House of Representatives

A New Tax System (Pay As You Go) Bill 1999

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Pay as you go (PAYG) Instalments

Overview

2.1 The amendments contained in Part 1 of Schedule 1 will insert a new Schedule into the TAA 1953. The Schedule will contain new Part2-10 the new PAYG instalments system.

2.2 The amendments contained in Part 2 of Schedule 1 are consequential and transitional amendments which will close off the operation of the provisional tax and company instalment systems which are being replaced by the PAYG instalments system.

Summary of the amendments

Purpose of the amendments

2.3 Schedule 1 to this Bill will insert in the TAA 1953 the new PAYG instalments system announced by the Government in its ANTS document. 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 years income tax and a GDP adjustment.

2.4 Schedule 1 to this Bill will also make amendments to close down the company instalment and provisional tax systems in the ITAA 1936. Special rules will be inserted to help taxpayers currently in the company instalment system to make the transition to the new system.

Date of effect

2.5 The new PAYG instalments system will apply to the 2000-2001 and later income years.

2.6 Transitional measures will operate to require instalments to be paid under the company instalment and provisional tax systems for the last time for the 1999-2000 income year.

Background to the legislation

2.7 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. Individuals and some trustees who are carrying on business or investing are required to pay income tax instalments under the provisional tax system.

2.8 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 years tax as increased by the provisional tax uplift factor within the income year.

2.9 The new PAYG instalments system will replace the existing company instalment and provisional tax systems. Under the new arrangements, all taxpayers will pay quarterly instalments after the end of a quarter or, in some cases, annually.

Explanation of the amendments PAYG instalments system

2.10 Item 2 of Part 1 of Schedule 1 of this Bill will insert in the TAA 1953 a new Schedule 1 to that Act which contains Part 2-10 PAYG instalments . The following paragraphs summarise the effect of Part 2-10 PAYG instalments as contained in the new Schedule 1 to the TAA 1953.

Guide to PAYG instalments

2.11 An entity with business or investment income must pay instalments towards its income tax (and other) liabilities. The instalments are usually payable within 21 days after the end of the each quarter of an income year. But some entities, who are neither registered nor required to be registered for GST, may choose to pay an annual instalment on 21 October after the end of the income year. In addition, eligible individuals will be able to choose to pay quarterly instalments which, broadly, are based on their last years income tax (less net capital gains) and a GDP adjustment.

2.12 An entity is only liable to pay instalments if the Commissioner has given it an instalment rate.

2.13 The amount of a quarterly instalment is:

worked out by multiplying the entity's instalment income for the quarter by the instalment rate the Commissioner gives it or the rate the entity chooses; or
if an eligible individual so chooses, their GDP adjusted notional tax .

2.14 The amount of an annual instalment can be worked out using the entity's instalment income for the entire income year. But an entity may choose to pay an amount based on last years tax as notified by the Commissioner or its own estimate of its expected tax liability for the year. [Section 45-1]

Object of PAYG instalments

2.15 Section 45-5 explains that the object of Part 2-10 PAYG instalments is to ensure the efficient collection of income tax, the Medicare levy and HECS.

Application of Part 2-10

2.16 New Part 2-10 will apply to individuals, companies and other entities that are required to pay income tax under the ITAA 1997. [Section45-10] Primarily, the Part will affect investors and those in business.

2.17 However, a trustee that is only assessed and liable to tax on behalf of non-resident beneficiaries under subsection 98(3) or (4) of the ITAA 1936 will not be liable to PAYG instalments for those assessments. [Note to section 45-10 and section 45-300]

Liability for instalments

2.18 The Commissioner may give an entity an instalment rate from time to time. The instalment rate is given by written notice. [Subsection 45-15(1)]

2.19 Generally, the Commissioner will work out an entity's instalment rate after it has lodged a return or, if an assessment is made on that return, after the assessment is made. However, the Commissioner may also work out an instalment rate after issuing an amended assessment. (The discussion of section 45-320 explains how the instalment rate is calculated.)

2.20 New subsection 45-15(2) provides that an entity will be liable to pay PAYG instalments if the Commissioner has given it an instalment rate. An entity that has not been notified of an instalment rate by the Commissioner will not be liable to pay PAYG instalments. Nor will an entity whose instalment rate has been withdrawn by the Commissioner. [Note 4 to section 45-15 and section 45-90]

2.21 All those entities that are currently in the company instalment and provisional tax systems (including annual payers) should expect to be notified of an instalment rate by the Commissioner.

2.22 However, those who pay provisional tax now only because of the operation of section 221YAB of the ITAA 1936 should not expect to be notified of an instalment rate by the Commissioner. (Broadly, section 221YAB operates when a person has only salary or wages income and the amounts deducted from that salary or wages income are at least $3,000 less than the tax payable on that income.) This is because the PAYG instalments system will not apply to income to which the PAYG withholding system applies. [Note 2 to section45-15]

2.23 Currently, some taxpayers are not required to pay provisional tax, eg. self-funded retirees whose income does not exceed the pensioner rebate threshold. Such taxpayers can expect that they will not be given an instalment rate by the Commissioner and, consequently, will not be required to pay PAYG instalments.

Liability to give information to the Commissioner

2.24 An entity that is liable to pay a quarterly instalment which is not based on an individuals GDP adjusted notional tax or an entity that chooses to calculate its annual instalment using its instalment rate, will also be liable to give specified information to the Commissioner in the approved form. In particular, an entity will be liable to notify the Commissioner of the amount of its instalment income by the due date for the instalment. [Section 45-20]

2.25 The dictionary in Chapter 6 (the Dictionary) of the ITAA 1997 as amended by Schedule 3 to this Bill, defines when a notice, application or other document is in the approved form , ie. it must:

be approved in writing by the Commissioner;
be signed, as required, by person(s) giving the information;
contain all the required information; and
if required to be lodged with the Commissioner be lodged at the place and in the manner the Commissioner requires.

The Commissioner has the power to use one approved form for several purposes. From 1 July 2000, this form is likely to be the Business Activity Statement.

Penalty for failure to notify

2.26 An entity that is required to notify the Commissioner of its instalment income and fails to notify the Commissioner of its instalment income for an instalment period, or fails to notify the correct amount of that instalment income, will be liable to pay the failure to notify penalty. The penalty is payable as a result of the failure to notify, or failure to notify the correct amount of, instalment income. The amount of the penalty will be 8% per annum in respect of the shortfall of the relevant instalment multiplied by the relevant instalment rate. The penalty will be calculated for the period starting on the due date for the relevant instalment and finishing on the day the entity notifies the Commissioner of the correct amount, or the Commissioner otherwise becomes aware of the correct amount. [Section 45-25]

2.27 The failure to notify penalty is worked out under Division 2 of Part IIA of the TAA 1953. [Note to section 45-25]

Credit for instalments payable

2.28 Each of the instalments payable under the PAYG instalments system will be debited to the RBA under section 8AAZD of the TAA 1953. Any payment made against that liability will be credited to the RBA under section 8AAZLA of that Act.

2.29 When the Commissioner makes an assessment of the tax payable (or determines that there is no tax payable) for an income year, an entity will be entitled to a credit against the assessment. The amount of that credit will be equal to the amount of any instalment liability under section 45-15 reduced by the amount of any credit claimed in respect of an instalment under section 45-215. [Subsections 45-30(1) and (2)]

2.30 The amount will be credited regardless of whether a particular instalment is paid. The making of an assessment (or determination) does not affect the liability to pay that instalment. [Subsection 45-30(3)] How the credit is applied is set out in Division 3 of Part IIB of the TAA 1953 which is also being inserted by this Bill. [Note to subsection 45-30(3)]

How many, and when, instalments are payable

2.31 Generally, an entity will be liable to pay a PAYG instalment for each quarter of an income year. However, entities will be entitled to choose to pay an annual instalment in specified circumstances.

