Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 5 - Shorter period of review
5.1 Schedule 6 to this Bill will amend the ITAA 6 and the TAA 1953 in relation to individual resident taxpayers with simple tax affairs in an income year. The Bill will reduce, from 4 to 2 years, the period during which amendments may be made to assessments of such taxpayers. There will be a similar reduction for such taxpayers in the period required for:
- keeping certain records;
- applying for private binding rulings;
- lodging objections to assessments and to private binding rulings.
5.2 Taxpayers with simple tax affairs are referred to as shorter period of review (SPOR) taxpayers.
5.3 Abbreviations used throughout this Chapter are summarised in the glossary following the Table of contents for this Explanatory Memorandum.
Summary of the amendments
5.4 The purpose of the amendments is to provide greater certainty for SPOR taxpayers and also to reduce their record keeping obligations.
5.5 The amendments will apply to the 2000-2001 income year and later income years. [Item 24]
Background to the legislation
5.6 On 13 August 1998 the Government released its ANTS tax reform package. The document stated that for taxpayers with simple tax affairs who were doing the right thing the 4 year period allowed for amending assessments was too long and should be reduced to 2 years.
5.7 Section 170 of the ITAA 6 provides a framework under which the Commissioner may amend the assessments of taxpayers within specified time periods.
5.8 In general, the Commissioner has 4 years from the date when tax became due and payable on an assessment to amend the assessment. However, in some cases the amendment period is unlimited, for example, where there is fraud or evasion.
5.9 Taxpayers generally have 4 years under the income tax law within which to:
- seek amendments to assessments;
- seek private binding rulings;
- lodge objections against assessments and private binding rulings.
5.10 Generally, under the income tax law, taxpayers must keep records for a period of 5 years.
Explanation of the amendments
Taxpayers eligible for a reduced period of review
5.11 The following diagrams:
- provide an overview of the operation of the new provisions; and
- set out how the amendments will affect SPOR taxpayers compared to other taxpayers.
Diagram 5.1: Determining if a taxpayer is a SPOR taxpayer in a year of income
Diagram 5.2: Comparison of effect of being a SPOR taxpayer in a year of income
Criteria to determine if a taxpayer qualifies as a SPOR taxpayer
5.12 Objective criteria will apply to determine if a taxpayer qualifies as a SPOR taxpayer for an income year. The criteria relate to:
- the taxpayer's capacity;
- the assessable income derived by the taxpayer;
- the deductions claimed by the taxpayer;
- certain matters that will disqualify the taxpayer from being a SPOR taxpayer.
5.13 SPOR taxpayer will be defined in subsection 6(1) of the ITAA 6 to have the meaning given by new section 6AD . [Item 1]
5.14 A SPOR taxpayer must be an individual who is not acting in the capacity of a trustee [new subsection 6AD(1), item 2] . Trustee is defined in subsection 6(1) of the ITAA 6.
5.15 A trustee who is an individual may be a SPOR taxpayer if they satisfy the SPOR tests in their personal capacity. However, these provisions will not apply to a taxpayer in their capacity as a trustee.
Example 5.1 Richard is a SPOR taxpayer. He is also the executor of his father's deceased estate. The estate derives rental income. Richard has lodged a trust return as executor for his late father which includes the rental income. Richard is a non-SPOR taxpayer for this purpose. However, he remains a SPOR taxpayer for the purposes of his own tax return.
5.16 A SPOR taxpayer's assessable income for an income year must only include the following categories of Australian source assessable income:
- salary or wages;
- interest income derived from financial institutions and government bodies;
- dividend income received from certain Australian resident, listed public companies.
[New subsection 6AD(2)]
5.17 Salary or wage income will take the meaning given in subsection 159ZR(1) of the ITAA 6 . This Bill will also amend subsection 159ZR(1) so that it broadly covers the following payments:
- payments to employees which include amounts of salary, wages, commission, bonuses or allowances paid to an individual as an employee;
- payments to company directors;
- payments to office holders;
- payments of pensions and annuities;
- social security and veterans' affairs payments and other benefits;
- Commonwealth education or training payments; and
- compensation sickness and accident payments.
