is generally not possible to ascertain whether excessive advance tax collection amounts have been collected until the relevant tax liability has been determined. Most advance tax collection amounts are not paid directly by a taxpayer, but are deducted from the taxpayer's income and paid to the Commissioner by another person such as the taxpayer's employer. However, provisional taxpayers and companies pay advance amounts, i.e., provisional tax and company instalments, directly to the Commissioner. In some cases these taxpayers may be able to determine in advance that the amount paid is excessive. In these cases, the law allows a person to vary downwards the amount of provisional tax and a company to vary the amount of a company instalment. Any overpayments that arise from such variations must generally be refunded or applied against another liability of the taxpayer. These overpayments will qualify for interest if a request for a variation is not dealt with by the Commissioner within 30 days.
Interest on early payments of income tax
9.14 The Bill will change the title of the Overpayments Act to the
Taxation (Interest on Overpayments and Early Payments) Act [item 2 of Schedule 5] and insert a new Part IIA [item 11 of Schedule 5] that will provide for interest to be paid on certain early payments of income tax. For this purpose income tax will include [new subsection 8A(1)]:
- amounts notified in a notice of assessment issued under the Act, i.e., income tax, including Medicare levy;
- HEC assessment debt under the Higher Education Funding Act 1988;
- FS assessment debt under the Student Assistance Act 1973;
- additional tax under Part VII of the Tax Act;
- interest under section 102AAM of the Act;
- amounts of provisional tax, including an instalment of provisional tax; and
- company tax instalments, i.e., initial and final payments of tax payable under Division 1B of Part VI of the Tax Act and instalments payable under Division 1C.
9.15 Interest will be payable where an amount of income tax is paid more than 14 days before the due date, but not where the payment is simply an application of a credit to which the person is entitled. This means interest on early payments will only be paid to a person where the person makes an actual payment of tax to the Commissioner. Interest on early payments will not be payable on any part of a payment that exceeds the amount of income tax that is due. Interest on early payments will not be attracted by amounts deducted from payments to a person under arrangements for advance collection of tax [new subsection 8A(2)]. For instance, tax instalment deductions made from a person's salary by an employer will not qualify for interest on early payments. Nor will a payment by the employer of the amount deducted to the Commissioner.
9.16 Amounts that may be credited in payment of a person's tax but are not directly paid by the person will not qualify for interest on early payments [new subsection 8A(3)]. These amounts include items like tax instalment deductions from salary and prescribed payment system deductions that are finally credited against tax payable after an assessment has been made. A full list of these amounts is contained in the definition of 'income tax crediting amount' being inserted by item 9 of Schedule 5. As well as income tax crediting amounts, overpayments of other income tax liabilities (say for an earlier or later year) or other tax liabilities (like FBT or sales tax, for instance) may be credited against an income tax liability. These credits do not qualify for interest on early payments.
9.17 For taxpayers who are on full self assessment (that is, companies, superannuation funds, and certain taxpayers who are treated like companies) the period for which early payment interest is calculated will generally run from the day an early payment is made until the day when the relevant amount of income tax becomes due and payable. For taxpayers not on full self assessment (referred to in this chapter as ordinary taxpayers), a payment made in advance of an assessment will only qualify for interest from the day when the assessment is made. [New section 8B]
9.18 The new provisions will apply to payments made on or after 1 July 1994 in respect of income tax liabilities for the 1993-94 year of income and later years.
9.19 A company's final payment of tax for the 1993-94 year of income is due on 15 March 1995. The company's accounts were completed well before the due date for lodgment of the tax return. After taking into account its initial payment and other credits the company calculated its final liability to be $2,000. The company decided to lodge its return early. It also made an early payment on 15 January 1995. The company is entitled to early payment interest on $2,000 calculated from 15 January 1995 to 15 March 1995.
|Early payment of $2,000||Final instalment day|
9.20 Under the new instalment arrangements the same company's first instalment of tax of $5,000 for the 1994 95 year of income falls due on 1 June 1995. The amount of the instalment is 25% of its likely tax of $20,000. The company makes a payment of $3,000 on 10 May 1995 and a further payment of $2,000 on 1 June 1995. The company is entitled to early payment interest on $3,000 for the period from 10 May 1995 to 1 June 1995, i.e. 23 days.
|Early payment of $3,000||Due date of instalment, Amount due $5,000|
9.21 On 30 October 1994 an ordinary taxpayer makes an early payment of $500 in respect of income tax for the 1993-94 year. The Commissioner issues a notice of assessment of the tax payable on 10 January 1995. The balance payable on the assessment is $150, which is the tax payable of $650 less the advance payment of $500. That amount is due on 1 April 1995. The taxpayer is entitled to early payment interest on $500 for the period from 10 January 1995 (i.e., later of payment date and date notice of assessment issued) to 1 April 1995.
|Payment of $500||Date of Assessment||Due date for payment of 1993-94 assessed tax|
9.22 On 31 January 1995 the Commissioner notifies the above taxpayer of a 1994-95 provisional tax liability of $2,000. The provisional tax is due for payment on 1 April 1995. On 10 February 1995 the taxpayer makes a payment of $2,150 in respect of the $150 balance payable on the 1993-94 income tax assessment and the $2,000 liability for1994-95 provisional tax. The taxpayer is entitled to early payment interest on $2,000 in respect of provisional tax and early payment interest on $150 in respect of income tax for the period from 10 February 1995 to 1 April 1995.
