Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 8 - Pay as you go (PAYG) instalments
Overview
8.1 The amendments contained in Schedules 10 and 16 to this Bill comprise the second instalment of the proposed PAYG income tax instalments (PAYG instalments) system. The first instalment is contained in the PAYG Bill.
8.2 PAYG instalments will replace the existing company instalment and provisional tax systems. Broadly, the new system will ensure that taxpayers pay either income tax instalments that reflect their current trading and investment conditions or quarterly instalments based on last year's income tax and a GDP adjustment. The PAYG Bill contains the general scheme of the PAYG instalments system and provisions to close down the company instalment and provisional tax systems. It also contains transitional measures to help taxpayers currently in the company instalment system to make the transition to the new PAYG instalments system.
8.3 Abbreviations used throughout this Chapter are summarised in the glossary following the Table of contents for this Explanatory Memorandum. Unless otherwise stated, legislative references are to provisions in Part 2-10 in Schedule 1 to the TAA 1953 which is to be inserted by the PAYG Bill.
Summary of the amendments
Purpose of the amendments
8.4 The amendments in Schedule 10 to this Bill consist of new provisions which:
- •
- deal with the way in which quarterly instalment payers who choose to calculate their instalments using GDP-adjusted notional tax may vary their instalments; and
- •
- make consequential amendments arising from the insertion of those new provisions.
8.5 The amendments in Schedule 16 to this Bill are consequential upon the introduction of the PAYG instalments system.
Date of effect
8.6 The new PAYG instalments provisions being inserted by Schedule 10 to this Bill will apply to the 2000-2001 and later income years. This is the same date of effect proposed for the provisions contained in the PAYG Bill. The consequential amendments being inserted by Schedule 16 to this Bill will also apply to the 2000-2001 and later income years.
Background to the legislation
8.7 Businesses and investors currently pay instalments of their expected tax liability through the company instalment or provisional tax system. For example, companies, superannuation funds and some corporate unit trusts, public trading trusts and corporate limited partnerships pay income tax instalments under the company instalment system. Some trustees and individuals who are carrying on business or investing are required to pay income tax instalments under the provisional tax system.
8.8 Those in the company instalment system mostly pay their income tax instalments after the income year. Those in the provisional tax system pay instalments of tax based on last year's tax as increased by the provisional tax uplift factor within the income year.
8.9 The new PAYG instalments system that will replace the company instalment and provisional tax systems is contained in the PAYG Bill. Schedule 10 to this Bill will insert some new provisions affecting quarterly instalment payers who are entitled to choose to calculate their instalments using GDP-adjusted notional tax and make various amendments to the PAYG instalments system consequential upon the insertion of those new provisions. Schedule 16 to this Bill will make various consequential amendments which arise because of PAYG instalments.
Explanation of the amendments - amendments to Division 45 to give GDP-adjusted notional tax payers a better variation mechanism
8.10 The amendments at items 5, 14 and 18 in Part 1 of Schedule 10 to this Bill will insert new provisions which provide a better way for quarterly instalment payers who are entitled to choose to pay on the basis of GDP-adjusted notional tax to vary the amount of their instalment. The amendments at items 4, 6 to 13 and 15 to 17 in Part 1 of Schedule 10 are all amendments of a consequential nature arising from the provisions inserted by items 5, 14 and 18.
Giving GDP-adjusted notional tax payers a better variation mechanism
Amount of instalment for quarterly payer who pays on the basis of GDP-adjusted notional tax
8.11 Item 5 will repeal subsections 45-112(1) and (2) and substitute new subsections 45-112(1), (2) and (3) .
8.12 Subsection 45-112(1) will specify the amount of an instalment payable by an individual who chooses to pay on the basis of GDP-adjusted notional tax. (The circumstances in which a person can choose to pay on the basis of GDP-adjusted notional tax are set in section 45-125. They were discussed in the Explanatory Memorandum to the PAYG Bill.)
8.13 Generally, the amount payable is the amount worked out by the Commissioner under Subdivision 45-L (which was discussed in the Explanatory Memorandum to the PAYG Bill) and notified to the taxpayer. [Paragraph 45-112(1)(a)]
An individual may vary by estimating benchmark tax
8.14 However, an individual may vary the amount of an instalment, by estimating his or her benchmark tax for the income year and working out the amount payable under new Subdivision 45-M [paragraph 45-112(1)(b)] . Item 18 of Schedule 10 to this Bill will insert Subdivision 45-M. (The meaning of the term benchmark tax is discussed in the Explanatory Memorandum to the PAYG Bill.)
8.15 If an individual chooses to work out an earlier instalment on the basis of an estimate of his or her benchmark tax (and is satisfied that the estimated benchmark tax is still appropriate) the amount payable as the instalment will be the amount worked out by the Commissioner under Subdivision 45-M based on that estimate. The Commissioner will notify the person of the amount of the instalment worked out under that Subdivision. [Paragraph 45-112(1)(c)]
8.16 New subsection 45-112(2) requires an individual who has calculated an instalment on the basis of his or her estimated benchmark tax under paragraph 45-112(1)(b) to notify the Commissioner, in the approved form, of the estimated amount before the due date for the instalment.