[New paragraph 6AD(2)(a) and Item 32, Schedule 1I]
5.18 A SPOR taxpayer's assessable income may also include interest derived from a financial institution or government body as defined by section 202A of the ITAA 6. A financial institution is a bank, building society or credit union. A government body is the Commonwealth, a State, a Territory or an authority of one of these. [New paragraph 6AD(2)(b), item 2]
5.19 Finally, a SPOR taxpayer's assessable income may include a dividend derived from a company that was:
- an Australian resident; and
- a listed public company whose shares were listed for quotation in the official list of the Australian Stock Exchange Limited at the earliest of the following times:
- when the dividend was declared, if liability to pay the dividend arose at that time;
- when the dividend was due and payable; or
- when the dividend was paid
[New paragraph 6AD(2)(c), item 2] .
5.20 Listed public company takes its meaning from the dictionary in subsection 995-1(1) of the ITAA 1997. Broadly, it is a company in which shares (other than fixed rate dividend shares) are listed for quotation in the official list of an approved stock exchange. A company is not a listed public company if, in general terms, 20 or less persons:
- control 75% or more of the voting power in the company; or
- have the right to receive 75% or more of the dividends or distributions of capital in the company.
Examples of income that will not meet the SPOR income test
5.21 Taxpayers who derive capital gains, rental income, business income, partnership or trust distributions, ETPs, lump sum payments on retirement, foreign income, life assurance or friendly society bonuses in an income year will not be SPOR taxpayers for that income year. This is because they have derived income other than salary and wages, certain interest and dividend income. This is not a complete list of such income.
Consequences of other types of income being identified after an assessment has been received
5.22 The SPOR income test is based on the income derived rather than the income included in the taxpayer's tax return. This will ensure that there is no incentive for taxpayers to leave certain income out of their tax returns so as to qualify as a SPOR taxpayer.
Example 5.2 Mary includes her salary in her tax return but decides not to declare trust income that she has earned. Later this omitted trust income is identified by the Commissioner and an amended assessment is issued. Mary is a non-SPOR taxpayer even though her income tax return did not disclose the trust income derived.
5.23 A taxpayer will, subject to the other tests, be a SPOR taxpayer for an income year if only the following items are deducted in determining their taxable income:
- expenditure incurred in managing the taxpayer's tax affairs. The expenditure must be of a kind to which paragraph 25-5(1)(a) of the ITAA 1997 applies and includes fees paid to a registered tax agent, barrister or solicitor concerning the taxpayer's tax return; or
- expenditure incurred for account keeping fees charged by financial institutions, or Commonwealth, State or Territory taxes such as financial institutions duty, Government duty tax, debits tax or similar taxes concerning such an account with a financial institution; or
- gifts and donations of money.
[New subsection 6AD(3), item 2] .
5.24 Under the deduction test, a SPOR taxpayer may claim deductions for gifts of money and donations of money to which item 1, 2 or 3 in the table in section 30-15 of the ITAA 1997 applies. These include gifts of money or contributions of money to:
- a political party;
- a fund, authority or institution broadly in the following areas: health, education, research, welfare and rights, defence, environment, industry, trade and design, the family, international affairs, sports and recreation, philanthropic trusts and cultural organisations; or
- a public fund established under a will or instrument of trust solely for providing money to a fund, authority or institution in any of the above areas.
Examples of expenditure that will not meet the SPOR deduction test
5.25 The following are examples of items that will not meet the SPOR deduction test:
- work related expenses (other than account keeping fees or Government charges on such accounts that relate to salary or wages);
- prior year losses;
- film industry incentives;
- non-employer sponsored superannuation contributions; and
- election expenses.
The above list is not a complete list of such expenses.
Expenditure must be deducted from a taxpayer's assessable income by the Commissioner in making an assessment
5.26 The SPOR deduction test is based on expenditure deducted from a taxpayer's assessable income by which the Commissioner makes an assessment of the taxpayer's taxable income (i.e. in effect claimed as a deduction). This contrasts with the SPOR income test which applies concerning income derived. Taxpayers who fail to identify all deductions that they are entitled to claim will not be disadvantaged. For example, if a taxpayer omits to claim a deduction for self-education expenses, the person can still qualify as a SPOR taxpayer, provided no amendment to claim the amount is sought.
