Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 7 - Electronic lodgment and electronic funds transfers
7.1 Schedule 7 of the Bill will amend the Income Tax Assessment Act 1936 (the Act), the Fringe Benefits Tax Assessment Act 1986 (the FBTAA) and the Taxation Administration Act 1953 (the TAA) to:
- provide a legal basis for the electronic lodgment of returns, applications for amendment and other notices; and
- allow the Commissioner to pay, by electronic transfer, any refunds to an account (which may be a third-party account) nominated by the taxpayer.
7.2 The amendments will provide a legislative basis for taxpayers to give documents to the Commissioner by electronic transmission. The amendments will allow the Commissioner to pay a taxpayer's refund by means of electronic funds transfer (EFT) into an account of a person nominated by the taxpayer.
7.3 The amendments in schedule 7 will commence from the date of Royal Assent and will apply from the following dates:
- to returns, applications for amendment or other documents relating to income tax that are given to the Commissioner on or after 1 July 1998; [Item 32(1)(a)]
- to statements relating to income tax made on or after 1 July 1998; [Item 32(1)(b)]
- to refunds of income tax payable by the Commissioner on or after 1July 1998; [Item 32(1)(c)]
- to returns, applications for amendment or other documents relating to fringe benefits tax that are given to the Commissioner on or after 1 April 1998; [Item 32(2)(a)]
- to statements relating to fringe benefits tax made on or after 1 April 1998; and [Item 32(2)(b)]
- to refunds of fringe benefits tax payable by the Commissioner on or after 1 April 1998. [Item 32(2)(c)]
7.4 In 1990 the ATO introduced the electronic lodgment service (ELS) to enable tax agents to furnish returns of individual taxpayers by electronic transmission. Tax agents who wanted to use ELS had to enter into a contract with the Commissioner that set out the terms of participation in the ELS. The basic requirements placed on tax agents were as follows:
- the taxpayer must be given the choice to lodge a return electronically or by the paper method;
- the taxpayer must sign the return prior to transmission;
- the return can only be furnished using an ELS software package authorised by the ATO;
- the tax agent must retain a copy of the original signed and dated paper return on behalf of the ATO; and
- upon request, the original return must be provided to the ATO within 14 days.
7.5 ELS proved to be a very efficient system for receiving return form information upon which an assessment could be made. ELS also provided faster processing of returns. In 1992, ELS was extended to cover partnerships, trusts, companies, superannuation funds, approved deposit funds, public trading trusts and corporate unit trusts. ELS was further extended in April 1997 to allow for the lodgment of fringe benefits tax returns by employers.
7.6 The amendments provide a legislative basis for the ELS and remove the need for individual contracts with tax agents. The amendments incorporate the requirements at paragraph 7.4 above, however they will remove the requirement for tax agents to store original tax returns on behalf of the Commissioner.
7.7 The cost to the tax office of issuing refunds to taxpayers by EFT is considerably less than that of sending cheques. EFT is currently available to taxpayers but, to date, its use has been limited. Almost 80% of individual tax returns are lodged through tax agents. In most cases, the address for service of notices is the tax agent's address and this is where the refund cheque is sent. Many agents have their clients sign an authority to deposit the client's refund cheque into the agent's account and pay the client the amount of the refund less the tax agent fee.
7.8 The amendments will allow the Commissioner to pay a taxpayer's refund by EFT to an account nominated by the taxpayer. The account may be an account of another person. This will enable tax agents to receive refunds electronically in a similar way to the current practice with cheques.
7.9 Under subsection 161(1) of the current law the Commissioner can require a person to lodge a return for a year of income on a form provided by the Commissioner. The return must be signed by the person, furnished in the prescribed manner and contain information relating to the person's income and deductions. A person's signature must be given on the return because it attributes the information in the return to the person. A person's signature is a form of identification that cannot easily be repudiated. The current provision does not allow the Commissioner to provide electronic return forms or for taxpayers to verify, by way of signature, information that is transmitted electronically.