8.17 New subsection 45-112(3) acknowledges that an instalment is due on or before the 21st day after the day on which notice of the amount payable is given by the Commissioner, if the Commissioner has given notice of the amount payable after the end of the instalment quarter. This means that the instalment will not be payable on the 21st day after the end of the instalment quarter as it otherwise would be. This subsection does not apply if the individual works out the amount of the instalment under Subdivision 45-M.
Working out the amount of the instalment after estimating the benchmark tax
8.18 When an individual who chooses to pay quarterly instalments on the basis of GDP-adjusted notional tax also chooses to vary the amount of the instalment that is payable by estimating his or her benchmark tax, the amount actually payable is worked out under Subdivision 45-M.
8.19 Item 18 of Schedule 10 to this Bill will insert new Subdivision 45-M . Subdivision 45-M comprises new sections 45-410, 45-415 and 45-420 .
8.20 New section 45-410 sets out how the amount payable for a particular instalment is worked out when an individual:
- •
- is estimating his or her benchmark tax for a particular instalment during an income year under paragraph 45-112(1)(b); or
- •
- has estimated his or her benchmark tax for an instalment for the income year and the Commissioner is working out the amount payable for a later instalment under paragraph 45-112(1)(c).
Section 45-410 is dependent for its operation on an individual's estimate of his or her benchmark tax for the income year. The estimate of the benchmark tax must be made on or before the 21st day after the end of the instalment quarter for which the instalment is payable. [Subsection 45-415(1)]
8.21 The benchmark tax that an individual estimates in calculating the instalment for a particular quarter cannot be changed for that instalment once notified to the Commissioner. [Subsection 45-415(2)]
8.22 The Commissioner will use the estimated benchmark tax to work out the amount payable for any subsequent instalments an individual is liable to pay for that income year. However an individual may choose to estimate a new benchmark tax for any subsequent instalment. [Subsection 45-415(3)]
General rule for working out amount payable
8.23 For an individual who estimates his or her benchmark tax, new subsection 45-410(1) states that the amount payable as an instalment is the amount worked out under subsection (2), (3), (4) or (5) as appropriate to the instalment, if that amount is positive. If it is not positive, no amount is payable. This reflects the fact that an individual's variation may result in no amount being payable for a particular quarter.
Amount payable when varying first instalment
8.24 New subsection 45-410(2) will apply to work out the amount of the instalment if an individual is varying for the first instalment for the income year for which the individual is liable. The amount payable is 25% of the estimated benchmark tax.
Amount payable when varying second instalment
8.25Subsection 45-410(3) will apply to work out the amount of the instalment if an individual is varying for the second instalment for the income year for which the individual is liable. The amount payable is 50% of the estimated benchmark tax less the amount payable for the previous instalment.
Amount payable when varying third instalment
8.26Subsection 45-410(4) will apply to work out the amount of the instalment if an individual is varying for the third instalment for the income year for which the individual is liable. The amount payable is 75% of the estimated benchmark tax less the amount payable for the previous instalments. But any credit claimed for the previous instalment under section 45-420 (which is discussed at paragraphs 8.28 to 8.30) must be added back to that amount. (Note: This step is not necessary in subsection 45-410(3) because the second instalment, ie. the instalment to which that subsection applies, is the first instalment in respect of which a variation credit can be claimed.)
Amount payable when varying fourth instalment
8.27 Subsection 45-410(5) will apply to work out the amount of the instalment if an individual is varying for the fourth instalment for the income year for which the individual is liable. The amount payable is the estimated benchmark tax less the amount payable for the previous instalments. But any credit claimed under section 45-420 must be added back to that amount.
Claiming a credit for earlier instalments
8.28 The amount of an instalment is nil if the amount worked out under subsection 45-410(2), (3), (4) or (5) is not positive. [Subsection 45-410(1)]
8.29 A negative amount indicates that an individual has paid more than is required for the year to date. The individual will be entitled to claim a credit whenever the amount calculated under those subsections is negative. The amount of the credit is the negative amount expressed as a positive. [Subsection 45-420(1)]
8.30 A claim for a credit must be made in the approved form on or before the day the instalment is due. [Subsection 45-420(2)] Any credit claimed will be credited to the individual's RBA and will be applied by the Commissioner according to Division 3 of Part IIB of the TAA 1953. [Note to Section 45-420]
Liability to penalty if estimated benchmark tax is too low
8.31 Item 14 of Schedule 10 to this Bill will insert a new provision under which a penalty may be imposed on an individual who pays quarterly instalments on the basis of GDP-adjusted notional tax and who chooses to vary the amount of the instalment that is payable by estimating benchmark tax. The individual will be liable to pay GIC in relation to an instalment if the estimated benchmark tax is less than 85% of the benchmark tax worked out by the Commissioner under section 45-365. [Subsection 45-232(1)] (Note: Section 45-365 is discussed in the Explanatory Memorandum to the PAYG Bill.)
Amount on which GIC is imposed
8.32 GIC will be imposed on the amount worked out by the Commissioner using the following formula (if the amount is positive):
Acceptable amount of the instalment - Actual amount
8.33 For the purposes of the above formula, the acceptable amount of an instalment is worked out under subsection 45-232(3). The acceptable amount of an instalment is:
- •
- if the individual has not varied that instalment, or an earlier instalment, for the income year - the amount of the instalment notified by the Commissioner under paragraph 45-112(1)(a); or
- •
- if the individual has varied that instalment, or an earlier instalment, for the income year - the amount worked out using the table to subsection 45-232(3).