Change of SPOR status under deduction test
5.27 Situations may arise in which a taxpayer lodges a tax return where, for example, only a salary has been derived and no deductions are claimed. In such a situation the taxpayer is a SPOR taxpayer. If the Commissioner later amends that assessment and additional deductions are allowed which do not meet the SPOR deduction test, then the taxpayer becomes a non-SPOR taxpayer for that income year.
Example 5.3 Paul lodges his tax return. He only derives income from salary and wages. He claims a deduction for a gift made to a tax deductible charity. He qualifies as a SPOR taxpayer. Some months later he realises that he is entitled to a work related expense claim for boots and he has his assessment amended. Paul is not a SPOR taxpayer following the making of the amended assessment, as the deduction does not satisfy the SPOR deduction test.
5.28 Taxpayers will not qualify as SPOR taxpayers in an income year:
- unless they are Australian residents (as defined in subsection 6(1) of the ITAA 6) for the whole of the income year; or
- if they have an entitlement to a foreign tax credit under Division 18 or 18A of Part III of the ITAA 6; or
- if they derived income from or incurred expenses to an associate.
takes the meaning that the term has in section 318 of the ITAA 6. An associate of a taxpayer includes:
- a relative, partner or a spouse or child of a partner; or
- a trustee of a trust estate under which the taxpayer or an associate of the taxpayer benefits or has the potential to benefit; or
- broadly, a company controlled by the taxpayer or associates of the taxpayer; or
- if they incurred a capital loss in the income year or derived a capital gain in the income year; or
- if they derived income from employment in a foreign country or employment on an approved overseas project which is exempt from income tax under section 23AF or 23AG of the ITAA 6.
[New subsection 6AD(4), item 2]
Example 5.4 Virginia lodges her tax return. She derives income from salary and wages. She claims a deduction for tax agent fees paid to her brother.Virginia's brother is an associate and she is therefore not a SPOR taxpayer.
Matters that do not affect SPOR status
5.29 A taxpayer may qualify as a SPOR taxpayer even though they have an entitlement to:
- a personal tax offset or rebate, other than foreign tax credits;
- receive fringe benefits provided by the taxpayer's employer which are exempt from income tax in the hands of the recipient under subsection 23L(1) of the ITAA 6. Such benefits may include the provision by the employer of a motor vehicle to an employee, payment of school fees etc.;
- a claim for an undeducted purchase price of an Australian pension or annuity. Such a claim represents the portion of the capital amount of the pension or annuity that has been purchased by the recipient.
Example 5.5 Vladimir lodges his tax return. He derives income from salary and wages. He claims a medical expenses offset (rebate) for unreimbursed medical expenses. His employer provides him with a fully maintained vehicle as part of a salary package and pays FBT on it.Vladimir is a SPOR taxpayer. Neither the receipt of fringe benefits nor the claim for the rebate affects his eligibility for SPOR status.
5.30 It will be possible for a taxpayer to be a SPOR taxpayer in one income year but not meet the test in a following year. The criteria for determining SPOR status must be applied in each income year.
Consequences of being a SPOR taxpayer in an income year
5.31 Broadly, if a taxpayer qualifies as a SPOR taxpayer, then the effect of the changes discussed in this chapter will be to reduce to a period of 2 years the time within which:
- assessments can be amended;
- certain records (other than for CGT purposes) must be kept;
- applications for private binding rulings can be made; and
- objections to assessments and to private bindings rulings can be lodged.
