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Senate

Taxation Laws Amendment Bill (No. 3) 2001

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
This Memorandum takes account of amendments made by the House of Representatives to the Bill as introduced

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation Definition
ADF approved deposit fund
ATO Australian Taxation Office
BAS business activity statement
COIN company instalments
Commissioner Commissioner of Taxation
FBT fringe benefits tax
FBTAA 1986 Fringe Benefits Tax Assessment Act 1986
GDP gross domestic product
GIC general interest charge
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax) Act 1999
IAS instalment activity statement
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
PAYG pay as you go
PDI public debt interest
TAA 1953 Taxation Administration Act 1953

General outline and financial impact

GST returns and payments

Part 1 of Schedule 1 to this Bill amends the GST Act and the TAA 1953 to simplify the GST return and lodgement systems. The amendments:

·
extend the due date for payment of net amounts and lodgement of GST returns for entities that account for GST on a quarterly basis;
·
remove the requirement for the net amount to be provided on the GST return; and
·
ensure that the annual GST information sheet that an entity may need to lodge, can require entities to provide details for more than one tax period.

Date of effect: The amendments apply, and are taken to have applied, in relation to GST returns, and net amounts, for tax periods ending on or after 22 February 2001.

Proposal announced: A number of amendments were announced in Treasurers Press Release No. 7 of 22 February 2001.

Financial impact: Nil.

Compliance cost impact: The amendments will reduce compliance costs.

Payment of GST by instalments

Part 2 of Schedule 1 to this Bill amends the GST Act and the TAA 1953 to simplify the GST return and lodgement systems. The amendments set up the GST instalment system for small businesses.

Date of effect: The amendments apply, and are taken to have applied, in relation to GST returns, and net amounts, for tax periods ending on or after 22 February 2001.

Proposal announced: A number of amendments were announced in Treasurers Press Release No. 7 of 22 February 2001.

Financial impact: The estimated cost to revenue is $65 million in 2000-2001 and $130 million in 2001-2002, with an additional cost of $15 million in outyears due to growth. The additional tolerance before underestimation penalty is applied for the September 2001 quarter will result in an additional deferral of $10 million revenue to the succeeding financial year.

Compliance cost impact: The amendments will reduce compliance costs.

Substituted accounting periods

Part 3 of Schedule 1 to this Bill amends the GST Act to permit entities who use substituted accounting periods to be able to choose either quarterly or monthly tax periods, subject to the existing turnover threshold and election rules. Without these amendments the Commissioner must determine that an entity which has a substituted accounting period accounts for GST on a monthly basis unless that entity is a non-profit entity.

Date of effect: 1 July 2001.

Proposal announced: Not previously announced.

Financial impact: $80 million cost to revenue in the 2001-2002 financial year representing the deferral of 2 months instalments, with a further cost of $5 million in outyears due to growth.

Compliance cost impact: The amendments will reduce compliance costs.

Correcting GST errors

Part 4 of Schedule 1 to this Bill amends the GST Act to permit the Commissioner to make a determination that allows a net amount for a tax period to be worked out to take account of the need to correct errors made in the immediately preceding tax period.

The intention of these amendments is to allow the Commissioner to make flexible rules to minimise the effort required to remedy small errors made in preparing GST returns.

Date of effect: 1 July 2000.

Proposal announced: Not previously announced.

Financial impact: Small but unquantifiable.

Compliance cost impact: The amendments will reduce compliance costs.

Input tax credits for motor vehicles

Part 5 of Schedule 1 amends this Bill to allow GST registered businesses that are entitled to claim input tax credits, to claim full input tax credits for motor vehicles, trailers and vehicle bodies acquired or imported by them on or after 23 May 2001.

Date of effect: The amendments apply to acquisitions or importations of motor vehicles, trailers and vehicle bodies made on or after 23 May 2001.

Proposal announced: 2001-2002 Federal Budget announcement and Treasurers Press Release No. 34 of 22 May 2001.

Financial impact: $20 million in 2000-2001, $570 million in 2001-2002 and $80 million in 2002-2003.

Compliance cost impact: Minimal.

PAYG instalments

Schedule 2 to this Bill amends the PAYG instalments legislation to allow certain entities to pay instalments based on an amount worked out, and notified, by the Commissioner. All of the following entities will be able to pay instalments worked out by the Commissioner using the GDP-adjusted notional tax method following the amendments made by this Bill:

·
all individuals;
·
companies, superannuation funds and other entities that are taxed as companies that have $1 million or less in instalment income for their previous income year; and
·
companies, superannuation funds and other entities that are taxed as companies that have more than $1 million in instalment income for their previous income year and are eligible to pay annual instalments under the PAYG instalments regime but have not chosen to do so.

Note: an entitys instalment income is generally its ordinary business and investment income, but there are special rules for some entities including superannuation funds.

These amendments will reduce the costs these taxpayers incur in complying with their PAYG instalments obligations as they will no longer have to keep track of the instalment income they earn each quarter.

The PAYG instalments legislation will also be amended so that certain individuals who either carry on primary production businesses or who are authors, artists or other special professionals will be required to pay only 2, not 4, quarterly instalments each year. These 2 instalments will be payable at the end of the third and fourth quarters of the income year and will also be worked out using the GDP-adjusted notional tax method. This change will give those individuals whose income fluctuates from quarter to quarter during the income year, a way of paying GDP-adjusted notional tax instalments that addresses the fluctuating nature of their income flows.

Currently, the PAYG instalments provisions provide that a person must pay using the instalment income times instalment rate method (instalment income method) unless they are entitled to choose, and have chosen, to pay using another method. The PAYG instalments legislation will be amended so that taxpayers who qualify to use the GDP-adjusted notional tax method will be required to pay their instalments on that basis. However, they will be entitled to choose to pay annual instalments (if eligible) or to pay quarterly instalments worked out using the instalment income method. They will only be able to make that choice at the end of the first instalment quarter of the income year.

Schedule 5 to this Bill will make technical corrections to ensure that PAYG instalment variation credits are correctly taken into account on assessment.

Date of effect: The amendments made by Schedule 2 will generally apply for the 2001-2002, and later, income years.

However, entities who:

·
will become entitled to use the GDP-adjusted notional tax method as from the 2001-2002 income year; or
·
were already entitled to choose to use the GDP-adjusted notional tax method for the 2000-2001 income year but did not make the choice to use that method,

will be given the right to choose to use the GDP-adjusted notional tax method to pay any of their remaining 2000-2001 instalments. This Bill therefore contains special transitional rules which will ensure that the affected entities benefit immediately from the changes to the law.

The amendments made by Schedule 5 to this Bill will apply for the 2000-2001 income year and later income years.

Proposal announced: The main aspects of these amendments were announced in Treasurers Press Release No. 7 of 22 February 2001. The amendments in Schedule 5 and the amendments to allow certain individuals to pay only 2 quarterly instalments each year have not previously been announced.

Financial impact: The PAYG measures contained in this Bill will result in a one-off cost to the revenue for 2001-2002 of $200 million. There will be a $10 million cost to the revenue for subsequent years.

Compliance cost impact: The compliance cost impact is summarised in the regulation impact statement for this measure.

Deferral of due dates

Schedule 3 to this Bill amends the ITAA 1936, the TAA 1953 and other Acts to modify the conditions for lodgment of quarterly BAS and IAS, and for the payment of tax debts.

The amendments in this Bill will:

·
defer the due date for quarterly GST lodgement dates and payments and other quarterly obligations for entities other than those with monthly GST obligations to 28 October, 28 February, 28 April and 28 July;
·
ensure that where a due date for payment of a tax debt or lodgement of an approved form falls on a Saturday, a Sunday or a public holiday, the payment or lodgement may be made on the next working day without incurring a penalty or GIC; and
·
streamline the reporting arrangements in relation to the lodgement and signing of approved forms such as the BAS and IAS.

Date of effect: The amendments apply to amounts that are due and notifications required on or after 1 April 2001.

Proposal announced: The deferral element of the proposal was announced in Treasurers Press Release No. 7 of 22 February 2001.

Financial impact: The measures will result in the public debt interest costs as set out in the following table:

2001-2002 2002-2003 2003-2004 2004-2005
$150m $160m $170m $180m

Compliance cost impact: The measures will reduce the compliance burden on taxpayers by streamlining the approved form reporting requirements, and by giving taxpayers more time to meet their obligations. The compliance cost impact is explained in more detail in the regulation impact statement.

Changes to the GIC and the benchmark interest rate

Schedule 4 to this Bill amends the TAA 1953 to replace the benchmark rate applied in the calculation of the GIC and some interest amounts paid by the Commissioner. The amendment also reduces the margin that is added to the benchmark rate in order to determine the GIC rate, from 8 percentage points to 7 percentage points.

It is necessary to replace the current benchmark rate, the average yield of 13-week Treasury Notes tenders, because those notes are no longer issued. The replacement benchmark rate is the monthly average yield of 90-day Bank Accepted Bills published by the RBA.

The margin that is added to this benchmark rate, in calculating the GIC rate, is being reduced in response to concerns that the GIC rate is excessive.

Date of effect: The amendments will apply from the first full quarter following Royal Assent.

Proposal announced: Not previously announced.

Financial impact: The amendment to the benchmark rate will cost the revenue approximately $1 million per annum. The amendment to the loading for determining the GIC rate will cost the revenue $14 million in the 2001-2002 income year (assuming Royal Assent is granted on or before 1 July 2001) and $10 million per annum thereafter.

Compliance cost impact: Nil.

Summary of regulation impact statement - extended due dates and GST changes

There are separate regulation impact statements for the GST measures and the PAYG instalment measures. The GST regulation impact statement also deals with the extension of time to lodge the BAS or IAS, which impacts on all taxes reported on those forms.

Regulation impact on business

Impact: The measures are expected to significantly reduce compliance costs for enterprises which lodge their GST returns quarterly. There is a cash flow benefit to taxpayers reflected in the PDI cost of the delayed receipt of revenue. The GST instalments option will result in some deferral of revenue.

Main points:

·
The measures will considerably reduce compliance costs for entities whose turnover does not exceed the $20 million threshold for monthly lodgement, by providing additional options to ease their reporting burden. Nine out of 10 entities who lodge GST returns are quarterly remitters.
·
All entities with a liability reported on the BAS or IAS have their due dates for reporting and paying tax extended; 95% of quarterly GST payers with a net GST liability will be able to adopt the GST instalments option; and 82% of entities with substituted accounting periods will be able to lodge their GST returns quarterly.
·
The extension of the due dates will result in a significant cash flow benefit for quarterly lodgers, which is likely to exceed the PDI cost as small businesses typically pay higher interest rates than the Commonwealth.
·
There is a small additional administration cost involved in changing ATO systems and processes to deal with the new arrangements. An extensive education and information campaign, including television, press and radio advertisements, will assist business in evaluating the additional reporting and payment options.
·
There has been extensive consultation with small business and tax professionals in framing these measures.

Summary of regulation impact statement - PAYG instalments

Regulation impact on business

Impact: The amendments will reduce the costs incurred by many taxpayers in complying with their obligations under the PAYG instalments regime. This will occur because the affected taxpayers will be able to pay an instalment amount worked out, and notified, by the Commissioner and will not be required to keep track of the instalment income they earn each quarter. Further, some taxpayers will be able to pay 2 quarterly instalments rather than 4.

Main points:

·
It is estimated that some 1.1 million individuals who are currently required to work out the amount of their instalments using the instalment income basis, will be entitled to pay an instalment amount that is worked out, and notified, by the Commissioner.
·
It is estimated that some 400,000 companies, superannuation funds and other entities that are taxed like companies that are currently required to work out the amount of their instalments using the instalment income basis, will be entitled to pay an instalment amount that is worked out, and notified, by the Commissioner.

Chapter 1 - GST returns and payments

Outline of chapter

1.1 Part 1 of Schedule 1 to this Bill explains the amendments to the GST Act and the TAA 1953 to simplify the GST return and lodgement systems. The amendments:

·
extend the due date for payment for net amounts and lodgement of GST returns for entities that account for GST on a quarterly basis;
·
remove the requirement for the net amount to be provided on the GST return; and
·
ensure that the annual GST information report that an entity may need to lodge can require entities to provide details for more than one tax period.

Detailed explanation of new law

Overview

1.2 On 22 February 2001, the Government announced changes to simplify the way businesses will report and pay GST and extend the due dates for payment and lodgement of quarterly GST returns. These changes have been designed to help businesses by making it easier, especially for small businesses, to report their GST obligations.

1.3 The changes allow entities to continue their current way of reporting and paying GST or, if eligible, choose one of the other options from the quarter ending 31 March 2001. All entities report on the current BAS for the quarter ending 31 March 2001, but a new simplified BAS will be introduced from the quarter ending 30 June 2001.

1.4 Entities accounting for GST on a quarterly basis may have 3 choices in the way they report and pay GST. These choices are:

1.
All quarterly entities can continue to report and pay/claim actual GST amounts quarterly.
2.
All quarterly entities can pay/claim GST amounts quarterly and lodge an annual GST information report.
3.
Eligible entities can pay a GST instalment quarterly and lodge an annual GST return.

1. All quarterly entities can continue to report and pay/claim actual GST amounts quarterly

1.5 If the way an entity has been paying and reporting GST up until now suits the business, there is no need for them to change. The only difference the entity will notice is a new streamlined quarterly reporting form sent to them from the quarter ending 30 June 2001.

2. All quarterly entities can pay/claim GST amounts quarterly and lodge an annual GST information report

1.6 Entities will continue to pay/claim actual GST amounts and report only GST collected, GST paid and total sales each quarter (BAS boxes 1A, 1B and G1).

1.7 Entities making this choice must also complete a separate annual GST information report to provide annual amounts for any exports, other GST-free sales, and capital and non-capital purchases (BAS boxes G2, G3, G10 and G11). The GST information report for this financial year must be lodged by either when the entitys income tax return is due or 28 February 2002, whichever is the earlier.

1.8 Item 5 (discussed in paragraphs 1.19 and 1.20) ensures that the Commissioner is able to compel entities to provide annual figures for their exports, other GST-free sales and capital and non-capital purchases on the GST information report.

3. Eligible entities can pay a GST instalment quarterly and lodge an annual GST return

1.9 There is now a third choice for reporting and paying GST if an entity meets certain eligibility requirements discussed in Chapter 2. This choice involves:

·
paying a quarterly GST instalment worked out by the ATO on a quarterly form; and
·
accounting for any difference between actual GST liability and total GST instalments for the year on an annual GST return covering the financial year.

Extending the due date of GST return and payment for quarterly entities

1.10 Items 1 and 6 amend Divisions 31 and 33 to extend the lodgement date of GST returns and payments of net amounts for entities with a quarterly tax period.

1.11 A tax period will be a quarterly tax period if it is a period of 3 months, or would be a period of 3 months but for the 7-day rule in section 27-35 of the GST Act, or because the entity has registered for GST part way through the tax period [Schedule 1, Part 1, items 1 and 20, subsection 31-8(2)] . The 7-day rule enables an entity to extend or reduce their tax period by a maximum of 7 days so that it is consistent with the commercial accounting period of the entity.

1.12 The new quarterly lodgement and payment dates mean that entities on a quarterly tax period will have more time to prepare and lodge their quarterly GST return and make any payment. Table 1.1 outlines the new quarterly lodgement and payment dates as provided in sections 31-8and 33-3.

Table 1.1: Quarterly tax period lodgement and payments dates
Quarter Due date
1 July to 30 September 28 October
1 October to 31 December 28 February
1 January to 31 March 28 April
1 April to 30 June 28 July

1.13 Due to the above amendments, items 2, 3, 7 to 10, 12 and 15 make minor consequential amendments to various provisions of the GST Act. Item 20 inserts the definition of quarterly tax period in the GST Dictionary in section 195-1 of the GST Act.

1.14 Further details of this, and other amendments relating to extending the lodgement and payment dates of quarterly BAS obligations are contained in Chapter 6.

Removal of requirement to state the net amount in GST returns

1.15 Under the existing law, there is an obligation for a GST return to include an entitys net amount on it. A form that does not include this information will not meet the form and contents requirements of a GST return. As part of the overall simplification of GST reporting requirements, the requirement for the GST return to state the entitys net amount will be removed.

1.16 Item 4 repeals subsection 31-15(1) and replaces it with a requirement that a GST return for a period must only be in an approved form, rather than the additional tests that were imposed under the existing law. [Schedule 1, Part 1, item 4, subsection 31-15(1)]

1.17 As a result of the amendment contained within item 4, it is necessary to repeal subsection 31-20(2) as it provides that the Commissioner may direct that a GST return does not need to state a net amount. As the statement of a net amount will no longer be required this subsection is redundant.

1.18 Due to the above amendments, items 11, 13, 14 and 16 to 19 make minor consequential amendments to various provisions of the GST Act to remove redundant references to the net amount being stated in a GST return. Item 21 makes a minor consequential amendment to the TAA 1953 to remove a redundant reference to the net amount being stated in a GST return in section 70 of that Act.

Simplifications to the form and contents of GST returns

1.19 An entity that accounts for GST using quarterly tax periods will have the choice of reporting less information each quarter and lodging an annual GST information sheet at the end of the financial year with details of annual amounts for exports, other GST-free sales, and capital and non-capital purchases (BAS boxes G2, G3, G10 and G11).

1.20 The Commissioner is able to compel entities to provide additional returns at any time. Item 5 inserts subsection 31-20(2) to clarify that the additional returns that the Commissioner can request may cover more than one tax period. This amendment clarifies that the Commissioner can request annual amounts for G2, G3, G10 and G11 in the annual GST information sheet for entities choosing to report less information each quarter.

Application and transitional provisions

1.21 The amendments in this chapter apply, and are taken to have applied, in relation to GST returns, and net amounts, for tax periods ending on or after 22 February 2001. [Schedule 1, Part 1, item 22]

Chapter 2 - Payment of GST by instalments

Outline of chapter

2.1 Part 2 of Schedule 1to this Bill explains the amendments to the GST Act and the TAA 1953 to simplify the GST return and lodgement systems. The amendments set up the GST instalment system for small businesses.

Context of reform

2.2 On 22 February 2001, the Government announced changes to simplify the way businesses will report and pay GST. These changes have been designed to help businesses by making it easier, especially for small businesses, to report their GST obligations.

2.3 The changes allow entities to continue their current way of reporting and paying GST or, if eligible, choose one of the other options from the quarter ending 31 March 2001. All entities report on the current BAS for the March quarter, but a new simplified BAS will be introduced from the quarter ending 30 June 2001.

2.4 An eligible entity may choose to pay GST by instalments and lodge an annual GST return. This choice involves:

·
paying a quarterly GST instalment worked out by the ATO on a quarterly form; and
·
accounting for any difference between actual GST liability and the total GST instalments for the year on an annual GST return covering the financial year.

Detailed explanation of new law

2.5 The amendments will allow an eligible small business to have the choice of annual GST reporting by simply paying a quarterly GST instalment (as calculated by the ATO or varied by the small business) and reporting their actual GST information for the financial year. [Schedule 1, Part 2, item 29]

Choosing to pay GST by instalments

Eligibility to choose to pay GST by instalments

2.6 Entities that meet all of the criteria specified in section 162-5 will be able to choose to pay their GST liability by instalments.

2.7 An entity will satisfy the criteria where it:

·
does not exceed the instalment turnover threshold;
·
is not obliged to meet its GST obligations on a monthly basis;
·
has lodged GST returns that cover at least 4 months worth of information (if the entity is a member of a GST group, the GST returns must be lodged for exactly the same group membership);
·
has complied with all its obligations to lodge GST returns; and
·
is not in a net refund position.

[Schedule 1, item 29, subsection 162-5(1)]

Criteria 1 - instalment turnover threshold

2.8 An entity may be eligible to choose to pay GST by instalments if its annual turnover does not exceed the instalment turnover threshold. [Schedule 1, item 29, paragraph 162-5(1)(a)]

2.9 The instalment turnover threshold is $2 million or such higher amount as the regulations specify [Schedule 1, item 29, subsection 162-5(2)] . Since reference to the instalment turnover threshold has been added to the table of turnover thresholds in section 188-5 and included in the turnover test provision in section 188-10, an entity will exceed this threshold where their annual turnover exceeds the instalment turnover threshold [Schedule 1, Part 1, items 30 and 32] .

2.10 Under subsection 188-10(2), an entitys annual turnover will not exceed the instalment turnover threshold if:

·
its current annual turnover is at or below $2 million, and the Commissioner is satisfied that the entitys projected annual turnover is not more than $2 million; or
·
its projected annual turnover is $2 million or less.

2.11 Current annual and projected annual turnover is calculated in the same manner as for other turnover thresholds in Division 188. That is, it is the sum of the GST exclusive value of the supplies that are made in a 12-month period except supplies that are:

·
input taxed;
·
not for consideration (and not made to associates);
·
not made in connection with an enterprise carried on by an entity; and
·
supplies made between group members of a GST group.

2.12 To determine an entitys current annual turnover, the entity needs to look at the 12-month period ending at the end of the current month. An entity will need to look at the 12-month period starting at the beginning of the current month if it wants to determine its projected annual turnover.

Example 2.1 Davis Co has a current annual turnover of $2.5 million. Its projected annual turnover is $1.95 million. Davis Co meets the instalment turnover threshold criteria by virtue of subsection 188-10(2) since its projected annual turnover is less than the instalment turnover threshold (of $2 million or less). Davis Co may be eligible to choose to pay GST by instalments if it meets all of the other criteria.