2.32 An entity's first instalment will be payable for the instalment quarter in which the Commissioner first gives it an instalment rate (even if it is not the first instalment quarter of that year). But if the entity is entitled to choose to pay an annual instalment, and makes that choice, its first instalment will be that annual instalment for the income year in which the Commissioner first gives it an instalment rate. [Subsection 45-50(1)]

2.33 New Subdivision 45-E provides that an entity may choose to pay a single annual instalment if:

it is neither registered, nor required to be registered, for GST;
it is not a partner in a partnership that is registered, or required to be registered, for GST;
the most recent notional tax amount notified by the Commissioner is less than $8,000; and
if it is a company it is not part of an instalment group or a participant in a GST joint venture under Division 51 of the GSTA 1999.

[Subsection 45-140(1)]

2.34 An instalment group is a group of companies that are related to each other according to a majority control test. The group consists of:

a controlling company that has the majority control of at least one other company but which is not itself under the majority control of any other company; and
each other company of which the controlling company has majority control.

[Subsection 45-145(1)]

2.35 A company has majority control of another company if:

it can cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the other company;
it has the power to appoint or remove the majority of the directors of the other company; or
the other company is, or a majority of its directors are, accustomed or under an obligation, to act according to the directions, instructions or wishes of the first company.

[Subsection 45-145(2)]

2.36 Once an entity is liable to pay its first instalment, it is liable to pay an instalment for each subsequent quarter unless:

it becomes entitled, under Subdivision 45-E to pay its instalments annually and chooses to do so; or
the Commissioner withdraws the instalment rate.

[Section 45-55]

2.37 Similarly, once an entity is liable to pay an annual instalment for an income year, it is liable to pay an annual instalment for each subsequent income year unless:

it ceases to be entitled to pay an annual instalment;
it chooses to pay its instalments quarterly; or
the Commissioner withdraws the entity's instalment rate from the entity.

[Section 45-65]

Entities that stop being annual payers and become quarterly payers

2.38 There are some special rules to deal with annual payers who cease to be entitled to pay annually in an instalment quarter.

Circumstances in which an annual payer becomes a quarterly payer immediately

2.39 If, during an instalment quarter, an entity:

becomes registered, or is required to be registered, for GST;
becomes a partner in a partnership that is registered, or required to be registered, for GST;
being a partner in a partnership the partnership becomes registered, or required to be registered, for GST; or
being a company becomes part of an instalment group or a participant in a GST joint venture under Division 51 of the GSTA 1999;

the entity immediately becomes a quarterly payer and must pay an instalment for that instalment quarter and each subsequent quarter. But it must also pay an annual instalment for the income year that includes that instalment quarter. The amount of the annual instalment is reduced by the amount of each of the quarterly instalments payable for the income year. [Sections 45-150 and 45-65]

2.40 There is a special rule that applies when an annual payer becomes, for any of the reasons set out in section 45-150, a quarterly payer before its first annual instalment is payable. It ensures that the entity's first instalment is the quarterly instalment required to be paid under section 45-150, rather than its first annual instalment payable under paragraph 45-50(1)(b). [Subsection 45-50(2)]

Circumstances in which an annual payer becomes a quarterly payer in the year following a specified event

2.41 If, during an income year, an entity:

is notified of a notional tax of $8,000 or more; or
chooses to pay instalments quarterly instead of annually;

the entity becomes a quarterly payer for the first instalment quarter of the next income year. In those circumstances, the annual instalment for the income year in which the relevant event occurs remains payable. [Sections 45-155 and 45-65]

Note: There is a special transitional rule that will ensure that an entity's first instalment cannot be payable before the 2000-2001 income year commences even though the Commissioner gives it a rate before that income year starts. [Item 4 of Part 1 of Schedule 1 to this Bill]

When quarterly instalments are due

2.42 Quarterly instalments are due 21 days after the end of each instalment quarter of the income year. [Subsections 45-60(1) and (3)]

2.43 The following table sets out the due dates for an entity that balances on 30 June:

For the quarter ending on: Pay the instalment on or before:
30 September 21 October
31 December 21 January
31 March 21 April
30 June 21 July

[Subsection 45-60(1)]

2.44For an entity that has a substituted accounting period, the quarterly instalments are due 21 days after the end of each of its quarters. For example, the following table sets out the due dates for an entity that has a substituted accounting period ending on 30 April:

For the quarter ending on: Pay the instalment on or before:
31 July 21 August
31 October 21 November
31 January 21 February
30 April 21 May

[Subsections 45-60(2) and (3)]

When annual instalments are due

General rule for 2002-2003 and later income years

2.45 For the 2002-2003 and later income years, annual instalments must be paid on or before:

21 October after the end of the income year for an entity that balances on 30 June; and
the 21st day of the fourth month after the end of the income year for an entity that has a substituted accounting period.

[Section 45-70]

Special rule for 2000-2001 and 2001-2002 income years

2.46For the 2000-2001 and 2001-2002 income years, the annual instalments will be due at the same time as the existing dates for annual instalments under the company instalment and provisional tax systems. [Section 45-170]

2.47 The annual instalment will be due on 15 December (or the 15th day of the sixth month after the end of the income year for an entity with a substituted accounting period) for an entity that is an instalment taxpayer as defined in subsection 221AZK(1) of the ITAA 1936. [Subsection 45-170(3)]

2.48 The annual instalments payable by any other entity (generally an individual) will be payable during the income year for which the instalment is being paid. However, the instalment will not be payable before 31 March and an entity must be given 30 days notice of the due date for payment. [Subsections 45-170(2)]

Electronic payment

2.49 An entity must pay its PAYG instalment electronically if it is required to pay electronically any other amount that is due on the same day as the instalment. For example, if the entity is required to pay its GST liability electronically on the same day as its PAYG instalment, it must also pay its PAYG instalment electronically. [Section 45-72]

PAYG instalments recoverable in same way as income tax

2.50 PAYG instalments will be treated as income tax for the purposes of the following sections of the ITAA 1936:

section 208, making it a debt due to the Commonwealth;
section 209, making it capable of being sued for and recovered in any Court of competent jurisdiction;
section 214, dealing with service of notice of proceedings for recovery;
section 215, dealing with the responsibilities of liquidators, receivers and certain agents;
section 254, dealing with the responsibilities of agents and trustees;
section 255, dealing with the responsibilities of persons in receipt or control of money from non-residents;
section 258, which allows a person who has paid tax on behalf of another to recover it from that person; and
section 259, which allows a person who is jointly liable for tax with another person to seek a contribution from the other person for any tax it has paid.

[Section 45-75]

GIC is payable if an instalment is paid late

2.51 An entity that does not pay its instalment by the due date will be liable to the GIC payable under Division 1 of Part IIA of the TAA 1953.

2.52 The GIC is payable on the unpaid amount for each day in the period that starts on the due date for the instalment and finishes at the end of the last day on which either the instalment or the GIC on any of the instalment remains unpaid. [Section 45-80]

Extension of time to pay an instalment

2.53 The Commissioner may extend the time for payment of an instalment as he or she considers the circumstances warrant. If an extension of time is granted, the instalment is due on the day or days specified by the Commissioner. [Section 45-85]

Commissioner may withdraw instalment rate

2.54 An entity is no longer liable to pay instalments if the Commissioner withdraws its instalment rate. He or she may withdraw an instalment rate in either of 2 ways, ie. by written notice to an entity; or by publishing a notice in the Gazette in respect of a class of entities. [Subsection 45-90(1)]

2.55 If the Commissioner gives an entity an instalment rate after having withdrawn its instalment rate, the entity again becomes liable to pay instalments. The first instalment will be payable under section 45-50. [Subsection 45-90(2)]

Amount of a quarterly instalment

Quarterly instalments worked out by multiplying an entity's instalment income by the Commissioners rate

2.56 The amount payable as a quarterly instalment is worked out under new subsection 45-110(1) as follows:

applicable instalment rate x Entity's *instalment income for the quarter

unless an eligible individual chooses to pay quarterly instalments based on their GDP adjusted notional tax . [Section 45-125, subsection 45-110(1)]

Applicable instalment rate

2.57 In most cases, the applicable instalment rate will be the latest instalment rate notified by the Commissioner (provided the Commissioner notified that rate before the end of the instalment quarter for which the instalment is calculated). [Paragraph 45-110(2)(a)]

2.58 However the applicable instalment rate may instead be the instalment rate that an entity chooses, under Subdivision 45-F, for the current, or an earlier, instalment quarter of the same income year. [Paragraphs 45-110(2)(b) and (c)] An entity may choose an instalment rate if it considers that the instalment rate notified by the Commissioner, or the rate it has previously chosen, is not appropriate to the current income year.