|Provisional tax notice issued||Payment of $2,150 being $2,000 of provisional tax and $150 of income tax||Due date of provisional tax and 1993-4 income tax.|
|Payment of $1,000||Date of Assessment||Due date for payment of 1993-94 assessed tax|
Interest payable on new qualifying overpayments
Overpayments resulting from credit amendments
9.24 Under the existing law, the only overpayments that qualify for interest are those described in paragraph 9.6. Even these overpayments only qualify when a further condition is met. This condition is that the credit amendment giving rise to the overpayment must be made as a consequence of a decision to which the Overpayments Act applies. There are two broad types of decision which may lead to a qualifying credit amendment. The first is where the Commissioner, the Administrative Appeals Tribunal or a court makes a decision in relation to an objection by a taxpayer against an income tax assessment. The second is where the Commissioner decides to amend an assessment to reduce a taxpayer's liability without the taxpayer having sought an amendment.
9.25 When interest is payable under the existing law on an overpayment of income tax caused by a credit amendment, the interest period commences on the later of the day when the original notice of assessment was issued or the day when a payment was made to the Commissioner by the taxpayer. The former day is taken to be the date of payment in respect of amounts collected in advance under the various PAYE schemes that are credited in payment of tax assessed at the time when the assessment is made. The interest period ends on the day when the overpayment is refunded to the taxpayer or credited against some other liability of the taxpayer.
9.26 The Bill will change the existing law in two ways. First, it will remove the condition mentioned in paragraph 9.24, so that nearly all overpayments of income tax resulting from credit amendments will qualify for interest. (The only exceptions will be certain amendments to relieve international double taxation - see notes at paragraphs 9.62 to 9.67). This will be achieved by amending the definition of "decision to which this Act applies" in subsection 3(1) of the Overpayments Act [item 4 of Schedule 5]. The amendment will apply to relevant decisions occurring after 30 June 1994 insofar as they relate to assessments for the 1993-94 year of income and later years.
9.27 Secondly, the interest period for taxpayers on full self assessment, i.e., companies, superannuation funds and certain other taxpayers taxed like companies, is to be altered to make it consistent with full self assessment arrangements. Under those arrangements, companies are expected to lodge a tax return and make their final payments of tax for a year on a particular day (the final instalment day - see definition being inserted by item 9 of Schedule 5).
9.28 Both late payment penalty, under sections 207 and 207A of the Tax Act, and underpayment interest payable under section 170AA on a tax shortfall for a company arising from an amended assessment, are calculated from the final instalment day until the liability is paid. This is the case even though the actual assessment may not have been made until after the final instalment day. The Bill will ensure consistent treatment for interest on an overpayment of company tax that results from a credit amendment. At present the overpayment interest period commences on the later of the day the original assessment being amended was issued or the date when a payment was made by the company. The former day is, effectively, taken to be the day when advance tax collection amounts, like company instalments or prescribed payment system deductions are credited. In future the interest period for companies will commence on the later of the final instalment day or the day when the company paid the tax. [Item 17 of Schedule 5]
9.29 This amendment will apply in respect of decisions to which the Overpayments Act applies that occur after 30 June 1994 and that relate to assessments for the 1993-94 and later years of income.
9.30 A company lodged its return for the 1993-94 year and made a final payment of tax on 6 March 1995. The company later discovered that it had omitted from its calculation of taxable income a $1,200 deduction for the investment allowance. It requested the Commissioner to amend the assessment to allow the deduction. The Commissioner made an amendment to the assessment on 23 September 1995 that reduced the tax payable by $396. The company is entitled to interest on overpayments on $396 for the period from 15 March 1995 to 23 September 1995, that is from the final instalment day to the date of the refund.
|Lodgement of return||Final instalment day||Amendment of assessment|
Interest on overpayments of income tax resulting from assessments
9.31 The Bill will also insert new Part IIB in the Overpayments Act to further expand the range of overpayments that qualify for interest under that Act. In broad terms, these new overpayments can be described as overpayments resulting from assessments.
9.32 As mentioned in paragraph 9.8, it will often happen that an overpayment of income tax is discovered after a person has lodged a tax return, at the time when the person's income tax assessment for a year of income is made. A typical example of this is where tax instalments deducted from a person's salary and wages exceed the final tax liability for the year, resulting in a refund to the person. In certain circumstances an overpayment of this type is to qualify for interest. That is to be the case whether the overpayment is refunded or is applied against some other liability of the taxpayer.
Entitlement to interest - ordinary taxpayers
9.33 New subsection 8E(1) will identify overpayments in original assessments for ordinary taxpayers (i.e., those taxpayers who are not on full self assessment) by comparing the sum of income tax liabilities notified in an assessment notice for a year of income with the sum of any credits (income tax crediting amounts) that are notified as having been set off against the liabilities. Where there is an excess of income tax crediting amounts over income tax liabilities, then subject to the qualification in paragraph 9.35, the excess will attract interest regardless of whether it is refunded or not.