Criteria 2 - tax periods

2.13 To be eligible to choose to pay GST by instalments an entity must either account for GST on a quarterly basis or have an instalment tax period (i.e. just before making the choice, the entity was previously paying GST by instalments). This effectively means that to be eligible to elect to pay GST by instalments an entity must not be obliged to account for GST using monthly tax periods. [Schedule 1, item 29, paragraph 162-5(1)(b)]

2.14 An entity will have monthly tax periods if:

·
the Commissioner determines the entity must have monthly tax periods under section 27-10. For example, he must do this when the entitys annual turnover is at or above $20 million;
·
the entity makes an election that they want to have monthly tax periods under section 27-15, although an entity may be eligible to revert to 3-monthly tax periods; or
·
the entity has an annual turnover of $20 million or more and has requested a special determination of its tax periods under section 27-37.

Criteria 3 - GST lodgement record

2.15 To be eligible to choose to pay GST by instalments an entity must have a current GST lodgement record for at least 4 months [Schedule 1, item 29, paragraph 162-5(1)(c)] . A current GST lodgement record for an entity (other than an entity that is a member of a GST group or has previously been a representative member of a GST group), is the period immediately before the current tax period applying to the entity that is covered by GST returns [Schedule 1, item 29, subsection 162-10(1)] . This effectively means that the entity must have a lodgement record for at least a 4-month period before the current tax period. That is, the entity must have lodged at least:

·
4 monthly GST returns;
·
2 quarterly GST returns; or
·
1 quarterly and 1 monthly GST return,

for the tax periods before the current tax period. Accordingly most entities that have been lodging GST returns from 1 July 2000 will meet this criteria. This lodgement requirement ensures that the ATO has sufficient payment history for it to calculate future notified instalment amounts.

Example 2.2 Murtons Pty Ltd commences operations on 1 January 2001. This company has an annual turnover of $1 million and lodges quarterly GST returns. Murtons would like to pay its GST liability using the instalment system. This company will meet the lodgment requirement to elect to pay GST by instalments when it has lodged GST returns for at least 4 months preceding its current tax period. For this company, the earliest it could make an election would be after it has lodged its second quarterly GST return (i.e. quarter 4 return, due 28 July 2001).

Example 2.3 The Theobald Family Trust has lodged returns on a quarterly basis since 1 July 2000. On 13 April 2001 it wants to choose to pay GST by instalments. This entity will meet the lodgement record criteria because in the period preceding the March 2001 quarter it has lodged GST returns for a period of 6 months (i.e. for the tax periods ended 30 September 2000 and 31 December 2000).

Example 2.4 Taylor and Partners has been registered since 1 July 2000 and has elected to lodge GST returns monthly. However the partnership decides to use the quarterly system from 1 January 2001. Taylor and Partners has a lodgement record for at least 4 months preceding the current tax period at 21 April 2001, since it has lodged 6 monthly GST returns.

2.16 However an entity that is a member of a GST group will not be eligible to choose to pay GST by instalments if, during the period immediately preceding the current tax period applying to the entity, the membership of the GST group for which the entity is a member has changed. This is because the current GST lodgement record of a member of a GST group is the tax periods immediately preceding the current tax period applying to an entity, for which it has given GST returns and has the same GST group membership. [Schedule 1, item 29, subsection 162-10(2)]

Example 2.5 Shaz Castle Pty Ltd, Faccin Enterprises and Clancy & Co are all members of a GST group for which Faccin Enterprises is the representative member. They are registered for GST and account for GST on a quarterly basis. On 1 January 2001 Clancy & Co leave the GST group. Faccin Enterprises would like to pay GST by instalments but is ineligible to do so until 2 quarterly GST returns have been lodged in respect of the new group membership (of Shaz Castle Pty Ltd and Faccin Enterprises).

2.17 If an entity has been (and is not currently) a representative member of a GST group, any tax periods and GST returns that it has lodged in their capacity as representative member of a GST group is not counted towards the entitys current GST lodgement record. [Schedule 1, item 29, subsection 162-10(3)]

2.18 The reason behind these special eligibility criteria for GST groups and past representative members of GST groups, is that the payment history the ATO has on these entities will not be correct where the membership of a GST group changes, or the representative member leaves the GST group. This will mean that the ATOs calculation of the entitys future notified instalment amounts will be inaccurate and may lead to an entity receiving a notified instalment amount that is too high and does not accurately reflect the entitys new structure.

Criteria 4 - GST obligation requirement

2.19 To be eligible to pay GST by instalments an entity must have lodged all its previous GST returns as required. [Schedule 1, item 29, paragraph 162-5(1)(d)]

Criteria 5 - no net refund position

2.20 To be eligible to pay GST by instalments an entity must not be in a net refund position [Schedule 1, item 29, paragraph 162-5(1)(e)] . An entity will be in a net refund position if the sum of an entitys net amounts (excluding any special sales tax credits it has claimed) for a specified period is less than zero [Schedule 1, item 29, subsections 162-5(3) and (4)] .

2.21 Subsection 162-5(3) sets out the tax periods which must be taken into account when determining whether an entity is in a net refund position. The number of tax periods which must be taken into account varies according to an entitys current GST lodgement record. The longer the lodgement record, the longer the period that must be taken into account when determining the net refund position.

2.22 As a general rule, the number of months for which the net amounts (less any special sales tax credits claimed by an entity) will be taken into account to determine whether an entity is in a net refund position will be all of the previous months (up to a maximum of 12 months) for which a GST return was lodged, excluding the GST return(s) lodged for the first 3 months. For example, an entity with a lodgement record of 9 months will be in a net refund position if the total net amount for the 6 months preceding the current tax period (excluding special sales tax credits) is not less than zero. [Schedule 1, item 29, subsection 162-5(4)]

Example 2.6 Verity has been registered for GST since 1 July 2000 and has been lodging GST returns on a quarterly basis. The net amount on her first quarterly GST return was $1,000. Verity made some large equipment purchases in October and received a net refund of $2,000 in her second quarterly GST return. On 21 April 2001, Verity wants to choose the instalment system. She will not be eligible at this time because she is currently in a net refund position.Verity has a net liability of $3,000 on her next quarterly GST return which is lodged on 28 April 2001. On 28 July 2001 Verity lodges her June GST return and has a net liability of $3,653. She would be eligible from this date to pay GST by instalments since she is now not in a net refund position. As Verity has a lodgement record of 12 months she must take into account the 9 months preceding the current tax period in determining her net refund position. That is, the total net amount for December 2000 ($2,000 refund), March 2001 ($3,000 payable) and June 2001 ($3,653 payable). [Schedule 1, item 29, subsection 162-5(3)]

Electing to pay GST by instalments

2.23 Entities that meet all of the eligibility criteria can choose to pay GST by instalments by making an election to the Commissioner in the approved form. [Schedule 1, item 29, subsection 162-15(1)]

2.24 The Commissioner has the discretion to disallow an election even if the entity has met all of the eligibility criteria if the entity has a history of failing to comply with their tax obligations [Schedule 1, item 29, subsection 162-15(2)] . If the Commissioner disallows an entitys election under subsection 162-10(1), the election is taken never to have had effect [Schedule 1, item 29, subsection 162-15(3)] .

2.25 Item 60 amends the TAA 1953 to ensure that the Commissioners decision under subsection 162-15(2) to disallow an entitys GST instalment election is a reviewable GST decision.

2.26 An entitys election to pay GST by instalments can only relate to one financial year and will only remain valid for that financial year. [Schedule 1, item 29, subsection 162-15(4) and section 162-30]

Elections by representative members of GST groups

2.27 A representative member of a GST group is only able to elect to pay GST by instalments if all the members of that GST group are eligible to choose to pay GST by instalments. [Schedule 1, item 29, subsection 162-20(1)]

2.28 Once the representative member of a GST group elects to pay GST by instalments for the GST group, every member in that group will have a tax period equal to the instalment tax period of the group (i.e. the length of time the representative members election remains valid). Only the representative member of the GST group will be liable to pay GST instalments. [Schedule 1, item 29, subsection 162-20(2)]

When an entity must make its election

2.29 An entity that wants to use the instalment system must make an election on or before 28 October in the applicable financial year, unless the Commissioner has allowed the entity to elect into the system part way through the financial year. [Schedule1, item 29, section 162-25]

2.30 The Commissioners decision to disallow an entity to elect into the GST instalment system part way through the financial year is a reviewable GST decision. [Schedule 1, Part 2, item 60]

2.31 However, if an entity first becomes eligible to elect to pay GST by instalments because it is has only just met the 4 month current lodgement requirements since it is a new GST registrant, the entity may still make an election provided that the entity makes its election on or before the GST return would be due for that quarter in which it first becomes eligible. [Schedule 1, item 29, subsection 162-25(2)]

2.32 For the third quarter of the 2000-2001 financial year, all entities will only have a maximum lodgement record of 6 months and will therefore be able to elect to pay GST by instalments by 28 April 2001. This election will mean that the entity pays instalments in the third and fourth quarters of the 2000-2001 financial year. An entity that does not elect to use GST instalments in the third quarter cannot make that election in the fourth quarter. However, if eligible, the entity could elect to pay GST by instalments for the 2001-2002 financial year.

Duration of the election

2.33 Where an entity elects to pay GST by instalments, it must remain paying GST by instalments for the whole of the financial year (or rest of the financial year if the entity elects part way through the financial year). This is the case even if the annual turnover of the entity rises to above $2 million during that year. Once an entitys annual turnover exceeds $2 million the entity will be ineligible to elect to pay GST by instalments for the following financial year, unless the entitys projected annual turnover at the time of the election is below $2 million. [Schedule 1, item 29, section 162-30]

2.34 However, there are special rules that apply to GST groups, entities that go bankrupt, into liquidation or receivership. These rules are discussed in paragraphs 2.43 to 2.49.

2.35 Generally an entitys election will remain valid for the whole of the financial year in which it is made [Schedule 1, item 29, subsection 162-30(1)] . However, if an entity makes an election part way through the financial year, it will only remain effective from the start of the GST instalment quarter in which the election was made, until the end of the financial year [Schedule 1, item 29, subsection 162-30(2)] .

Example 2.7 Mollie becomes eligible for the first time to use the instalment system on 28 February 2002 when she lodges her second GST return. If she elects to use the instalment system shortly after this date, it will apply from 1 January 2002 to 30 June 2002.

Consequences of choosing to pay GST by instalments

2.36 Subdivision 162-B discusses the consequences of choosing the GST instalment system. These consequences include:

·
making an entity a GST instalment payer for that part of the financial year in which its election has effect [Schedule 1, item 29, section 162-50] ;
·
changing the tax period for a GST instalment payer so that it is aligned with the length of their election [Schedule 1, item 29, section 162-55] ;
·
providing the due date an entity using the GST instalment system must lodge their annual GST return and pay their net amount and make GST instalment payments [Schedule 1, item 29, sections 162-60 and 162-110] ;
·
providing the due date an entity using the GST instalment system must pay their GST instalment amounts [Schedule 1, item 29, section 162-70] ; and
·
providing special rules for eligible primary producers and other income tax averaging entities [Schedule 1, item 29, section 162-80] .

GST instalment payer

2.37 An entity that has chosen under new section 162-15 to pay GST by instalments will be known as a GST instalment payer for the financial year, or that part of the financial year in which their choice has effect. [Schedule 1, item 29, section 162-50]

Tax periods

2.38 A GST instalment payers tax period will be the time the entitys choice to pay GST by instalments has effect [Schedule 1, item 29, subsections 162-55(1) and (2)] . The tax period of a GST instalment payer will be known as an instalment tax period [Schedule 1, item 29, subsection 162-55(3)] . While a GST instalment payer was required to have a quarterly tax period before being eligible to choose to pay GST by instalments, once that choice has effect, the tax period of the entity changes from being a quarterly tax period to an instalment tax period because of the special tax period rule in Division 162.

2.39 The special rule for tax periods contained in new section 162-55 has effect despite the normal tax period rules in Division 27, apart from the 7-day rule in section 27-35 and the concluding tax period rule in section 27-40. [Schedule 1, item 29, subsection 162-55(4)]

2.40 The maximum time a GST instalment payers election has effect will be a single financial year (since an election can only relate to one financial year and may have effect for the whole financial year under sections 162-25 and 162-30). Consequently, the longest tax period a GST instalment payer will have is one year.

Example 2.8 Peters Pots is eligible to pay GST by instalments and elects on 1 October to do so from the start of the 2001-2002 financial year. Peters Pots has changed the day on which their tax period ends to 7 days before the end of each tax period. As such, Peters Pots quarterly tax period before its election ended on 25 June 2001. Peters Pots instalment tax period for the 2001-2002 financial year will start on 26 June 2001 and end on 25 June 2002.

2.41 As the longest tax period an entity may now have is one year, item59 amends section 22 of the TAA 1953 to ensure that the Commissioner may make an assessment of any part of an entitys net amount. Under section 22 of the TAA 1953, the Commissioner may make an assessment of an entitys net amount for a tax period at any time. This amendment aligns the GST special assessment provision with that which currently exists for income tax.

2.42 While an entity may now have an annual tax period, the rules in the GST Act that applied to the entity when it accounted for GST on a quarterly basis remain the same. That is, an entity will still require tax invoices before being able to claim input tax credits relating to the instalment tax period. Where there has been an adjustment to the price of a supply in a tax period after which the entity made or acquired it, and that adjustment decreases the entitys net amount for a previous instalment tax period, the entity will need an adjustment note before claiming the decreasing adjustment in the next tax period.

Special rules for GST groups

2.43 The instalment tax period for members of a GST group will end on the date there is a change in the membership of the GST group. If a new member joins the GST group, or one leaves the GST group, the instalment tax period of the GST group will end. [Schedule 1, item 29, section 162-95]

2.44 The reason behind this provision is that at the time the membership changes, a GST group should account for its supplies and acquisitions and be able to offset the previous GST instalments paid by the group on behalf of these supplies or acquisitions. For example, if a member leaves a GST group, it should still be able to use a proportion of the GST instalments paid by the representative member to offset some of the GST payable by the leaving member for the supplies it made while being a member of the GST group. The only way this can occur is if the GST groups tax period ends on the date the member left so that the GST group can account for the GST payable on its supplies for the period the leaving member was still in the GST group.

2.45 The GST return for that tax period will be due on the 21st of the month following the end of the tax period (i.e. following the date the membership of the GST group changed). [Schedule 1, item 29, subsection 162-95(2)]

2.46 Since a GST group is not eligible to elect to pay GST by instalments where there has been a change in membership until GST returns covering at least 4 months have been lodged (under paragraph162-5(1)(c)), all members of the GST group must revert to quarterly tax periods when there has been a change in the GST groups membership. An entity leaving the GST group will also revert back to quarterly tax periods.

Example 2.9 Co A, Co B, Co C and Co D are members of a GST group. They have also elected to pay GST by instalments and their instalment tax period started on 1 July 2001. On 15 December 2001 Co D leaves the group. At this time the GST group has paid one GST instalment of $15,000. The instalment tax period of the GST group ends on 15 December 2001 and the GST group must lodge the GST return in respect of that tax period by 21 January 2002 (and pay any net amount for that tax period by this date). Co D and the new GST group of Co A, Co B and Co C will revert back to quarterly tax periods from the time the membership of the group changed. Both Co D and the representative member of the GST group will need to lodge a BAS for that part of the October to December quarter that they are on a quarterly tax period. After Co D and the new GST group have lodged 2 quarterly BASs, both may elect to pay GST by instalments (where they meet all the other eligibility criteria).

Concluding tax periods

2.47 In certain circumstances under the current legislation, a tax period will be the concluding tax period for an individual or other entity. If an entity dies, becomes bankrupt or goes into liquidation or receivership, the entitys concluding tax period is taken to have ended at the end of the day before the death, bankruptcy or liquidation. Where an entity ceases to carry on an enterprise or has its GST registration cancelled, the last day of the entitys concluding tax period is the day the entity ceased to carry on an enterprise or had its registration cancelled.

2.48 However, where an entity is a GST instalment payer and the entity is an individual who dies, an entity that ceases to carry on an enterprise, or has its registration cancelled, the normal rules (as noted in paragraph 2.47) for the entitys concluding tax period changes. In these circumstances the instalment tax period is not affected by the death, cessation or cancellation and will instead end at the end of the financial year. The entity will not be required to pay any GST instalments for GST instalment quarters that commence after the death, cessation of enterprise or cancellation of the entity (however, the entity will still be required to lodge an annual GST return for the tax period). [Schedule 1, item 29, section 162-85]

2.49 However, if an entity is a GST instalment payer and is an individual that becomes bankrupt, an entity that goes into liquidation or receivership or for some other reason ceases to exist, the entitys instalment tax period will end on the day before the date of bankruptcy, liquidation or receivership [Schedule 1, item 29, subsection 162-85(4) and section 27-40] . The GST return, and any payment of the net amount for the instalment tax period will be due on or before the 21st of the month following the end of that tax period (i.e. the date the entity went into bankruptcy, liquidation, receivership or cessation) [Schedule 1, item 29, subsection 162-90] .

Payment of GST by instalments

2.50 A GST instalment payer will have an obligation to pay the Commissioner a GST instalment for each GST instalment quarter in the instalment tax period, unless the entity is one for which only 2 instalments are required. [Schedule 1, item 29, subsection 162-70(1)]

GST instalment quarters

2.51 The GST instalment quarters for an instalment tax period are:

·
the 3 months ending on 30 September during the instalment tax period;
·
the 3 months ending on 31 December during the instalment tax period;
·
the 3 months ending on 31 March during the instalment tax period; and
·
the 3 months ending on 30 June during the instalment tax period.

[Schedule 1, item 29, subsection 162-70(2)]

2.52 If an instalment tax period is only for part of a financial year, those 3 month periods that are not within the instalment tax period are not GST instalment quarters. [Schedule 1, item 29, subsection 162-70(3)]

Due dates for GST instalments

2.53 A GST instalment payer must pay its GST instalments to the Commissioner by:

·
28 October(for the GST instalment quarter ending on 30 September);
·
28 February (for the GST instalment quarter ending on 31 December);
·
28 April (for the GST instalment quarter ending on 31 March); and
·
28 July (for the GST instalment quarter ending on 30 June).

[Schedule 1, item 29, subsection 162-70(4)]

2.54 GST instalments may be paid electronically if they are paid by way of electronic transmission approved by the Commissioner. A GST instalment that is not paid electronically must be paid in a manner the Commissioner has determined in writing. Generally this will mean sending in a cheque or providing direct debit authority. [Schedule 1, item 29, subsection 162-70(5)]

2.55 When making a payment of a GST instalment, the Commissioner may require a GST instalment payer to send in notice of the GST instalment in the approved form by the date the payment is required [Schedule 1, item 29, section 162-75] . If the entity pays a varied instalment amount to the Commissioner, the entity will be required to notify the Commissioner of this varied instalment amount (and the estimated annual GST amount) by the time the entity is required to pay the instalment [Schedule 1, item 29, section 162-140] .

2.56 If a GST instalment payer fails to pay some or all of its GST instalments by the due date for the GST instalment, the GST instalment payer will be liable for GIC on the unpaid amount [Schedule 1, item 29, section 162-100] . The GIC is based on a commercially realistic rate of interest together with a fixed culpability component.

2.57 The GIC will be calculated on a daily compounding basis from the time the GST instalment was due to be paid and finishes at the end of the last day on which either the GST instalment remains unpaid or the GIC on the instalment remains unpaid (whichever comes later). [Schedule 1, item 29, section 162-100]

2.58 However, the Commissioner has the ability to remit the GIC having regard to the circumstances specified in section 8AAG of the TAA 1953. These special circumstances may include things such as financial hardship as a result of a natural disaster.

2.59 Item 58 consequentially amends section 8AAB of the TAA 1953 to include reference to the new section 162-100 GIC penalty in the table of when the GIC applies.

Special rules for primary producers and certain income tax averaging entities

2.60 Since the supplies of primary producers and special professionals will be seasonal due to the nature of their enterprise, a special rule has been included in new Division 162 to ensure that these entities subject to very large inherent fluctuations in income patterns have access to a GST instalment system that, where possible, accommodates this fluctuation. Entities are only required to pay the last 2 GST instalments if:

·
they are eligible to elect to use the GST instalment system; and
·
they elect to use the GST instalment system and:

-
they are a primary producer that satisfies both of the conditions in paragraph 162-80(2)(a), or
-
they are a special professional in the current year and had at least $1 of net professional income in the base year. An individual will be a special professional if he or she is an author, inventor, performing artist, production associate or a sportsperson.

[Schedule 1, item 29, section 162-80]

2.61 A primary producer satisfies both of the conditions in paragraph 162-80(2)(a), if he or she:

·
is carrying on primary production business (as defined in the ITAA 1997) in the year in which the entity chooses to pay GST instalments; and
·
had at least $1 of net income from primary production in the entitys last income tax return.

2.62 The following are examples of primary production business (as defined in the ITAA 1997):

·
cultivating or propagating plants, fungi or their products or part;
·
maintaining animals for the purposes of selling them or their bodily produce;
·
manufacturing dairy produce from raw material that it produces; and
·
felling trees in a plantation or forest.

2.63 If an entity chooses to pay GST by instalments before it has lodged its income tax return for the previous income year, the last income tax return required to be lodged will be used for determining whether the entity has net primary production income of at least $1.

Example 2.10 Foreman owns and operates a dairy farm. On 28 October 2001 Foreman chooses to pay GST by instalments. While Foreman has not yet lodged its income tax return for the 2000-2001 income year, in its 1999-2000 income tax return it had $20,000 net income from its dairy farm. As Foreman carries on a primary production business in the 2001-2002 income year and had more than $1 of net income from its primary production business in its last income tax assessment, Foreman will be on the 2 instalment system.On 31 October 2001 Foreman lodges its income tax return and has a net loss from its primary production business. As, at the time of it choosing to pay GST by instalments, its last income tax return assessed had a net profit from primary production, it will go on the 2 instalment system.