Review of assessments for SPOR taxpayers
5.32 Section 170 of the ITAA 6 authorises the Commissioner to amend an assessment in certain circumstances. As a general rule, the Commissioner may amend an assessment within a period of 4 years after tax became due and payable under the assessment. For SPOR taxpayers, the Bill will make a number of amendments to section 170 which will reduce that period to 2 years. However, in cases of fraud or evasion etc., the Commissioner will continue to have an unlimited period of review. [Items 4 to 11]
5.33 More specifically, this Bill will reduce to 2 years the period within which the Commissioner is authorised to:
- further amend an assessment to increase a taxpayer's liability following an amendment to reduce the taxpayer's liability on the basis of the taxpayer's statement (subsection 170(1A));
- amend an assessment as the Commissioner thinks necessary to correct the assessment (subsection 170(2));
- amend an assessment to effect a reduction in the liability under the assessment (subsection 170(3)); and
- further amend an assessment that has been amended previously in a particular, to reduce the liability of the taxpayer in respect of that amendment as is reasonable (subsection 170(5)).
[Items 4 to 7]
5.34 This Bill will also enable the Commissioner to amend an assessment for a SPOR taxpayer after 2 years from the date that tax was due and payable if:
- the taxpayer has supplied to the Commissioner within the 2 year period all information needed by the Commissioner to enable the application to be decided (subsection 170(6)); or
- an application for a private ruling has been made within the 2 years period after the last day allowed to the taxpayer for lodging an income tax return for that year and the Commissioner has made a private ruling concerning the application (subsection 170(6A) renumbered to subsection 170(6AA)).
[Items 8 and 9]
Amendments concerning non-SPOR matters
5.35 There will be situations in which a mistake in making an assessment will lead to the Commissioner and the taxpayer believing that the taxpayer is a SPOR taxpayer when in fact they are a non-SPOR taxpayer and vice versa. In these cases, the Commissioner will be authorised to amend the assessment after the period in which SPOR taxpayers' assessments can generally be amended (SPOR amendment period), so as to reflect the taxpayer's correct status. This broadly maintains the existing 4 year amendment period in these cases.
5.36 If a taxpayer was incorrectly assumed to be a SPOR taxpayer in an income year, then items 4 to 9 will allow the Commissioner to amend the assessment after the SPOR amendment period to correct the error. This is because this Bill will not alter the amendment rights of non-SPOR taxpayers.
5.37 Alternatively, if a taxpayer was incorrectly assumed to be a non-SPOR taxpayer in an income year, new subsection 170(9E) will allow the Commissioner to amend the assessment after the SPOR amendment period to similarly correct the error. [Item 11]
5.38 Accordingly, the Commissioner may amend an assessment after the end of the 2 year amendment period for SPOR taxpayers:
- to exclude from the taxpayer's assessable income, income that does not satisfy the SPOR income test;
Example 5.6 Luigi returned a salary and a distribution from a trust in his return for the 2000-2001 income year. Therefore it appeared that Luigi was a non-SPOR taxpayer. Three years after his assessment for the 2000-2001 income year was due and payable his new accountant discovers that the trust distribution was assessable in the 2001-2002 income year rather than the 2000-2001 income year. Luigi is a SPOR taxpayer for the 2000-2001 income year. Luigi's assessment can be amended to excluded the trust distribution even though the SPOR amendment period has expired.
- to include or exclude an amount that has been deducted from assessable income by the Commissioner in determining the taxpayer's taxable income, other than a deduction that satisfies the SPOR deduction test;
Example 5.7 Gavin lodges his tax return showing that his only income is salary. He does not claim any deductions. He receives his assessment. Gavin is a SPOR taxpayer for the income year. Three years after his assessment is due and payable Gavin realises that he should have claimed a deduction for his membership of a professional association. Gavin is able to have his assessment amended to claim the deduction. Gavin becomes a non-SPOR taxpayer for the income year as a result of the amendment.
- because circumstances that were previously thought to disqualify the taxpayer from being a SPOR taxpayer for the income year have been found not to exist;
Example 5.8 Teresa took extended leave from her job and travelled overseas for half of the 2000-2001 income year. Teresa incorrectly showed on her tax return that she was a non-resident therefore suggesting that she was a non-SPOR taxpayer. She would otherwise qualify as a SPOR taxpayer except for this statement.Teresa discovered her error in the 2003-2004 income year and requested that her assessment for the 2000-2001 income year be amended to show her as a resident. The Commissioner is authorised to make the amendment.