9.34 For the purposes of this process, income tax liabilities for an ordinary taxpayer include income tax (including the medicare levy) assessed on taxable income, any related HEC or FS assessment debt calculated by reference to that taxable income, any additional tax assessed under Part VII of the Tax Act and any section 102AAM interest payable for the year of income. The 'income tax crediting amounts' to be compared to these liabilities (see full definition being inserted by item 9 of Schedule 5) include any amounts that may be credited in payment of income tax apart from overpayments of other liabilities and interest payable to a person under the Overpayments Act on such overpayments. Income tax crediting amounts do not include payments made directly by a taxpayer. The types of amounts that may be credited are generally those deducted under statutory arrangements for payment of tax in advance, e.g., tax instalments deducted from salary and wages, amounts deducted under the prescribed payments system, payments of provisional tax and amounts deducted under tax file number and other withholding tax arrangements. Also included are foreign tax credits. The application of these income tax crediting amounts immediately following the assessment is referred to as a 'notice crediting' [new paragraph 8E(1)(c)]. The income tax crediting amounts are shown on the notice of assessment.
9.35 Where, following an assessment, there is an excess of income tax crediting amounts over income tax liabilities at the time when an ordinary taxpayer is given a notice of the assessment, the excess will attract interest if the assessment notice is issued more than 30 days after the day when the person lodged a tax return for the year of income [new subsection 8E(1)]. The interest will generally be payable from the 30th day after the return was lodged until the day the assessment was issued [new subsection 8F(1)]. However, the interest period can never commence before 1 July 1994.
9.36 Special provisions will deal with cases where a taxpayer lodges a return but it is found that no tax is payable. This is necessary to trigger the operation of new subsection 8E(1), which requires that an assessment of tax has been made and a notice of the assessment given to the taxpayer before an interest entitlement can arise. The special provisions [new subsections 8K(1) and (2)] deem that an assessment has been made under which a nil amount of tax is payable and treat the notice that no tax is payable as a notice of the nil assessment.
9.37 Interest will also be payable where an income tax crediting amount is not credited until some time after an assessment has been made [new subsection 8E(2)]. This later application of income tax crediting amounts is referred to as a 'post-notice crediting' [new paragraph 8E(2)(c)]. These creditings could happen, for instance, where a person applies for a prescribed payment system credit after an original assessment has been made. In such a case the relevant income tax crediting amount will be compared with any income tax liability for that year that remains outstanding to determine whether there is an excess. Any excess amount will attract interest.
9.38 New subsection 8E(2) will deal with some cases where amounts are credited in an original assessment. These are cases where new subsections 8K(1) and (2), discussed in paragraph 9.36, have already deemed an original assessment to have been made where no tax was payable. Cases like this could typically occur where a person does not include a group certificate with a tax return but sends it in later, causing his or her taxable income to increase and exceed the tax free threshold.
9.39 The interest period in these cases is to be based on the existing rules that apply to overpayments of tax resulting from amendments. That is, the period will commence on the later of the day the original assessment for the year was made or the day when a subsequent payment of tax was made [new subsections 8E(2) and (3)]. However, the interest period cannot commence before 1 July 1994. Where any subsequent payments have been made, an excess will be taken to be attributable to payments in reverse order to the order in which they were made. This is also consistent with the operation of the existing Overpayments Act. Payments already treated as overpayments by an application of the existing rules or an earlier application of these new rules will be disregarded in calculating interest for a later crediting of an income tax crediting amount.
9.40 A taxpayer lodges a return for the 1993-94 year and the Commissioner makes an assessment on 21 August 1994. The assessment has a balance of tax payable of $100 which is due on 1 December 1994. The taxpayer makes the payment on 30 November 1994. The taxpayer later becomes aware of an additional group certificate which shows income of $4,000 which was not included in the return. The taxpayer requests the Commissioner to make an amendment to include the additional income in the assessment. On 22 April 1995 the Commissioner amends the assessment to increase the taxable income. Although there is an increase in taxable income, the taxpayer is entitled to a refund of excess credits of $300 because an amount of $2,000 was shown as tax instalment deductions in the group certificate. The taxpayer is entitled to interest on overpayments on $100 for the period 30 November 1994 to 22 April 1995 and on $200 for the period 21 August 1994 to 22 April 1995.
|Interest period FOR $100||Interest period for $200|
|Date of assessment||Payment date||Date of amendment|
Entitlement to interest - relevant entities and instalment taxpayers (companies)
9.41 Companies will be entitled to interest on overpayments arising from assessments in much the same way as ordinary taxpayers (see new subsections 8G(1) and 8G(2), which substantially mirror new sections 8E(1) and 8E(2)). However, there are some differences in the requirements that have to be satisfied for an interest entitlement to arise and in the interest period. The differences generally reflect the fact that companies are on full self assessment while ordinary taxpayers are not.