2.64 The instalments of those entities on the 2 GST instalment system will be due on 28 April and on 28 July.

2.65 Apart from only being required to pay 2 GST instalments, these entities will be subject to the same rules as other entities choosing to pay GST by instalments. That is, the entity will pay either the notified instalment amount or a varied instalment amount to the Commissioner by these due dates. However, to avoid being subject to an underestimation penalty, an entity on the 2 GST instalment system will need to ensure that:

·
their instalments ensure that at least 85% of their actual GST liability is paid by 28 July;
·
their estimated annual GST amount is at least 85% of their actual GST liability for the year;
·
75% of their estimated annual GST amount is paid by 28 April (if the variation occurs in the third GST instalment quarter); and
·
100% of their estimated annual GST amount less the instalment amount paid for the preceding quarter is paid by 28 July (if the variation occurs in the last GST instalment quarter).

2.66 More details of the underestimation penalty is provided in paragraphs 2.90 to 2.117.

Example 2.11 Terri Rod operates a family business and averages her income for income tax purposes. She is eligible and elects to pay GST by instalments from 1 July 2001. As a consequence of this she is only liable to 2 instalments, due on 28 April 2002 and 28 July 2002. The ATO tells her that her notified instalment amount for the third instalment quarter is $15,000 and the notified instalment amount for the fourth quarter is due on 28 July 2002 is $5,000.She pays $15,000 on 28 April 2002, but decides to pay a varied instalment amount on 28 July 2002. She estimates her annual GST payable for the year to be $18,000 and works out that her varied instalment amount for the last quarter is $18,000 - $15,000 = $3,000.Before lodging her annual GST return for the 2001-2002 instalment tax period she works out that the GST on the supplies she made was $40,000 while her input tax credit entitlement was $21,000. She works out her net amount for the instalment tax period as follows:

$40,000 - $21,000 - $15,000 - $3,000 = $1,000

Terri must pay $1,000 by the date her annual GST return is due. As she has varied her fourth quarter instalment amount Terri may be liable to a penalty if she has underestimated too much. However, since:

·
the amount of instalments she has paid over the year is within 85% of her actual liability;
·
her estimated GST payable for the year is within 85% of her actual liability; and
·
she ensured she had paid 100% of her estimate in the fourth quarter;

Terry is not liable to any underestimation penalties on her fourth quarter variation. Terri can not be liable to any penalties on her other instalment amount since she did not vary this amount but instead paid the notified instalment amount for that quarter.

GST return

2.67 Under section 31-5 all entities are required to give a GST return to the Commissioner for each tax period whether or not the entity is liable to pay any GST or has a zero net amount. A GST instalment payer must lodge their GST return for their instalment tax period by:

·
the time their income tax return is due; or
·
28 February in the year following the end of their tax period where the GST instalment payer is not required to lodge an income tax return.

[Schedule 1, item 29, subsection 162-60(1)]

2.68 However, for the 2000-2001 financial year, a GST instalment payers GST return for their instalment tax period must be lodged by the date the GST instalment payers income tax return is due or by 28 February 2002, whichever is earlier. [Schedule 1, item 29, subsection 162-60(2)]

2.69 The Commissioner has the ability to extend the due date of a GST return under section 388-55 in Schedule 1 to the TAA 1953.

2.70 The GST return for an instalment tax period may require entities paying GST by instalments to provide details for that instalment tax period and any previous tax period in the financial year in which the instalment tax period falls (if the instalment tax period is not the whole financial year). [Schedule 1, item 29, section 162-65]

2.71 It is envisaged that the approved form for the GST return for an instalment tax period will require entities to provide annual figures of 1A (GST payable), 1B (credits for GST paid), G1 (total sales), G2 (exports), G3 (other GST-free supplies), G10 (capital acquisitions) and G11 (other acquisitions) even if the entity is a GST instalment payer for only 3 months of the financial year.

Example 2.12 Pootie Mens Wear elects to pay GST by instalments on 28 April 2001 which means its instalment tax period runs from 1 January 2001 to 30 June 2001. Pootie Mens Wear lodges its GST return for the instalment tax period on 28 February 2002 (since its income tax return is not due until April 2002) and provides annual figures of 1A, 1B, G1, G2, G3, G10 and G11 since the approved form of the GST return required these annual figures.Even though Pootie Mens Wear has previously reported 1A, 1B, G1, G2, G3, G10 and G11 for the first half of the financial year in its 2 previous GST return covering the July-September and October-December tax periods, it must still provide annual figures. This is because that is what the Commissioner has required in the approved form instructions.

Balancing payments or refunds for GST instalment payers

2.72 At the end of the financial year, when a GST instalment payer works out their actual GST liability they may have paid too much GST to the ATO or too little. Therefore, the Commissioner will either require the entity to pay the balancing amount (section 162-110 ) or will be required to pay that amount to the entity (section 35-5).

2.73 For the purpose of calculating this balancing amount, the net amount for an instalment tax period of a GST instalment payer (which is generally GST less any input tax credits) is reduced by subtracting from this amount the sum of all GST instalments payable for the GST instalment quarters in the instalment tax period. [Schedule 1, item 29, section 162-105]

2.74 If this amount is a positive amount, a GST instalment payer must pay this amount to the Commissioner on or before the due date of its GST return for the instalment tax period. [Schedule 1, item 29, section 162-110]

Example 2.13 Hari runs a personal fitness service and has elected to pay GST by instalments on 28 April 2001. He pays the notified instalment amount ($5,500) on 28 April 2001 and 28 July 2001. Before lodging his GST return for the instalment tax period he calculates that he is liable for $33,000 GST on the taxable supplies he has made from 1 January 2001 to 30 June 2001 and is entitled to $11,000 input tax credits. His net amount for the instalment tax period is:

$33,000 - 11,000 - $5,500 - $5,500 = $11,000

Hari is required to pay $11,000 by the date his income tax return is due or 28 February 2002, whichever is earlier.

2.75 However, if this amount is negative, the Commissioner must pay this amount to the GST instalment payer after it lodges its GST return for the instalment tax period by virtue of section 35-5. If the Commissioner takes more than 14 days after an entity lodges its return to refund this amount, he will generally be liable to interest under the Taxation (Interest on Overpayments and Early Payments) Act 1983.

Example 2.14 Uma is the sole proprietor of a law firm and elects to pay GST by instalments for the 2001-2002 financial year. She pays the notified instalment amount of $9,000 for each of the GST instalment quarters of the instalment tax period.At the end of the financial year she calculates that the GST on taxable supplies she has made in the instalment tax period is $50,000 and she is entitled to the input tax credits of $18,000.Umas net amount is:

$50,000 - $18,000 - $36,000 = -$4,000

After Uma lodges her GST return for the instalment tax period the Commissioner is required to refund $4,000 to her.

GST instalments

2.76 Subdivision 162-C provides details of a GST instalment.

What is a GST instalment?

2.77 A GST instalment is defined in subsection 162-70(1) to be the amount that a GST instalment payer must pay to the Commissioner each GST instalment quarter. This amount will be worked out under subsections162-130(2) and 162-130(3) and will be:

·
if the GST instalment is for the first GST instalment quarter in an entitys instalment tax period:

-
the amount the ATO has told the GST instalment payer to pay (the notified instalment amount); or
-
the amount as varied by the GST instalment payer (the varied instalment amount) [Schedule 1, item 29, subsection 162-130(2)] ;

·
if the GST instalment is for any other GST instalment quarter in an entitys instalment tax period and the entity has paid a notified instalment amount for the previous GST instalment quarter:

-
the amount the ATO has told the GST instalment payer to pay (the notified instalment amount); or
-
the amount as varied by the GST instalment payer (the varied instalment amount) [Schedule 1, item 29, paragraph 162-130(3)(a)] ; or

·
if the GST instalment is for any other GST instalment quarter in an entitys instalment tax period and the entity has paid a varied instalment amount for the previous GST instalment quarter:

-
25% of the GST instalment payers previous estimated annual GST amount; or
-
a different varied instalment amount [Schedule 1, item 29, paragraph 162-130(3)(b)] .

2.78 However, if a GST instalment payer pays a varied instalment amount to the Commissioner, it may be liable to a penalty under Subdivision 162-D where it has underestimated their instalment amount by too much. Further details of these penalties are provided in paragraphs 2.90 to 2.117.

Notified instalment amount

2.79 A GST instalment payers notified instalment amount for a GST instalment quarter will be the amount as worked out by the Commissioner and notified to the GST instalment payer before the due date of their first GST instalment for the GST instalment quarter. If an entity pays the notified instalment amount to the Commissioner for their first GST instalment quarter (i.e. they do not vary their instalment amount), the Commissioner will notify the entity of their notified instalment amount for the next GST instalment quarter. [Schedule 1, item 29, section 162-135]

2.80 Once an entity pays a varied instalment amount to the Commissioner for a GST instalment quarter, the Commissioner will not work out or notify the entity of a notified instalment amount for each GST instalment quarter after their varied instalment amount. This is because by varying the instalment, the entity has indicated that the past data the ATO relied on to calculate the notified instalment amount is not representative of the current financial years trading. [Schedule 1, item 29, subsection 162-135(2)]

Varied instalment amount

2.81 An entity is able to vary their instalment amount to any amount that is not less than zero [Schedule 1, item 29, subsection 162-140(2)] . An entitys varied instalment amount is:

·
the amount it substitutes for its notified instalment amount;
·
the amount it substitutes for its previous quarters varied instalment amount; or
·
25% of its preceding quarters estimated annual GST amount [Schedule 1, item 29, subsection 162-140(1) and paragraph 162-140(5)(a)] .

2.82 However, if an entity underestimates their variation by too much it may be subject to an underestimation penalty.

2.83 Therefore, an entity that varies their instalment amount must calculate their varied instalment amount with reference to their estimated annual GST amount otherwise they may be subject to penalties for underestimating their variation. The estimated annual GST amount is the GST instalment payers estimate of their annual GST liability. [Schedule 1, item 29, subsection 162-140(4) and section 162-145]

2.84 Where an entity chooses to pay GST by instalments part way through the financial year, it would have lodged BASs for the tax periods in the financial year it was not paying GST by instalments (otherwise it would be ineligible to choose to pay GST by instalments). An entitys early net amounts for the financial year are its net amounts for those tax periods which it lodged BASs in the financial year before it chose to pay GST by instalments. [Schedule 1, item 29, subsection 162-145(3)]

Example 2.15 NG Enterprises chooses to pay GST by instalments from the third quarter of the 2000-2001 financial year as they meet the eligibility requirements.The ATO notifies NG Enterprises their notified instalment amount for the GST instalment quarters ending 31 March 2001 and 30 June 2001 is $30,000. As NG Enterprises wishes to vary their notified instalment amount it must first calculate its estimated annual GST amount relating to the GST instalment quarter. This means that NG Enterprises need to estimate their GST payable for the full financial year (1 July 2000 to 30 June 2001).This is because the instalment tax period for NG Enterprises is from 1 January 2001 to 30 June 2001, while its early net amounts will be the net amounts for the 1 July 2000 to 30 September 2000 quarter and the 1 October 2000 to the 31 December 2000 quarter.As NG Enterprises paid $27,000 of GST in its September BAS and $38,000 of GST in its December BAS, it estimates that its annual GST liability for the 2000-2001 financial year will be $120,000. It varies its third quarter instalment amount to:

($120,000 * 75%) - $27,000 - $38,000 = $25,000

2.85 However, when calculating the estimated annual GST amount, a GST instalment payer must do so carefully. If, at the end of the instalment tax period it turns out that the GST instalment payers estimate is not within 85% of their actual GST payable for the financial year, the entity will be liable for underestimation penalties outlined in Subdivision 162-D.

2.86 Once an entity has paid a varied instalment amount to the ATO, it must vary its notified instalment amount for all subsequent GST instalment quarters in the instalment tax period. When varying their GST instalment, a GST instalment payer must notify the Commissioner of its varied instalment amount and its estimated annual GST amount in the approved form by the time its GST instalment is due. [Schedule 1, item 29, subsections 162-140(1), (3) and (4)]

Guidelines on how an entity should determine their varied instalment amount

2.87 When estimating a varied instalment amount, an entity will first need to work out what it estimates its GST liability will be for the year (known in Division 162 as the entitys estimated annual GST amount). An entity will need to make this estimate with some accuracy since if, at the end of the year, it turns out that this estimate was not within 85% of their actual GST liability, the entity will be subject to a penalty (at the rate of the GIC) for each quarter that their estimate was not within 85% of the actual GST liability for the year.

2.88 After the entity has estimated their GST liability for the year, it works out its varied instalment amount as follows:

·
if the variation is for the first quarter (ending 30 September):

varied instalment amount = estimated annual GST amount * 25%;

·
if the variation is for the second quarter (ending 31 December):

varied instalment amount = (estimated annual GST amount * 50%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts);

·
if the variation is for the third quarter (ending 31 March):

varied instalment amount = (estimated annual GST amount * 75%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts); or

·
if the variation is for the fourth quarter (ending 30 June):

varied instalment amount = (estimated annual GST amount * 100%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts).

2.89 An entity should also ensure that, by the end of the financial year, 85% of the actual GST liability for the year has been paid.

Example 2.16 Elizabeth, an electrician, is eligible to pay GST by instalments and chooses to do so on 28 April 2001. Her instalment tax period is therefore from 1 January 2001 to 30 June 2001. In her first quarterly BAS she paid the ATO $18,000 GST and in her second quarterly BAS she paid $25,000. The ATO advises her that her notified instalment amount for the third and fourth GST instalment quarters of the 2000-2001 financial year is $25,000. Elizabeth estimates that her GST liability for the 2000-2001 financial year to be $80,000. She then decided to vary her third quarter GST instalment and works out her varied instalment amount for the third quarter to be:

($80,000 * 75%) - $25,000 - $18,000 = $17,000

In the fourth quarter she revises her estimated GST liability for the year and believes it will be $85,000. As she has varied in the third quarter, she must vary in the fourth quarter as well and works out that her varied instalment amount for the fourth quarter to be:

($85,000 * 100%) - $25,000 - $18,000 - $17,000 = $25,000

At the end of the year she calculates that her actual GST liability for the year is $90,000. Elizabeth is not liable to any penalties as 85% of this ($76,500) was paid by the end of the year and all her estimates of GST liability for the year were within 85% of $90,000. Elizabeth will need to make a final payment of GST of $90,000 less $85,000 (her previous GST instalments and net amounts) by the time she must lodge her GST return for the instalment tax period (i.e. the earlier of when her income tax return is due or 28 February 2002).

Example 2.17 Linda operates a civil engineering firm and chooses to pay GST by instalments from 1 July 2001. The ATO informs her that her notified GST instalment for the first GST instalment quarter is $50,000. Before paying her GST instalment for the first quarter, Linda estimates her GST liability for the year to be $175,000. She decides to pay a varied instalment amount to the ATO for the first quarter and works it out to be:

($175,000 * 25%) = $43,750

In the second quarter she revises her estimate of her annual GST liability to $185,000 and works out that her varied instalment amount for that quarter to be:

($185,000 * 50%) - $43,750 = $48,750

In the third quarter she estimates that her annual GST liability for the year to remain at $185,000. Her varied instalment amount for that quarter is:

($185,000 * 75%) - $43,750 - $48,750 = $46,250

In the fourth quarter she revises her annual GST liability for the year to $190,000. Her varied instalment amount for the fourth quarter is:

($190,000 100%) - $43,750 - $48,750 - $46,250 = $51,250

Linda works out that her actual GST liability for the year to be $215,000. As she has paid more than 85% of this by the end of the 2001-2002 financial year, she is not liable to a section 162-175 penalty. Her estimates of her GST liability for quarters 2 to 4 were within 85% of this amount, so she is not liable to any penalties for those quarters. Due to the transitional rule for the 2001-2002 financial year, Linda only needs to ensure that her first quarter estimate is within 75% of her actual GST liability for the year (75% of $215,000 is $161,250). As her estimated annual GST amount for this quarter was above this amount, she is not liable for any penalties for underestimating her GST liability.Linda will only need to make a final payment of GST of $25,000 ($215,000 - $190,000; her previous GST instalments for the year) by the time she must lodge her GST return for the instalment tax period (i.e. the time her income tax return is due).

Example 2.18 Walker Co sells hiking gear to the general public. It is eligible and chooses to pay GST by instalments from 1 January 2001 to 30 June 2001. Walker Cos GST payable on its September 2000 BAS was $35,000 while on its December 2000 BAS was $50,000. The ATO informs Walker Co that its notified instalment amount for the March and June GST instalment quarters is $50,000.In the third quarter, Walker Co estimates their GST liability for the year to be $155,000 and decide to pay a varied instalment amount for that quarter of:

($155,000 * 75%) - $35,000 - $50,000 = $31,250

However, in May and June 2001 Walker Co experiences an unexpected and huge surge in sales of hiking gear after an extensive marketing campaign by health groups on the benefits of hiking for all persons. Therefore Walker Co now estimates that their GST liability for the quarter to be $200,000. Their varied instalment amount for the fourth quarter is:

($200,000 100%) - $35,000 - $50,000 - $31,250 = $83,750

At the end of the year Walker Co lodges its GST return with an actual GST liability for the year of $210,000. While they have ensured that 85% of this was paid by the end of the fourth quarter, their estimate for the third quarter was well below $178,500 (85% of $210,000).However, after the ATO notifies them of the penalty they are subject to for this estimation, they contact the ATO and ask that the Commissioner remit the penalty, in whole or in part. They notify the ATO that at the third quarter, Walker Cos estimated GST liability for the year was both fair and reasonable and the only reason it was incorrect was because of an unexpected upturn in sales in the fourth quarter. The Commissioner decides to remit all of the penalty since Walker Co is able to adequately prove that their estimated annual GST amount for the third quarter of $155,000 was both a fair and reasonable estimate of their liability at that time.Walker Co must still ensure that they pay the difference between the GST that they have paid and what they should have paid ($210,000 - $200,000) to the ATO by the earlier of when their income tax return is due or 28 February 2002.

Underestimation penalties if varied instalment amounts are too low

2.90 A GST instalment payer that pays a varied instalment amount for a GST instalment quarter may be subject to penalties if they underestimate their variation by too much. Subdivision 162-D provides the details of the penalties that may apply to an entity paying GST by instalments that has varied their instalment amount and underestimated it by too much. An entity will never be subject to a penalty under Subdivision 162-D if it pays the ATO notified instalment amount for each quarter in the instalment tax period.

2.91 To ensure that the varied instalment amount is not subject to an underestimation penalty, a GST instalment payer should ensure that:

·
the total of what they have paid (including their instalment payments) is not below 85% of their annual GST liability;
·
their estimated annual GST amount is not below 85% of their annual GST liability; and
·
their varied instalment amount is a correct proportion of their estimated annual GST amount.

[Schedule 1, item 29, section 162-170]

2.92 There are 3 mutually exclusive penalties an entity may be subject to if they vary their notified instalment amount. While the penalty will apply the GIC to the GST instalment shortfalls, it will not make an entity liable to the GIC [Schedule 1, Part 2, item 29, section 162-205] . Penalties under Subdivision 162-D are income tax deductible [Schedule 1, Part 2, items 56 and 57] .

The GST paid for the year is less than 85% of its actual GST liability for the year

2.93 The first penalty looks at the amount of instalments a GST instalment payer has paid over the year in which it chooses to pay GST by instalments, and compares this to the actual GST it should have paid for the year. Where the total of what an entity has paid (including their instalments payments) is less than 85% of the entitys actual GST liability for the year, the entity will be subject to a penalty at the rate of the GIC. [Schedule 1, item 29, section 162-175]

2.94 The penalty is levied for each quarter in which an entity pays the ATO a varied instalment amount. The amount of this penalty for a particular day, is worked out by applying the GIC to an entitys GST instalment shortfall. An entitys GST instalment shortfall is worked out as follows for each quarter:

·
first quarter:
(annual GST liability * 25%) - GST already payable;
·
second quarter:
(annual GST liability * 50%) - GST already payable;
·
third quarter:
(annual GST liability * 75%) - GST already payable; and
·
fourth quarter:
(annual GST liability * 100%) - GST already payable.

2.95 The GST already payable is the sum of:

·
the varied instalment amount;
·
all other instalments amounts for the earlier GST instalment quarters in the financial year (if any); and
·
all other early net amounts for the financial year (if any).

[Schedule 1, item 29, subsection 162-175(3)]

2.96 If an entity is liable to this penalty for more than one GST instalment quarter in the financial year, the amount of the GST instalment shortfall for the later GST instalment quarters is reduced by the amount of the preceding quarter(s) GST instalment shortfall. Where the sum of the GST instalment shortfalls for the previous GST instalment quarters is greater than the amount of the GST instalment shortfall for the later GST instalment quarter, the entity is not liable for a penalty for that GST instalment quarter under section 162-175. [Schedule 1, item 29, subsection 162-175(4)]

2.97 However, the amount of the GST instalment shortfall (which is applied to the penalty) will be reduced if:

·
an entitys notified instalment amount is less than 25% of its annual GST liability; or
·
the entitys notified instalment amount would have been less than 25% of its annual GST liability (had the Commissioner had notified the entity of one).