- if a consequential amendment is necessary solely because of an amendment made above.
Example 5.9 Assume the same facts as example 5.8. However, Teresa also requested that her assessment for the 2000-2001 income year be amended to allow her to claim a medical expenses rebate. Teresa did not originally claim the rebate as she incorrectly thought that she was a non-resident for tax purposes. Teresa qualified for the rebate as a consequence of her resident status. The assessment can be amended to allow the rebate.
Correction of incorrect assessments
5.39 A situation may arise where the Commissioner has amended an assessment more than 2 years after it was made on the understanding that the taxpayer was a non-SPOR taxpayer. However, it may later become apparent that the taxpayer was a SPOR taxpayer for that particular year. In these circumstances the amendment should not have been made because it was made outside the 2 year period within which the Commissioner is generally authorised to amend the assessments of SPOR taxpayers. Accordingly, if this occurs the Commissioner will be authorised to further amend the assessment to reverse the effect of the original amendment. [New subsection 170(9F), item 11]
Example 5.10 Joe returned salary, interest and a share of partnership income for the 2000-2001 income year. Therefore it appeared that Joe was a non-SPOR taxpayer. Three years after his assessment for the 2000-2001 income year was due and payable he requests that the Commissioner amend his assessment to include a further amount of interest income that he derived in that income year.Later Joe changes accountants. His new accountant discovers that the partnership income was assessable in the 2001-2002 income year rather than the 2000-2001 income year. Joe is a SPOR taxpayer for the 2000-2001 income year. His new accountant seeks a further amended assessment for the 2000-2001 income year, 3 years after tax on the original assessment was due and payable, to exclude the partnership income.The amendment to exclude the partnership income is authorised under new subsection 170(9E) . The amendment to exclude the interest income is authorised under new subsection 170(9F) .
5.40 This Bill will also make a technical correction to section 170. Currently, the section has 2 consecutive subsections numbered (6A). This Bill will renumber the second one as (6AA). [Item 10, Schedule 6]
5.41 A number of provisions in the taxation law require taxpayers to keep records for a period of 5 years. This Bill will reduce this period to 2 years for record keeping provisions that will apply to SPOR taxpayers. There is one exception. This Bill will not change the record keeping requirements for CGT purposes.
5.42 Additionally, for SPOR taxpayers, the Bill will modify the date from which the record keeping retention period will commence. That period will commence:
- from the date that tax is due and payable under the taxpayer's assessment or amended assessment for the income year; or
- if no tax is due and payable for that year, from the 30th day after the day on which notice has been served on the taxpayer by the Commissioner that no tax is due and payable for the income year.
5.43 These changes will apply to the following provisions:
- section 161E of the ITAA 6, which requires a taxpayer declaration in support of an electronic lodgment of a return or application for amendment; and
- section 251R of the ITAA 6, to the extent that it provides for the keeping of family agreements for Medicare levy purposes; and
- section 18-100 of the TAA 1953 (as proposed to be inserted by the PAYG Bill), which will provide for keeping a payment summary (currently referred to as a group certificate) for salary and wages.
Capital gains tax records must still be kept for 5 years
5.44 Regardless of whether a taxpayer is a SPOR taxpayer in an income year, they will need to keep records for CGT purposes in accordance with existing requirements.
Applications for private binding rulings
5.45 Consistent with the SPOR and record keeping provisions, the time allowed for a SPOR taxpayer to lodge a private binding ruling will also be reduced to 2 years. The period will commence after the last day allowed for the taxpayer to lodge a return for the income year to which the ruling relates. [New paragraph 14ZAN(fa) of the TAA 1953, item 16]
5.46 The time limit for SPOR taxpayers to lodge an objection to an assessment will be 2 years from the date the assessment is due and payable. The time limit for SPOR taxpayers to lodge an objection against a private binding ruling will be the later of:
- 60 days after the private ruling was made; or
- 2 years after the last day allowed to the person to lodge a return for that income year.