9.42 As happens with ordinary taxpayers a company will be entitled to interest where, at a particular time, the sum of any income tax crediting amounts credited by the Commissioner exceed the income tax liabilities of the company. As with ordinary taxpayers, the first crediting is likely to occur soon after a tax return is furnished for a year of income. However, under full self assessment the Commissioner is deemed to make original assessment on the later of the final instalment day or the date the return is lodged and the return is deemed to be a notice of the assessment. As the Commissioner does not prepare a notice of assessment, the application of the crediting amounts to process the overpayment could not be given to a company in the deemed notice of assessment. For that reason, new paragraphs 8G(1)(b) and (c) are different to paragraphs 8E(1)(b) and (c). They do not require that an assessment should have been made and notice of any credits given in the notice of the assessment. Instead they require that the Commissioner credit an income tax crediting amount in payment of the company tax and that this be the first time when such an amount has been credited. This application of credits is referred to as a 'first crediting' [new paragraph 8G(1)(b)].
9.43 Apart from the difference referred to in paragraph 9.42, the liabilities of a company, to be compared to crediting amounts to arrive at any excess, are different [new paragraphs 8G(1)(d) and 8G(2)(c)]. This is because companies cannot be liable for a HEC assessment debt or FS assessment debt.
9.44 As with ordinary taxpayers, interest will also be payable where an income tax crediting amount is credited some time after an assessment has been made [new subsection 8G(2)]. This later application credit is referred to as a 'later crediting' [new paragraph 8G(2)(b)]. These creditings could happen, for instance, where a person applies for a foreign tax credit after a first crediting had occurred. In such a case the relevant income tax crediting amount will be compared with any income tax payable for that year that remains outstanding to determine whether there is an excess. The excess amount will attract interest.
9.45 The interest period for companies can be different to the period that would apply to an ordinary taxpayer. Where an interest entitlement for a company is in respect of a first crediting (entitlement under new subsection 8G(1)) the interest period will generally depend on when the company lodged its tax return but the interest period can never commence before 1 July 1994. The are three different circumstances affecting the commencement of the interest period. They are as follows:
- if the return was lodged 30 days or more before the final instalment day, and the overpayment is not refunded or credited to another liability within 30 days, the interest period will commence on the 30th day after the date of lodgement;
- if the return was lodged less than 30 days before the final instalment day and the overpayment is not refunded or credited to another liability before the final instalment day, the interest period will commence on the final instalment day; and
- if the return was lodged on or after the final instalment day, the interest period will commence on the final instalment day.
This is different to what happens with ordinary taxpayers, who are not expected to pay their tax until an assessment is issued. Because any late payment penalty on unpaid company tax commences to accrue from the final instalment day, interest on overpayments will be paid for the period commencing on that day (see notes at paragraphs 9.27 and 9.28 on related amendments also).
9.46 These amendments will apply where the income tax crediting amounts are credited on or after 1 July 1994 and relate to income tax for the 1993-94 year of income or a later year.
9.47 A company lodges its return for the 1993-94 year of income on 20 September 1994. It claims a refund of $5,000. The Commissioner processes the return and issues a refund cheque for $5,000 on 20 November 1994. The company is entitled to interest on overpayments on $5,000 for the period from 20 October 1994 to 20 November 1994 (i.e., 30 days after lodgment to the first crediting day).
|Lodgement of return||30 days after lodgment||First crediting day|
9.48 A company lodges its return for the 1993-94 year on 15 March 1995. It claims a refund of $4,000. The Commissioner processes the return on 28 April 1995 and issues the refund cheque. The taxpayer is entitled to interest on overpayments on $4,000 for the period from 15 March 1995 to 28 April 1995 (i.e., the final instalment day to the first crediting day).
|Final instalment day||First crediting day|
9.49 A company lodges its return for the 1993-94 year and makes a payment of $1,000, being the amount due, on 15 April 1995. The Commissioner is deemed to make an assessment on that day The following month the company becomes aware of a foreign tax credit of $2,000 and requests the Commissioner to allow the further credit. On 25 June 1995 the Commissioner issues a refund cheque for $2,000. The company is entitled to interest on overpayments on $1,000 for the period from 15 April 1995 to 25 June 1995 (i.e., from the payment day to the later crediting day) and on $1,000 for the period 15 March 1995 to 25 June 1995 (i.e., from the final instalment day to the later crediting day).
|Interest period for $1,000||Interest period for $1,000|
|Final instalment day||Date of payment||Later crediting day|
Interest on overpayments resulting from remission of income tax penalties or from income tax instalment variations
9.50 The Bill will insert a new Part IIIA to deal with certain overpayments of tax not connected with assessments [item 22 of Schedule 5]. Part IIIA will deal with overpayments that may result from remission of certain penalties or from reductions in provisional tax, provisional tax instalments or company tax instalments. It will also deal with refunds of certain advance payments of tax.
9.51 In a number of cases the law imposes penalties that are directly related to a person's own income tax liabilities. For example, a person who pays an amount of income tax after the due date for payment is liable to pay late payment penalty under section 207 of the Tax Act. Again, if a person seeks a downward variation of provisional tax on the basis of certain estimates and, in broad terms, the estimates are lower than the correct amount by more than 15%, the person is liable to pay a penalty under section 221YDB of the Tax Act.