7.10 The Bill will omit the current subsection 161(1) and introduce new provisions that will clarify lodgment requirements in an electronic environment. The current law requires a person to lodge a return for a year of income, if required by the Commissioner by a notice published in the Gazette. The amendments will reiterate this requirement, however, the form and content of the returns will be clarified [new subsection 161(1) of the ITAA - item 5] .
7.11 The amendments allow the Commissioner to approve the form of return that each taxpayer must use (for example, individual, company or trust returns). The form of the return can be either paper or electronic. The amendments will allow the Government to introduce regulations that prescribe the information that different taxpayers must provide in the return. The prescribed information will include all details necessary to make an assessment, that is, all assessable income and allowable deductions and rebates. It may also include credits and interest entitlements necessary for the Commissioner to determine the net tax payable or refundable following assessment. [New subsection 161A(1) of the ITAA - item 6] .
7.12 Similarly, for fringe benefits tax, the lodgment provision in section 70 will be amended to cater for electronic lodgment. The law will require the Commissioner to approve in writing the form of a fringe benefits tax return. [Paragraph 70(c) of the FBTAA - item 19]
7.13 The amendments will also allow the Commissioner to permit a return to be given in an electronic form. The Commissioner will be able to determine the software requirements for electronic forms where a return is to be given by electronic transmission (such as electronic mail) or on a kind of data processing device (such as diskette). This will apply to any return that is lodged in an electronic form whether by:
- a registered tax agent using his or her facilities to transmit a return on behalf of a taxpayer;
- a registered tax agent using the facilities of another person to transmit a return on behalf of a taxpayer; or
- a person who transmits a return without the services of a tax agent.
This will give the Commissioner the discretion to approve new technologies for electronic transmissions as they emerge. [New subsection 161A(2) of the ITAA, item 6 and new subsection 70(2) of the FBTAA - item 21]
7.14 Registered tax agents are referred to throughout the amendments. A registered tax agent is a person who meets standards of qualifications, experience and character that are set out in Part VIIA of the Act and registered by a Tax Agents' Board. The definition of registered tax agent in Part VIIA of the Act is picked up by these amendments. [Subsection 6(1) of the ITAA - item 2 and subsection 136(1) of the FBTAA - item 31]
7.15 The amendments restate an existing requirement in section 161 of the ITAA that the regulations will prescribe the manner in which the return must be given. The regulations refer to the office or location where a taxpayer must lodge a return. [New section 161B - item 6]
7.16 When a return or other document is lodged electronically it is not possible for it to contain the written signature of the taxpayer in the declaration or the written signature of the tax agent in the agent's certificate. Accordingly, the law will be amended to give a person the means of verifying the information in the electronic return, or other electronic document, by means of an electronic signature.
7.17 The amendments will allow the Commissioner to approve an electronic signature that is a unique identifier of a person. The type of electronic signature to be used by a taxpayer may differ from the type of signature to be used by a tax agent. Signatures may vary depending on the specifications of the software used to transmit and receive electronic documents. The requirements for electronic signatures will probably change with developments in electronic technology. Examples of electronic signatures are personal identification numbers and public and private key systems. [Subsection 6(1) of the ITAA - item 1 and subsection 136(1) of the FBTAA - item 30]
7.18 In the case of returns and other documents that are lodged in an electronic form by taxpayers who do not use a tax agent, the information in the return will be attributed to the taxpayer by the taxpayer using an approved electronic signature. However, in cases where an electronic return is transmitted to the Commissioner by a tax agent on behalf of a taxpayer, it is not practical for a taxpayer to use an electronic signature. The taxpayer could provide the agent with the electronic signature but this would compromise the security of the signature. In these cases, an amendment will be made that will require the taxpayer to provide the tax agent with a signed written authority to transmit the return on behalf of the taxpayer (refer to paragraph 7.20.).
7.19 The amendments will require that a return, an application for amendment or a notice must be signed in the following ways:
- where a return or other document is provided in written form (on paper) the return or other notice must be signed by the taxpayer.