2.59 The Commissioner works out the instalment rate under Subdivision 45-J which is discussed later in this Chapter. Subdivision 45-F explains when and how an entity chooses an instalment rate. That Subdivision is also discussed later in this Chapter.

Instalment income

2.60 The general rule is that instalment income for the instalment quarter is so much of an entity's ordinary income derived in that quarter as will be assessable income of the income year that includes that quarter. [Subsection 45-120(1)]

2.61 For the purposes of subsection 45-120(1 ) , an entity's ordinary income will generally be its gross ordinary income. However, in those exceptional circumstances where the Courts have ruled that only the profit made in relation to a profit making scheme or undertaking should be treated as ordinary income, only that profit will be instalment income .

2.62 Some examples of ordinary income are:

gross sales;
fees for services;
interest paid or credited to a bank account;
gross rent;
dividends paid or applied on your behalf, but not any imputation credit recorded on the dividend statement, nor any amount that is only deemed to be a dividend under a specific provision of the income tax laws;
royalties.

2.63 The requirement that the ordinary income be assessable income ensures that instalments are not payable on amounts that are exempt from tax or otherwise not assessable. In addition, the requirement that the ordinary income also be assessable income of the year in which it is derived ensures that the instalments are not paid on too high an amount.

2.64 For example, a primary producer may be forced to dispose of livestock in circumstances that entitle that primary producer to choose to return the profit on sale over 5 income years under section 385-105 of the ITAA 1997. If the total profit on sale is $500,000, and the amount to be included in assessable income in the year of the disposal is $100,000, the primary producers instalment income would include only $100,000 from the profit on sale of the livestock.

2.65 An amount of statutory income is not instalment income unless it is specifically included in instalment income by one of the following special rules or the rules for partnership and trust income in Subdivisions 45-H and 45-I which are discussed below. [Notes 1 and 2 to subsection 45-120(1)]

Instalment income special inclusion rules

2.66 For some entities, there are special rules which include other amounts in instalment income .

2.67 One special rule applies only to eligible approved deposit funds, eligible superannuation funds and pooled superannuation trusts (as defined in section 267 of the ITAA 1936). For those entities, instalment income is their total assessable income. This is because the special rule in subsection 45-120(2) adds so much of their assessable statutory income as is reasonably attributable to an instalment quarter to the ordinary income included under subsection 45-120(1).

Note: It may be that an amount of statutory income is not reasonably attributable to a particular instalment quarter. If that is so, it may be disregarded in working out the instalment income of a fund for a particular instalment quarter. [Paragraph 45-120(2)(d)]

2.68 Another special rule applies to a primary producer who makes a withdrawal from a farm management deposit. The instalment income of an owner of a farm management deposit will include the unrecouped farm management deposit deduction (ie. the amount included in assessable income under section 393-15 in Schedule 2G to the ITAA 1936) in respect of a farm management deposit that has been withdrawn during the instalment period. [Subsection 45-120(5)]

2.69 There are further special rules that apply to working out the instalment income of:

partners in a partnership [Subdivision 45-H] ; and
beneficiaries and trustees of trusts [Subdivision 45-I] .

They are discussed below.

Instalment income special exclusion rules

2.70 A taxpayers instalment income does not include any amounts from which an amount is, or should be, withheld by the payer under the PAYG withholding system. But, if the amount is to be withheld because of the entity's failure to provide a TFN or ABN, that amount is not excluded from instalment income . [Subsection 45-120(3)]

2.71 Again there is a special rule for primary producers who are entitled to make farm management deposits. A primary producer may reduce its instalment income for an instalment quarter if it makes a farm management deposit during that quarter. Its instalment income will be reduced by the amount that the farm management deposit owner can reasonably expect to be able to deduct in that income year. However the primary producer cannot reduce its instalment income for the quarter below nil. [Subsection 45-120(4)]

An entity can have instalment income even if it is not liable to pay instalments

2.72 An entity can have instalment income even if it is not liable to pay an instalment. For example, a partnership can have instalment income even though it is the partners that are liable to pay instalments. This provision supports the rules in Subdivisions 45-H and 45-I. [Subsection 45-120(6)]

Quarterly payers who pay instalments on the basis of GDP adjusted notional tax

2.73 An eligible individual can choose, but only once each year, to pay quarterly instalments based on his or her GDP adjusted notional tax . This choice must be made by notifying the Commissioner, in the approved form, on or before the due date for payment of the instalment for the first instalment quarter in an income year for which the individual is liable to pay an instalment. [Section 45-125]

2.74 An individual is eligible to make the choice to pay instalments based on their GDP adjusted notional tax if:

(a)
they are neither registered, nor required to be registered, under Part2-5 of the GSTA 1999; and
(b)
they are not a partner in a partnership that is registered, or required to be registered, under Part 2-5 of the GSTA 1999; and
(c)
their most recent notional tax notified by the Commissioner is $8,000 or more.

2.75 This means that individuals cannot choose to pay quarterly instalments under this method if they are eligible to be an annual payer. [Subsection 45-125(1)]

2.76 An eligible individual who has chosen, in an income year, to pay quarterly instalments based on their GDP adjusted notional tax , can choose to pay the subsequent quarterly instalments for that income year worked out under section 45-110. This choice can only be made once in any income year. It takes effect for, and from, the instalment quarter in which it is notified to the Commissioner, in the approved form. [Paragraph 45-130(1)(a) and subsection 45-130(2)]

2.77 An individual may again become a quarterly payer who pays on the basis of GDP adjusted notional tax in a subsequent income year if they again:

satisfy the conditions in section 45-125; and
choose under that section to pay quarterly instalments on the basis of their GDP adjusted notional tax.

[Subsection 45-130(3)]

2.78 The Commissioner must work out, in accordance with the following table, an amount that he or she notifies to the taxpayer under section 45-112 as the amount of their instalment for an instalment quarter in an income year (the current year). [Section 45-400]

Amount of quarterly instalment worked out on basis of GDP adjusted notional tax
Item If the instalment quarter is: The amount of the instalment is:
1 the first in that income year for which an individual is liable to pay an instalment 25% of the *GDP adjusted notional tax
2 the second in that income year for which an individual is liable to pay an instalment 50% of the *GDP adjusted notional tax, reduced by the amount of your instalment for the earlier *instalment quarter in that income year
3 the third in that income year for which an individual is liable to pay an instalment 75% of the *GDP adjusted notional tax, reduced by the total of your instalments for earlier *instalment quarters in that income year
4 the fourth in that income year for which an individual is liable to pay an instalment 100% of the *GDP adjusted notional tax, reduced by the total of your instalments for earlier *instalment quarters in that income year

Annual payer becoming quarterly payer because of notification that their notional tax is $8,000 or more

2.79 If an individual is an annual payer and the Commissioner notifies them of a notional tax of $8,000 or more, they become a quarterly payer with effect for the first quarter in the subsequent income year. They also become eligible to choose (on or before the due date for payment of the first quarterly instalment for that next income year) to work out the amount of their quarterly instalments based on their GDP adjusted notional tax. This is subject to the proviso that they satisfy the other conditions in section 45-125. [Section 45-155]

Effect of being notified of a notional tax of less than $8000

2.80 An individual, paying instalments based on their GDP adjusted notional tax , who is notified of a notional tax of less than $8,000 continues to be liable to pay quarterly instalments based on the GDP adjusted notional tax for the balance of that income year. That individual is required to pay instalments worked out under section 45-110 for the first and subsequent quarters of the next income year. However, that individual can (on or before the due date for payment of the first instalment for that following income year) choose to pay annual instalments. [Paragraph 45-135(1)]

2.81 The individual may (in a subsequent year) become a quarterly payer who pays on the basis of GDP adjusted notional tax if they again:

satisfy the conditions in section 45-125; and
choose under that section to pay quarterly instalments on the basis of their GDP adjusted notional tax.