[Schedule 1, item 29, subsection 162-195(1)]

2.98 The reduction in the GST instalment shortfall will be the difference between the annual GST liability that should have been paid in a particular quarter, and the sum of the entitys notified instalment amounts (or what would have been the entitys notified instalment amounts had the Commissioner notified the entity of one) that it should have paid by that quarter. [Schedule 1, item 29, subsection 162-195(2)]

2.99 However if, because of the reduction, an entitys GST instalment shortfall for the GST instalment quarter is less than zero, the entity is not liable for a penalty under section 162-175 in relation to that quarter. [Schedule 1, item 29, subsection 162-195(3)]

Example 2.19 Owango Co chooses to pay GST by instalments from 1 July 2001. It pays the notified instalment amount ($12,000) for the first quarter but pays a varied instalment amount for the second quarter to the fourth quarter of $10,000, $11,000 and $12,000 respectively.At the end of the year Owango Co lodges its GST return with an actual GST liability of $55,000. As the amount of GST Owango Co has paid over the year ($45,000) is less than 85% of $55,000 ($46,750), Owango Co is liable for a penalty under section 162-175 for each GST instalment quarter it varied its instalment amount (i.e. the second quarter to the fourth quarter).Assuming the Commissioner would have notified Owango Co to pay an instalment of $12,000 in each GST instalment quarter of the instalment tax period, the reduction in any GST shortfall amount will be:

·
second quarter:
(50% * $55,000) - ($12,000 + $12,000) = $3,500;
·
third quarter:
(75% * $55,000) - ($12,000 + $12,000 + $12,000) = $5,250; and
·
fourth quarter:
(100% * $55,000) - ($12,000 4) = $7,000

The amount on which the penalty will be applied (taking into account these reductions) is calculated as:

·
second quarter:
($55,000 * 50%) - ($22,000) - $3,500 = $2,000;
·
third quarter:
($55,000 * 75%) - ($33,000 + $2,000) - $5,250 = $1,000; and
·
fourth quarter:
($55,000 * 100%) - ($45,000 + $2,000 + $1,000) - $7,000 = $0

2.100 An entity will only be subject to the second penalty if it has varied its instalment amount and is not subject to the first penalty. The second penalty looks at what a GST instalment payer has provided as its estimated annual GST amount (i.e. its annual estimate) and compares it to its actual annual GST liability. An entity will be subject to a penalty for each quarter in which the estimate is not within 85% (or 75% if the estimate is made in the GST instalment quarter that ends on 30 September 2001) of the entitys actual annual GST liability. [Schedule 1, item 29, section 162-180]

2.101 The amount of the penalty is calculated by way of a formula and is dependant on which quarter the underestimation occurred. The penalty applies the GIC to the GST instalment quarters GST instalment shortfall. If the underestimation occurred in the first quarter of the financial year (ending on 30 September) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 25%

2.102 Where the underestimation occurs in the second quarter of the financial year (ending 31 December) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 50%

2.103 Where the underestimation occurs in the third quarter of the financial year (ending 31 March) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 75%

2.104 Where the underestimation occurs in the fourth quarter of the financial year (ending 30 June) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 100%

2.105 However, if an entity is liable to this penalty for more than one GST instalment quarter in the financial year, the amount on which the penalty is based for the later GST instalment quarters is reduced by the penalty amount (excluding GIC) for the entity, that was calculated in respect of the previous GST instalment quarters. Where the sum of those amounts for the previous GST instalment quarters is greater then the amount on which the penalty will be applied for the later GST instalment quarter, the entity is not liable for a penalty for that GST instalment quarter under section 162-180. [Schedule 1, item 29, subsection 162-180(4)]

Example 2.20 Rebecca is a plumber registered for GST and chooses to pay GST by instalments from 1 July 2001. The ATO notified instalment amounts for the first 2 quarters was $25,000 each quarter. Rebecca varies her instalments in the third quarter to $10,000 (based on an annual estimate of $80,000). In the fourth quarter she varies upwards to $25,000 (based on an annual estimate of $85,000). The total of her instalment payments is $85,000.At the end of the financial year she lodges her annual GST return and works out that her GST payable was $95,000 (85% of this is $80,750). Since the total of her instalments paid was over 85% of her actual GST liability, Rebecca is not subject to a section 162-175 penalty. However, in the third quarter, Rebeccas annual estimate of GST was less than 85% of the actual amount of $95,000. She is liable to a section 162-180 penalty for the quarter in which the underestimation occurred (the third quarter). The amount on which the penalty is applied is:

($95,000 - $80,000) = $11,250

2.106 The amount of the GST instalment shortfall (which is applied to the penalty) will also be reduced if:

·
an entitys notified instalment amount is less than 25% of its annual GST liability; or
·
the entitys notified instalment amount would have been less than 25% of its annual GST liability (had the Commissioner notified the entity of one).

[Schedule 1, item 29, subsection 162-195(1)]

2.107 The reduction in the GST instalment shortfall will be the difference between the annual GST liability that should have been paid in a particular quarter, and the sum of the entitys notified instalment amounts (or what would have been the entitys notified instalment amounts had the Commissioner notified the entity of one) that it should have paid by that quarter. [Schedule 1, item 29, subsection 162-195(2)]

2.108 However if, because of the reduction, an entitys GST instalment shortfall for the GST instalment quarter is less than zero, the entity is not liable for a penalty under section 162-180 in relation to that quarter. [Schedule 1, item 29, subsection 162-195(3)]

Shortfall where the GST instalments are worked out with reference to the estimated annual GST amount

2.109 The last penalty ensures that an entitys varied instalment amount is a correct proportion of their estimated annual GST amount. A correct proportion of an estimated annual GST amount for the first quarter is 25%, for the second quarter is 50% (less previous payments), for the third quarter is 75% (less previous payments) and for the fourth quarter is 100% (less previous payments). An entity will only be subject to this penalty where it is not liable for any of the other 2 penalties for the quarter. [Schedule 1, Part 2, item 29, section 162-185]

2.110 This penalty ensures that an entity that correctly estimates its annual GST amount cannot vary their instalments to zero in the first 3 quarters and then pay 100% of the estimated annual GST liability in the last quarter. By doing this the entity would avoid the first 2 penalties but will be subject to this last penalty.

2.111 To ensure that the varied amount is the correct proportion of an entitys estimated annual GST amount, the entity must ensure that it is not less than:

·
25% of their estimated annual GST amount (if the variation occurs in the first GST instalment quarter);
·
50% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarter (if the variation occurs in the second GST instalment quarter);
·
75% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarters (if the variation occurs in the third GST instalment quarter); and
·
100% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarters (if the variation occurs in the last GST instalment quarter).

[Schedule 1, item 29, section 162-185]

2.112 The penalty applies the GIC to the GST instalment shortfall for the GST instalment quarter. The GST instalment shortfall for each quarter will be as follows:

·
first quarter:
(estimated annual GST amount * 25%) - GST already paid or payable;
·
second quarter:
(estimated annual GST amount * 50%) - GST already paid or payable;
·
third quarter:
(estimated annual GST amount * 75%) - GST already paid or payable; and
·
fourth quarter:
(estimated annual GST amount * 100%) - GST already paid or payable.

2.113 An entitys GST already paid or payable is the varied instalment amount for the GST instalment quarter, plus any GST instalment it has paid (or is liable to pay) for the earlier GST instalment quarters (if any), plus any early GST net amounts it has paid (or is liable to pay) for other tax periods in the financial year (if any). [Schedule 1, item 29, paragraph 162-185(1)(c)]

Example 2.21 Amenko Pty Ltd chooses to pay GST by instalments from 1 January 2001. Its notified instalment amount in the third quarter is $25,000. In the fourth quarter it estimates its annual GST liability to be $85,000. However, it varied its fourth quarter instalment to $21,000. In the first quarter and the second quarter of the 2000-2001 financial year it paid the ATO an amount of $10,000 and $25,000 respectively. Amenko Pty Ltd works out its actual GST liability for the year to be $95,000. It is therefore not subject to a section 162-175 or 162-180 penalty as both 85% of total GST liability was paid by the end of the year and Amenko Pty Ltds estimate was within 85% of $95,000. However, since for the fourth quarter, the varied amount of $21,000 is less than 100% of ($85,000 less $60,000), they are liable to a section 162-70 penalty. The amount on which the penalty is applies is:

($85,000 * 100%) - ($21,000 + $25,000 + $25,000 + $10,000) = $4,000

The period for which an entity is liable to a penalty

2.114 The penalty is imposed at the rate of the GIC for each day in the period:

·
starting on the due date for the GST instalment for the GST instalment quarter; and
·
finishes the day before the end of the due date on which the entity must pay its net amount to the Commissioner under section 162-60. This day is generally the day before an entity is required to give the Commissioner its income tax return, or 28 February. For the 2000-2001 financial year this day will be the day before the earlier of either when an entity is required to give its income tax return or 28 February 2002.

[Schedule 1, item 29, section 162-190]

2.115 However, where an amount of a GST instalment shortfall for a varied GST instalment is made up in a later GST instalment quarter, the period for which the penalty is imposed will end on the day before the shortfall amount was made up. [Schedule 1, item 29, section 162-200]

Example 2.22 Brad Danes Pty Ltd chooses to pay GST by instalments from 1 July 2001. Its notified instalment amount is $2,300. Brad Danes Pty Ltd chooses to vary its GST instalments for all quarters and pays the following:

·
first quarter:

$1,375 (based on an estimated annual GST amount of $5,500)

·
second quarter:

$2,625 (based on an estimated annual GST amount of $8,000)

·
third quarter:

$2,000 (based on an estimated annual GST amount of $8,000)

·
fourth quarter:

$2,000 (based on an estimated annual GST amount of $8,000)

At the end of the financial year it works out that its annual GST liability for the 2001-2002 financial year was $8,000. While it has paid over 85% of this amount by the due date of the last GST instalment quarter, its estimated annual GST amount in first quarter was less than 75% of its annual GST liability. The amount on which the penalty applies is:

($8,000 - $5,500) * 25% = $625

Brad Danes Pty Ltd makes up this shortfall amount in the second quarter because the instalment paid in the second quarter ($2,625) exceeds 25% of the annual GST liability ($8,000). Therefore, the penalty Brad Danes Pty Ltd is liable to for its underestimation in the first quarter runs from the date the first quarter GST instalment was due (28 October) and will end on the day before it paid the $2,625 to the ATO.

Machinery provisions for civil penalties

2.116 Division 298 in Schedule 1 to the TAA 1953 provides generic machinery provisions for all civil penalties in the taxation law that are expressed as penalty units. The civil penalties in the taxation law are imposed where an entity has failed to satisfy a particular requirement. The matter is not an offence and, as such, does not require prosecution. Item59 amends section 298-5 to include reference to the underestimation penalties in it, so that the requirements Division 298 imposes on the Commissioner are also imposed on him for Subdivision 162-D penalties. [Schedule 1, Part 2, item 61]

2.117 Consequently, where an entity is subject to a Subdivision 162-D penalty:

·
the Commissioner is obliged to serve a notice of the penalty on the entity (the notice can be included in any other notice that the Commissioner gives the entity under that section);
·
the penalty will become due on the day specified in the notice which must be at least 14 days after service of the notice on the entity; and
·
the Commissioner will be able to remit the penalty, in whole or in part:

-
where the Commissioner decides not to remit the penalty or to remit only part of the penalty he must give written notice of the remission decision to the entity; and
-
if an entity is dissatisfied with the Commissioners remission decision and the penalty payable after the remission decision is more than 2 penalty units, the entity can object against the decision under Part IVC of the TAA 1953.

Consequential amendments

2.118 Items 23 to 27 insert references to Division 162 in sections 17-99, 27-99, 31-99, 33-9 and 37-1 respectively. This ensures that readers are aware of the special rules relating to an entitys net amount, tax period, GST return, payment of GST and the checklist of special rules because of the new GST instalment system.

2.119 Item 28 inserts a note about Division 162 in Division 126 so that a reader is aware how their net amount is reduced by GST instalments. Items 33 to 55 amend the GST Dictionary in section 195-1 to insert the new terms used in Division 162 into that Dictionary.

Application and transitional provisions

2.120 The amendments in this chapter (apart from those relating to the income tax deductibility of the underestimation penalties) apply, and are taken to have applied, in relation to GST returns, and net amounts, for tax periods ending on or after 22 February 2001. [Schedule 1, Part 2, subitem 62(1)]

2.121 The amendment to make the underestimation penalties income tax deductible apply to income tax assessments for the 2000-2001 income year and later income years. [Schedule 1, Part 2, subitem 62(2)]

Chapter 3 - Substituted accounting periods

Outline of chapter

3.1 Part 3 of Schedule 1to this Bill details the amendments to the GST Act to permit entities who use substituted accounting periods to be able to choose either quarterly or monthly tax periods, subject to the existing turnover threshold and election rules.

Detailed explanation of new law

3.2 Currently, where an entity has a substituted accounting period, the Commissioner must determine that it accounts for GST on a monthly basis (paragraph 27-15(1)(d)), unless that entity is a non-profit entity (subsection 27-15(2A)).

3.3 Item 64 of Schedule 1 repeals paragraph 27-15(1)(d)), so that an entity with a substituted accounting period may choose quarterly or monthly tax periods, subject to the existing turnover thresholds and election rules. Due to the above amendment, item 63 makes a minor consequential amendment to paragraph 27-15(1)(c) of the GST Act.

3.4 Item65 repeals subsection 27-15(2A) of the GST Act as it is no longer required given the repeal of paragraph 27-15(1)(d).

Example 3.1 Lee and John have run an eco-farm for 10 years and have always accounted for all their taxation obligations in an income year that is not the financial year (i.e. they adopted a substituted accounting period) as it better suited the seasonal nature of their business. Their annual turnover is $5 million. Under the existing law, Lee and John would have to account for GST on a monthly basis. From 1 July 2001, their tax periods will be 3-month periods, however they may elect to account for GST on a monthly basis.

Application and transitional provisions

3.5 These amendments apply from 1 July 2001 [Schedule 1, Part 3, subitem 66(1)] . Under section 27-25, the Commissioner is unable to revoke a determination of a monthly tax period until it has had effect for 12 months. However, the Commissioners determination for entities with a substituted accounting period end on 1 July 2001, even if that date is less than 12 months after the date on which the determination was made [Schedule 1, Part 3, subitem 66(2)] .

Chapter 4 - Correcting GST errors

Outline of chapter

4.1 Part 4 of Schedule 1 to this Bill describes amendments to the GST Act to permit the Commissioner to make determinations that provide for a simplified mechanism for correcting errors in GST returns.

Detailed explanation of new law

4.2 Section 17-20 provides that the Commissioner may make a determination that allows a net amount for a tax period to take account of the need to correct errors made in the immediately preceding tax period. [Schedule 1, Part 4, item 67]

4.3 The intention of this section is to allow the Commissioner to make flexible rules to minimise the effort required to remedy small errors made in preparing GST returns.

Example 4.1 The Commissioner makes a determination in relation to the correction of errors made in GST returns. Benjamin prepares and lodges his GST return for the third quarter of 2001. Some days later Benjamin realises that in preparing that GST return he had mistakenly double counted a $100 input tax credit in relation to a stationery supply. Benjamin checks that this correction falls under the limitations provided in the Commissioners determination and finds that it does. As such, he may correct the error by subtracting the overclaimed input tax credit from his GST return for the fourth quarter of 2001.

Application and transitional provisions

4.4 These amendments apply from 1 July 2000. [Schedule 1, Part 4, item 68]

Chapter 5 - Input tax credits for motor vehicles

Outline of chapter

5.1 Part 5 of Schedule 1 amends section 20 of the GST Transition Act to remove the phasing-in rules for input tax credits that apply in relation to the acquisition or importation of motor vehicles, trailers and vehicle bodies.

Context of reform

5.2 Under the New Tax System, the availability of input tax credits for the GST on new motor vehicles, certain trailers and vehicle bodies was subject to a phasing-in arrangement. Input tax credits were denied in full for the first year of the GST and a 50% denial was to be applied for the year commencing 1 July 2005. Full input tax credits were to be available from 1 July 2002. These phasing-in rules were designed to minimise the disruption to the market that could have occurred if businesses were to defer their purchases of motor vehicles in the months preceding the GST.

Detailed explanation of new law

5.3 Section 20 of the GST Transition Act applies to:

·
motor vehicles (including cars, trucks and motor cycles);
·
detachable trailers for heavy prime movers such as semi-trailers; and
·
bodies for motor vehicles (e.g. refrigerated bodies).

5.4 Amendment 2 amends section 20 to effectively end the input tax credit phasing-in rules on and from 23 May 2005. The effect of these changes is that entities entitled to claim input tax credits will be able to claim full input tax credits for new motor vehicles, trailers and vehicle bodies acquired or imported on or after 23 May 2005. For the purposes of these amendments, a motor vehicle, trailer or body will be taken to be acquired when it is physically removed by the entity acquiring the motor vehicle, trailer or body. Where the entity claiming the input tax credit has imported the motor vehicle, trailer or body, the time of importation is taken to be the time the taxable importation occurs. The changes to achieve these outcomes are discussed in paragraphs 5.5 to 5.10.

5.5 Subsection 20(2) is amended to change the date on which the denial of input tax credits ends. Currently, the denial of input tax credits relates to acquisitions or importations made before 1 July 2005. This date is amended to 23 May 2001 [Schedule 1, item 70] . Subsection 20(4C), which is about eligible short-term lease agreements, is also amended to reflect this change [Schedule 1, item 75] .

5.6 Subsection 20(3) provided a 50% denial of input tax credits for acquisitions or importations made on or after 1 July 2001 but before 1 July 2002. As full input tax credits will be available on and from 23 May 2001, this subsection is no longer relevant and is repealed [Schedule 1, item 71] . Subsections 20(3A) and 20(4B) are amended to remove redundant references to subsection 20(3) [Schedule 1, items 72 to 74] . Subsection 20(6) is also repealed as it referred only to the 50% reduction in input tax credits in subsection 20(3) [Schedule 1, item 76] .

5.7 Section 6 of the GST Transition Act provides rules for determining when an acquisition occurs and refers to when the goods are removed. To clarify the time of supply, section 20 is amended to provide rules for determining when motor vehicles, trailers and bodies are removed. Subsection 6(2) is amended by adding a note referring to the rules in new subsection 20(8) for when goods are taken to be removed. [Schedule 1, item 69]

5.8 New subsection 20(8) provides that the time motor vehicles, trailers and bodies are taken to be removed is when they are physically removed:

·
by the entity acquiring the motor vehicle, trailer or body; or
·
by the lessee where the motor vehicle, trailer or body is leased if this occurs before the lessor removes them.

[Schedule 1, item 77]

Example 5.1 Ray orders and pays for a vehicle on 21 May 2001 but does not take delivery of the vehicle until 23 May 2005. The vehicle is delivered on or after 23 May 2001 and therefore section 20 will not prevent Ray from claiming an input tax credit for the acquisition of the vehicle. Ray will still need to satisfy the normal rules for claiming input tax credits in Division 11 of the A New Tax System (Goods and Services Tax) Act 1999.

Example 5.2 Bruno orders and pays for a new refrigerated body for his delivery truck on 10 May 2005. The manufacturer phones Bruno on 21 May 2001 to say that the refrigerated body is complete and ready to be fitted. Bruno does not take his truck to have the new body fitted until 24 May 2005. The refrigerated body is physically removed on or after 23 May 2005. As Bruno has not acquired the refrigerated body before 23 May 2001, section 20 will not prevent Bruno from claiming an input tax credit in relation to the acquisition of the refrigerated body.

Example 5.3 AGP Finance enters into an agreement with MG Company for the lease of a motor vehicle. AGP Finance orders the vehicle on 21 May 2005. The vehicle is available on 22 May 2001 but AGP Finance does not take delivery of the vehicle. The vehicle is taken from the motor vehicle dealer by MG Company on 24 May 2005. The vehicle is physically removed by the lessee on or after 23 May 2001 and therefore section 20 will not prevent AGP Finance from claiming an input tax credit in relation to the acquisition of the vehicle.

5.9 The rule in new subsection 20(8) only applies in relation to acquisitions covered by section 20. [Schedule 1, item 77, subsection 20(9)]

5.10 New subsection 20(10) provides a rule for determining the time an importation takes place. A motor vehicle, trailer or vehicle body will be taken to be imported when it becomes a taxable importation. In the majority of cases the importation of a motor vehicle will become a taxable importation when it is entered for home consumption. [Schedule 1, item 77]

Application and transitional provisions

5.11 The amendments apply in relation to motor vehicles, trailers and vehicle bodies acquired or imported on or after 23 May 2001 [Schedule 1, item 78] . The amendments in Part 5 of Schedule 1 are taken to have commenced on 23 May 2005.

Chapter 6 - PAYG instalments

Outline of chapter

6.1 Schedule 2 to this Bill explains amendments to simplify the PAYG instalments regime with a view to reducing the costs incurred by taxpayers in complying with that regime. The amendments implement measures - most of which were announced in Treasurers Press Release No. 7 on 22 February 2001. Schedule 5 to this Bill will make 2 technical corrections to subsection 45-30(2) of Schedule 1 to the TAA 1953. They ensure that the correct amount of PAYG instalments is credited against the payers assessment when taxpayers using the GDP-adjusted notional tax method vary their instalment(s).

Context of reform

6.2 The PAYG instalments regime has operated since the beginning of the 2000-2001 income year. The object of the PAYG instalments regime is to ensure the efficient collection of income tax, the Medicare levy and liabilities for debts arising under the higher education contribution and student financial supplement schemes. It requires taxpayers who have been given an instalment rate by the Commissioner to pay instalments over the course of the income year that are as close as possible to the total of the entitys liabilities for those amounts on assessment for that year.

6.3 The PAYG instalments regime currently provides that entities are required to pay quarterly instalments worked out using the instalment income times instalment rate (instalment income) method unless they are entitled to choose, and have chosen, to pay using another method. The instalment income method generally requires entities to keep track of the instalment income they earn each quarter. (Note: an entitys instalment income is generally its ordinary business and investment income, but there are special rules for some entities including superannuation funds.) Many entities, especially individuals who are either partners in partnerships or beneficiaries in trusts, have found the compliance costs incurred in doing this high.

6.4 Currently, certain entities can choose to pay quarterly or annual instalments that are worked out, and notified, by the Commissioner. For example, entities which are not registered, or required to be registered, for GST and whose notional tax (which in simple terms is the tax attributable to an entitys business and investment income for the previous income year) is less than $8,000 can pay an annual instalment equal to their notional tax. Further, individuals who are not registered, or required to be registered, for GST and who have a notional tax of $8,000 or more may pay their quarterly instalments based on an amount worked out, and notified, by the Commissioner. This method is known as the GDP-adjusted notional tax method.