8.34 The table is used to calculate the amount on which the GIC will be imposed. GIC is imposed separately for each instalment which is the subject of the variation penalty. The table contains 4 items, one for each instalment. The method of calculation has been designed to ensure that the amount on which the penalty is imposed cannot exceed the amount which would have been payable if the individual had based his or her instalments on the lesser of the:
- •
- GDP-adjusted notional tax notified by the Commissioner; or
- •
- benchmark tax worked out by the Commissioner under section 45-365.
8.35 For the purposes of the formula in subsection 45-232(2), the actual amount is either the actual amount of the instalment payable by the individual or the amount of any credit claimed expressed as a negative amount. [Subsection 45-232(2)]
Period for which GIC is imposed
8.36 The amount worked out under subsection 45-232(2) is subject to GIC for each day in the period that:
- •
- starts at the beginning of the due date for the instalment that is the subject of the penalty; and
- •
- finishes at the end of the due date for payment of the assessed tax for the variation year, or the date of payment of the assessed tax if that is earlier.
Commissioner must notify individual of penalty
8.37 The Commissioner must give the individual written notice of the amount of penalty payable. The notice must give the individual 14 days to pay that penalty. [Subsection 45-232(5)]
GIC is imposed on any unpaid variation penalty
8.38 If the penalty is not paid by the due date, the amount unpaid will be subject to the GIC for each day it remains unpaid. The GIC applies both to the unpaid amount and to any GIC on the unpaid amount. [Subsection 45-232(6)]
Adjustment to the amount on which the GIC is imposed
8.39 There will be circumstances in which the penalty imposed under section 45-232 will be too high. This can occur, for example, when an individual estimates his or her benchmark tax for a particular instalment and uses a higher estimate for a later instalment. In that case, the later instalment will catch-up some of the earlier underpayment because of the way in which the amount of an instalment is worked out under Subdivision 45-M.
8.40 Therefore, item 14 of Schedule 10 to this Bill will also insert new section 45-233 which will reduce the amount on which GIC is imposed under section 45-232 (subsection 45-233(1) calls that amount the shortfall ) in relation to the instalment payable for an instalment quarter in which an individual estimated his or her benchmark tax. The reduction occurs if, for a later instalment quarter of the same income year the amount worked out using the following formula is a negative amount:
Acceptable amount of the instalment for the later instalment quarter - Actual amount of that instalment
That amount, expressed as a positive number, is called the top up . [Subsection 45-233(1)]
8.41 For the purposes of the formula in the previous paragraph, the actual amount of the instalment for the later quarter is either:
- •
- the amount of the instalment for that quarter as worked out under section 45-112; or
- •
- the amount of any credit claimed for that quarter, expressed as a negative amount.
[Subsection 45-233(2)]
8.42 The shortfall is reduced by the top up calculated under the formula. But the shortfall cannot be reduced below nil. [Subsection 45-233(3)]
8.43 As the top up may exceed the amount of a particular instalment, any amount not applied under subsection 45-233(3), can be applied to another later instalment of the same income year. [Subsection 45-233(4)]
8.44 The reduction has effect for each day in the period that:
- •
- starts on due date for payment of the later instalment; and
- •
- ends on the due date for payment of the assessed tax, or the date of payment of the assessed tax if that is earlier.
[Subsection 45-233(5)]
Example 8.1: Effect of sections 45-232 and 45-233
An individual's instalments for quarters 1 and 2 of an income year are $10,500, being based on a GDP-adjusted notional tax of $42,000. The later instalments would also have been $10,500 but, at the end of quarter 2, the individual estimates her benchmark tax to be $28,000 and pays her instalment accordingly.
For quarter 3 the Commissioner notifies the individual of the amount payable based on her estimated benchmark tax.
At the end of the quarter 4, she realises that her estimated benchmark tax is too low and estimates a new benchmark tax of $32,000.
Subsequently, the Commissioner works out that the benchmark tax for the income year is $40,000. As both estimates are less than 85% of the benchmark tax worked out by the Commissioner, GIC may be imposed in relation to quarters 2, 3 and 4.
| Instalments based on | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 |
|---|---|---|---|---|
| GDP-adjusted notional tax | $10,500 (25% of $42,000) | |||
| Estimated benchmark tax | $3,500 (50% of $28,000 - $10,500) | $7,000 (75% of $28,000 - $14,000) | $11,000 (100% of $32,000 - $21,000) |
| Amount based on | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 |
|---|---|---|---|---|
| GDP-adjusted notional tax | $10,500 (25% of $42,000) | $10,500 (50% of $42,000 - $10,500) | $10,500 (75% of 42,000 - $21,000) | $10,500 (100% of $42,000 - $31,500) |
| Estimated benchmark tax less previous acceptable amount(s) | $9,500 (50% of $40,000 - $10,500) | $10,000 (75% of $40,000 - $10,500 - 9,500) | $10,000 (100% of $40,000 -$10,500 - $9,500 - $10,000) | |
| Acceptable amount | $10,500 | $9,500 | $10,000 | $10,000 |
| Shortfall | $6,000 ($9,500 - $3,500) | $3,000 ($10,000 - $7,000) | - ($10,000 - $11,000) | |
| Top up | $1,000 ($10,000 - $11,000) |
GIC will be imposed on $6,000 for the period from 21 January to 21 July.