[Subsection 45-135(3)]

Effect of becoming registered, or required to be registered, for GST

2.82 If an individual who has chosen to pay instalments based on their GDP adjusted notional tax :

becomes registered, or required to be registered, for GST under Part 2-5 of the GSTA 1999; or
becomes a member of a partnership that is registered, or required to be registered, for GST under Part 2-5 of the GSTA 1999; or
is a member of a partnership which becomes registered, or required to be registered for GST under Part 2-5 of the GSTAA 1999;

during an instalment quarter , that individual immediately ceases to be eligible to pay quarterly instalments based on their GDP adjusted notional tax.

2.83 Such individuals must work out the amount of their instalment for that, and following, instalment quarters under Section 45-110. They may (in a subsequent year) become quarterly payers who pay on the basis of GDP adjusted notional tax if they again:

satisfy the conditions in section 45-125; and
choose under that section, on or before the due date for payment of the first instalment in a succeeding income year, to pay quarterly instalments on the basis of their GDP adjusted notional tax.

[Section 45-130]

GDP adjusted notional tax

2.84 The Commissioner works out an eligible individuals GDP adjusted notional tax and will notify that individual of the amount of the instalment. [Section 45-112]

2.85 The GDP adjusted notional tax is worked out in much the same way as notional tax is worked out under Subdivision 45-J. However, for the purposes of working out the GDP adjusted notional tax, the adjusted taxable income for the base year (worked out under section 45-330 and referred to as the original amount) is increased by the GDP adjustment before the adjusted tax is worked out on that increased adjusted taxable income under section 45-340.

2.86 The adjusted withholding income for the base year (worked out under section 45-335 and also referred to as the original amount) is also increased by the GDP adjustment before the adjusted tax is worked out on that increased adjusted withholding income under section 45-340.

2.87 The formula increasing the original amount(s) is:

Original amount * (1 + GDP adjustment)

[Subsection 45-405(2)]

2.88 The GDP adjustment is a percentage (rounded to the nearest whole number, rounding down a number ending in .5) that is worked out using the formula:

(100 * (Sum of GDP amounts (current year)/Sum of GDP amounts (previous year))) - 100

2.89 If the percentage worked out according to the formula is a negative amount the GDP adjustment is 0%. [Subsection 45-405(3)]

2.90 The GDP amount for a quarter is the amount published by the Australian Statistician as the original gross domestic product at the current prices for the quarter. [Subsection 45-405(5)]

2.91 The sum of GDP amounts (current year) is the sum of GDP amounts , for the quarters in the last calendar year (the later calendar year) ending at least 3 months before the start of the current year, specified in the first document that is published by the Australian Statistician after the end of the later calendar year and that sets out the GDP amounts for all the quarters in both the later calendar year and the earlier calendar year.

2.92 The sum of GDP amounts (previous year) is the sum of the GDP amounts for the quarters in the calendar year (the earlier calendar year) before the later calendar year, specified in the first document that is published by the Australian Statistician after the end of the later calendar year and that sets out the GDP amounts for all the quarters in both the later calendar year and the earlier calendar year. [Subsections 45-405(4), (5) and (6)]

Example If the Commissioner notifies an individual of the amount of an instalment based on the GDP adjusted notional tax in July 2000, the Commissioner uses a GDP adjustment where the current year is the 2000-2001 income year. The sum of GDP amounts (current year) is the sum of GDP amounts for the quarters in the 1999 calendar year. The sum of GDP amounts (previous year) is the sum of the GDP amounts for the quarters in the 1998 calendar year.

Amount of annual instalments

2.93 From the 2002-2003 income year, the amount payable as an annual PAYG instalment is worked out under paragraph 45-115(1)(a) as follows:

Commissioner's instalment rate * Entity's *instalment income for the income year

2.94 The instalment rate used by an annual PAYG instalment payer must be the instalment rate notified by the Commissioner prior to the end of the income year. [Subsection 45-115(2)] The entity is not entitled to choose its own instalment rate. [Note 1 to subsection 45-115(1)]

2.95 The instalment income for the income year is worked out in the same way as the instalment income for an instalment quarter . However, an annual PAYG instalment payer may instead choose to pay either of 2 other amounts:

an amount based on the previous years tax liability; or
its own estimate of its current years tax liability.

[Paragraphs 45-115(1)(b) and (c)]

2.96 The amount referred to in the first dot point of paragraph 2.95 is the amount notified by the Commissioner prior to the end of the income year as the notional tax worked out from the most recent assessment for the most recent income year. Notional tax is worked out under section 45-325.

2.97 The second dot point of paragraph 2.95 acknowledges that an annual instalment payer may vary the amount of its instalment by estimating its tax liability for the relevant income year. However, as Note2 to subsection 45-115(1) states, the taxpayer may be liable to a penalty if its estimate is too low. That penalty is imposed under section 45-235 which is discussed later in this Chapter. An entity that chooses to estimate its tax liability for the income year must notify the Commissioner of the amount of the instalment in the approved form. [Subsection 45-115(3)]

2.98 The amount of an annual instalment payable for the 2000-2001 and 2001-2002 income years by an entity who is liable to pay its instalment during the income year will be whichever of the following the entity chooses:

an amount based on the previous years tax liability; or
its own estimate of its current years tax liability.

[Section 45-175]

2.99 That is, the annual payer who pays its instalment during the income year cannot choose to work out its instalment using its instalment rate and instalment income for the income year. Its instalment income for the year cannot be determined when the instalment is due.

How a quarterly PAYG instalment payer varies the instalment rate

Choosing your own instalment rate

2.100 A quarterly PAYG instalment payer varies its rate under new Subdivision 45-F. [Section 45-200]

2.101 Individuals have no right to vary their GDP adjusted notional tax or to choose their own rate while their choice to pay quarterly instalments based on their GDP adjusted notional tax is still current. If such individuals consider that their quarterly instalments are not an adequate reflection of their expected tax liability for that income year, they can choose to stop being a quarterly payer who pays on the basis of GDP adjusted notional tax . [Paragraph 45-130(1)(a)]

2.102 That choice will take effect for, and from, the quarter in respect of which it is notified to the Commissioner in the approved form . The individual is then required to pay quarterly instalments worked out under section 45-110. The applicable instalment rate will be the most recent instalment rate given to him or her by the Commissioner before the end of that quarter. [Paragraph 45-110(2)(a)]

2.103 However, that individual may instead choose their own rate under Subdivision 45-E

2.104 An entity that pays quarterly PAYG instalments based on the Commissioners rate and their instalment income, may choose to use its own instalment rate instead of the Commissioners instalment rate when it works out the amount of its instalment for an instalment quarter. [Subsection 45-205(1)] For example, an entity that considers the instalments payable as a result of applying the Commissioners instalment rate to its instalment income for the quarter will not be an adequate reflection of its expected tax liability for that income year may work out its own instalment rate.