5.47 The time limit for SPOR taxpayers to lodge an objection against an amended assessment will be the later of:
- 60 days after the notice of the amended assessment has been served on the SPOR taxpayer; or
- 2 years after the day on which tax was due and payable under the assessment that was amended by the amended assessment.
5.48 SPOR taxpayers will be able to seek the exercise of the Commissioner's discretion to treat late objections as having been lodged within the required time period. [Item 21]
SPOR status may be incorrectly determined
5.49 There will be situations where taxpayers prepare income tax returns and only keep records for 2 years assuming that they are SPOR taxpayers for that income year. However, the Commissioner or the taxpayers may later discover that the taxpayer is a non-SPOR taxpayer.
5.50 No prosecution, administrative penalty or imposition of Medicare levy will be able to be imposed upon a non-SPOR taxpayer for failing to keep records for the required 5 year period in certain circumstances. This will be the case if the taxpayer has complied, to the extent they are capable, with any notice to produce records served within the SPOR record keeping period, and the taxpayer either:
- had reasonable grounds to believe that they were a SPOR taxpayer for the income year; or
- was a SPOR taxpayer for the income year but ceased to be a SPOR taxpayer for the income year as a result of an amendment, notice of which was served after the end of the SPOR record keeping period.
For the 2000-2001 income year, John includes income in his tax return from his salary and interest from a bank. He claims a deduction for a gift to his favourite charity, which qualifies for a deduction. John considers that he is a SPOR taxpayer. He lodges his tax return electronically through his tax agent and received an income tax refund for his return of income for the year ended 30 June 2001 in August 2001.In December 2003 he disposed of his tax records for the 2000-2001 income year as he thought that he was a SPOR taxpayer for that year.In January 2004 he was contacted by the executor of a deceased estate. John was advised that he was one of the beneficiaries under the will and that he is entitled to a share of income from July 2000. He is a non-SPOR taxpayer for the 2000-2001 income year.John was unaware of this additional income and upon notification from the executor he writes to the Commissioner seeking to amend his assessment for the 2000-2001 income year to include the additional income. John could not reasonably have been expected to know of the estate income derived in the 2000-2001 income year.Accordingly, John cannot be subject to any prosecution or administrative penalty for not keeping for the required 5 years his payment summary (group certificate) or the declaration for the electronic lodgment of his return.
Robert's only income for the 2000-2001 income year is from his Defence Force salary. His wife also works for the Defence Force. Accordingly, neither party is required to pay Medicare levy. However, they have a son who is not exempt from the Medicare levy. Robert and his wife sign a family agreement that his wife will pay the Medicare levy. Robert does not claim any deductions in his return. He receives an income tax refund for the year in August 2001.Several years later he starts his own business. He visits a tax agent for advice in October 2003. The tax agent advises that his premiums paid to an insurance company for his sickness and accident policy he has paid since July 2000 are tax deductible and arranges for his assessment to be amended after obtaining details of the policy from the insurance company.Robert has already destroyed his taxation records (including the family agreement) for the year ended 30 June 2001 as he thought that he was a SPOR taxpayer and only needed to keep records for 2 years.In these circumstances Robert would normally be required to pay Medicare levy for his son. However, because he became a SPOR taxpayer for the 2000-2001 income year after the end of the SPOR record keeping period, he will not be subject to any penalty for not keeping his payment summary (group certificate) for the required 5 years even though he is a non-SPOR taxpayer. Similarly, Robert will not be liable for Medicare levy for his son for that income year.
5.51 The amendments in Schedule 6 to this Bill apply to income years beginning on or after 1 July 2000. [Item 24]
5.52 New section 18-100 of the TAA 1953 in item 23 to this Bill commences immediately after the commencement of the A New Tax System (Pay As You Go) Act 1999 (PAYG Act). This is necessary because item 23 will modify the payment summary record keeping provisions in the PAYG Act.
5.53 If item 23 of Schedule 6 to this Bill was to commence prior to the PAYG Act, the changes to the payment summary (group certificate) provisions in this Bill would not be effective until the commencement of the PAYG Act.