6.5 The Government has decided to allow a broader range of entities to use the GDP-adjusted notional tax method of paying quarterly instalments. This will reduce the costs of complying with the PAYG instalments system because the affected entities will simply pay an amount worked out, and notified, by the Commissioner and will not have to keep track of the instalment income they earn each quarter.

Summary of new law

6.6 A much larger subset of PAYG instalment payers will become eligible to use the GDP-adjusted notional tax method. All of the following entities will be eligible to pay instalments worked out, and notified, by the Commissioner using the GDP-adjusted notional tax method following the amendments made by this Bill:

·
all individuals;
·
companies, superannuation funds and other entities that are taxed as companies that have $1 million or less in instalment income for their previous income year; and
·
companies, superannuation funds and other entities that are taxed as companies that have more than $1 million in instalment income for their previous income year and are eligible to pay annual instalments under the PAYG instalments regime but have not chosen to do so.

6.7 These amendments will reduce the costs these taxpayers incur in complying with their PAYG instalments obligations as they will no longer have to keep track of the ordinary income they earn each quarter.

6.8 The PAYG instalments legislation will also be amended so that certain individuals who either carry on primary production businesses or who earn income from sporting or artistic activities will only be required to pay 2, not 4, quarterly instalments each year. These 2 instalments will be payable at the end of the third and fourth quarters of the income year and will also be worked using the GDP-adjusted notional tax method. This change will give those individuals, whose income fluctuates from quarter to quarter during the income year, a way of paying PAYG instalments that addresses the fluctuating nature of their income flows.

6.9 Currently, the PAYG instalments provisions provide that a person will pay on the basis of the instalment income times instalment rate method unless they are entitled to choose, and have chosen to, pay using another method. The PAYG instalments legislation will be amended so that taxpayers who qualify to use the GDP-adjusted notional tax method will be required to pay their instalments on that basis. However, those entities will be entitled to pay annual instalments (if eligible) or to choose to pay instalments worked out using the instalment income method. They will generally be required to make that choice at the end of the first instalment quarter of their income year.

6.10 An entity that pays instalments using the GDP-adjusted notional tax method, and who chooses (at the end of the first instalment quarter) to pay instalments worked out using the instalment income method, will continue paying on that basis from year to year. However, they may choose to revert to using the GDP-adjusted notional tax method at the end of the first instalment quarter of a subsequent income year provided they are eligible to use that method at that time.

6.11 The technical amendments that will be made by Schedule 5 ensure that the correct amount of PAYG instalments is credited against the payers assessment when a taxpayer using the GDP-adjusted notional tax method varies their instalment(s).

Comparison of key features of new law and current law
New law Current law
All of the following entities must generally pay quarterly instalments based on an amount worked out, and notified, by the Commissioner using the GDP-adjusted notional tax method:

·
all individuals;
·
companies, superannuation funds and other entities that are taxed as companies that have $1 million or less in instalment income for their previous income year; and
·
companies, superannuation funds and other entities that are taxed as companies that have more than $1 million in instalment income for their previous income year and that are eligible to pay annual instalments under PAYG instalments but have not chosen to do so.

These entities will pay instalments using the GDP-adjusted notional tax unless they choose to pay either annually (if eligible) or using the instalment income method.

Individuals who are not registered for GST and who have a notional tax of greater than $8,000 are eligible to choose to pay quarterly instalments based on an amount worked out, and notified, by the Commissioner. An individual who does not so choose is required to pay quarterly instalments using the instalment income times instalment rate method.

Generally, an entity that is required to pay quarterly instalments will pay 4 instalments each year.

Certain individuals who carry on primary production businesses or who earn income from sporting or artistic activities will be required to pay 2, not 4, quarterly instalments each year. These instalments will also be based on an amount worked out, and notified, by the Commissioner using the GDP-adjusted notional tax method and will be payable at the end of the third and fourth instalment quarters.  

Detailed explanation of new law

6.12 The following diagram summarises the basis on which different entities pay PAYG instalments under the amended law and what choices they have.

Summary of the basis on which different entities pay PAYG (under amended law)

Categories of instalment payers who pay instalments worked out, and notified, by the Commissioner using GDP-adjusted notional tax and new default rules

6.13 Subdivision 45-D of Part 2-10 of Schedule 1 to the TAA 1953 (which contains the rules used to determine which entities can use the GDP-adjusted notional tax method) will be amended to ensure that a much larger proportion of PAYG instalments payers will be entitled to pay instalments on an amount worked out, and notified to them, by the Commissioner. The entities that will be entitled to pay their quarterly instalments on this basis are:

·
all individuals;
·
companies, corporate limited partnerships and the trustees of corporate unit trusts, public trading trusts, eligible approved deposit funds, eligible superannuation funds and pooled superannuation trusts (all of which come within the definition of full self-assessment taxpayer provided their base assessment instalment income for the base year is $1 million or less; and
·
full self-assessment taxpayers whose base assessment instalment income for the base year is more than $1 million and that are entitled, but have not chosen, to be annual payers under the existing PAYG instalments provisions.

[Schedule 2, item 14, paragraphs 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(i)]

6.14 Note, for the purposes of the third dot point in paragraph 6.12, an entity is entitled to choose to pay annual instalments if it:

·
is not GST registered (whether in its own right or as a partner in a GST registered partnership or through a GST joint venture);
·
is not a member of an instalment group (i.e. a group of companies with 50% common ownership); and
·
has a notional tax of less than $8,000.

6.15 An entitys base assessment instalment income is so much of an entitys assessable income as the Commissioner determines is instalment income for the base year - see subsection 45-320(2). Instalment income is generally the ordinary income an entity derives, but only to the extent that that income is assessable income of the income year. However, the instalment income of a superannuation fund also includes its statutory income. Section 45-120 of the existing law defines instalment income.

6.16 A full self-assessment taxpayer that has $1 million or less in base assessment instalment income for the base year is automatically a quarterly payer who pays on the basis of GDP-adjusted notional tax unless it chooses to pay on another basis.

6.17 A full self-assessment taxpayer that has more than $1 million in base assessment instalment income can only be a quarterly payer who pays on the basis of GDP-adjusted notional tax if it is eligible to be an annual payer.

6.18 However, no individual or full self-assessment taxpayer will be a quarterly payer who pays on the basis of GDP-adjusted notional tax if, at the end of the starting instalment quarter in an income year, it is an annual payer [Schedule 2, item 14, paragraphs 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(ii)] . An entity will be an annual payer at the end of the starting instalment quarter if it is entitled to, and chooses to be, an annual payer by the due date for that instalment. It will also be an annual payer if it chose to pay annually, in an earlier income year, as that choice carries on from year to year until the entity ceases to be entitled to choose to pay annually or chooses not to pay on that basis.

6.19 An entity will not be a quarterly GDP-adjusted notional tax instalment payer if, at the end of the starting instalment quarter in an income year, it chooses to work out the amount of its quarterly instalments on the basis of instalment income. [Schedule 2, item14, paragraph 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(iii)]

6.20 The starting instalment quarter is generally the first instalment quarter of an income year. This will be the instalment quarter ending 30 September for all entities whose income year ends on 30 June. However, where an entity has not previously been liable to pay PAYG instalments, it is the instalment quarter in which the entity is first notified of its instalment rate by the Commissioner. If an annual payer becomes GST registered in a particular quarter, that quarter is also a starting instalment quarter. This is because the annual payers GST registration means that it stops being an annual payer and may become a quarterly payer who pays on the basis GDP-adjusted notional tax if it is eligible at the end of that instalment quarter. [Schedule 2, item 14, subsection 45-125(2)]

6.21 There are various provisions which state how and when you become, and stop being, a quarterly payer who pays on the basis of GDP-adjusted notional tax. They are needed to facilitate the interaction of the rules that are used to define the various groups of PAYG instalments payers. [Schedule 2, item 14, subsections 45-130(3) to (9)]

6.22 The effect of these rules is that all of the entities identified in paragraph 6.12 will pay quarterly instalments being an amount notified by the Commissioner unless they choose to pay their quarterly instalments using the instalment income method or choose to pay annually.

6.23 This contrasts with the PAYG instalments regime as it currently operates. It provides that entities will pay quarterly instalments that are worked out using the instalment income method. However, under the current regime certain individuals may choose to pay on the basis of GDP-adjusted notional tax.

GDP-adjusted notional tax payers may choose instalment income method

6.24 Entities that are eligible to pay quarterly instalments using GDP-adjusted notional tax method (whether they pay 2 or 4 instalments annually) will default into that method, that is, if they do not choose to pay on another basis, their instalments will be worked out using that method.

6.25 Entities that are defaulted into the GDP-adjusted notional tax method will be given the choice of working out their instalments on the basis of instalment income [Schedule 2, item 14, paragraph 45-125(1)(b)] . Those who are eligible to pay annual instalments, will still have the choice of paying annually.

6.26 An entity that wants to choose to pay on the basis of instalment income must make that choice by notifying the Commissioner in the approved form on or before the due date for payment of the instalment for the starting instalment quarter. [Schedule 2, item 14, subsection 45-125(4)]

6.27 Having notified the Commissioner of its choice, the entity becomes a quarterly payer who pays on the basis of instalment income just before the end of the starting instalment quarter. [Schedule 2, item 14, subsection 45-125(3)]

6.28 That choice remains in force from year to year unless the entity chooses to:

·
become an annual payer at the end of the first instalment quarter of a later income year [Schedule 2, item 14, paragraph 45-125(6)(a)] ; or
·
no longer be a quarterly payer who pays on the basis of instalment income at the end of the first instalment quarter of a later income year and becomes a quarterly payer who pays on the basis of GDP-adjusted notional tax. This choice would only be effective if the entity is eligible to be a quarterly payer who pays on the basis of GDP-adjusted notional tax [Schedule 2, item 14, paragraph 45-125(6)(b) and subsection 45-125(7)] .

6.29 An entity that, at the end of the first instalment quarter of a later income year, chooses to revert from paying on the instalment income basis to the GDP-adjusted notional tax method will become a quarterly payer who pays 2 or 4 instalments annually on the basis of GDP-adjusted notional tax as appropriate to its circumstances at the end of that quarter. [Schedule 2, item 14, subsections 45-132(2) and 45-134(2)]

GDP-adjusted notional tax payers must pay either 2 or 4 instalments

6.30 Most entities who are quarterly payers who pay on the basis of GDP-adjusted notional tax will be required to pay 4 instalments each year, which is consistent with the existing rules for the PAYG instalments regime. However, certain individuals will come within a new category of PAYG instalments payers who will be required to pay 2 instalments each year. Consequently, there will be a new rule which requires an entity to pay 4 quarterly instalments if it is a quarterly payer who pays on the basis of GDP-adjusted notional tax and it does not come within the new 2 instalments payer rules. [Schedule 2, item 14, subsection 45-132(1)]

6.31 Again, there are various provisions which state when an entity becomes, and stops being, a quarterly payer who pays 4 instalments annually on the basis GDP-adjusted notional tax. They are needed to facilitate the interaction of the rules that are used to define the various groups of PAYG instalments payers. [Schedule 2, item 14, subsections 45-132(2) to (5)]

GDP-adjusted notional tax payers who pay only 2 instalments

6.32 As stated in paragraph 6.29, a new category of quarterly payer who pays on the basis of GDP-adjusted notional tax will be created. These PAYG instalments payers will be required to pay 2 instalments each year. This will address the fact that some GDP-adjusted notional taxpayers have fluctuating income flows within the income year.

6.33 An individual will be required to pay only 2 instalments each year if, at the end of the starting instalment quarter in the income year, he or she is a quarterly payer who pays on the basis of GDP-adjusted notional tax, and the individual satisfies both of the following:

·
he or she is either or both:

-
carrying on a primary production business in the current year [Schedule 2, item 14, paragraph 45-134(1)(a)] ; or
-
an author, artist or other special professional in the current year [Schedule 2, item 14, paragraph 45-134(1)(b)] ; and

·
the assessable income that was derived from, or resulted from that business or those activities in the most recent income year that has been assessed exceeded so much of the deductions for that year that reasonably relate to that income [Schedule 2, item 14, paragraphs 45-134(1)(a) and (b)] .

How the 2 instalments system works

6.34 In general terms, individuals who are quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax (hereafter called 2 instalments payers) will pay instalments at the end of the third and fourth instalment quarters of their income years. The amount payable will be the amount worked out, and notified by, the Commissioner.

6.35 However, consistently with the existing GDP-adjusted notional tax method, the 2 instalments payer will be entitled to vary the amount of an instalment by estimating their expected tax liability for the year. An individual who varies the instalment amount may be liable to pay the GIC if the varied amount is too low. Paragraphs 6.35 to 6.61 explain in more detail how the 2 instalments will work.

When the 2 instalments will be payable

6.36 Subdivision 45-B currently contains rules that state both when an entitys first instalment, and subsequent instalments, are payable - see sections 45-50, 45-55 and 45-66. It also contains rules in section 45-60 which state when those quarterly instalments are due. Each of these sections will be repealed by amendments in Schedule 2 to this Bill and will be replaced by new rules that specify how many instalments are payable by an entity for an income year and when the quarterly instalments are due. [Schedule 2, items 5 to 7]

6.37 An individual who is a 2 instalments payer will be liable to pay instalments only at the end of the third and fourth instalment quarters of the income year. [Schedule 2, item 5, subsection 45-50(2)]

6.38 However, an entity cannot be liable to pay an instalment for an instalment quarter if:

·
that instalment quarter is earlier than the instalment quarter in which it is first notified of an instalment rate by the Commissioner; or
·
the Commissioner withdraws the entitys instalment rate before the end of that instalment quarter.

[Schedule 2, item 5, subsection 45-50(4)]

6.39 For example, if a 2 instalments payer has not previously been liable to pay PAYG instalments, and the Commissioner notifies the individual of an instalment rate in the fourth quarter of its income year, the individual will only be liable to pay an instalment for the fourth instalment quarter. Further, if the Commissioner withdraws the individuals instalment rate during the second quarter of the subsequent income year, the individual would not be liable to pay instalments for the second, third or fourth instalment quarter of that income year.

When the 2 instalments will be due

6.40 The due date for payment of the 2 quarterly instalments payable by a 2 instalments payer will depend on whether the individual is a deferred BAS payer and whether it has a substituted accounting period. The meaning of deferred BAS payer is discussed in Chapter 7.

6.41 The due dates are set out in Table 6.1.

Table 6.1
2 instalments payer who is: Instalment for the third quarter is due on or before: Due date for the fourth quarter is due on or before:
Not a deferred BAS payer whose income year ends on 30 June. [Schedule 2, item 6, subsection 45-61(1)] 21 April 21 July
A deferred BAS payer whose income year ends on 30 June. [Schedule 2, item 6, subsection 45-61(2)] 28 April 28 July
Not a deferred BAS payer whose income year ends on a day other than 30 June. [Schedule 2, item 6, subsection 45-61(1)] 21 days after the end of the third instalment quarter of the income year. 21 days after the end of the fourth instalment quarter of the income year.
A deferred BAS payer whose income year ends on a day other than 30 June. [Schedule 2, item 6, subsection 45-61(2)] 28 days after the end of the third instalment quarter of the income year.

But if all or part of December falls within the last month of that quarter, the next 28 February.

28 days after the end of the fourth instalment quarter of the income year.

But if all or part of December falls within the last month of that quarter, the next 28 February.

How the amount of the 2 instalments will be worked out

6.42 The amount of the quarterly instalment that is payable by a 2 instalments payer will be worked out under subsection 45-112(1) in the same way as currently for those who are already entitled to pay on the basis of GDP-adjusted notional tax. That is, the amount payable will be:

·
the amount the Commissioner works out, and notifies, to the entity;
·
the varied amount the entity works out from its estimate of its benchmark tax (i.e. its expected tax liability for the year less any tax attributable to net capital gains expected to be included in assessable income and its PAYG withholding credits); or
·
the amount the Commissioner works out from an entitys estimate of its benchmark tax for an instalment quarter subsequent to an instalment quarter in which the entity varies its instalment amount.

This result arises from section 45-112 without the need for any consequential amendment.

Amount notified by the Commissioner

6.43 The Commissioner will generally work out the amount of an instalment as follows:

·
for the instalment payable for the third quarter - 75% of the entitys GDP-adjusted notional tax; and
·
for the instalment payable for the fourth quarter - 100% of the entitys GDP-adjusted notional tax less the previous instalment unless the amount is negative. If it is negative, the amount of the instalment is nil.

This method is used when an individual is a 2 instalments payer at the end of the first instalment quarter in an income year. [Schedule 2, item 29, subsections 45-402(1) to (3)]

6.44 The amount payable by a 2 instalments payer is reduced if the individual becomes a 2 instalments payer at the end of the second, third or fourth instalment quarter of the income year. This will happen if the individual is first notified of an instalment rate by the Commissioner during one of those quarters. This reduction ensures that the individual does not pay more than he or she would have been required to pay had they been a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax or if they had chosen to pay quarterly instalments on the basis of instalment income. [Schedule 2, item 29, subsections 45-402(4) to (6)]

6.45 If the individual is first notified of an instalment rate by the Commissioner during the second instalment quarter of the income year, the amount of the instalment is worked out as follows:

·
for the instalment payable for the third quarter - 50% of the entitys GDP-adjusted notional tax; and
·
for the instalment payable for the fourth quarter - 75% of the entitys GDP-adjusted notional tax less the previous instalment.

[Schedule 2, item 29, subsection 45-402(4)]

6.46 If the individual is first notified of an instalment rate by the Commissioner during the third instalment quarter of the income year, the amount of the instalment is worked out as follows:

·
for the instalment payable for the third quarter - 25% of the entitys GDP-adjusted notional tax; and
·
for the instalment payable for the fourth quarter - 50% of the entitys GDP-adjusted notional tax less the previous instalment.

[Schedule 2, item 29, subsection 45-402(5)]

6.47 If the entity is first notified of an instalment rate in the fourth instalment quarter of the income year, the amount of the instalment for the fourth instalment quarter is 25% of the entitys GDP-adjusted notional tax. [Schedule 2, item 29, subsection 45-402(6)]

Varying the amount notified by the Commissioner

6.48 An entity varies the amount of its instalment by estimating its benchmark tax in the same way as currently happens for both the existing GDP-adjusted notional tax payers and annual payers. An entitys benchmark tax is its tax liability for the year less the tax attributable to any net capital gain included in assessable income and its credits for amounts deducted from its withholding income.

6.49 Generally the amount of the varied instalment will be the amount worked out as follows (if it is positive):

·
if the individual varies the amount of the instalment payable for the third quarter - 75% of the individuals estimate of benchmark tax; and
·
if the individual varies the amount of the instalment payable for the fourth quarter - the individuals estimate of benchmark tax reduced by the previous instalment.

The amount of the instalment is nil, if the amount worked out is negative. [Schedule 2, item 34, subsections 45-412(1) to (4)]

6.50 The calculation of the varied instalment amount is also modified where the amount is being worked out in an income year in which the 2 instalments payer is first notified of its instalment rate in a quarter other than the first instalment quarter. The modifications operate in the same way as when the Commissioner works out the amount of the instalment. [Schedule 2, item 34, subsections 45-412(5) to (9)]

6.51 An individual may claim a variation credit under section 45-420 for an instalment, if the amount worked out for that instalment under section 45-412 is negative. This is achieved by a consequential amendment to section 45-420. [Schedule 2, item 35]

Penalty if the varied amount is understated

6.52 A 2 instalments payer who varies the amount of an instalment will be liable to pay the GIC if the estimate of the individuals benchmark tax is less than 85% of the individuals actual benchmark tax as worked out by the Commissioner after the end of the income year. The penalty will be payable under subsection 45-232(1), but no specific amendment is needed to achieve this.

6.53 Existing subsection 45-232(2) provides the formula for working out the amount of the GIC payable by a taxpayer and that calculation is based, in part, on the existing definition of an acceptable amount in subsection 45-232(3). This definition will be amended to provide that it only applies for a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 89, subsection 45-232(3)]

6.54 New subsections will be inserted into existing section 45-232 which define acceptable amount for the purposes of working out the amount on which GIC is payable by a 2 instalments payer. They take account of the fact that such an instalment payer only pays instalments after the end of the third and fourth instalment quarters. [Schedule 2, items 88 and 90, subsections 45-232(2) and (3A) to 3(D)]

6.55 When a 2 instalments payer does not vary the instalment payable for the third instalment quarter of an income year, the acceptable amount of that instalment will be the amount notified by the Commissioner as the amount of the instalment for that quarter. [Schedule 2, item 90, paragraphs 45-232(3A)(b), (3B)(d) and (3C)(d)]

6.56 If a 2 instalments payer varies the amount of the instalment that would otherwise be payable for the third instalment quarter, the acceptable amount of the instalment for that instalment quarter is the lower of:

·
the amount notified to the 2 instalments payer under paragraph 45-112(1)(a) as the amount for that instalment; and
·
75% of the benchmark tax for the income year.

[Schedule 2, item 90, paragraph 45-232(3A)(a) and table item 1]

6.57 If a 2 instalments payer varies the amount of the instalment for either the third or fourth instalment quarter, the acceptable amount of the instalment for the fourth instalment quarter is the lower of:

·
the amount that the Commissioner would have notified to the 2 instalments payer under paragraph 45-112(1)(a) as the amount for that instalment (i.e. as if no variation(s) had been made); and
·
100% of the benchmark tax for the income year less the amount that is the acceptable amount for the third instalment quarter.