9.52 If a person makes a payment of one of these penalties, directly related to the person's own income tax liabilities, and seeks remission of the penalty, an overpayment will result if the penalty is subsequently remitted to any extent. For example, if a person pays a late payment penalty of $20 that is later remitted in part to $10, there will be an overpayment of $10. Overpayments like this [new subparagraph 12A(a)(i)] are to qualify for interest if the remission takes place more than 30 days after the request for remission is made.
9.53 Overpayments can also occur under arrangements for collection of provisional tax (Division 3 of Part VI of the Tax Act) and advance payments of company tax (initial payments under Division 1B and company instalments under Division 1C of Part VI). These overpayments may occur for a number of reasons. For example, a person's provisional tax for a year, which is broadly calculated by reference to the tax payable in the previous year, may be reduced following a credit amendment that reduces the tax payable in the previous year. If the provisional tax had been paid, an overpayment will result that must be refunded to the person or credited against another liability (subsection 221YG(2) of the Tax Act). Where this reduction is done at the request of a person, the amount credited or refunded is to qualify for interest [new subparagraph 12A(a)(iii)] if the crediting or refund takes place more than 30 days after the request is made.
9.54 Similar overpayments may occur where an instalment of provisional tax is superseded (subsection 221YBA(6) of the Tax Act) or reduced (subsection 221YCA(2)), or an amount of provisional tax is varied downwards in accordance with section 221YDA. Where such an overpayment is determined as a result of a request by the person, interest will be payable if the relevant overpayment is credited or refunded more than 30 days after the request made [new subparagraph 12A(a)(iii)].
9.55 A range of similar overpayments can occur under the arrangements in Divisions 1B and 1C for collection of company tax. These overpayments [new subparagraph 12B(a)(ii)] must be refunded to the company and are to qualify for interest if the refund takes place more than 30 days after a request is made by the company.
9.56 A taxpayer will also be entitled to overpayment interest where the Commissioner takes longer than 30 days to refund certain payments of tax. These type of payments in advance are listed in new subparagraph 12A(a)(iv). The payments that are covered by this part are the same type of payments to which the interest on early payment provisions can apply, as outlined in paragraph 9.14.
9.57 In all of the cases covered by new Part IIIA, the interest period will commence on the 30th day after the relevant request is made and end on the day the relevant remission, crediting or refund occurs [new section 12B]. The new provisions will apply in the following circumstances:
- where the remitted penalty relates to a liability for the 1993-94 year of income or a later year;
- where the overpayment of a company instalment, provisional tax, or instalment of provisional tax is in respect of the 1993-94 year of income or a later year; and
- where the request for a refund is in respect of an advance payment on account of a tax, a debt, interest, an amount or an instalment that will be payable in respect of the 1993-94 year of income or a later year.
However, where the request is made before 1 July 1994 interest will be payable only from 1 July 1994.
9.58 A taxpayer has a liability to pay instalments of provisional tax for the 1994-95 year of income. After paying the second instalment of $3,000 the taxpayer estimates that taxable income to which provisional tax applies will be considerably less than what was assessed in the 1993-94 year. On 20 December 1994 the taxpayer lodges a variation statement with the Commissioner reducing the instalment to $1,000. As the taxpayer has paid $6,000 in the first two instalments there has been a $2,000 overpayment of provisional tax. The Commissioner processes the variation and issues a refund cheque on 15 February 1995. The taxpayer is entitled to interest on overpayments on $2,000 for the period from 19 January 1995 to 15 February 1995 (i.e., 30 days after lodging the refund request to the refund day).
|Lodgement of variation||30 days after lodgment||Refund issued|
9.59 A company pays its initial instalment of tax of $85,000 on 28 July 1994. On 15 January 1995 the company's accountant completes its accounts and calculates that its tax for the 1993-94 year is $50,000. In order to get a refund of part of the initial instalment the company lodges an estimate of its taxable income for the year on 16 January 1995 reducing its initial instalment to $42,500. The Commissioner processes the refund on 23 March 1995. The company is entitled to interest on overpayment on $42,500 for the period from 15 February 1995 to 23 March 1995 (i.e., 30 days after lodging the refund request to the refund day).
|Lodgement of variation||30 days after lodgment||Refund issued|
9.60 There will be cases where the same payment will attract interest under more than one of the entitlement provisions. For example, this could occur where a company makes an early payment of an instalment of tax and later requests a refund of the excessive part of the instalment because of a downwards estimate of likely tax. Under Part IIIA the taxpayer will be entitled to overpayment interest if the excessive amount is not refunded within 30 days after the day on which the request was made. The overpayment interest will accrue from the 30th day until the day on which the refund takes place. There will also be an entitlement under Part IIA to early payment interest on the payment of the company instalment. The entitlement will include the interest on the excessive amount that will accrue until the day the refund takes place. Where this occurs the early payment interest will not be payable on the amount that is refunded for the period from the 30th day after the day on which the refund request was made until the day on which the refund takes place. [New section 8D]
9.61 On 15 June 1995 a company makes an early payment of $5,000 on account of its second instalment of tax for the 1994-95 year of income. The amount of the instalment is 25% of its likely tax of $20,000. The instalment is due on 1 September 1995. The company then becomes aware that its tax for the year will be approximately $12,000 and on 15 July 1995 lodges an estimate to reduce the instalments to $3,000. The Commissioner issues a refund for the overpaid instalments on 10 September 1995. The company is entitled to early payment interest on $3,000 from 15 June 1995 to 13 August 1994 (from the day of payment until the day before the day that overpayment interest commenced) and overpayment interest on $2,000 from 14 August 1995 to 1 September 1995 (from 30 days after lodgment of the likely tax estimate until the day the refund issues).