2.105 The taxpayer can use its own instalment rate to calculate the instalment payable for a quarter but must then use that rate for each subsequent quarterly instalment unless the entity chooses to work out another rate. This is so even when the Commissioner notifies the entity of a further instalment rate calculated from a later assessment than the assessment from which the earlier Commissioners instalment rate was calculated. This is because the instalment rate chosen by an entity should be a better reflection of the amount of tax payable for the income year than the Commissioners instalment rate which can only be calculated on the basis of income from prior income years. [Subsections 45-205(2) and (3)]

2.106 However, the taxpayers own instalment rate worked out for a particular income year does not carry over to a subsequent income year. The first instalment of the subsequent income year must be calculated using the latest rate notified by the Commissioner unless the entity again chooses to work out its own instalment rate for that subsequent year. [Subsection 45-205(4)]

2.107 When an entity uses its own instalment rate to calculate a quarterly PAYG instalment, it must notify the Commissioner of that instalment rate as well as its instalment income for the quarter on or before the due date for the instalment. [Sections 45-210 and 45-20]

2.108 An entity cannot revoke the instalment rate it has chosen once it has notified the Commissioner that it has chosen to use that varied instalment rate to calculate the instalment for that quarter. But it may choose a different instalment rate for a later instalment quarter. [Section 45-205(2)]

Claiming a credit for earlier instalments

2.109 An entity that has already paid one or more quarterly instalments before choosing an instalment rate under section 45-205 may claim a credit in respect of its previous instalments if either:

the instalment rate chosen for the calculation of the current quarterly instalment is less than the instalment rate used to calculate the previous instalment(s); or
the amount of their instalment for a previous instalment quarter in the same income year was an amount notified to them by the Commissioner under section 45-112 (because they were a quarterly payer whose instalments were based on GDP adjusted notional tax );

and the amount worked out using the Method Statement in paragraph 45-215(1)(c) is greater than nil. [Subsection 45-215(1)]

2.110 The following example illustrates how the amount of the credit that may be claimed is worked out under subsection 45-215(1) by an entity that is required to pay instalments worked out under section 45-110 for the income year:

Example The Commissioner has notified Company A (a retailer) that its instalment rate is 15%. Company A uses that rate to calculate its first quarterly instalment for the income year. Its instalment income for that quarter is $80,000 and, therefore, it is liable to pay $12,000 (ie. 15% of $80,000) as its first quarterly instalment.Company As instalment income for its second instalment quarter is $100,000. It is concerned that the instalment rate notified by the Commissioner is too high because its July and Christmas sales have been significantly down compared with the corresponding periods of the previous year and its operating costs have increased slightly. It chooses to use 10% as its varied instalment rate . Using the method statement at subsection 45-215(1), Company As variation credit is worked out as follows:Step 1 Company As earlier instalments for the year add up to $12,000.Step 2 Company A used the instalment rate notified by the Commissioner when calculating the first quarterly instalment. It has no previous credits by which to reduce the $12,000 from Step 1. Result is $12,000.Step 3 Company As $80,000 instalment income from the first instalment quarter is multiplied by its varied instalment rate of 10%. The result is $8,000.Step 4 $12,000 - $8,000 = $4,000Step 5 The amount of Company As credit is $4,000.The result is that Company A will have an instalment liability for the second instalment quarter of $10,000 (ie. 10% of $100,000) and may claim a credit of $4,000.In the third instalment quarter, Company As instalment income of $70,000 was also lower than the equivalent quarter of the previous year and its expenses were again higher. It chooses to use 8% as its instalment rate. It would be liable to an instalment of $5,600 (being 8% of $70,000) and may claim a credit of $3,600 worked out as follows:Step 1 Company As earlier instalments for the year are $12,000 and $10,000. They add up to $22,000.Step 2 Company A claimed a credit of $4,000 in the second instalment quarter. So $22,000 is reduced by $4,000. The result is $18,000.Step 3 Company As $180,000 instalment income from the first and second instalment quarters is multiplied by its chosen instalment rate of 8%. The result is $14,400.Step 4 $18,000 - $14,400 = $3,600Step 5 The amount of Company As credit is $3,600.

2.111 An entity is not required to make additional payments when it chooses an instalment rate higher than the instalment rate it used in the previous instalment quarter. But it may choose to make additional payments.

2.112 When an individual makes a claim for a credit arising from a variation they will need to know their instalment income for each of the instalment quarters in the income year. This is so even in the case of an individual whose instalment(s) were based on GDP adjusted notional tax for some quarters in the income year in respect of which they vary. This information is required by the Method Statement in subsection 45-215(1).

2.113 The individual may be required to provide to the Commissioner details of the amount of his or her instalment income , in the approved form , in respect of instalment quarters for which they were liable to instalments based on their GDP adjusted notional tax . This information will enable the Commissioner to work out (under section45-230) the GIC on a shortfall in quarterly instalments and on excess credit claimed, if the varied instalment rate was too low.

2.114 A claim for a credit arising from a variation (variation credit) must be made in the approved form. [Subsection 45-215(2)]

What happens to the instalment credit claimed?

2.115 As with the instalment liabilities payable under section 45-15, a variation credit claimed by an entity will be credited to its RBA. The Commissioner will apply that credit in accordance with section 8AAZLA or 8AAZLB which are being inserted in the TAA 1953 by Schedule 2 to this Bill.

Liability to penalty

2.116 An entity is liable to a penalty for each instalment quarter in which it chose to use an instalment rate under section 45-205 (varied instalment rate) that is less than 85% of the instalment rate that should have been used. The Commissioner works out that rate the benchmark instalment rate having regard to the entity's instalment income and assessed tax for that year. [Subsection 45-230(1)]

Working out the benchmark instalment rate

2.117 The Commissioner works out the benchmark instalment rate. An entity does not need to work it out, but an understanding of how it is worked out may help an entity to work out the instalment rate it chooses to use under section 45-205.

2.118 The benchmark instalment rate is the percentage calculated to 2 decimal places (rounding the third decimal place up if it is 5 or more) using the formula:

(The entity's *benchmark tax / Variation year instalment income) * 100

[Subsection 45-360(1)]

2.119 The variation year instalment income (the denominator in the formula contained in subsection 45-360(1)) is so much of the entity's assessable income for the variation year as the Commissioner determines is instalment income for the year. [Subsection 45-360(2)]

2.120 The entity's benchmark tax (the numerator in the formula contained in subsection 45-360(1)) is the entity's adjusted assessed tax (worked out under section 45-375) on the entity's adjusted assessed taxable income (worked out under section 45-370) for the variation year. [Subsection 45-365(1)]

2.121 But if the entity's assessable income included withholding payments, the benchmark tax is reduced (but not below nil) by any withholding credits (including credits for amounts withheld for a failure to quote an ABN or TFN). [Subsections 45-365(2) and (3)]

2.122 This ensures that the figure used to determine the amount of any variation penalty is reduced to reflect the entity's actual withholding credits for the income year.

2.123 An entity's adjusted assessed taxable income for the variation year is the entity's taxable income reduced by any net capital gain included in assessable income. [Subsection 45-370(1)] This ensures that an entity cannot be penalised for not paying instalments for any capital gains derived during the year. But this rule does not apply to eligible approved deposit funds, eligible superannuation funds and pooled superannuation trusts (as defined in section 267 of the ITAA 1936). [Subsection 45-370(2)]

2.124 The adjusted assessed tax on an entity's adjusted assessed taxable income for a variation year is worked out using the Method Statement in section 45-375.

2.125 Under Step 1 of the Method Statement , an entity's adjusted assessed tax is worked out by applying the Income Tax Rates Act 1986 to its adjusted assessed taxable income. But the entity's entitlement to the low income earner offset and the offsets for a private health insurance policy and superannuation contributions made for a spouse are disregarded.

2.126 Then any liability an entity has for Medicare or HECS is worked out under Steps 2 and 3 of the Method Statement .

2.127 Under Step 4 the amounts from Steps 1, 2 and 3 are added together if, for the variation year, a determination is made that the entity is entitled under Part 9 of the A New Tax System (Family Assistance) (Administration) Act 1999 to the family tax benefit the Commissioner must work out the amount of family tax benefit that the entity would have been entitled to claim on the assumption that its adjusted assessed taxable income were its taxable income for the current year. That amount is subtracted from the result of the addition of the results from Steps 1, 2 and3. [Section 45-375]

Working out the amount on which penalty is imposed

2.128 The entity will be liable to pay the GIC on the amount worked out using the formula in subsection 45-230(2) , ie.:

(Rate discrepancy * Entity's *instalment income for the variation quarter) + Credit adjustment)

2.129 The first part of the formula (the part in brackets) works out the difference between the amount that was payable and the amount that should have been payable for the quarter (the variation quarter). It multiplies the instalment income of the variation quarter by the rate discrepancy. The rate discrepancy is the difference between the entity's chosen instalment rate and the lesser of:

the benchmark instalment rate; and
the most recent Commissioners instalment rate that was given to the entity before the end of the variation quarter.