GIC will be imposed on $5,000 ($6,000 less top up of $1,000) for the period from 21 July to the due date for payment of the assessed tax, or the date the assessed tax is paid if earlier.
GIC will be imposed on $3,000 from 21 April to the due date for payment of the assessed tax, or the date the assessed tax is paid if earlier. The shortfall is not reduced because the top up from quarter 4 was completely absorbed in reducing the GIC for quarter 2.
No GIC will be imposed. The amount worked out under subsection 45-232(2) is negative.
Amendments consequential upon the insertion of the provisions to provide a better variation mechanism to GDP-adjusted notional tax payers
8.45 As stated in paragraph 8.10, items 5, 14 and 18 in Part 1 of Schedule 10 to this Bill will insert new provisions which provide a better way for quarterly instalment payers who are entitled to choose to pay on the basis of GDP-adjusted notional tax to vary the amount of their instalment. Items 4, 6 to 13, and 15 to 17 in Part 1 of Schedule 10 to this Bill are all amendments of a consequential nature arising from the provisions inserted by items 5, 14 and 18.
8.46 Item 4 will amend section 45-20 which requires PAYG instalments payers to notify the Commissioner of its instalment income for a period. Paragraph 45-20(3)(a) states that an individual does not need to notify the Commissioner of his or her instalment income if the individual calculates the amount of an instalment using GDP-adjusted notional tax.
8.47 Amend paragraph 45-20(3)(a) to add a reference to estimated benchmark tax.
8.48 The amendment will ensure that an individual who chooses to pay GDP-adjusted notional tax and to vary the amount of the instalment by estimating his or her benchmark tax is not required to notify the Commissioner of his or her instalment income. The Commissioner does not need to know the individual's instalment income as that is not the basis on which the instalments are calculated.
8.49 Item 6 will amend section 45-125 which outlines the circumstances in which an individual is entitled to choose to pay quarterly instalments on the basis of GDP-adjusted notional tax. Subsection 45-125(2) specifies that the individual must notify the Commissioner of his or her choice before the due date for the first instalment for an income year for which he or she is liable.
8.50 Consequentially amend subsection 45-125(2) for the insertion of subsection 45-112(3) by item 5.
8.51 Subsection 45-112(3) extends the due date for payment of an instalment for which the amount payable is the amount notified by the Commissioner, that is, where the amount of the instalment is worked out under paragraph 45-112(1)(a) or (c). The extension of time occurs if the Commissioner fails to notify the individual of the amount payable before the end of the instalment quarter for which the instalment is payable. Subsection 45-125(2) will be amended to state that the individual must notify the Commissioner of his or her choice to use GDP-adjusted notional tax by the due date regardless of the extension.
8.52 Items 7 and 8 will also amend section 45-125 which sets out the circumstances in which an individual may choose to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax.
8.53 Repeal the note to subsection 45-125(3) and insert a new subsection 45-125(4) which will require an individual to make the choice in every year in which the individual chooses to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax.
8.54 Subsection 45-125(4), combined with the amendments at items 9 and 10, will ensure that an individual cannot choose to change the basis on which his or her instalments are calculated during an income year. See also the discussion of items 9 and 10 immediately below which explains the rationale for this rule.
8.55 Items 9 and 10 will amend section 45-130. Paragraph 45-130(1)(a) sets out what happens when an individual chooses not to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax. One of its effects, is to allow an individual to choose to pay quarterly PAYG instalments on the basis of GDP-adjusted notional tax for a particular income year and then vary the amount of the instalments by choosing to calculate instalments for the same income year using the 'instalment rate times instalment income' method.
8.56 Repeal paragraph 45-130(1)(a) and thereby remove an individual's ability to choose to swap between the GDP-adjusted notional tax method of calculating his or her quarterly instalments and the 'instalment rate times instalment income' method within one income year.
8.57 Those individuals who choose to pay their quarterly instalments on the basis of GDP-adjusted notional tax will be provided with a better variation mechanism. They will be able to estimate their benchmark tax and calculate their instalments as a percentage of that amount rather than the GDP-adjusted notional tax figure calculated by the Commissioner. The existing variation mechanism will be deleted as it will unnecessarily complicate the law and the systems required to administer the law by allowing some individuals 2 methods of varying the amount of their instalments. Items 5, 14 and 18 give effect to the improved variation mechanism.
8.58 Item 11 will amend section 45-135 which sets out what happens when an individual who chooses to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax is notified that his or her notional tax exceeds $8,000 during an income year.
8.59 Repeal section 45-135.
8.60 The combined effect of the amendments at items 7, 8, 9 and 10 is that an individual's choice to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax applies for the whole of an income year and an individual cannot be required to pay instalments using the 'instalment income times instalment rate' method simply because he or she is later notified that his or her GDP-adjusted notional tax exceeds $8,000. As this makes section 45-135 redundant, it will be repealed.