|Interest period- Early payment of $3,000||Interest period- Overpayment of $2,000|
|Payment date||Variation lodged||30 days after lodgment||Refund issued|
Entitlement to interest - correlative adjustments to relieve international double taxation arising from transfer pricing
9.62 The payment of interest is premised on there being an overpayment of income tax. There are certain situations where an amount will be refunded or credited to a taxpayer which will not be identified with an overpayment of tax upon which interest will be payable. These situations occur in the international context where a downward correlative adjustment is made by Australia to relieve international double taxation which has arisen as a result of a foreign tax administration making a transfer pricing or profit/expense allocation debit adjustment.
9.63 Where profits are shifted internationally through transfer pricing or other means it does not generally lead to an overpayment of tax on a global basis. Such profit shifting merely leads to less tax being paid in one country and more in another. Where profits are shifted to Australia and the foreign tax administration makes an appropriate debit adjustment for its tax purposes, Australia is generally obliged under its international tax treaties to reduce the Australian tax payable by a corresponding downward correlative adjustment.
9.64 To ensure that taxpayers and multinational enterprises (MNEs) do not suffer undue double taxation, where an overpayment of tax results from a downward correlative adjustment (to provide correlative relief - see definition being inserted by item 9 of Schedule 5) which is effected by a credit amendment or the crediting of an amount for foreign tax paid, interest will be payable in respect of the overpayment where the foreign country making the upwards transfer pricing adjustment imposes an interest charge in respect of that adjustment (late payment interest - see definition being inserted by item 9 of Schedule 5). Interest will not be paid on overpayments resulting from a downward correlative adjustment where the foreign country does not impose interest on its corresponding underpayment of tax. To do so would result in a windfall gain for a taxpayer or MNE where the taxpayer or MNE viewed as an economic unit has not overpaid its global tax obligations. This would place taxpayers or MNEs who engage in international profit shifting through transfer pricing in a better position than those who do not [item 13 of Schedule 5].
9.65 The following provisions in Australia's double tax agreement with Austria are examples of the types of provisions in Australia's international tax treaties which provide for correlative relief to be given:
- paragraph (2) of Article 7, Business Profits;
- paragraph (3) of Article 9, Associated Enterprises; and
- Article 24, Mutual Agreement Procedure.
The type of credit amendments and crediting of amounts for foreign taxes paid which provide correlative relief will be prescribed in regulations [item 10 of Schedule 5].
9.66 Where an overpayment of income tax arising from the provision of correlative relief does qualify for the payment of interest, the amount of interest will be limited to the lesser of the following amounts:
- the amount of interest that the taxpayer would otherwise be entitled to;
- the amount of interest imposed by the foreign adjusting country; or
- the amount of the correlative relief being provided.
[Item 20 of Schedule 5]
9.67 These limitations apply to qualifying overpayments of tax identified on or after 1 July 1994 in respect of income tax obligations for any year.
Rate of interest
9.68 The rate of interest payable on overpayments of tax under the Overpayments Act is presently specified in the Taxation (Interest on Overpayments) Regulations. The rate specified in those regulations from 1 July 1994 is the rate provided for in section 214A of the Tax Act, less 4 percent. The rate in section 214A, which is used in calculating interest on underpayments of income tax under section 170AA of the Tax Act, is based on the 13 week Treasury Note rate. The Treasury Note rate is increased by 4 percent to arrive at the section 214A rate.
9.69 The rate of interest provided for in section 214A can be adjusted from time to time to reflect changes in interest rates generally. These changes are automatically picked up for the purposes of calculating interest on overpayments of tax. Because of this, it is no longer necessary to prescribe the rate of interest on overpayments in regulations. That was originally done to allow the interest rate to be changed from time to time, without having to amend the Overpayments Act. The rate of interest payable on early payments of income tax, the new expanded range of overpayments of income tax and overpayments of other taxes will in future by specified in the Overpayments Act. [Item 18 of Schedule 5; new sections 8C, 8I and 12C]
Consequential amendments of other Acts
9.70 A number of other Acts pick up the rate of interest prescribed for the purpose of the Overpayments Act for purposes of their own. For instance, the interest rate used to determine the amount of interest payable under section 102AAM of the Tax Act is the rate prescribed for the purposes of section 10 of the Overpayments Act (see paragraph 102AAM(5)(b)).
9.71 The Bill will amend the following Acts to remove the reference to the interest rate prescribed for purposes of the Overpayments Act.