- where the return or other document is lodged by the taxpayer electronically it must contain the electronic signature of the taxpayer (refer to paragraph 7.17).
- where the return or other document is lodged electronically by a tax agent on behalf of a taxpayer it must contain the electronic signature of the tax agent (refer to paragraph 7.17).
This requirement for a tax agent to provide an electronic signature is necessary because the document must be identified as a valid transmission from the tax agent. [ITAA: new section 161C - item 6, new subsection 170(6A) - item 10 and new section 264B - item 16; FBTAA: paragraph 70(c) - item 20, new subsection 74(6A) - item 24 and new section 124B - item 28]
7.20 As mentioned in paragraph 7.18 above, when a taxpayer lodges an electronic document through a tax agent, the amendments will require the taxpayer to complete a declaration. The purpose of the declaration is to ensure that the taxpayer authorises the electronic transmission of his or her return or request for an amendment and agrees with the information to be transmitted. The Commissioner will approve the form of the declaration and ensure that it contains all the information necessary to authorise the transmission. [New section 161D of the ITAA - item 6 and new section 70A of the FBTAA - item 22]
7.21 The amendments will require the taxpayer to keep the original of the declaration for 5 years after the declaration is made. This requirement is a protection for both the taxpayer and the tax system. The declaration is evidence of the information the taxpayer intended the tax agent to transmit to the Commissioner and may be needed in case of a problem with the return or other document. For example, if there is a dispute about content of the transmission the declaration will show the information that was intended for transmission. The taxpayer must produce the declaration if requested to by the Commissioner within the 5 year retention period. This period is the standard period in the law for the retention of taxation records. Failure to comply with these requirements could result in the taxpayer being liable for a penalty on prosecution of 30 penalty units (currently a penalty unit is $100). [New subsections 161E(1) and (2) of the ITAA - item 6 and new subsection 70B(1) and (2) of the FBTAA - item 22]
7.22 The tax agent must not transmit the taxpayer's document before receiving a copy of the declaration. This requirement is necessary because the declaration gives the agent the taxpayer's permission to transmit the document electronically and authorises the information to be sent on the taxpayer's behalf. Transmitting information without the taxpayer's consent on the declaration could result in a tax agent being liable for a penalty on prosecution of 30 penalty units. [New subsection 161E(3) of the ITAA - item 6 and new subsection 70B(3) of the FBTAA - item 22]
7.23 Under the current law, tax agents are required to sign a certificate setting out the sources of information used for preparing a return. This is called the 'agent's certificate'. The amendments will rewrite this requirement to cater for electronic lodgment. There will be three different methods for making the agent's certificate.
- Where a return or application for an amendment is lodged electronically by the tax agent using the facilities of another person, the tax agent cannot provide an electronic signature because the agent is not the transmitter of the return. In these cases the agent must complete a certificate which will be endorsed on or annexed to the taxpayers declaration (refer to paragraph 7.20). [Subsection 165(1) and paragraph 165(1AA)(a) of the ITAA - item 7 and subsection 71(1) and paragraph 71(1AA)(a) of the FBTAA - item 23]
- In the case of a return or application for an amendment lodged with the Commissioner on paper, the agent's certificate must be on the return or application for an amendment. [Subsection 165(1) and paragraph 165(1AA)(b) of the ITAA - item 7 and subsection 71(1) and paragraph 71(1AA)(b) of the FBTAA - item 23]
- Where a return or application for an amendment is transmitted electronically by the tax agent using his or her own facilities, the agent's certificate must be provided electronically. That is, the agents certificate will need to be certified with the electronic signature of the agent. (refer to paragraphs 7.17 and 7.19). [Subsections 165(1) and (1AB) of the ITAA - item 7 and subsections 71(1) and (1AB) of the FBTAA - item 23]
7.24 Under the current law, where a person is carrying on a business and does not use a tax agent to lodge his or her income tax return the person must provide particulars, in prescribed form, of the sources of information used to complete the return. This requirement will be amended to incorporate returns that are lodged electronically by a taxpayer. [subsection 165(2) of the ITAA - item 8]
7.25 Under the current laws there are no requirements relating to the form and manner of submitting an application for an amendment. In a self assessment environment, an application for an amendment is a significant adjunct to the assessment process and has a similar effect to the lodgment of a return. A number of changes are being made to formalise this process.