[Schedule 2, item 90, paragraph 45-232(3A)(a) and table item 2]

6.58 Special rules will be used to work out the acceptable amount for an instalment quarter in which the Commissioner first notifies a 2 instalments payer of its instalment rate in a quarter other than the first instalment quarter. These special rules operate as exceptions to new subsection 45-232(3A), but will work in essentially similar ways to that subsection. The only difference will arise when it is necessary to work out the acceptable amount of the instalment by reference to the percentage of a taxpayers benchmark tax.

6.59 The special rules align the benchmark tax percentages used in working out the acceptable amount with the percentages of the GDP-adjusted notional tax that are used by the Commissioner in working out the amount of the instalment payable by a 2 instalments payer under section 45-402. This has the effect of ensuring that a 2 instalments payer is not disadvantaged in relation to a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax.

6.60 In such cases, the percentages of benchmark tax used in working out the acceptable amount depend on when a taxpayer is first given a PAYG instalment rate by the Commissioner. If this occurs in the second instalment quarter, the percentage of benchmark tax used to work out the acceptable amount of the third instalment quarter will be 50% [Schedule 2, item 90, subsection 45-232(3B), table item 1] . The percentage of benchmark tax used in the calculation of the acceptable amount of the fourth instalment quarter will be 75% [Schedule 2, item 90, subsection 45-232(3B), table item 2] .

6.61 Similarly, if the taxpayer is first given an instalment rate during the third quarter, the percentages of benchmark tax will be 25% and 50% for the third and fourth instalment quarters respectively [Schedule 2, item 90, subsection 45-232(3C), table items 1 and 2] . If the instalment rate is first notified to the taxpayer during the fourth instalment quarter, the benchmark tax percentage for that quarter will be 25% [Schedule 2, item 90, paragraph 45-232(3D)(d)] .

Credit for instalments payable

6.62 Schedule 5 to this Bill will make 2 minor technical corrections to subsection 45-30(2) of Schedule 1 to the TAA 1953. The first amendment prevents a taxpayer who has varied their benchmark tax from obtaining a double benefit from a credit arising as a result of that variation. It does this by providing that a credit claimed under section 45-420 of Schedule 1 to the TAA 1953 because of a variation of a quarterly GDP-adjusted notional tax instalment, is properly taken into account in working out the amount of the credit for PAYG instalments against assessed tax under section 45-30(2). [Schedule 5, item 1, subsection 45-30(2)]

6.63 The second amendment is consequential upon the first and repeals a non-operative note to subsection 45-30(2). [Schedule 5, item 2, subsection 45-30(2)]

6.64 Both of these corrections are consequential upon the amendments to the PAYG instalments legislation made by A New Tax System (Tax Administration) Act 1999 but were omitted from that Act in error. They will be retrospective to the date of effect of those amendments and will apply for the 2000-2001 income year and later income years.

6.65 Few (if any) PAYG instalment payers have so far been affected by the anomalous situation arising as a result of the unintended omission of these consequential amendments. The only group of taxpayers who could have been affected prior to introduction of this Bill is the limited class of individuals who are currently entitled to use the GDP-adjusted notional tax basis of paying PAYG instalments and who:

·
balance earlier than 30 June;
·
have already varied their benchmark tax for the 2000-2001 income year; and
·
whose assessments for the 2000-2001 income year have been issued and a credit applied against that assessment as a result of that variation.

6.66 Schedule 2 to this Bill extends the class of taxpayers who have access to the GDP-adjusted notional tax method. The corrections referred to in paragraph 6.62 will also ensure that taxpayers within this extended class will have the correct amount credited against their assessed tax.

Application and transitional provisions

6.67 The amendments made by Schedule 2 to this Bill will generally apply to the 2001-2002 income year, and later income years. [Schedule 2, item 40 and subitem 95(1)]

6.68 However, Schedule 2 to this Bill also contains transitional provisions that will allow the PAYG instalments payers affected by the amendments to take advantage of some of the proposed amendments sooner, including for an instalment quarter ending 31 March 2001. This will ensure that most of the affected instalment payers will benefit immediately from the reduced compliance costs that flow from these amendments. [Schedule 2, item 49]

6.69 The transitional provisions will also specify how the Commissioner will work out the amount of the instalment that is to be notified to the affected taxpayers for a brief transitional period that will cover any instalment quarter that ends on or after 31 March but not on or after 31 December 2001. This will allow the Commissioner to establish the computer systems needed to calculate the amount. Taxpayers will not be disadvantaged as a result of these transitional measures. [Schedule 2, item 51]

6.70 There will also be transitional rules that:

·
ensure that the individuals who chose to pay instalments for the 2000-2001 income year on the basis of GDP-adjusted notional tax are not excluded from that method if they become GST registered after the end of the first instalment quarter of that year [Schedule 2, item 50] ; and
·
specify how the new rules for 2 instalments payers will apply to individuals whose 2001-2002 income year ends before 30 June 2002 [Schedule 2, item 52] .

6.71 A power to make regulations is also provided in case additional rules are needed to give effect to the transitional rules. [Schedule 2, item 53]

Granting access to the GDP-adjusted notional tax method immediately

Certain PAYG instalments payers can choose to pay instalments on the basis of GDP-adjusted notional tax for the remainder of their 2000-2001 income year

6.72 At the end of each transitional quarter for which certain entities are liable to pay a PAYG instalment, the entities will be able to choose to become a quarterly payer who pays on the basis of GDP-adjusted notional tax [Schedule 2, subitem 49(1)] . Most entities will make this choice for the instalment quarter that ends on 31 March 2001 in respect of the instalment payable for the period 1 January 2001 to 31 March 2001. However, an entity will be entitled to make that choice for any instalment quarter that is a transitional quarter.

6.73 A transitional quarter is an instalment quarter that is an instalment quarter of the 2000-2001 income year and that ends on or after 31 March, but not after 31 December 2001 [Schedule 2, paragraph 49(1)(b)] . For example, an entity whose 2000-2001 income year ends on 30 June, will have 2 transitional quarters being the instalment quarters that end on 31 March and 30 June 2001. An entity whose 2000-2001 income year ends on 31 December 2001 (a late December balancer) will have 4 transitional quarters being the instalment quarters ending 31 March, 30 June, 30 September and 31 December 2001.

Which entities can make the choice?

6.74 All individuals, and multi-rate trustees, will be able to choose to pay on the basis of GDP-adjusted notional tax for their transitional quarters unless they have already chosen to pay an annual instalment for the 2000-2001 income year or to pay on the basis of GDP-adjusted notional tax for that year. [Schedule 2, paragraph 49(2)(a)]

6.75 Full self-assessment taxpayers will also be entitled to choose to pay on the basis of GDP-adjusted notional tax for their transitional quarters if their base assessment instalment income for the base year is $1 million or less. However, if such an entity has already chosen to pay an annual instalment for the 2000-2001 income year it cannot choose to pay on the basis of GDP-adjusted notional tax. [Schedule 2, paragraph 49(2)(b)]

6.76 Full self-assessment taxpayers that:

·
have a base assessment instalment income of more than $1 million for the most recent income year that has been assessed; and
·
are eligible to be annual payers under the existing PAYG instalments provisions but have not chosen to be annual payers,

can choose to pay instalments on the basis of GDP-adjusted notional tax for their transitional quarters of the 2000-2001 income year. [Schedule 2, paragraph 49(2)(c)]

Machinery provisions to support the main transitional provisions

6.77 There are several machinery provisions that are needed to support these transitional rules, including rules to:

·
require an entity making the choice to pay on the basis of GDP-adjusted notional tax for a transitional quarter to notify the Commissioner of the choice in the approved form, on or before the due date for the relevant instalment [Schedule 2, subitem 49(3)] ;
·
state when an entity becomes, and stops being, a quarterly payer who pays on the basis of GDP-adjusted notional tax and to treat the entity as such a payer for all purposes of Division 45 for the 2000-2001 income year [Schedule 2, paragraphs 49(4)(a) and (b)] ;
·
ensure that the entities who become GDP-adjusted notional tax payers in the 2000-2001 income year as a result of the transitional rules are not subjected to the eligibility rules for paying on that basis in subsections 45-125(1) to (3) [Schedule 2, paragraph 49(4)(c)] ;
·
ensure that GST registration does not stop an entity being a quarterly payer who pays on the basis of GDP-adjusted notional tax by preventing section 45-130 from applying to any entity who becomes such a payer under these transitional rules [Schedule 2, paragraph 49(4)(c)] ; and
·
enable the consequential amendments to Part IIIAA of the ITAA 1936 (Franking of Dividends) to apply to instalments that are payable in respect of transitional quarters (as that term is defined by item 49) worked out on the basis of GDP-adjusted notional tax [Schedule 2, subitem 95(2)] .

Individuals already paying quarterly instalments on the basis of GDP-adjusted notional tax

6.78 Section 45-130 states that an individual stops being a quarterly payer who pays on the basis of GDP-adjusted notional tax if it becomes registered, or required to be registered, for GST whether in their own right or as a partner in a partnership. It effectively requires an individual to revert to the instalment income basis for working out quarterly instalments if the individual becomes GST registered.

6.79 GST registration becomes irrelevant in determining an entitys eligibility to pay quarterly instalments using GDP-adjusted notional tax under the proposed amendments, both for the 2001-2002 and later income years under the amended law and for the transitional quarters of the 2000-2001 income year under item 49. Therefore, it is not appropriate to require an individual who has chosen to pay its 2000-2001 quarterly instalments on the basis of GDP-adjusted notional tax and who becomes GST registered in that income year to stop paying their instalments on that basis.

6.80 Consequently, section 45-130 will not apply to an individual who has chosen to pay its 2000-2001 quarterly instalments on the basis of GDP-adjusted notional tax under the existing law and who becomes GST registered in a transitional quarter in that income year. [Schedule 2, item 50]

Calculating the amount of the instalment

6.81 The Commissioners existing administrative and computer systems are not structured to enable the calculation of the GDP-adjusted notional tax figure needed for the new categories of PAYG instalments payers who will be eligible to pay instalments on the basis set out in existing section 45-400. Consequently, the amount that the Commissioner notifies will be calculated in a different way for a short period of time until the necessary administrative and computer system changes are implemented.

6.82 These transitional arrangements will apply to any instalment quarter of the 2000-2001 or 2001-2002 income year that ends on or after 31 March 2001 but not on or after 31 December 2001. For example, they will apply for the third and fourth quarters of a 30 June balancing entitys 2000-2001 income year and the first quarter of its 2001-2002 income year. [Schedule 2, subitem 51(2)]

6.83 The transitional calculation method will affect all the additional entities that will be eligible to become quarterly payers who pay on the basis of GDP-adjusted notional tax under either subitem 49(2) of Schedule 2 to this Bill or Division 45 as amended by this Bill. These entities are called transitional payers for the purposes of this particular transitional provision. [Schedule 2, subitem 51(4)]

6.84 The amount of the instalment payable by a transitional payer will be calculated using the following formula:

notional tax * (1 + GDP adjustment) / 4

The terms notional tax and GDP adjustment will take their meanings from the meanings given to those terms under the existing Division 46. [Schedule 2, subitem 51(2)]

6.85 This calculation differs from the calculation of GDP-adjusted notional tax under the existing law in 2 key aspects. First, this calculation applies the GDP adjustment to an entitys notional tax. The existing law increases the entitys adjusted taxable income and adjusted withholding by the GDP adjustment and then calculates the entitys notional tax from those adjusted amounts.

6.86 For example, suppose an entitys adjusted taxable income is $50,000 and the GDP adjustment is 10%. The GDP-adjusted notional tax amount worked out under the existing law is the tax that would be payable on $55,000, which is $13,480 at 2000-2001 income tax rates. The transitional method will require the Commissioner to work out the notional tax on $50,000 which is $11,380, and increase that by the GDP adjustment of 10%. The result would be a GDP-adjusted notional tax figure of $12,518.

6.87 Secondly, the existing law requires each instalment to be worked out as a percentage of the GDP-adjusted notional tax figure, where the relevant percentage increases with each quarter and the quarterly instalment payable takes account of the amount of any earlier instalment payable for the income year. That is, the first instalment is 25% of the GDP-adjusted notional tax, the second is 50% of that amount less the previous instalment and so on. The transitional method will simply require the Commissioner to advise the entity of an amount being 25% of the GDP-adjusted notional tax figure.

6.88 Machinery provisions will ensure that the amounts calculated under this transitional method apply for the purposes of Subdivision 45-L which states how the Commissioner works out the amount of a GDP-adjusted notional tax quarterly instalment [Schedule 2, subitem 51(3)] . In particular, an entity will be able to vary the amount of an instalment in the usual way by estimating its benchmark tax [Schedule 2, subitem 51(4)] .

6.89 However, if an entity does vary the instalment amount for a transitional quarter, the Commissioner will not be required to take account of the entitys variation when working out the instalment for a subsequent transitional quarter. Further, the entity will not be able to claim a variation credit under section 45-420 in respect of a variation made for a transitional quarter. [Schedule 2, subitem 51(5)]

Special rule for quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax and whose income year ends before 30 June

6.90 The Commissioners existing administrative and computer systems are not structured to enable him to identify immediately which individuals will become quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax. This will not be a problem for those entities whose 2001-2002 income years end on 30 June 2002 or a later date, but it will be a problem for those whose 2001-2002 income years end before that date (i.e. for the early balancing individuals).

6.91 Therefore, special rules will apply to those individuals who would otherwise become quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax at the end of the first instalment quarter of their 2001-2002 income year where that instalment quarter begins before 1 July 2001. [Schedule 2, subitem 52(1)]

6.92 The transitional rules will provide that:

·
such an individual will not become a 2 instalments payer at the end of the first instalment quarter of their 2001-2002 income year [Schedule 2, paragraph 52(2)(a)] ; and
·
instead, the individual will be treated as if it is a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax before the end of that quarter [Schedule 2, paragraph 52(2)(b)] .

6.93 However, the rules will also provide that the individual will become a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax for the first instalment quarter of its income year that commences on or after 1 July 2001. [Schedule 2, paragraphs 52(2)(c) and (d)]

6.94 Most of the PAYG instalments payers who will be affected by this transitional provision will have 2001-2002 income years ending on 31 March 2002. As a result of this provision, these instalments payers will pay 3 instalments for their 2001-2002 income year, being for the instalment quarters ending 30 June 2001, 31 December 2001 and 31 March 2002. They will not pay more than they would otherwise have paid had they paid only 2 instalments for the 2001-2002 income year.

Consequential amendments

6.95 Various consequential amendments will be made to the TAA 1953 (Table 6.2) and the ITAA 1997 (Table 6.3) to take account of the amendments described in this chapter. Consequential amendments will also be made to the ITAA 1936 (Table 6.4) to state how an entity that is liable to keep a dividend franking account must take account of a variation credit which arises when that entity pays instalments using the GDP-adjusted notional tax method.

Table 6.2: Amendments to the TAA 1953
Item no. Provision amended Explanation
86 and 87 6-5(3) Section 6-5 is part of the Guide to the Pay As You Go (PAYG) system. Subsection 6-5(3) deals with PAYG instalments.

Following the enactment of new sections inserted by item 14 of Schedule 2 to this Bill, PAYG instalment payers who are entitled to pay on the GDP-adjusted notional tax basis will now be required to pay on this basis unless they choose another basis for paying instalments. This contrasts with the position under the law prior to the amendments, where instalment payers were required to pay on the instalment rate times instalment income basis but could choose the GDP-adjusted notional tax method if eligible.

The amendments to subsection 6-5(3) will ensure that the guide material reflects the law as amended by this Bill.

The first amendment will ensure that the additional default method is included in the outline. [Schedule 2, item 86]

The guide will also be amended to reflect that this Bill provides for a new category of instalment payers that pay on the basis of GDP-adjusted notional tax; that is, 2 instalments payers. [Schedule 2, item 87]

1 45-1 The Guide to Division 45 will be amended to ensure that it reflects the facts that:

·
those entities that are eligible to become quarterly payers who pay on the basis of GDP-adjusted notional tax will be assumed to use that method unless they choose to pay on some other basis; and
·
some entities will become quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 1, section 45-1]

2 and 3 45-5 Section 45-5 states the object of the PAYG instalments regime. Subsections 45-5(2) and (5), which both deal with features of the instalment income method, will be modified to make it clear that they apply only to quarterly payers who pay on the basis of instalment income. [Schedule 2, items 2 and 3]
4 Heading to 45-20 Section 45-20 requires an entity that is liable to pay an instalment for a period to report their instalment income for that period, even if their instalment amount is nil. However, this section does not apply to an entity that pays a quarterly instalment worked out on the basis of GDP-adjusted notional tax or an annual instalment worked out using notional tax.

The heading to this section will be amended to reflect the fact that not all entities are required to notify the Commissioner of their instalment income. [Schedule 2, item 4]

5 and 7 45-50, 45-55 and 45-65 The existing law establishes the liability to pay PAYG instalments by reference to an entitys liability to pay its first instalment (whether it be a quarterly or annual instalment) and an entitys liability to pay subsequent instalments. Once an entity is liable to pay its first instalment for an instalment quarter or income year, it is liable to pay instalments for each subsequent instalment quarter or income year respectively.

With the creation of a new category of instalment payer who is required to pay only 2 instalments for each year, a structure that is dependent on the assumption that instalments are payable for consecutive quarters or years is not appropriate.

As such, sections 45-50, 45-55 and 45-65, which give effect to the existing structure will be repealed and replaced by a new section that will specify the liability to pay instalments by reference to 3 categories of instalment payers.

·
An entity that is a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax or a quarterly payer who pays on the basis of instalment income at the end of an instalment quarter will be liable to pay an instalment for that quarter. This will effectively mean that these instalment payers will be liable to pay an instalment for each instalment quarter of an income year. [Schedule 2, item 5, subsection 45-50(1)]
·
Quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax will be liable to pay instalments for the third and fourth instalment quarters in an income year. [Schedule 2, item 5, section 45-50(2)]
·
Annual payers will be required to pay a single instalment for the income year. [Schedule 2, item 5, section 45-50(3)]

As under the existing law, an instalment will not be payable for an instalment quarter or income year if the Commissioner has not yet given an entity an instalment rate. Nor will an instalment be payable for an instalment quarter or income year if the Commissioner has given an entity an instalment rate but has subsequently withdrawn it before the end of that quarter or year. [Schedule 2, item 5, subsection 45-50(4)]

6 45-60 Section 45-60 contains rules which define the term instalment quarter and establish the due dates for payment of quarterly instalments.

That section will be amended for 2 reasons:

·
to set out the new due dates that apply because of the deferral of due dates for BAS obligations as discussed in Chapter 6; and
·
to establish due dates for the payment of quarterly instalments by quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax.

Instalment quarter will be defined in one provision that will apply regardless of whether an entitys income year ends on 30 June. An entitys first instalment quarter will be the first 3 months of an income year. The second instalment quarter will be the fourth, fifth and sixth months of the income year. The third will be the seventh, eighth and ninth months and the fourth will be the tenth, eleventh and twelfth months. Subsections 45-60(1) and (2) previously defined instalment quarter separately for entities whose income years ended on 30 June and on another date. [Schedule 2, item 6, section 45-60]

For instalments payable by those instalment payers who are required to pay an instalment for each instalment quarter of an income year and whose income year ends on 30 June, the due date is generally on or before the 21st day of the month after the end of the instalment quarter. For an entity whose income year ends on 30 June the due dates are as follows:

·
21 October for the first instalment quarter;
·
21 January for the second instalment quarter;
·
21 April for the third instalment quarter; and
·
21 July for the fourth instalment quarter.

[Schedule 2, item 6, subsection 45-61(1)]

However, if the quarterly payer is a deferred BAS payer whose income year ends on 30 June, the instalments will be due on or before the 28th day of the month after the end of the instalment quarter unless all or a part of December falls within the last month of the instalment quarter. In that case, the instalment is due on or before the next 28 February. For an entity whose income year ends on 30 June the due dates are as follows:

·
28 October for the first instalment quarter;
·
28 February for the second instalment quarter;
·
28 April for the third instalment quarter; and
·
28 July for the fourth instalment quarter.

[Schedule 2, item 6, subsection 45-61(2)]

No special rules are needed to specify the due date for instalments payable by quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax.

8 45-90(1) Note Subsection 45-90(1) states how the Commissioner withdraws an entitys instalment rate. The Note to the subsection explains the consequences of a withdrawal of the rate and refers the reader to paragraphs 45-55(b) and 45-65(b) which state the legal effect of such a withdrawal.

As the amendments in items 5 and 7 of Schedule 2 repeal those provisions, the Note will be amended to refer to subsection 45-50(4) which now sets out the legal consequences of the withdrawal of an entitys instalment rate. [Schedule 2, item 8]

9 45-90(2) Subsection 45-90(2) states the effect of the Commissioner giving an entity another instalment rate subsequent to withdrawing that entitys earlier instalment rate. It requires the entity to pay an instalment as if it were the entitys first instalment under section 45-50 and as if the new instalment rate were the first that the entity had been given.

The amendments in items 5 and 7 of Schedule 2 repeal the existing separate liabilities for the first and subsequent instalments. As such, the subsection will be amended to reflect the new liability rules contained in the new section 45-50. [Schedule 2, item 9]

10 and 11 45-110(1) and heading to 45-110 Section 45-110 states how the amount of a quarterly instalment is worked out using the instalment income method. Its structure reflects the fact that the existing Division 45 assumes that an entity pays quarterly instalments on the instalment income method unless it has chosen to pay annually, or quarterly on the GDP-adjusted notional tax basis.

The heading to section 45-110 and the wording of subsection 45-110(1) will be amended to take account of the new default arrangements for quarterly payers who pay on the basis of GDP-adjusted notional tax. They will acknowledge that they only apply to those quarterly payers who are required to work out the amount of their quarterly instalment on the basis of instalment income or who have chosen to work it out on that basis. [Schedule 2, items 10 and 11]

12 45-112(1) Subsection 45-112(1) states how the amount of a quarterly instalment is worked out for a quarterly payer who pays on the basis of GDP-adjusted notional tax.