2.130 The credit adjustment (the second part of the formula contained in subsection 45-230(2)) determines the part of the penalty attributable to any credit the entity claimed in the variation quarter. If no credit is claimed, the credit adjustment is nil. If a credit is claimed, the credit adjustment is the lesser of the following amounts:

the amount of the credit actually claimed; or
the amount worked out by multiplying the instalment income of the preceding instalment quarters of the income year by the rate discrepancy. [Subsection 45-230(2), definition of credit adjustment]

Example The instalments payable, and credits claimed, by Company A for the year were based on the following information:

  Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Instalment income $80,000 $100,000 $70,000 $50,000 $300,000
Commissioners rate 15% 15% 12% 12%
Varied rate N/A 10% 8% 8%
Debit $12,000 $10,000 $5,600 $4,000 $31,600
Credit N/A $4,000 $3,600 N/A $7,600
The Commissioner determines Company A's benchmark instalment rate to be 10%.Company A would not be penalised in the second instalment quarter. Its varied rate was equal to the benchmark instalment rate.The amount on which Company A's penalty would be based for the third quarter would be worked out as follows:

[(10% - 8%) * $70,000] + [$3,600 or (10% - 8%) * $180,000]
$1,400 + [$3,600 or $3,600]
$5,000

The amount on which Company A's penalty would be based for the fourth quarter would be worked out as follows:

[(10% - 8%) * $50,000] + Nil
$1,000

Working out the amount of the GIC penalty

2.131 The amount worked out under subsection 45-230(2) is subject to the GIC for each day in the period that:

started on 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.

[Subsection 45-230(3)]

Example Assuming the GIC rate is 12.75% for all of the relevant period and that the due date for assessment is 1 March after the end of the income year, Company As penalty for the third instalment quarter would be calculated for the period starting on 21 April and ending on 1 March of the following year. The penalty for the third quarter would be worked out as follows:

$5,000 * 12.75% * 315/365 = $550

Commissioner must notify the entity of the penalty

2.132 The Commissioner must give an entity written notice of the amount of penalty payable. The notice must give the entity 14 days to pay that penalty. [Subsection 45-230(4)]

2.133 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 45-230(5)]

How an annual PAYG instalment payer estimates its own tax

2.134 As explained earlier, an annual PAYG instalment payer may work out its annual instalment by:

multiplying its instalment income for the income year by the instalment rate notified by the Commissioner; or
paying the notional tax notified by the Commissioner; or
estimating its benchmark tax for the income year.

[Subsection 45-115(1)]

2.135 That is, an annual instalment payer varies by estimating its benchmark tax for the income year. The way in which the benchmark tax is worked out was explained above in relation to the Commissioners calculation of the benchmark instalment rate.

Liability to penalty

2.136 A penalty is payable if the entity's instalment (ie. its estimated amount) is less than 85% of the benchmark tax as worked out by the Commissioner under Subdivision 45-K after the end of the income year. [Subsection 45-235(1)]

2.137 The GIC is imposed on the difference between the instalment payable (ie. the estimated tax) and the lowest of the:

amount of the instalment worked out using the most recent instalment rate given by the Commissioner before the end of the income year;
most recent notional tax notified by the Commissioner (under subsection 45-320(5)) before the end of the income year;
entity's benchmark tax for the income year.

[Subsection 45-235(3)]

2.138 In working out the amount on which the penalty is based for the 2000-2001 and 2001-2002 income years of an entity that pays its instalment during the income year, the GIC is imposed on the difference between the instalment payable (ie. the estimated tax) and the lowest of the:

most recent notional tax notified by the Commissioner (under subsection 45-320(5)) before the end of the income year;
entity's benchmark tax for the income year.

Such an entity is not entitled to calculate its instalment using its instalment rate and its instalment income for the year because its instalment is payable during the income year. [Subsection 45-235(2)] (Note: The way in which the benchmark tax is worked out was explained above in relation to the Commissioners calculation of the benchmark instalment rate.)

2.139 The GIC is imposed for each day in the period:

starting on the due date for the instalment for the income year; and
finishing at the end of the due date for payment of the assessed tax for the income year, or the date of payment of the assessed tax if that is earlier.

[Subsection 45-235(4)]

2.140 The Commissioner must give an entity written notice of the amount of penalty payable. The notice must give the entity 14 days to pay the amount. [Subsection 45-235(5)]

2.141 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 45-235(6)]

Commissioner may remit the variation penalty

2.142 The Commissioner may remit the whole or part of the penalty imposed under section 45-230 or 45-235. He or she must be satisfied that it is fair and reasonable to do so, having regard to any special circumstances that exist. [Section 45-240]

Special rule for working out the instalment income of a partner

2.143 New Subdivision 45-H sets out rules which require partners to include in their instalment income for an instalment quarter or income year, their share of the partnership income of that period. The rules recognise that partners derive partnership income throughout the income year and not just at the time when partnership accounts are struck.

2.144 The rules are only relevant to a partner who is liable to pay an instalment ie. a partner who is given an instalment rate by the Commissioner. The amount included under Subdivision 45-H is added to any other instalment income of the partner for the period.

2.145 A partner must include an amount in its instalment income for each partnership in which it is a partner at any time during the instalment quarter or income year. [Subsection 45-260(1)] The amount to be included is a share of so much of the partnership income as satisfies the definition of instalment income in section 45-120. The share required to be included is worked out as a proportion being:

the amount included in the partners assessable income for the last income year
divided by
the partnerships instalment income for that last income year.

[Subsection 45-260(1)]

2.146 The amount included in the partners assessable income for the last income year is defined to be so much of the partners individual interest in the partnerships net income for an income year as was included in the partners assessable income by section 92 of the ITAA 1936 for the most recent income year for which an assessment has been made. [Subsection 45-260(2)]

2.147 The partnerships instalment income for that income year is so much of the partnerships assessable income as would satisfy the definition of instalment income in section 45-120.

2.148 But, if either of the components of that ratio does not exist (eg. because the partnership incurred a loss) or is a nil amount, the partner may still be required to include an amount in its instalment income. The partner is required to include a fair and reasonable amount in its instalment income. That amount is determined having regard to:

the extent of the partners interest in the partnership;
the instalment income of the partnership for the relevant period; and
any other relevant circumstances.

[Subsection 45-260(3)]

2.149 The fair and reasonable amount will also be included in the partners instalment income in circumstances where the partner was not a partner in a partnership, or that particular partnership, in the earlier income year. [Paragraph 45-260(2)(b)]

Special rule for working out the instalment income of certain beneficiaries and trustees

2.150 New Subdivision 45-I sets out rules which require beneficiaries to include in their instalment income for an instalment period a share of the trust income of that period. The rules ensure that beneficiaries include some proportion of their trust income in working out each instalment and that trustees pay instalments where in the past they have been assessed and liable to tax on some part of the net income of a trust estate.

2.151 The rules are only relevant to a beneficiary or trustee who is liable to pay a PAYG instalment ie. one who is given an instalment rate by the Commissioner. So far as a beneficiary is concerned, the amount included under Subdivision 45-I is added to any other instalment income of the beneficiary for the period.

2.152 A beneficiary must include an amount in its instalment income for each trust of which it is a beneficiary. [Subsection 45-280(1)] The amount to be included in the beneficiary's instalment income is a share of so much of the trust income as satisfies the definition of instalment income in section 45-120. The share required to be included is worked out as a proportion being:

the amount included in the beneficiary's assessable income for the last income year
divided by
the trusts instalment income for that income year.

[Subsection 45-280(1)]

2.153 The amount included in the beneficiary's assessable income for the last income year is defined to be the amount the beneficiary was required to include in its assessable income under Division 6 of Part III of the ITAA 1936 for the most recent income year for which an assessment has been made. [Subsection 45-280(2)]

2.154 The trusts instalment income for that income year is so much of the trusts assessable income as would satisfy the definition of instalment income in section 45-120.