7.26 As is the case with a return, a taxpayer will be able to lodge an amendment request in writing or electronically which must be signed in accordance with the requirements explained in paragraph 7.19 [new subsection 170(6A) of the ITAA - item 10 and new subsection 74(6A) of the FBTAA - item 24] . An application for an amendment will be required to be given to the Commissioner in a prescribed manner and contain prescribed information. That is, the application must be lodged at a certain office or location and must contain the information necessary for processing the amendment. [New subsection 170(6B) of the ITAA and new subsection 74(6B) of the FBTAA]
7.27 The current penalty for a tax shortfall under Part VII of the ITAA is imposed where there is a difference between the tax properly payable at law (proper tax) and the tax payable calculated on the basis of statements made by the taxpayer in a return or other document (statement tax). A statement made by a taxpayer can either be a statement made to a taxation officer or another person in the return, or other document. To ensure that statements made in electronically transmitted documents are subject to the tax shortfall provisions, the definitions of 'taxation officer statement' and 'taxation purpose statement' in subsection 222A(1) will be amended to include statements made in electronic documents. [Subsection 222A(1) of the ITAA - items 13 and 14]
7.28 A franking deficits tax shortfall is also calculated on the basis of a statement made by a taxpayer in a return or other document. Amendments will be made to include statements made in electronic documents. This will be done by amending the definition of taxation statement in the franking deficits tax shortfall provisions. [Subsection 160ARXA(1) of the ITAA - item 3]
7.29 In the case of fringe benefits tax, penalties are based on whether a taxpayer has made a false or misleading statement in the return or request for amendment. The definitions of 'statement made to a taxation officer' and 'statement made to other persons' are amended to include statements made by way of electronic transmission. [Subsections 115(3) and (4) of the FBTAA - items 25 and 26]
7.30 The amendments propose that all documents furnished electronically to the Commissioner by a tax agent on behalf of a taxpayer will prima facie be statements made by the taxpayer. It is necessary, however, to protect a taxpayer from a penalty in respect of statements made in a return, an application for amendment or other document that is lodged by a tax agent on behalf of the taxpayer, that are not authorised by the taxpayer. Accordingly the Bill provides that statements made in an electronic return lodged through a tax agent will be deemed to be those of the taxpayer unless the taxpayer can show that he or she did not authorise the statement. All of the available evidence would need to be considered in determining whether a taxpayer authorised a statement made in a return. A taxpayer may, for example, be able to prove that he or she did not authorise a statement by providing a declaration (refer to paragraph 7.20) that differed from the information sent electronically, depending on any other evidence to the contrary. [ITAA: new subsection 160ARXA(3) - item 4 and new subsection 222A(3) - item 15; and new subsection 115(6) of the FBTAA - item 27]
7.31 There are several offence provisions in the Taxation Administration Act 1953 (TAA) that relate to a person making a false or misleading statement to a taxation officer. The current definition of statement made to a taxation officer refers to statements made in a data processing device but does not refer to statements made in an electronic transmission. The Bill will amend the definition of statement made to a taxation officer to incorporate statements made by electronic transmission new subsection 8J(2) of the TAA - item 17. An amendment will also be made to the TAA to allow a person to refute a statement where the person can show that a statement contained in a document lodged electronically by the tax agent on behalf of the person was not authorised. [New subsection 8J(2A) of the TAA - item 18]
7.32 The current law allows the Commissioner to produce copies or extracts from a return or notice of assessment and these are taken to be evidence in the same way that the original would be (refer subsection 177(4) of the Act). The amendments being made by the Bill will provide for copies or extracts (eg. print-outs or paper versions) of electronic documents to be treated in the same way for evidentiary purposes. However, a copy of an electronic document is not evidence of the return or notice if the taxpayer can show that he or she did not authorise the document. This will apply to copies or extracts of electronic returns and notices of assessment. [New subsection 177(5) of the ITAA - item 11 and new subsection 126(3A) of the FBTAA - item 29]