- the Income Tax Assessment Act 1936
- the Fringe Benefits Assessment Act 1986
- the Petroleum Resource Rent Tax Assessment Act 1987
- the Training Guarantee (Administration) Act 1990
These Acts will in future refer to the rate provided for in section 214A of the Tax Act. [Items 26-32, 37, 38, 42 and 43 of Schedule 5]
Miscellaneous amendments - adjustment of interest
9.72 Subsection 10(4) and sections 11 and 11A of the existing Overpayments Act deal with matters like rounding up or down interest payments and writing off small amounts (under 50 cents) of overpayments interest or small residual debts remaining after setting off an interest entitlement. If an amount of interest is less than 50 cents the amount is not payable to the person. Because the Overpayments Act will now have to deal with a range of new interest payments, under new Parts IIA, IIB and IIIA, these miscellaneous rules are being moved to a new Part IIIB that will deal with all of these cases. The Bill will omit existing subsection 10(4) and repeal sections 11 and 11A. [Items 19, 20 and 22 of Schedule 5]
Application of interest as a credit
9.73 Section 13 of the Overpayments Act allows the Commissioner to offset an amount of interest payable to a person against any other liability to the Commonwealth. The Bill will amend section 13 to allow the Commissioner to offset amounts payable on overpayments under new Parts IIB and IIIA as well as those payable under existing Part III. [Item 23 of Schedule 5]
9.74 The Bill will put in place some more specific rules concerning the crediting of amounts of interest payable on early payments under new Part IIA [item 24 of Schedule 5]. These rules will deal separately with early payments made by ordinary taxpayers and early payments made by companies.
Application of interest - ordinary taxpayers
9.75 For ordinary taxpayers interest in respect of an early payment of income tax for a year of income is generally to be credited first against income tax and other assessed liabilities payable for the following year of income [new subsection 13(2)]. The exception to this general rule is where early payment interest is in respect of an early payment of provisional tax or an instalment of provisional tax for a year of income. In that case the interest is to be credited first against income tax for the same year of income [new subsection 13(4)]. This is because provisional tax is payable in respect of the following year of income. While the Commissioner may offset a person's early payment interest in this way, this could lead to a delay in the entitlement being given to the person. Where this would occur, it will be open to a person to seek an earlier refund or crediting.
Example 12 9.76
A taxpayer has an income tax liability of $100 for the 1993-94 year and a provisional tax liability in respect of the 1994-95 year of $110. Both are due for payment on 1 April 1995. The taxpayer pays both liabilities before they are due and is entitled to early payment interest under Part IIA on both payments, totalling $6.
9.77 The Commissioner may offset both the interest entitlements first against income tax payable by the taxpayer for the 1994-95 year. Since the tax payable for 1994-95 will not be known for some time, the taxpayer may ask the Commissioner to either refund the $6 or credit it against any other liability of the taxpayer to the Commonwealth.
Application of interest - companies
9.78 Interest on early payments of tax by companies under Division 1B and 1C of the Assessment Act in respect of a year of income may be applied by the Commissioner against company tax for that year and then against any other liability of the company to the Commonwealth [new subsection 13(3)]. As in the case of ordinary taxpayers, a company may request the Commissioner to either pay the interest or credit it at an earlier time.
9.79 Under the new instalment arrangements a company has its first instalment of tax of $5,000 for the 1994-95 year of income due on 1 June 1995. The amount of the instalment is 25% of its likely tax of $20,000. The company pays the $5,000 on 10 May 1995. The company is entitled to early payment interest of $10, i.e. interest on $5,000 for the period from 10 May 1995 to 1 June 1995. This amount of interest can be claimed by the company as a credit when it lodges its return for the 1994 95 year of income.
Superannuation guarantee charge - Preservation of interest rate
9.80 The Bill also amends the Superannuation Guarantee (Administration) Act 1992 (the Guarantee Act) to ensure that the rate of interest used to calculate the nominal interest component of superannuation guarantee charge and any additional charge imposed by way of late payment penalty continues to be 10% after 30 June 1994.
9.81 The Bill will remove the reference in the Guarantee Act to the rate of interest prescribed in regulations for the purposes of the Overpayments Act, as explained in paragraphs 9.70 and 9.71 will be the case with a number of other Acts. However, in the case of the Guarantee Act amendments will allow a rate of interest to be prescribed in regulations solely for the purposes of the Guarantee Act. Unlike amendments to the other Acts which, in future will refer to the rate provided for in section 214A of the Act, the 10% interest rate presently used for the purposes of the Guarantee Act will be preserved until the new regulations are made.
9.82 The Guarantee Act, broadly, requires employers to make superannuation contributions on behalf of employees. The amount of contributions is required to be a specified percentage of an employee's earnings base. Where the required amount of contributions are not made an employer will be liable to pay an amount of superannuation guarantee charge. The amount of charge payable is equal to the 'employer's superannuation guarantee shortfall', which is made up of three components. One component is the amount of contributions, in broad terms, required to be made by an employer that have not been made. Another component is a statutory amount, called the employer's administration component, that is determined in accordance with a formula in section 32 of the Guarantee Act. The final component is called the employer's nominal interest component.
9.83 When an amount of superannuation guarantee charge is paid to the Commissioner by an employer, that amount, less the administration component, is generally to be paid by the Commissioner to a superannuation fund or approved deposit fund on behalf of the relevant employee. In certain circumstances the amount may be paid directly to the employee or the employee's personal representative. This means the employee will get the benefit of the amount of superannuation contributions that should have been made, plus the employer's nominal interest component.