2.155 But, if either of the components of that ratio does not exist (eg. because the trust incurred a loss) or is a nil amount, the beneficiary may still be required to include an amount in its instalment income. The beneficiary is required to include a fair and reasonable amount in its instalment income. That amount is determined having regard to:

the extent of the beneficiary's interest in the trust; and
the extent of the beneficiary's interest in the income of the trust; and
the trusts instalment income for the relevant period; and
any other relevant circumstances. [Subsection 45-280(3)]

2.156 The fair and reasonable amount will also be included in the beneficiary's instalment income in circumstances where the beneficiary was not a beneficiary of the trust in the earlier income year.

2.157 Section 45-300 explains how Part 2-10 applies to trustees of trusts. Subsection 45-300(1) specifically acknowledges that the trustees who are assessed and liable to tax for entities that are taxed as companies are liable to pay PAYG instalments under Part 2-10.

2.158 Subsection 45-300(2) specifically acknowledges that trustees who are assessed and liable to tax under section 98, 99 or 99A of the ITAA 1936 are liable to pay instalments under Part 2-10. But, if a trustee is assessed and liable to tax only under subsection 98(3) or (4) on a non-residents share of the net income of a trust, it will not be liable to pay PAYG instalments.

2.159 More specific rules as to how to calculate the instalment rate for trustees will be introduced later in a separate Bill see the List of Issues to be Addressed Later at the end of this Chapter.

How the Commissioner works out the instalment rate

2.160 New Subdivision 45-J contains rules about how the Commissioner works out the instalment rate.

2.161 As stated in paragraph 2.18 above, the Commissioner may notify an entity of its instalment rate at any time by giving written notice of it. [Subsection 45-15(1)] Entities will generally receive a new instalment rate each year as their assessment is made or their income tax return for the year processed. Notice of the rate may be incorporated in a notice of assessment. [Subsection 45-320(6)] The Commissioner must also notify an entity of its notional tax when it notifies it of its instalment rate. [Subsection 45-320(5)]

2.162 The instalment rate will be calculated as a percentage to 2 decimal places, with the third decimal place rounded up if it is 5 or more. [Subsection 45-320(1)] For example, a figure calculated as 12.495% would be rounded up to 12.50%.

2.163 The formula used to calculate the percentage itself is:

(Entity's *notional tax / Base assessment instalment income) * 100

The terms used in both the numerator and denominator are separately defined. [Subsection 45-320(1)]

2.164 The base assessment instalment income (the denominator) is so much of the assessable income as worked out for the base assessment as the Commissioner determines is instalment income for the base year . [Subsection 45-320(2)]

2.165 The base assessment is defined to be the latest assessment for an entity's most recent income year. But if there is a later income year for which the entity does not have a taxable income (eg. it made a loss or the tax losses exceeded what would otherwise have been its taxable income) the base assessment is the latest return or other information from which an assessment for that income year would have been made. [Subsection 45-325(3)]

2.166 The base year is the income year to which the base assessment relates. [Subsection 45-320(4)]

2.167 The entity's notional tax (the numerator) is worked out under section 45-325 . There are several steps involved in working it out. These steps ensure that notional tax is calculated taking into account only the instalment income of the entity and not, eg., income from which a payer withheld, or should have withheld, amounts under the PAYG withholding system.

2.168 Subsection 45-325(1) sets out the first step for calculating an entity's notional tax. It is the entity's adjusted tax (worked out under subsection 45-340) on its adjusted taxable income (worked out under subsection 45-330) for the income year to which the base assessment relates.

2.169 Subsections 45-325(2) and (3) set out the second step for calculating an entity's notional tax. That step only applies if the entity has income which is the subject of the PAYG withholding system in the income year which is the subject of the base assessment. In that case, the notional tax calculated under subsection 45-325(1) is reduced (but not below nil) by the adjusted tax for the income year to which the base assessment relates (worked out under section 45-340) on its adjusted withholding income (as worked out under section 45-335).

2.170 When the Commissioner works out an entity's notional tax, the Commissioner is required to apply the law that applies to the income year in which he or she is working out the instalment rate as if it had applied to the income year to which the base assessment relates. This means that the Commissioner can take account of any changes to the law that did not apply for the purposes of the base assessment but may reasonably be expected to apply for the income year in which he or she is working out the instalment rate. [Subsection 45-325(4)]

2.171 Further the Commissioner may, when calculating the instalment rate, take into account any provisions of an Act or regulations that, in the Commissioners opinion, are likely to be enacted or made. But the Commissioner may do so only if doing so will result in a reduced instalment rate. [Subsection 45-325(5)]

Working out the adjusted taxable income of an entity

2.172 The adjusted taxable income of an entity is worked out by the Commissioner in much the same way as taxable income is worked out under section 4-15 of the ITAA 1997. However, 2 adjustments must be made.

2.173 The first adjustment is to exclude any net capital gain included in the assessable income for the base assessment of an entity that is not an eligible approved deposit fund, eligible superannuation fund or pooled superannuation trust (as defined in section 267 of the ITAA 1936). [Paragraph 45-330(1)(a) and subsection 45-330(2)]

2.174 The second adjustment relates to any tax losses (as defined in the ITAA 1997) claimed in the base assessment. The adjustment requires the Commissioner to replace the deduction actually allowed for tax losses in the base assessment with the tax losses still available for deduction in subsequent income years. [Paragraphs 45-330(1)(b) and (c)] This will ensure that the Commissioner calculates an instalment rate for loss entities in the income year in which they are likely to become taxable.

Working out adjusted withholding income of an entity

2.175 The adjusted withholding income of an entity is the total assessable income of the entity from which there were, or should have been, amounts withheld under the PAYG withholding system. That amount is then reduced by so much of the entity's deductions that reasonably relate to the withholding income. However, assessable income from which an amount has been withheld only because of the entity's failure to provide its TFN or ABN is not included in adjusted withholding income. [Section 45-335]

Working out adjusted tax under section 45-340

2.176 The method for working out an entity's adjusted tax as discussed in the following paragraphs applies whether the Commissioner is working it out for that entity's adjusted taxable income or adjusted withholding income for the base assessment. [opening words of section 45-340]

Method Statement in section 45-340

2.177 Step 1 of the Method Statement requires the Commissioner to work out the amount of income tax that would have been payable if the adjusted taxable income or adjusted withholding income had been the entity's taxable income for the purposes of applying the Income Tax Rates Act 1986 to the current year. However, an entity's entitlement to specified offsets is disregarded. This approach replicates what happens under the current provisional tax system. As a matter of policy, these offsets are only taken into account on actual assessments and cannot currently be claimed through lower deductions from withholding payments or as a reduction in provisional tax.

2.178 Step 2 requires the Commissioner to work out the amount that would be payable by the entity under the Medicare Levy Act 1986 on the assumption that its adjusted taxable income or adjusted withholding income were its taxable income for the current year, but disregarding sections 8B to 8G of that Act, which increase the levy in certain cases.

2.179 Step 3 requires the Commissioner to work out the amount that would be payable by the entity under either the Higher Education Funding Act 1988 in respect of its accumulated HEC debt for the base year on the assumption that its adjusted taxable income or adjusted withholding income were its taxable income for the current year.

2.180 Step 4 requires the Commissioner to add up the amounts from Steps 1, 2 and 3. Then if, for the base year, a determination is made that the entity is entitled under Part 9 of the A New Tax System (Family Assistance) (Administration) Act 1999 to the family tax benefit, the Commissioner must work out the amount of family tax benefit that the entity would have been entitled to claim on the assumption that its adjusted taxable income or adjusted withholding income were its taxable income for the current year. That amount is subtracted from the result of the addition of the results from Steps 1, 2 and 3.