7.33 Under the current law the Commissioner is obliged to pay a refund to the person entitled to receive that refund. This can be by way of cheque or by electronic funds transfer. These amendments will allow the Commissioner to pay the refund by way of EFT to any one account specified by the taxpayer. The account will not have to be the taxpayer's account. For instance, it may be an account of the tax agent or another third party. If a taxpayer wants to receive the refund by EFT the taxpayer will be required to request the Commissioner, by written notice, to pay the refund to a specified account with a financial institution. The notice must be signed in accordance with new section 264B of the ITAA or new section 124B of the FBTAA (see paragraph 7.17 above). If the taxpayer's request for an EFT refund is lodged electronically by a tax agent, the taxpayer must complete a declaration (see paragraph 7.17) which includes a statement making the request for the EFT and specifying the account. [New section 264C of the ITAA - item 16 and new section 124C of the FBTAA - item 28]
7.34 The amendments will allow a taxpayer to change the account details for EFT payments. However this will only be valid where the taxpayer gives the Commissioner a subsequent notice in accordance with new subsection 264C(1) of the ITAA and new subsection 124C(1) of the FBTAA. The notification will apply to all payments made by the Commissioner after the later notice is received by the Commissioner. [New subsection 264C(5) of the ITAA and new subsection 124C(5) of the FBTAA]
7.35 Under the amendments, any payment made by way of EFT into the account specified in the notice under new subsection 264C(1) will extinguish the Commissioner's obligation to pay the refund to the taxpayer. The exception to this is where the Commissioner is satisfied that the taxpayer did not authorise the EFT payment into the account. [New subsection 264C(3) of the ITAA and new subsection 124C(3) of the FBTAA]
7.36 There will be a new requirement for tax agents to provide the notice of assessment, or a copy of the notice, to a taxpayer. The requirement will apply in those cases where a taxpayer's address for service of notices is the tax agent's address. Having a notice of assessment will enable a taxpayer to check that the details match the information authorised by the taxpayer's declaration (refer to paragraph 7.20). This will give a taxpayer the opportunity to check the accuracy of the transmission for errors or unauthorised statements by the tax agent. It will also allow a taxpayer to know the amount of the tax refund to which he or she is entitled. This is a fraud prevention measure where there is an EFT to an account of a third person. [New section 161G of the ITAA - item 6 and new section 70D of the FBTAA - item 22]
7.37 There are problems with the current self assessment requirements in subsection 166A(2) of the ITAA. This provision deems the Commissioner to make an assessment where an instalment taxpayer lodges a return that specifies the amount of taxable income, or net income, and the tax payable thereon. An instalment taxpayer is a company, a superannuation fund, an approved deposit fund and certain trusts. The way the provision is currently worded allows a taxpayer to lodge more than one return. The consequences of this are that an assessment is deemed to be made every time a further return is lodged by the instalment taxpayer. This is not the proper procedure for making an amendment.
7.38 The new provisions will give certainty to the original assessment by allowing a self assessment to occur only in respect of the lodgment of the first return. Any changes to the assessment will then be made by the taxpayer following the amendment processes outlined in paragraphs 7.25 and 7.26 above. It may be noted that these changes will bring subsection 166A(2) into line with the approach adopted under the FBTAA. [Subsection 166A(2) of the ITAA - item 9]
7.39 Tax vouchers and group certificates are currently required to be sent to the Commissioner with a tax return. However, it is not possible to furnish these paper documents with an electronic transmissions of a return. The amendments will remove the requirement for tax vouchers and group certificates to be sent in with both paper and electronic returns. Instead, a person will be required to retain tax vouchers or group certificates for a period of 5 years after the person's assessment. The person will be required to provide the tax vouchers and group certificates to the Commissioner if requested within the period. [Subsections 221H(1) and (1A) of the ITAA - item 12]