9.84 The employer's nominal interest component is worked out under section 31 of the Guarantee Act. In broad terms, this component is meant to reflect the amount of interest that would have been earned on the contributions not made by the employer, if they had been made to a superannuation fund and invested on behalf of the employee. It also serves as an incentive for employers to make superannuation contributions rather than pay the superannuation guarantee charge. The nominal rate of interest to be applied to the contributions shortfall under section 31 is the rate of interest prescribed for the purposes of the Overpayments Act. That rate, was until recently based on a benchmark interest rate that was considered reasonable for the purpose of calculating the employer's nominal interest component.
9.85 However, the benchmark interest rate for interest payable under the Overpayments Act changed from 1 July 1994. The new benchmark is the 13 week Treasury Note interest rate, which is significantly lower (it is currently about 4.7%) than the former benchmark rate (which was 10% at 30 June 1994). This new lower rate would not be an appropriate rate for the purpose of calculating the employer's nominal interest component of an employer's superannuation guarantee shortfall for two reasons. First, because a superannuation fund could ordinarily be expected to earn a higher rate than the new benchmark rate, employees would not be adequately compensated for lost earnings. Secondly, there would not be as much incentive for employers to pay superannuation contributions rather than superannuation guarantee charge.
9.86 The present benchmark rate of interest for the purpose of the Overpayments Act is also used in the Guarantee Act when calculating penalty (additional superannuation guarantee charge under section 49 of the Guarantee Act) in respect of late payment of superannuation guarantee charge. The new lower benchmark rate to apply to overpayments of tax from 1 July 1994 is also inappropriate for this purpose. This is because the penalty is not like ordinary late payment penalties that compensate the revenue for the delay in payment. Additional superannuation guarantee charge is like an extension of the employer's nominal interest component in that it compensates an employee for loss of earnings that would have been derived by a superannuation fund on behalf of the employee if the original charge had been paid on time and then been directed to the fund by the Commissioner. Along with a shortfall of superannuation contributions for an employee and the nominal interest component that is based on the shortfall, additional superannuation guarantee charge paid for late payment must be paid by the Commissioner to a superannuation fund or in another approved manner for the benefit of the employee.
Explanation of the amendments to the Guarantee Act
9.87 The Bill will amend sections 31 and 49 of the Guarantee Act to remove the references to the interest rate prescribed for the purposes of the Overpayments Act [items 33 and 35 of Schedule 5]. These references will be replaced with references to the rate of interest prescribed for the purposes of those sections. This will allow for regulations to be made for the specific purpose of setting an interest rate appropriate for the Guarantee Act. From 1 July 1994 until the relevant regulations are made, the rate of interest to be used for the purposes of sections 31 and 49 of the Guarantee Act is 10% [subitem 47(1) of Schedule 5]. This is, of course, the same rate that applies now for the purposes of those sections.
9.88 The amendments will affect the calculation of a nominal interest component under section 31 of the Guarantee Act for any year where the relevant interest period occurs after 1 July 1994 and before Schedule 2 commences to have effect [subitem 46(11) of Schedule 5]. They will also affect the calculation of additional superannuation guarantee charge under section 49 in respect of any superannuation guarantee charge that is overdue during that period [subitem 46(12) of Schedule 5]. The effect is that nominal interest components and late payment penalty will continue to be calculated using an interest rate of 10%.
9.89 A special provision [subitem 47(2) of Schedule 5] will make it clear that a person cannot unfairly suffer a penalty under Part 7 of the Guarantee Act or be taken to have committed an offence solely because of the retrospective effect of the amendment being made by subitem 47(1). Part 7 penalties are imposed, in broad terms, where an employer gives incorrect information to the Commissioner in a statement in relation to a superannuation guarantee charge liability. The effect of the special provision is that employers cannot be penalised if, during the period from 1 July 1994 until the commencement of the Bill, they used the interest rate prescribed for the purposes of the Overpayments Act at the time for the purpose of calculating superannuation guarantee charge in a superannuation guarantee statement given to the Commissioner. For instance, if a penalty was otherwise payable under section 60 of the Guarantee Act because a person understated the amount of nominal interest component of superannuation guarantee charge by using the 4.7% prescribed since 1 July 1994, no Part 7 penalty will apply.
9.90 However, a Part 7 penalty that is caused by something unrelated to the amendment being made by subitem 47(1) will apply normally [subitem 47(3) of Schedule 5]. An example is a section 60 penalty that applies because a person uses an incorrect rate of interest, say, 3%, or simply understates the amount of an individual superannuation guarantee shortfall, for instance. Another example is the penalty under subsection 59(1) of the Guarantee Act that applies if a person fails to provide a superannuation guarantee statement when required. In short, subitem 47(3) makes it clear that there is not to be a general moratorium on penalties under Part 7.
9.91 The special provision does not, of course, affect the calculation of additional superannuation guarantee charge imposed by Part 6 of the Guarantee Act in respect of late payment of superannuation guarantee charge.