8.61 Item 12 will amend section 45-215 which sets out how to calculate a variation credit.
8.62 Amend step 2 of the method statement in paragraph 45-215(1)(c) by adding a reference to section 45-420. Section 45-420 is being inserted by item 18 of Schedule 10 to this Bill.
8.63 Step 2 of the method statement for calculating the variation credit for a particular instalment takes account of any previous variation credits for the income year. The amendment ensures that a variation credit claimed under new section 45-420, by an individual who chooses to pay quarterly instalments on the basis of GDP-adjusted notional tax and an estimate of his or her benchmark tax, is taken into account. The amendment ensures that the variation credit is calculated correctly for an individual who is required, under section 45-130, to swap between the GDP-adjusted notional tax method and the 'instalment rate times instalment income' method within an income year. This can occur, for example, because the individual becomes registered for GST.
8.64 Item 13 will amend the heading to section 45-230. That section sets out the liability to GIC for an entity that uses a varied instalment rate to calculate its quarterly instalments.
8.65 Repeal the existing heading and substitute a new heading to section 45-230.
8.66 Section 45-230 will be given a new heading to make it clear that it applies to an entity that has varied its instalment rate. This will contrast with new section 45-232 which will apply to an individual who has chosen to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax and his or her estimated benchmark tax. (Section 45-232 is being inserted by item 14.)
8.67 Item 15 will amend section 45-240 which allows the Commissioner to remit the GIC imposed for a variation that is too low.
8.68 Add a reference to subsection 45-232(2) which imposes GIC in respect of an instalment calculated by reference to an individual's estimated benchmark tax where the amount of the estimated benchmark tax is too low.
8.69 The addition of subsection 45-232(2) will ensure that the Commissioner has the power to remit the GIC imposed in respect of the variation.
8.70 Item 16 will amend section 45-355 which sets out the circumstances in which the Commissioner works out the benchmark instalment rate and benchmark tax of an entity. Both are used in working out the variation penalty payable by an entity whose instalments have been too low as a result of a variation.
8.71 Insert a new subsection 45-355(1A).
8.72 New subsection 45-355(1A) will make it clear that the Commissioner will work out the benchmark tax of an individual who has chosen to pay his or her quarterly instalments on the basis of GDP-adjusted notional tax. The benchmark tax will be used to determine whether an individual who has varied his or her quarterly instalment by estimating his or her benchmark tax is liable to a variation penalty and to work out the amount on which GIC is imposed.
8.73 Item 17 will amend section 45-400 which states how the Commissioner works out the amount of the instalment payable by an individual who chooses to pay quarterly instalments on the basis of GDP-adjusted notional tax.
8.74 Omit the reference to section 45-112 and substitute a reference to paragraph 45-112(1)(a).
8.75 As a result of the amendment at item 5, Subdivision 45-L, which includes section 45-400, is only used to work out the amount of a quarterly instalment when an individual who chooses to pay on the basis of GDP-adjusted notional tax does not seek to vary his or her instalment. As such, the cross-reference to paragraph 45-112(1)(a) is more precise.
Explanation of the amendments consequential upon the introduction of the PAYG instalments system
8.76 Schedule 16 to this Bill contains a series of amendments to various Acts which are consequential upon the introduction of the PAYG instalments system.
Amendment of Crimes (Taxation Offences) Act 1980
8.77 Item 1 will amend the definition of income tax in subsection 3(1), which is the definition section of the Act.
8.78 Insert a new paragraph in the definition of income tax , which will ensure that it includes amounts payable under the PAYG instalments system under Division 45 in Schedule 1 to the TAA 1953.
8.79 The definition of income tax currently includes amounts payable under both the company instalment system under Division 1C of Part VI of the ITAA 6 and the provisional tax system under Division 3 of Part VI of the ITAA 6. As PAYG instalments will replace both of those systems, it is appropriate to add a reference to amounts payable under the PAYG instalments system.
Amendment of Higher Education Funding Act 1988
8.80 Item 2 will amend section 106U which explains how the ITAA 6 applies in collecting the amounts payable under HECS.
8.81 Add a new subsection 106U(5) which will mirror the effect of subsection 106U(4) for PAYG instalments.
8.82 Subsection 106U(4) facilitates the collection of amounts payable under HECS through the provisional tax system. New subsection 106U(5) will allow amounts payable under HECS to be collected under the PAYG instalments system which is replacing provisional tax.
Amendment of Income Tax Assessment Act 6
8.83 Item 3 will amend subsection 6(1), the general definition section of the ITAA 6.
8.84 Insert a new definition - full self-assessment taxpayer - which will list all of the entities who are currently full self-assessment taxpayers under the income tax laws. It will replicate the definition of instalment taxpayer currently found in Division 1C of Part VI of the ITAA 6.
8.85 Several provisions of the ITAA 6 are currently expressed to apply, or in some cases not to apply, in respect of taxayers who are instalment taxpayers as defined for the purposes of the company instalment provisions of Division 1C of Part VI of the ITAA 6. That Division applies to entities that are treated as full self-assessment taxpayers, ie. taxpayers who are liable to self-assess their own taxable income (or net income for those who are not assessed on taxable income) and the tax payable on that taxable income (or net income).