Explanation of the amendments (Closure of company instalment system)

2.181 Item 16 of Part 2 of Schedule 1 to this Bill will insert new section 221AZJA in the ITAA 1936. New section 221AZJA will ensure that an entity cannot be liable to pay an instalment under Division 1C of Part VI of the ITAA 1936 in respect of its income tax liability for the 2000-2001 income year. That Division applies to:

companies;
the trustees of trusts that are corporate unit trusts and public trading trusts within the meanings of Divisions 6B and 6C of Part III of the ITAA 1936 respectively;
the trustees of funds that are eligible approved deposit funds, eligible superannuation funds and pooled superannuation trusts within the meaning of section 267 of the ITAA 1936; and
corporate limited partnerships.

2.182 Item 15 of Part 2 of Schedule 1 will make a complementary amendment to Division 1B of Part VI of the ITAA 1936 that will ensure that an instalment does not become payable under that Division because instalments will no longer be payable under Division 1C of Part VI of the ITAA 1936.

Special transitional rules for company instalment taxpayers

2.183 The new PAYG instalments system will bring forward the timing of the income tax instalments payable by those entities who are in the company instalments system in the 1999-2000 income year. In their 2000-2001 income years, those taxpayers would be liable to pay instalments of income tax for both the 1999-2000 and 2000-2001 income years unless special arrangements are made.

2.184 The ANTS document outlined various transitional measures designed to overcome the cash-flow burden imposed on these taxpayers by the move to the PAYG instalments system. The following paragraphs explain the provisions needed to give effect to those measures.

Certain instalments will not be payable

2.185 Item 18 of Part 2 of Schedule 1 will insert in Division 1C of Part of the ITAA 1936 new section 221AZKB . This section provides that:

an entity, classified as medium for the purposes of applying Division 1C in the 1999-2000 income year, is not liable to pay its third instalment (ie. the instalment that would otherwise be due on 1 December, or the 1st day of month 18 for an entity with a substituted accounting period); [Subsection 221AZKB(1)]
an entity, classified as small for the purposes of applying Division 1C in the 1999-2000 income year, is not liable to pay its first instalment (ie. the instalment that would otherwise be due on 15 December, or the 15th day of month 18 for an entity with a substituted accounting period). [Subsection 221AZKB(2)]

2.186 However the liability to pay those respective instalments is only removed for an entity that is liable to pay a PAYG instalment for the first instalment quarter of the 2000-2001 income year. [Subsection 221AZKB(3)]

2.187 Further, subsection 221AZKB(2) does not apply to an entity classified as small which is liable to pay only a final instalment for the 1999-2000 income year under subsection 221AZK(3A). These are entities whose assessed tax for the 1999-2000 income year exceeds $300,000. [Note to subsection 221AZKB(2)]

2.188 As a result of removing the liability to pay these instalments, the amount payable by these entities as the final instalment for the 1999-2000 income year will be determined disregarding any amount that will not be payable as a result of new section 221AZKB. [Subsection 221AZKB(4)]

Some or all of the final instalment will be deferred

2.189 Item 18 of Part 2 of Schedule 1 will also insert in Division 1C of Part of the ITAA 1936 new section 221AZKC. This section gives effect to the proposal to defer some or all of the final instalment of each entity within the company instalment system for the 1999-2000 income year. [Subsection 221AZKC(1)]

2.190 However, as with new section 221AZKB, an entity is only entitled to the deferral of some or all of the final instalment for the 1999-2000 income year if it is liable to pay a PAYG instalment for the first instalment quarter of the 2000-2001 income year. That is, an entity who has not been notified of an instalment rate by the Commissioner or an entity who is eligible to choose to pay PAYG instalments annually and has made that choice is not entitled to the deferral. [Subsection 221AZKC(2)]

2.191 The amount that an entity can defer is set out in subsection 221AZKC(3):

an entity whose assessed tax for the 1999-2000 income year is less than $8,000 can defer a maximum of 100% of its assessed tax;
an entity whose assessed tax for the 1999-2000 income year is between $8,000 and $300,000 (inclusive) can defer a maximum of 42% of its assessed tax;
an entity whose assessed tax for the 1999-2000 income year is more than $300,000 can defer a maximum of 20% of its assessed tax.

2.192 If only some of the final instalment is deferred, the rest remains payable on the due date for the final instalment. [Subsection 221AZKC(4)]

Repayment of the deferred amount

2.193 For entities whose assessed tax for the 1999-2000 income year is $300,000 or less, the deferred amount is repayable in 21 equal quarterly payments. That is, 1/21 of the deferred amount will be repayable each quarter. For entities whose assessed tax for the 1999-2000 income year is more than $300,000, the deferred amount is repayable in 10 equal quarterly payments. That is 1/10 of the deferred amount will be repayable each quarter. [Subsection 221AZKC(3)]

2.194 The time when the first quarterly repayment will be payable depends on when the entity's final instalment liability for the 1999-2000 income year is due.

If the final instalment is due on 1 December 2000 (or the 1st day of month 18 for an entity with a substituted accounting period), the first repayment is due with the PAYG instalment due on 21 January (or the 21st day of month 19 for an entity with a substituted accounting period).
If the final instalment is due on 1 or 15 March 2000 (or the 1st or 15th day of month 21 for an entity with a substituted accounting period), the first repayment is due with the PAYG instalment due on 21 April (or the 21st day of month 22 for an entity with a substituted accounting period).

2.195 The granting, under section 206 of the ITAA 1936, of an extension of time to pay the final instalment for 1999-2000 will not affect the date on which the first repayment of the deferred amount is due. [Subsection 221AZKC(5)]

2.196 Each of the remaining quarterly payments is due 3 months after the day on which the previous quarterly payment is due. [Subsection 221AZKC(6)] That date will generally coincide with the due date for a PAYG instalment. But if no PAYG instalment is due that day, the quarterly repayment is still due. [Subsection 221AZKC(7)]

Late payment & other links

2.197 The quarterly payments are to be treated as tax or income tax for the purposes of sections 206, 208, 209, 214, 254, 255, 258 and 259 in the same way as the instalments payable under Division 1C. [Subsection 221AZKC(8)]

2.198 A quarterly payment that is paid late will be subject to the GIC imposed under Division 1 of Part IIA of the TAA 1953. The amendments in Items 19, 20 and 21 of Part 2 of Schedule 1 ensure that the liability to the GIC applying to Division 1C instalments also applies to the quarterly repayments.

Special rule for changed accounting periods

2.199 The Commissioner will have a broad power to determine the:

instalments which are the subject of deferral;
amount to be deferred; and
period over which the deferred amount will be repaid;

if an entity adopts a different accounting period for its 1999-2000 income year. [Paragraph 221AZKE(a)]

2.200 Similarly, the Commissioner will have a power to determine when the first repayment must occur if an entity adopts a different accounting period for its 2000-2001 income year. [Paragraph 221AZKE(b)]

2.201 Section 221AZKE is also being inserted in the ITAA 1936 by Item 18 of Part 2 of Schedule 1 . Item 17 of Part 2 of Schedule 1 is a minor amendment to ensure that the new sections 221AZKB, 221AZKC and 221AZKE interact correctly with the rest of Division 1C of the ITAA 1936.

Explanation of the amendments (Closure of provisional tax system)

2.202 Items 26 and 27 of Part 2 of Schedule 1 amend subsection 221YB(2) of the ITAA 1936 to ensure that the Commissioner cannot require an entity to pay provisional tax for the 2000-2001 or later income years.

2.203 Items 28 and 29 of Schedule 1 amend subsection 221YBA(1) of the ITAA 1936 to ensure that the Commissioner cannot require an entity to pay an instalment of provisional tax for the 2000-2001 or later income years.

2.204 There are no special transitional rules regarding the closure of the provisional tax system.

List of Issues to be Addressed Later

2.205 The provisions in Schedule 1 comprise the first instalment of the PAYG instalments system.

2.206 A further instalment of provisions will be introduced. It will cover issues such as:

special rules for determining the instalment rate and instalment income of trustees;
a penalty for false statements made in relation to information required to be given to the Commissioner;
anti-avoidance provisions (whether general or specific) to support the PAYG instalments system;
special rules to make the transition to PAYG instalments eg. in calculating the first instalment rate to be given to taxpayers;
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; and
consequential amendments to taxation and other legislation.


View full documentView full documentBack to top