The subsection will be amended to take account of the fact that instalments will not be payable at the end of every instalment quarter by quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 12]

13 Heading to Subdivision 45-D The heading to this Subdivision currently refers only to quarterly payers who pay on the basis of GDP-adjusted notional tax.

As a result of the amendments being made by item 14 of Schedule 2, this Subdivision will effectively define 3 categories of quarterly payers, being quarterly payers who:

·
pay 4 instalments annually on the basis of GDP-adjusted notional tax;
·
pay 2 instalments annually on the basis of GDP-adjusted notional tax; and
·
pay on the basis of instalment income.

As such the Subdivision heading will be amended to refer only to quarterly payers. [Schedule 2, item 13]

14 45-125,

45-130

Section 45-125 currently contains the criteria for determining who may pay quarterly instalments using the GDP-adjusted notional tax method. One of the existing criteria is that the entity must not be registered, or required to be registered, for GST.

Section 45-130 states that an entity stops being a quarterly payer who pays on the basis of GDP-adjusted notional tax if it becomes GST registered. The effect of the provision is to require the entity to pay instalments on the instalments income basis.

As discussed in paragraphs 6.12 to 6.52, new criteria for becoming a quarterly payer who pays on the basis of GDP-adjusted notional tax will be established. As such, the existing section 45-125 is being repealed and replaced by new sections 45-125, 45-130, 45-132 and 45-134. Further, as registration for GST will not be relevant in determining whether an entity can become a quarterly payer who pays on the basis of GDP-adjusted notional tax, the existing section 45-130 will no longer be necessary. [Schedule 2, item 14]

15 45-140(1) Subsection 45-140(1) sets out the circumstances in which an entity may pay annual PAYG instalments. To do so, it must satisfy certain conditions at the end of the first instalment quarter in an income year for which it would otherwise be liable to pay a quarterly instalment.

The new sections being inserted by item 14 of Schedule 2, apply their eligibility tests at what is effectively the same time as that described in subsection 45-140(1). However, those sections use the defined term, starting instalment quarter to describe the time when eligibility must be determined.

This subsection will be amended to refer to the new defined term starting instalment quarter to make it consistent with the new provisions. Subsection 45-140(3) defines who is an annual payer and states when an entity becomes an annual payer. [Schedule 2, item 15]

16 45-140(3) Subsection 45-140(3) defines who is an annual payer and states when an entity becomes an annual payer.

This subsection will be repealed and replaced by a new subsection which will state, in terms that are consistent with other rules about when an entity starts being a particular kind of instalment payer, when an entity becomes an annual payer. [Schedule 2, item 16, subsection 45-140(3)]

17 45-150(2) Section 45-150 states that an entity that is an annual payer stops being an annual payer if it becomes registered for GST. Subsection 45-150(2) states that such an entity must pay an instalment for the instalment quarter in which the GST registration occurs and subsequent instalment quarters in accordance with Subdivision 45-B.

As discussed above, the amendments in items 5 and 7 of Schedule 2 repeal the existing separate liabilities for the first and subsequent instalments. As such, the existing subsection will be repealed and replaced by a new subsection that reflects the new liability rules contained in the new section 45-50. [Schedule 2, item 17, subsection 45-150(2)]

18 to 20 45-155 Subsection 45-155(1) states that an entity that is an annual payer stops being an annual payer if it is notified of a notional tax amount of $8,000 or more or it chooses to stop being an annual payer. However, there is nothing in subsection 45-155(1) to state either:

·
when the entity is taken to stop being an annual payer consistent with timing rules in other such sections; or
·
exactly when the notification of the relevant notional tax amount must occur or how or when an entity makes the choice to stop being an annual payer.

Subsection 45-155(1) will be repealed and replaced by a new subsection which states that an annual payer will stop being an annual payer at the start of the first instalment quarter of an income year. This will happen if the annual payer chooses to stop being an annual payer at the end of the first instalment quarter of the income year. It will also happen if the Commissioner has notified the entity of a notional tax of $8,000 or more in the first instalment quarter of the income year or in the second, third or fourth instalment quarter of the preceding income year. [Schedule 2, item 18, subsection 45-155(1)]

A new subsection will be inserted to require an entity to make the choice to stop being an annual payer by notifying the Commissioner in the approved form, on or before the day on which the instalment for the first instalment quarter of the income year is due. [Schedule 2, item 19, subsection 45-155(1A)]

A minor amendment will also be made to subsection 45-155(3) to take account of the new subsection 45-155(1). [Schedule 2, item 20]

21 45-155(4) Subsection 45-155(4) states that an entity that has stopped being an annual payer under section 45-155 may again become an annual payer for a later income year if it again satisfies the conditions in subsection 45-155(1) and again chooses to pay annually. However, it does not clearly state when the entity again becomes an annual payer.

That subsection will be repealed and replaced by a new subsection that will clearly state that the entity again becomes an annual payer at the end of the first instalment quarter of the later income year. [Schedule 2, item 21]

22 45-180(2) Subsection 45-180(2) states what happens if an entity that is an annual payer for the 2001 and 2002 income years becomes registered, or required to be registered, for GST and therefore stops being an annual payer. It states that the entity must pay quarterly instalments for the first instalment quarter of the next income year and later quarters according to Subdivision 45-B.

The amendments in items 5 and 7 repeal the existing separate liabilities for the first and subsequent instalments. Consequently, the subsection will be repealed and replaced by a new subsection that reflects the new liability rules contained in the amended section 45-50. [Schedule 2, item 22, subsection 45-180(2)]

23 Heading to Subdivision 45-F The Heading to Subdivision 45-F refers to varying the instalment rate for quarterly instalments.

The Heading will be amended to take account of the fact that Subdivision 45-F will only apply to quarterly payers who pay on the basis of instalment income. [Schedule 2, item 23]

24 45-200 Section 45-200 states that Subdivision 45-F (which deals with how an entity varies its instalment rate) applies to a quarterly payer.

This section will be amended to reflect the fact that only quarterly payers who pay on the basis of instalment income will vary their instalments by varying their instalment rates. [Schedule 2, item 24]

25 45-215(1)(b) Section 45-215 states when an entity may claim a variation credit as a result of varying its instalment rate. Subparagraph (1)(b)(ii) deals with the case of an entity who has paid instalments in the same income year using GDP-adjusted notional tax and instalment income. It is necessary because section 45-130 currently requires an entity that is a quarterly payer who pays on the basis of GDP-adjusted notional tax and that becomes GST registered during the income year to revert to the instalment income basis for calculating quarterly instalments.

Subparagraph (1)(b)(ii) will have no practical effect once section 45-130 is repealed by item 14 of Schedule 2. Consequently, the subparagraph will also be repealed. [Schedule 2, item 25]

88 45-232(2) The amendment to subsection 45-232(2) reflects the expanded meaning of the term acceptableamount of an instalment for the purposes of the formula in subsection 45-232(2). The amended provision will state that the term acceptable amount has the meaning given by existing subsection 45-232(3) and the new subsections 45-232(3A) to 45-232(3D) that apply to 2 instalments payers. [Schedule 2, item 88]
26 to 28 45-400 including the section heading Section 45-400 states how the Commissioner must work out the amount of an instalment for a quarterly payer who pays on the basis of GDP-adjusted notional tax.

The heading to this section, and the section itself, will be amended to ensure that the Commissioner only applies the calculation set out in this section to a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax [Schedule 2, items 26 and 27, subsection 45-400(1)] . New section 45-402, which is being inserted by item 29, will state how the Commissioner works out the amount of an instalment payable by a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax. That provision was discussed in paragraphs 6.42 to 6.46.

A new subsection will also clarify that the amount of an instalment will be nil, if the amount worked out using the existing table is negative. This was not clear under the existing provision. [Schedule 2, item 26, subsection 45-400(2)]

30 45-405(1) Subsection 45-405(1) states how the Commissioner works out the amount of an entitys GDP-adjusted notional tax. It currently refers to notice of the amount of an instalment given under section 45-400. As a result of the amendment at Item 26, that sections operation will be limited to quarterly payers who pay 4 instalments annually on the basis of GDP-adjusted notional tax.

Subsection 45-405(1) will be amended to provide a reference to the amount of an instalment notified to a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 30]

31 to 33 45-410 including the section heading Section 45-410 states how the amount of a quarterly instalment is worked out when an entity varies the amount of an instalment that is worked out on the basis of GDP-adjusted notional tax.

The heading to this section, and the section itself, will be amended to ensure that the Commissioner only applies the calculation set out in this section to a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax [Schedule 2, items 31 and 32, subsection 45-410(1A)] . New section 45-412, which is being inserted by item 34 in Schedule 2 to this Bill, will state how the varied instalment amount is worked out for a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax. That provision was discussed in paragraphs 6.47 to 6.50.

A minor amendment to refer to that instalment instead of an instalment will be made to subsection 45-410(1) as a result of the insertion of new subsection 45-410(1A). [Schedule 2, item 33]

35 45-420(1) Subsection 45-420(1) allows an entity to claim a variation credit if the amount of an instalment worked out under section 45-410 is a negative amount. That will occur if the sum of the previous quarterly instalments payable for the year exceeds the relevant percentage of the entitys estimate of its benchmark tax.

This subsection will be amended to allow an entity who is a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax to claim a variation credit if the amount of the instalment worked out under new section 45-412 is negative. [Schedule 2, item 35]

91 to 93 45-450(1)

45-450(3)

As a result of the amendments made by item 14 of Schedule 2 to this Bill, single rate trustees (such as the trustees of public trading trusts and corporate unit trusts) will become eligible to use the GDP-adjusted notional tax method.

The amendments to subsections 45-450(1) and (3) and the Note to subsection 45-450(1) will delete the existing references to Subdivision 45-D that excluded single rate trustees from using the GDP-adjusted notional tax method. [Schedule 2, items 91 to 93]

36 to 38 45-468 Section 45-468 ensures that a multi-rate trustee that is liable to pay quarterly instalments is able to have those instalments worked out on the basis of GDP-adjusted notional tax. It does this by stating that Subdivision 45-D (which is currently about quarterly payers paying instalments on the basis of GDP-adjusted notional tax) applies to the trustee in the same way as it applies to an individual. (A multi-rate trustee is a trustee that is assessed and liable to tax under either subsection 98(1) or (2), 99 or 99A of the ITAA 1936.)

The heading to this section, and the section itself, will be amended to delete the reference to the basis on which quarterly payers pay. This will ensure that the section appropriately reflects the amendments made to the heading and contents of Subdivision 45-D. The section will still ensure that, where a provision of that Subdivision refers to an individual, it will also apply to a multi-rate trustee. [Schedule 2, items 36 and 37]

The new Note to section 45-468 will reinforce that point. [Schedule 2, item 38, note to section 45-468]

39 45-610 Section 45-610 defines the components of an entitys tax position for the purposes of Subdivision 45-P, the PAYG instalments anti-avoidance provisions. Item 1 in the table to that section defines the quarterly instalment component of an entitys tax position which is relevant to determining whether an entity has obtained a tax benefit from a scheme. Paragraph (b) of item 1 in the table makes it clear that the amount of such a component is nil even if the entity is not liable to pay a quarterly instalment because it is an annual payer.

That paragraph will be amended to recognise that the amount of a quarterly instalment component will also be nil if an entity is not liable to pay an instalment for a particular quarter because it is a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 39]

94 250-10(2)

table item 115

The amendment to item 115 of the table in subsection 250-10(2) reflects the fact that the liability to pay quarterly instalments will arise under section 45-61 as a result of other amendments made by this Bill. [Schedule 2, item 94]
Table 6.3: Amendments to the ITAA 1997
Item no. Provision amended Explanation
41 995-1(1) A new definition of full self-assessment taxpayer will be inserted in the Dictionary. The term will take its meaning from subsection 6(1) of the ITAA 1936 which, for a year of income (the current year), means any of the following:

·
a company;
·
the trustee of a trust that is either:

-
a corporate unit trust in relation to the current year for the purposes of Division 6B of Part III of that Act; or
-
a public trading trust in relation to the current year for the purposes of Division 6C of Part III of that Act; or

·
the trustee of a fund that is:

-
an eligible ADF;
-
eligible superannuation fund; or
-
pooled superannuation trust,

as those terms are defined in section 267 of that Act.

A corporate limited partnership is also a full self-assessment taxpayer as it is taken to be a company under section 94J of the ITAA 1936. [Schedule 2, item 41]

42 995-1(1) The existing definition of quarterly payer who pays on the basis of GDP-adjusted notional tax will be repealed and replaced by a new definition that states that the term takes its meaning from new section 45-130 of Schedule 1 to the TAA 1953. [Schedule 2, item 42]
43 995-1(1) A new definition for quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional taxwill be inserted in the Dictionary. The term will take its meaning from section 45-134 of Schedule 1 to the TAA 1953. [Schedule 2, item 43]
44 995-1(1) A new definition for quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional taxwill be inserted in the Dictionary. The term will take its meaning from section 45-132 of Schedule 1 to the TAA 1953. [Schedule 2, item 44]
45 995-1(1) A new definition for quarterly payer who pays on the basis of instalment income will be inserted in the Dictionary. The term will take its meaning from section 45-125 of Schedule 1 to the TAA 1953. [Schedule 2, item 45]
46 995-1(1) A new definition for starting instalment quarterwill be inserted in the Dictionary. The term will take its meaning from section 45-125 of Schedule 1 to the TAA 1953. [Schedule 2, item 46]
47 Application The amendments to the ITAA 1997 will apply for the 2001-2002, and later income years. [Schedule 2, item 47]
Table 6.4: Amendments to the ITAA 1936
Item no. Provision amended Explanation
54 and 55 160APA

Subparagraphs (a)(iabb) and (a)(iabd) of the definition of applicable general company tax rate

The amendments to subparagraphs 160APA(a)(iabb) and (a)(iabd) of the definition of applicable general company tax rateare as a consequence of the new term PAYG instalment variation credit having replaced the previous term PAYG rate variation credit. [Schedule 2, items 54 and 55]
56 and 57 160APA

New definition of PAYG instalment variation credit

Changing the term PAYG rate variation creditto PAYG instalment variation creditin section 160APA reflects that, because of amendments in Schedule 2 to this Bill, entities that can frank dividends can now also pay instalments on the basis of GDP-adjusted notional tax. They can also claim a credit under section 45-420 in respect of earlier PAYG instalments if they vary such an instalment amount by estimating their benchmark tax.

It is therefore necessary that the definition refer to both the credit claimed under section 45-215 on varying an instalment rate and the credit claimed under section 45-420 on varying a GDP-adjusted notional tax instalment. [Schedule 2, items 56 and 57]

58 and 59 160APA

Subparagraph (ab)(i) of the definition of termination time

The amendment to subparagraph 160APA(ab)(i) of the definition of termination timeis a consequence of the new term PAYG instalment variation credit having replaced the previous term PAYG rate variation credit. [Schedule 2, items 58 and 59]
61 to 68, 71 to 74 and 77 to 85 160APBC

160APBD(3)(a)

160APBD(3)(b)

160APMAB(3)

160APMF(1)

160APVI

160APVJ(1)(a)(ii)

160APVN(a)

160APYBAB(2)

160AQCNCA

160AQCNCB(a)(ii)

160AQCNCD(1)(a)(ii)

160AQCNCE(2)

160AQCNCJ(1)(b)

160AQDAA(2A)

160AQJC(1A)

160AQJC(3)

160AREA

160ARYC(2)

The amendments to these provisionsare as a consequence of the new term PAYG instalment variation credit having replaced the previous term PAYG rate variation credit. [Schedule 2, items 61 to 68, 71 to 74 and 77 to 85]
60 160APBB(2)(c) The amendment to this provision reflects the amendments in Schedule 2 to this Bill which allow entities that can frank dividends to also get a credit of a PAYG instalment under section 45-420 if they pay instalments on the basis of GDP-adjusted notional tax and vary the instalment amount by estimating their benchmark tax. [Schedule 2, item 60]
69, 70, 75 and 76 160APYBAB(1)

160AQCNCE(1)

These provisionsare amended as a consequence of the new term PAYG instalment variation credit having replaced the previous term PAYG rate variation credit, as well as to reflect the amendments in Schedule 2 to this Bill which allow entities that can frank dividends to claim a credit of a PAYG instalment under section 45-420. [Schedule 2, items 69, 70, 75 and 76]
95   The amendments made to the ITAA 1936 will apply to the 2001-2002 income year, and later income years. They will also apply in respect of instalment quarters of the 2000-2001 income year that are transitional quarters (as that term is defined in item 49). [Schedule 2, item 95]

Chapter 7 - Deferral of due dates

Outline of chapter

7.1 Schedule 3 to this Bill amends the FBTAA 1986, the ITAA 1936, the ITAA 1997 and the TAA 1953 to:

·
defer the due dates for quarterly notifications and payments under those Acts for entities other than those with monthly GST obligations to 28 October, 28 February, 28 April and 28 July;
·
ensure that where a due date for payment of a tax debt or lodgment of an approved form would otherwise fall on a Saturday, a Sunday or a public holiday, the payment and lodgment are due on the next business day; and
·
streamline the reporting arrangements by providing that a form such as the BAS and IAS is in the approved form if it is incomplete, but contains the information that the Commissioner requires. The amendments will also provide that when a document is to be given in an approved form to the Commissioner, in paper form by an agent, it is only necessary for a taxpayer to sign the document if the document so requires.

7.2 This chapter also explains amendments in Schedules 1 and 2 which deal with the deferral of due dates for GST and PAYG instalments of income tax.

Context of reform

7.3 The new tax system introduced the BAS for the reporting of GST and other obligations to the Commissioner. In addition to being the GST return, the BAS is the approved form for entities to notify the Commissioner of the following liabilities:

·
PAYG withholding amounts (although large withholders do not notify these amounts in a BAS);
·
PAYG instalments;
·
FBT instalments; and
·
deferred COIN.

7.4 All obligations notified on the BAS or IAS are currently due and payable on the same day. The new tax system introduced a due date of the 21st day after the end of a particular tax period for notifying and paying these obligations. The due date has raised concerns for many taxpayers, most notably small business taxpayers, who are currently required to report on a quarterly basis. In particular, the quarter ending 31 December has presented difficulties due to the impact of the Christmas break. The due dates for all quarterly BAS or IAS obligations will be extended to give those taxpayers coming within the amendments, additional time to meet their obligations.

7.5 An issue that has become increasingly significant is when taxpayers and others must lodge a form with the Commissioner or pay an amount to the Commissioner, if a due date is specified in the tax law for lodgment and/or payment, and that date falls on a weekend or public holiday. Particular due dates in respect of which this issue arose were the extension of the due dates for lodgment of the first and the second quarterly BAS by 3 and 2 weeks respectively and associated payments for 2000-2001, being Saturday 11 November 2000 and Sunday 4 February 2001 respectively.

7.6 Different interpretations of the law in relation to this issue have emerged. One interpretation is that section 36 of the Acts Interpretation Act 1901 applies to enable taxpayers and others to lodge a form with, and pay amounts to, the Commissioner on the next business day after the weekend or holiday. The other interpretation is that taxpayers should lodge the form or pay the amount before the weekend or holiday. These different interpretations have created uncertainty for taxpayers and tax practitioners.

7.7 The new tax system also has rules specifying the form and content of the forms to be lodged with the Commissioner, and the requirements in relation to declarations and the signing of forms by taxpayers. These rules currently require that all the information that a form requires must be provided and that the forms must be signed by taxpayers. These rules may impose an unnecessary compliance burden on taxpayers and tax practitioners.

Summary of new law

7.8 The amendments will provide entities with additional time to meet quarterly obligations to report and pay GST, PAYG withholding, PAYG instalment, deferred COIN and FBT instalment obligations through the BAS and IAS, by extending the quarterly due dates for meeting these obligations. The amendments will also streamline the BAS and IAS approved form requirements.

7.9 The extension will generally apply to any entity that has a BAS or IAS quarterly obligation apart from an entity that has chosen or is required to pay GST monthly.

7.10 For those taxpayers affected, the due dates will be permanently extended by one week for all quarters, except the December quarter which will be extended by one month and one week, in recognition of the impact of the Christmas break. The changes are summarised in Table 7.1.

Table 7.1: Change to due dates
  Quarter 1 Quarter 2 Quarter 3 Quarter 4
Current due date 21 October 21 January 21 April 21 July
Revised due date 28 October 28 February 28 April 28 July

7.11 Monthly withholders on substituted accounting periods have non-standard quarters for PAYG instalments and deferred COIN. The due date for notification and payment of those amounts is also extended by one week. This is explained in paragraph 7.31.

7.12 The amendments will also provide greater certainty to taxpayers where a due date for payment of a tax debt or lodgment of an approved form such as a BAS or IAS falls on a Saturday, a Sunday or a public holiday. Where the due date would otherwise fall on such a day, the payment and lodgment are due on the next business day.

7.13 Further simplifications include:

·
that a document needs only to be signed by a taxpayer if the document so requires, allowing agents to lodge a BAS and IAS in paper form without the signature of the taxpayer; and
·
that a document such as a BAS is in the approved form if it is incomplete, provided it contains all the information required by the Commissioner. This will streamline BAS reporting requirements.

Comparison of key features of new law and current law
New law Current law
The due dates for lodgment of quarterly BAS and IAS and associated payments will be the 28th day after the end of the quarter, except for the quarter ending 31 December which will be 28 February. The due dates for quarterly BAS and IAS obligations and associated payments is the 21st day after the end of the quarter.
Where a due date for lodgment of a form or payment of a tax liability falls on a Saturday, a Sunday or a public holiday, taxpayers may lodge the form or make the payment on the next business day. There is currently no specific provision in the tax law addressing due dates falling on a weekend or public holiday. The Acts Interpretation Act 1901 includes provisions which may address these due dates.
Taxpayers are only required to complete those elements of a form that the Commissioner requires and paper forms can be prepared by agents for taxpayers without the signature of the taxpayer. All information that an approved form requires must be provided and forms must be signed by taxpayers.