8.86 As Division 1C of Part VI of the ITAA 6 will apply, for the last time, to instalments payable for the 1999-2000 income year, it is inappropriate to continue to rely on the definition of instalment taxpayer in Division 1C. A complementary amendment will be made to insert new subsection 221AZJA(2) which will ensure that an entity cannot be an instalment taxpayer in relation to an income year within the meaning of Division 1C of Part VI if it is not liable to pay an instalment under that Division for that income year. [Item 15]
8.87 Items 4 and 5 will amend subsections 102AAM(12) and (13A) of the ITAA 6. Section 102AAM requires taxpayers to pay interest on distributions from certain non-resident trust estates. Subsection 102AAM(12) requires the Commissioner to assess the interest payable by a taxpayer that is not an instalment taxpayer , whereas subsection 102AAM(13A) requires an instalment taxpayer to self-assess the interest payable.
8.88 Add appropriate references to full self-assessment taxpayer to each of subsections 102AAM(12) and (13A).
8.89 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.90 Item 6 will amend the note to paragraph 102AAM(13A)(c) of the ITAA 6 which contains a reference to paragraph 221AZS(c) of that Act.
8.91 Add, to the note, a reference to new section 161AA.
8.92 The note to paragraph 102AAM(13A)(c) acknowledges that paragraph 221AZS(c) requires an instalment taxpayer to state the amount of any interest payable on distributions from non-resident trusts in its return. New section 161AA (which is being inserted by item 7) will perform the same function as section 221AZS in respect of full self-assessment taxpayers .
8.93 Item 7 will insert new section 161AA of the ITAA 6.
8.94 New section 161AA will specify the information that a full self-assessment taxpayer must include in its tax return for an income year. It will require a full self-assessment taxpayer to specify in a return, its taxable income (or net income if it is assessed on the basis of net income), the tax payable on its taxable income (or net income) and the amount of any interest payable under section 102AAM of the ITAA 6.
8.95 Section 221AZS currently requires an instalment taxpayer to specify certain information in its tax return for an income year. It forms part of the scheme of provisions that gives effect to the full self-assessment regime that applies to entities other than individuals and certain trustees. Section 161AA will perform the same function for those taxpayers who fall within the definition of full self-assessment taxpayer .
8.96 Items 8 and 9 will amend paragraphs A(1)(a) and B(1)(a) of the ITAA 6. Sections A and B impose a late lodgment penalty for instalment taxpayers and non-instalment taxpayers respectively who fail to lodge their returns on time.
8.97 Add appropriate references to full self-assessment taxpayer to each of the paragraphs A(1)(a) and B(1)(a).
8.98 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.99 Item 10 will amend section 166A of the ITAA 6 which deems an assessment to have been made in respect of returns lodged by instalment taxpayers . It is the main operative provision in the scheme of provisions that gives effect to the full self-assessment regime that applies to entities other than individuals and certain trustees.
8.100 Insert a new subsection 166A(3) which will deem an assessment to be made by the Commissioner in respect of returns lodged by full self-assessment taxpayers .
8.101 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.102 Items 11 and 12 will amend paragraph 170AA(4)(a) of the ITAA 6. Section 170AA requires taxpayers to pay interest where an assessment is amended to increase a taxpayer's liability to tax. Subsection 170AA(4) specifies how the interest is calculated, including the period for which it is payable.
8. Add an appropriate reference to a full self-assessment taxpayer to subparagraph 170AA(4)(a)(i) and insert a new subparagraph 170AA(4)(a)(ic) which will specify when the period for which interest is payable begins.
8.104 As with the other subparagraphs of paragraph 170AA(4)(a), subparagraph 170AA(4)(a)(ic) will specify when the period for which interest is payable by a full self-assessment taxpayer commences. It will commence on the day on which the tax became due and payable under the first assessment in respect of the income of the taxpayer for the income year.
8.105 Item 13 will amend section 170AA of the ITAA 6 which requires taxpayers to pay interest where an assessment is amended to increase a taxpayer's liability to tax.
8.106 Insert a new subsection 170AA(7B) which will replicate the effect of subsection 170AA(7A).
8.107 Subsection 170AA(7A) is one of a series of machinery provisions which are needed to establish the period for which the interest imposed under section 170AA is calculated. It applies when no tax is payable in relation to an original return lodged by an instalment taxpayer . Subsection 170AA(7B) will perform the same function when no tax is payable in relation to an original return lodged by a full self-assessment taxpayer .
8.108 Item 14 will amend section 204 of the ITAA 6 which is the general provision which specifies when a taxpayer's assessed tax (and any additional tax) is payable.
8.109 Insert a new subsection 204(1A) which will specify when a full self-assessment taxpayer's assessed tax is payable.
8.110 Section 221AZT of the ITAA 6 currently specifies when an instalment taxpayer's assessed tax is payable. It forms part of the scheme of provisions that gives effect to the full self-assessment regime that applies to entities other than individuals and certain trustees. Subsection 204(1A) will perform the same function for those taxpayers who fall within the definition of full self-assessment taxpayer .
8.111 Item 15 will amend section 221AZJA which closes down Division 1C of Part VI of the ITAA 6. It ensures that a taxpayer is not liable to pay instalments under that Division for the 2000-2001 income year or a later year.
8.112 Insert a new subsection 221AZJA(2) , which will limit the operation of the definition of instalment taxpayer .
8. This amendment complements the adoption of the new defined term full self-assessment taxpayer (as discussed at paragraphs 8.83 to 8.86) and the other amendments being made to maintain the effect of the full self-assessment regime. Subsection 221AZJA(2) will ensure that an entity cannot satisfy the definitions of instalment taxpayer and full self-assessment taxpayer for the same income year.
8.114 Items 16 and 17 will amend the section 222A definition of taxation officer statement and section 222 of the ITAA 6. Section 222A is the definition section for Part VII of the ITAA 6 which deals with penalty tax. Section 222 imposes a penalty for failure to furnish a return.
8.115 Add references to new section 161AA .
8.116 The paragraphs being amended currently contain references to returns lodged in accordance with section 221AZS which applies to instalment taxpayers . Section 161AA is the equivalent of that section for full self-assessment taxpayers .
Amendment of Income Tax Assessment Act 1997
8.117 Item 18 will amend item 1 of subsection 3-5(3). Section 3-5 is part of the guide to the ITAA 1997. It states that income tax is payable each year by individuals, companies and some other entities and that most entities have to pay instalments of income tax before the income tax they are actually liable to pay for a year is worked out. Item 1 of subsection 3-5(1) refers readers of the guide to section 750-1 of the ITAA 1997 to find out what instalments of income tax they must pay.
8.118 Substitute a reference to Schedule 1 to the TAA 1953 in place of the reference to section 750-1 of the ITAA 1997.
8.119 As stated in the Explanatory Memorandum to the PAYG Bill, the PAYG withholding and instalment systems provisions have been placed in the TAA 1953 rather than the ITAA 1997 as the first step towards putting the collection, recovery and administration rules for all the Acts administered by the Commissioner in one place. In particular, Division 6 of Schedule 1 to the TAA 1953 contains a guide to the operation of the PAYG withholding and PAYG instalments systems.
8.120 Item 19 will amend item 4 of subsection 3-5(3). Section 3-5 is part of the guide to the ITAA 1997. It states that income tax is payable each year by individuals, companies and some other entities and that most entities have to pay instalments of income tax before the income tax they are actually liable to pay for a year is worked out. Item 4 of subsection 3-5(1) refers readers of the guide to section 750-20 of the ITAA 1997 to find out what happens when their income tax is less than the instalments of income tax they have paid.
8.121 Substitute a reference to Division 3A of Part IIB in place of the reference to section 750-20 of the ITAA 1997.
8.122 Refunds of instalments are now payable under the RBA provisions of the TAA 1953. In particular, Division 3A of Part IIB of that Act sets out how the Commissioner will refund surpluses and credits in the RBA. Further, Part 4-5 of the ITAA 1997, which includes section 750-20, will be repealed by item 7 of Part 2 of Schedule 1 to the PAYG Bill.
Amendment of Taxation (Interest on Overpayments and Early Payments) Act 1983 (T(IOEP)A 1983)
8. Item 20 will amend subsection 3(1) of the T(IOEP)A 1983, which is the definition section of the Act.
8.124 Insert a new definition of full self-assessment taxpayer .
8.125 Several provisions of the T(IOEP)A 1983 are currently expressed to apply, or in some cases not to apply, in respect of taxpayers who are instalment taxpayers as defined for the purposes of the company instalment provisions of Division 1C of Part VI of the ITAA 6. That Division applies to entities that are treated as full self-assessment taxpayers, ie. taxpayers who are liable to self-assess their own taxable income (or net income for those who are not assessed on taxable income) and the tax payable on that taxable income (or net income).
8.126 As Division 1C of Part VI will apply, for the last time, to instalments payable for the 1999-2000 income year, it is inappropriate to continue to rely on the definition of instalment taxpayer . As discussed at paragragraphs 8.83 to 8.86, a new definition, full self-assessment taxpayer , will be inserted in the ITAA 6 and will be used instead of the term instalment taxpayer . Similar amendments are therefore being made to this Act.
8.127 Items 21 and 22 will amend subsection 8B(1) of the T(IOEP)A 1983, which defines the period for which the interest that is payable under section 8A is to be paid.
8.128 Add appropriate references to full self-assessment taxpayer to paragraphs 8B(1)(a) and (b) in addition to the current references to instalment taxpayer .
8.129 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.130 Items 23 and 24 will amend section 8E of the T(IOEP)A 1983 which requires the Commissioner to pay interest to a person whose assessment gives rise to a refund and the refund is not paid within a specified period of lodgment of the person's return. The section does not apply to a person who is a full self-assessment taxpayer.
8.131 Add appropriate references to full self-assessment taxpayer to paragraphs 8E(1)(a) and (2)(a) in addition to the current references to instalment taxpayer .
8.132 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8. Items 25, 26 and 27 will amend section 8G of the T(IOEP)A 1983 which, like section 8E, requires the Commissioner to pay interest to a person whose assessment gives rise to a refund and the refund is not paid within a specified period of lodgment of the person's return. However, section 8G applies to a person who is a full self-assessment taxpayer.
8.134 Items 25 and 27 will add appropriate references to full self-assessment taxpayer to paragraphs 8G(1)(a) and (2)(a) in addition to the current references to instalment taxpayer .
8.135 Item 26 will repeal existing paragraphs 8G(1)(e) and (f) and substitute new paragraphs 8G(1)(e) and (f) .
8.136 Items 25 and 27 are necessary to take account of the adoption of the term full self-assessment taxpayer as discussed at paragraphs 8.83 to 8.86.
8.137 Item 26 is necessary because paragraphs 8G(1)(e) and (f) define the period in which the Commissioner should give the relevant credit or refund by reference to the final instalment day , which is the due date for the final instalment payable by instalment taxpayers under Division 1C of Part VI of the ITAA 6. The substituted paragraphs 8G(1)(e) and (f) will also contain references appropriate to full self-assessment taxpayers who pay PAYG instalments.
8.138 Items 28 and 30 will amend section 8H of the T(IOEP)A 1983 which defines the period for which the interest that is payable under section 8G is to be paid.
8.139 Add appropriate references to full self-assessment taxpayer to the heading to section 8H and subsections 8H(1) and (2) in addition to the current references to instalment taxpayer .
8.140 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.141 Items 29, 31 and 32 will also amend section 8H of the T(IOEP)A 1983 which defines the period for which the interest that is payable under section 8G is to be paid to a person who is a full self-assessment taxpayer.
8.142 Insert new subsections 8H(1A) and (2A) and substitute a new paragraph 8H(3)(d) for the existing paragraph 8H(3)(d) which will define the periods for which the section 8G interest is payable. The new provisions will contain references appropriate to full self-assessment taxpayers who pay PAYG instalments.
8. Subsections 8H(1) and (2) and paragraph 8H(3)(d) define the periods for which the section 8G interest is payable by reference to the final instalment day , ie. the day on which the final instalment payable by instalment taxpayers under Division 1C of Part VI of the ITAA 6 is due. That is because the final instalment payable under the company instalment system comprises the excess of the assessed tax over the amounts previously payable for the year.
8.144 Under the PAYG instalments system, the final instalment does not require the payment of a person's assessed tax. Therefore, it is necessary to insert new rules to define the period for which the interest will be payable by a full self assessment taxpayer . The new rules for full self-assessment taxpayers will be defined by reference to the due date for payment of the assessed tax.
8.145 Item 33 will amend section 12A of the T(IOEP)A 1983 which requires the Commissioner to pay interest to a person who has effectively overpaid an amount because the Commissioner has exercised a power to remit or refund all or part of certain amounts.
8.146 Add a reference to section 45-240 in Schedule 1 to the TAA 1953 to subparagraph 12A(1)(a)(i).
8.147 Subparagraph 12A(1)(a)(i) contains a reference to section 8AAG of the TAA 1953 which allows the Commissioner to remit GIC. It also deals with the GIC imposed in relation to the incorrect variation of instalments payable under the company instalment and provisional tax systems. Section 45-240 is being added because it also deals with the remission of GIC imposed for incorrect variations under the PAYG instalments system.
8.148 Item 34 will also amend section 12A of the T(IOEP)A 1983 which requires the Commissioner to pay interest to a person who has effectively overpaid an amount because the Commissioner has exercised a power to remit or refund all or part of certain amounts.
8.149 Add references to sections 45-230, 45-232 and 45-235 in Schedule 1 to the TAA 1953, each of which imposes GIC in respect of incorrect variations.
8.150 Subparagraph 12A(1)(a)(i) contains a reference to sections 221AZP and 221YDB of the ITAA 6 which impose GIC in relation to the incorrect variation of instalments payable under the company instalment and provisional tax systems. References to sections 45-230, 45-232 and 45-235 are being added because they impose GIC for incorrect variations under the PAYG instalments system.
8.151 Item 35 will also amend section 12A of the T(IOEP)A 1983 which requires the Commissioner to pay interest to a person who has effectively overpaid an amount because the Commissioner has exercised a power to remit or refund all or part of certain amounts.
8.152 Insert a new subparagraph 12A(1)(a)(iiia) to deal with cases where the Commissioner applies or refunds the whole or part of an amount in respect of a credit under section 45-215 or 45-420 of Schedule 1 to the TAA 1953.
8. The credits that a taxpayer may claim under section 45-215 and 45-420 of the PAYG instalments system are of a similar nature to the other credits listed in the paragraph 12A(1)(a).
8.154 Item 36 will amend subsection 13(4) of the T(IOEP)A 1983 which states how the Commissioner applies any interest payable under the Act to an instalment taxpayer .
8.155 Add to subsection 13(4) appropriate references to full self-assessment taxpayer in addition to the current references to instalment taxpayer .
8.156 As discussed at paragraphs 8.83 to 8.86, the term full self-assessment taxpayer will be used instead of the term instalment taxpayer .
8.157 The amendments made by Schedule 16 to this Bill apply to the 2000-2001, and later income years.
List of Issues to be Addressed Later
8.158 The following issues are under consideration:
- •
- how the Commissioner should determine the instalment rate of trustees and how trustees should determine the instalment income on which they are liable to pay an instalment;
- •
- whether a specific or general anti-avoidance provision is needed for the PAYG instalments system is being considered as part of the review of the general anti-avoidance provision (Part IVA of the ITAA 6);
- •
- the effect of an amendment of the 1999-2000 income year assessment on the transitional deferral arrangements for an entity that is a company instalment payer.