Detailed explanation of new law

Definition of a deferred BAS payer

7.14 The deferral of quarterly due dates will apply to taxpayers who are required to report and pay GST on a quarterly basis, or who are not registered for GST but are required to report another BAS obligation quarterly. These taxpayers will be defined by the term deferred BAS payer, inserted into subsection 995-1(1) of the ITAA 1997 and referred to in other relevant Acts. An entity will only be a deferred BAS payer for a month in which it has a quarterly obligation. For example, if the only obligation payable on an activity statement is a PAYG monthly withholding obligation, the entity will not be a deferred BAS payer for that month, and will notify and pay on the 21st. However, if the entity also has a quarterly obligation payable in a month, for example, GST or PAYG instalment, the entity will be a deferred BAS payer for that month. [Schedule 3, items 7, 16 and 18, subsections 136(1) of the FBTAA 1986, 221AZKC(9) of the ITAA 1936 and 995-1(1) of the ITAA 1997]

7.15 Entities with a monthly GST tax period, by virtue of either section 27-10 (taxpayer chooses) or 27-15 (Commissioners determination) of the GST Act, will not be able to take advantage of the revised quarterly due dates.

7.16 Diagram 7.1 sets out the process for determining whether the quarterly deferred due dates apply to an entity.

Diagram 7.1: Steps to determine if deferred due dates apply to an entity

Process for determining whether the quarterly deferred due dates apply to an entity

Large and medium PAYG withholders

7.17 The current payment arrangements for large withholders in subsection 16-75(1) of Schedule 1 to the TAA 1953 are not affected by the deferral of quarterly due dates. The application of the new rules in relation to medium and large PAYG withholders are summarised in Tables 7.2 and 7.3.

Table 7.2: Notification and payment of activity statements by medium PAYG withholders
Month Deferred BAS payer Not a deferred BAS payer
January to November 28th of the next month 21st of the next month
December 28 February 21 January
Table 7.3: Lodgment and payment of activity statements by large PAYG withholders for obligations that are not PAYG withholding obligations
Month Deferred BAS payer Not a deferred BAS payer
March, June, September 28th of the next month 21st of the next month
December 28 February 21 January

7.18 The specific amendments to implement the changes to the due dates for each type of tax obligation are discussed in paragraphs 7.18 to 7.33.

GST

7.19 Subsection 31-8(1) and section 33-3 of the GST Act specify the revised due dates for providing GST returns and paying net amounts for a quarterly tax period. [Schedule 1, items 1 and 6, subsection 31-8(1) and section 33-3]

7.20 Section 162-70 specifies the dates by which GST instalments must be paid for those taxpayers who elect to pay GST by quarterly instalments. Section 162-80 caters for the payment of the 2 GST instalments for those entities who are averaging entities. These 2 instalments are to be aligned with the payment of the third and fourth quarterly instalment payments (i.e. 28 April and 28 July). [Schedule 1, item 29, sections 162-70 and 162-80]

FBT instalments

7.21 Subsection 103(1) of the FBTAA 1986is amended so that the current due dates for paying instalments of FBT continue to apply to an employer who is not a deferred BAS payer. New subsection 103(2) specifies the revised due dates for payment of FBT instalments for deferred BAS payers. As the FBT year commences on 1 April, the change will result in the payment arrangements as shown in Table 7.4.

Table 7.4: Due dates for FBT instalments
  First instalment Second instalment Third instalment Fourth instalment
Current due date 21 July 21 October 21 January 21 April
Revised due date 28 July 28 October 28 February 28 April

7.22 A number of other amendments are being made to support the new quarterly deferred due dates for FBT. Section 109 of the FBTAA 1986 is amended to state the GIC period for the deferred due dates. Consequential amendments are being made to subsections 110(5), 111(1) and (2) and 112A(2) to remove references to the due date being the 21st day. [Schedule 3, items 1 to 7]

Deferred COIN

7.23 Section 221AZKC of the ITAA 1936 outlines the procedure for repayment of a deferred COIN for the 1999-2000 income year. Deferred COIN repayments are notified on each quarterly BAS or IAS and paid at the same time as other quarterly obligations. A number of changes as explained in paragraphs 7.23 to 7.27 are necessary to ensure that deferred BAS payers benefit from the new quarterly deferred dates. [Schedule 3, items 9 to 16, section 221AZKC]

7.24 Subsection 221AZKC(5) currently outlines the procedure for determining the due date for the first deferred COIN repayment. The subsection is being amended to state that the subsection applies subject to new subsection 221AZKC(6), ensuring that the due date of the 21st of a particular month continues to apply to taxpayers who are not deferred BAS payers. [Schedule 3, items 12 and 13, subsections 221AZKC(5) and (6)]

7.25 Existing subsection 221AZKC(6) is repealed and replaced with a new subsection 221AZKC(6). This subsection describes the date for the first COIN repayment for a deferred BAS payer. These dates will align with the due dates for quarterly PAYG instalment obligations notified on a BAS or IAS, that is, 28 October, 28 February, 28 April and 28 July. As a result, the first deferred COIN instalment for many small and medium deferred BAS payers will be due on 28 April 2001. [Schedule 3, item 14, subsection 221AZKC(6)]

7.26 In the 2000-2001 income year, all taxpayers with deferred COIN repayments will pay quarterly PAYG instalments, as this was a condition for eligibility to defer the final company instalment. In the 2001-2002 and later income years, however, ataxpayer with COIN repayments may be eligible to pay PAYG instalments annually or twice yearly, or may cease to have an ongoing PAYG instalment obligation. Deferred COIN repayments will continue to be due each quarter even if the taxpayer does not have a quarterly PAYG instalment obligation.

7.27 Current subsection 221AZKC(7) is being replaced with new subsections 221AZKC(7) and (7A) which will provide that deferred COIN repayments will continue to be due on the same date as PAYG quarterly instalments, whether the taxpayer continues to have this obligation or not. This is achieved by creating a notional PAYG quarterly instalment for all taxpayers with deferred COIN repayments defined by new subsection 221AZKC(7B). As a deferred COIN repayment is a BAS amount, a taxpayer with this liability will be a deferred BAS payer unless it has a GST obligation for a one month tax period. The due date for such taxpayers with a monthly GST tax period will be the 21st day after the end of a quarter, while all others will be due on 28 October, 28 February, 28 April and 28 July. [Schedule 3, item 14, subsections 221AZKC(7), (7A) and (7B)]

7.28 As a result of the extension of the December quarter lodgment date to 28 February, not all deferred COIN repayments will be paid at 3 month intervals. The references to quarterly in paragraph 221AZKC(3)(b), subsections 221AZKC(3), (5) and (8) are omitted to reflect this change. [Schedule 3, items 9 to 11 and 15, subsections 221AZKC(3), (5) and (8)]

PAYG withholding amounts

7.29Sections 13-5 and 13-20 in Schedule 1 to the TAA 1953 will be amended to apply the new quarterly deferred due dates to obligations that must be met by a personal services entity that is a deferred BAS payer. Subsections 13-5(3) to (5) and 13-20(2) make the necessary changes to implement the new quarterly deferred due dates. [Schedule 3, items 20 to 22]

7.30Some medium withholders will also benefit from the deferred quarterly due dates as their withholding obligations for the third month in a quarter are due and notified at the same time as their other quarterly obligations, if any, on the same BAS or IAS. For example, under the amendments, a medium withholder who is a deferred BAS payer will be required to pay its September withholding obligations on 28 October rather than 21 October. The timing for their July and August obligations will remain at 21 August and September respectively. Subsection 16-75(2) has been amended and new subsection 16-75(2A) allows the withholding obligation to be deferred to the 28th of the next month (or 28 February if the month is December) in any month in which the medium withholder is a deferred BAS payer. For medium withholders with standard quarters, this deferral will be available in March, June, September and December. [Schedule 3, items 23 and 24, subsections 16-75(2) and (2A)]

7.31 A small number of taxpayers with substituted accounting periods for income tax may have deferred COIN or PAYG instalment obligations for non-standard quarters. These taxpayers will be deferred BAS payers in respect of these amounts. The due date for notification and payment of these amounts and the withholding obligation for the third month of the non-standard quarter is extended by one week to the 28th day of the next month. [Schedule 3, items 20 and 24, subsections 13-5(5) and 16-75(2A)]

7.32 Subsection 16-75(3) in Schedule 1 to the TAA 1953 will be amended to state that the current quarterly due dates are retained for small PAYG withholders (annual remittances not exceeding $25,000) who are not deferred BAS payers. A new subsection is being inserted so that the new deferred quarterly due dates will apply to small withholders who are deferred BAS payers. [Schedule 3, items 25 and 26, subsections 16-75(3) and (4)]

7.33 Section 16-120 provides special rules specifying when certain amounts must be paid to the Commissioner if an entity withholds an amount under certain withholding provisions in the financial year starting on 1 July 2000. New subsection 16-120(2) is being inserted to apply the new deferred due dates to taxpayers who are deferred BAS payers of withholding amounts to which section 16-120 applies. [Schedule 3, items 27 and 28, subsection 16-120(2)]

PAYG instalments

7.34 Sections 45-50, 45-55, 45-60 and 45-65 of Schedule 1 to the TAA 1953 specify the liability to pay and the current due dates for PAYG instalments. As part of broader changes to the PAYG instalments system these sections are repealed and replaced with new sections to specify the revised liability to pay and due dates under the new PAYG instalment arrangements. These amendments take effect from the start of the 2001-2002 income year, apart from the deferred due dates which apply from 1 April 2001.

7.35 The deferred due dates for payers who are not deferred BAS payers are specified in new subsection 45-61(1). The due dates continue to be the 21st day after the end of the quarter for these payers. The deferred due dates for PAYG instalment payers who are deferred BAS payers are specified in subsection 45-61(2). Transitional provisions explained in paragraphs 7.42 to 7.46 ensure that the deferred due dates are effective from 1 April 2001. The changes to the PAYG instalment system are explained in more detail in Chapter 5. [Schedule 2, item 6]

Due date for lodgment of an approved form or payment of a tax debt falling on a Saturday, a Sunday or a public holiday

7.36 The law is also being amended to address due dates for the lodgment of an approved form or payment of a tax debt that fall on a day that is a Saturday, a Sunday or a public holiday. Where these due dates occur, taxpayers will be permitted to lodge the form and make associated payments on the first day following which is not a Saturday, a Sunday, or a public holiday. The new rule will apply to the due dates for all obligations to lodge approved forms and pay tax debts under the tax law. A tax debt does not include GIC that is already accruing on an existing debt.

7.37 Section 8AAZMB is being inserted into Division 4 of the TAA 1953 to provide the new rule for payment of tax debts. Subsection 8AAZMB(2) will introduce a definition of business day to support the new arrangements. Section 388-52 is being inserted into Division 388 of Schedule 1 to the TAA 1953 to provide the new rule for the lodgment of approved forms. The definition of business day is also inserted into subsection 995-1(1) of the ITAA 1997. [Schedule 3, items 34 to 36, sections 8AAZMB of the TAA 1953, 388-52 in Schedule 1 to the TAA 1953 and subsection 995-1(1) of the ITAA 1997]

7.38 Public holidays that may fall on a day other than a Saturday or Sunday include:

·
New Years Day;
·
Australia Day;
·
Good Friday;
·
Easter Monday;
·
Anzac Day;
·
Queens Birthday;
·
Christmas Day;
·
Boxing Day;
·
Labour Day (ACT, NSW, QLD, SA, Vic and WA);
·
Eight Hours Day (TAS); and
·
May Day (NT).

Approved forms

7.39 Subsection 388-50(1) in Schedule 1 to the TAA 1953 states that a relevant form must contain all the information required in the form to be in the approved form. Subsection 388-50(1A) is being inserted to modify this requirement by providing that a document or form containing the information that the Commissioner requires, will be in the approved form. [Schedule 3, item 30, subsection 388-50(1A) in Schedule 1 to the TAA 1953]

Signature requirements

7.40Paragraph 388-75(2)(a) currently states that any return, notice, statement or other document given by an agent in paper form on a taxpayers behalf must be signed by the taxpayer. This paragraph is being repealed and a new paragraph 388-75(2)(a) is being inserted to provide that such a document need only be signed by the taxpayer if the document so requires. [Schedule 3, item 31, paragraphs 388-75(2)(a) and (b) in Schedule 1 to the TAA 1953]

Application and transitional provisions

7.41 The revised BAS and IAS lodgment dates and other amendments explained in this chapter will apply for amounts that are due and notifications or forms required on or after 1 April 2001. [Schedule 3, items 8, 17, 19, 29 and 32]

Transitional rule for PAYG instalments

7.42 Schedule 2to this Billamends the rules relating to PAYG instalments and will apply from 1 July 2001. The extension of due dates for deferred BAS payers, however, will commence from 1 April 2001. Transitional provisions are necessary to ensure that PAYG instalments are due on the same date as other quarterly obligations for the remainder of the 2000-2001 income year. [Schedule 3, item 33]

7.43 The transitional rules will only apply for instalment quarters in the 2000-2001 income year that end on or after March 2001. The rules also cater for taxpayers whose 2000-2001 income year ends other than on 30 June 2001. [Schedule 3, subitems 33(1) and (2)]

7.44 For entities that are not deferred BAS payers and whose income year ends on 30 June, the due date of the 21st day after the end of the quarter continues to apply. The extended due dates of 28 October, 28 February, 28 April and28 July will apply to an entity that is a deferred BAS payer. [Schedule 3, subitem 33(3)]

7.45 For entities whose income year ends other than on 30 June, similar transitional rules are being made. [Schedule 3, subitem 33(4)]

7.46 An interpretative provision is being inserted to ensure that in the transitional rules the terms deferred BAS payerand instalment quarter have the same meaning as in subsection 995-1(1) of the ITAA 1997. [Schedule 3, subitem 33(5)]

Chapter 8 - Changes to the GIC and the benchmark interest rate

Outline of chapter

8.1 This chapter explains the amendments to the TAA 1953 and necessary consequential amendments to replace the benchmark rate used for the GIC and certain interest payments by the Commissioner, and to reduce the margin that is added to the benchmark rate in determining the GIC.

Context of reform

8.2 The GIC, provided for in Division 1 of Part IIA to the TAA 1953, is applied to relevant penalties and tax debts that are not paid on time. The rate at which the GIC is charged each day in a quarter is determined by adding 8 percentage points to a benchmark rate, presently described as the weighted average yield set at the last weekly tender for the 13-week Treasury Note before the end of the second month before the quarter commences. For example, the rate for November is used as the benchmark rate for the quarter commencing 1 January.

8.3 The Treasury Note yield rate is also used as the benchmark for interest payable by the Commissioner, such as interest on early payments, interest on overpayments and delayed refund interest, pursuant to the Taxation (Interest on Overpayments and Early Payments) Act 1983.

8.4 On 26 June 2000, the Australian Office of Financial Management in conjunction with the RBA announced that it would no longer issue fixed term Treasury Notes. As such the benchmark rate, upon which interest rates charged and paid by the Commissioner are calculated, continues to be fixed at the yield set at the last tender of 13-week Treasury Notes in June 2000.

8.5 Further, tax professional bodies have expressed concerns that the GIC is excessive, because they consider the 8 percentage point margin is greater than necessary.

Summary of new law

8.6 The amendments provide for the necessary change of the benchmark rate that is applied for the purpose of calculating interest amounts charged by and paid to the Commissioner, to the monthly average yield of 90-day Bank Accepted Bills, as published by the RBA.

8.7 The amendments also provide for a reduction in the margin added to the benchmark rate for the purposes of the GIC from 8 to 7 percentage points. The Government considers that a 7 percentage point margin is sufficient to support the policy objectives that taxpayers should pay their tax liabilities on time and not use the Commonwealth as a lending authority.

8.8 The amendments do not alter the manner in which an interest amount (whether chargeable or payable) is calculated, nor the determination of whether this amount will in fact be charged or paid.

Comparison of key features of new law and current law
New law Current law
The 90-day Bank Accepted Bill rate is used as the base rate for the GIC and various interest payment regimes. The 13-week Treasury Note yield rate is used as the base rate for the GIC and various interest payment regimes.
The margin added to the base rate in calculating the GIC is 7 percentage points. The margin added to the base rate in calculating the GIC is 8 percentage points.

Detailed explanation of new law

Amendment to the benchmark rate applied for the purposes of the GIC and some interest payment regimes

8.9 The 90-day Bank Accepted Bill rate replaces the Treasury Note yield rate in providing a benchmark for formulating the GIC and amounts of interest paid by the Commissioner. This rate correlates closely to the Treasury Note yield rate, is of similar maturity length and is determined by the RBA on a regular basis using a consistent methodology.

8.10 New subsection 8AAD(2) of the TAA 1953 provides a definition for the term base interest rate, replacing the former Treasury Note yield rate. This is defined as the monthly average yield of 90-day Bank Accepted Bills. The replacement rate is published by the RBA in Table F1 of the Reserve Bank of Australia Bulletin. This subsection also provides a table identifying the appropriate monthly average to be used for each quarter. [Schedule 4, item 1]

8.11 Where the RBA has not published the specified rate by the start of a quarter, new subsection 8AAD(3) substitutes the last published monthly average. [Schedule 4, item 1]

8.12 New subsection 8AAD(1) of the TAA 1953 determines the GIC rate applicable to relevant penalties and tax debts that remain to be paid to the Commissioner. It currently refers to the Treasury Note yield rate. Amendment of this label to base interest rate will give effect to the intended change. [Schedule 4, item 1]

8.13 Similarly, new subsection 8AAD(4) of the TAA 1953 provides for the rounding of the base interest rate to the second decimal place, as was previously the case with the Treasury Note yield rate. [Schedule 4, item 1]

Amendment to the margin added to the benchmark rate for the purposes of the GIC

8.14 New subsection 8AAD(1) reduces the margin added to the base rate in calculating the GIC to 7 percentage points. [Schedule 4, item 1]

Application and transitional provisions

8.15 The amendments will have effect from the first full quarter following Royal Assent [Schedule 4, item 10] . Consequently, there are no transitional provisions required.

Consequential amendments

8.16 Consequential amendments are also necessary to provisions in other Acts which refer to the Treasury Note yield rate. These amendments, which replace Treasury Note yield rate with the new term base interest rate, are listed in Table 8.1.

Table 8.1
Item no. Provision amended
2 Subsection 16B(3) of the Diesel and Alternative Fuels Grants Scheme Act 1999.
3 and 4 Subsection 16B(4) of the Diesel and Alternative Fuels Grants Scheme Act 1999.
5 Subsection 214A(1) of the Income Tax Assessment Act 1936.
6 Subsection 214A(2) of the Income Tax Assessment Act 1936.
7 Subsection 24A(3) of the Product Grants and Benefits Administration Act 2000.
8 and 9 Subsection 24A(4) of the Product Grants and Benefits Administration Act 2000.

[Schedule 4, items 2 to 9]

Chapter 9 - Regulation impact statement - extended due dates and GST changes

Scope of this regulation impact statement

9.1 Treasurers Press Release No. 7 of 22 February 2001 announced measures which will ease the compliance burden for taxpayers in the PAYG system and simplify and streamline small businesses GST payment and reporting arrangements.

9.2 This RIS deals with the measures in the package relating to:

·
GST returns[F1] and payments (Schedule 1);
·
extended due dates for reporting and paying indirect taxes, PAYG withholding, PAYG and FBT instalments, and deferred company instalment obligations on the business activity and instalment activity statements[F2]; and
·
associated changes to approved forms and reporting.

9.3 The GST measures that are the subject of this RIS are complemented by amendments to remove the liability of some taxpayers for PAYG instalments and extend the availability of ATO calculated quarterly PAYG. A separate RIS deals with the changes which are specific to PAYG instalments.

Policy objective

9.4 The objective of the GST measures and the extension in due dates for reporting and paying BAS obligations is to achieve a significant and ongoing reduction in reporting costs and the compliance burden. This is intended to be achieved by simplifying and streamlining GST payment and reporting arrangements, and by providing additional reporting choices for entities, particularly small businesses, who are required to lodge activity statements under the new tax system.

9.5 As information collected on the GST return is essential to the integrity of the new tax system, the changes are also intended to avoid unduly risking the integrity of the system. Taxpayers will continue to provide sufficient information, in a suitable timeframe, to ensure that necessary appropriate compliance verification can continue.

Implementation options

9.6 The implementation option was outlined in Treasurers Press Release No. 7 of 22 February 2001. The GST changes in the package which are the subject of this RIS will ease the reporting burden for taxpayers who lodge their BAS quarterly by:

·
simplifying the approved form of the BAS, permitting partial completion of approved forms where the Commissioner permits this, and permitting quarterly lodgers to lodge some data annually if they so wish;
·
extending the due dates for lodgement and payment of obligations that are notified on a quarterly BAS or IAS, thus providing additional time to prepare returns and make payments;
·
permitting quarterly, rather than monthly, GST returns and payments to be lodged by most entities with substituted accounting periods;
·
providing a quarterly instalment option, with a requirement to lodge GST returns annually, to most quarterly lodgers;
·
requiring taxpayers who average their income tax to pay only the final 2 instalments for the financial year if they choose to pay GST instalments; and
·
giving the Commissioner clear authority to permit taxpayers to correct minor errors in a GST return by making appropriate changes in the next return.

Eligible entities will be advised of the availability of these new options by the Commissioner.

Simplified BAS

9.7 The streamlined reporting and payment arrangements will see a simplification of indirect tax reporting requirements from the third (January-March) quarter of the 2000-2001 financial year.

9.8 From that quarter, businesses who currently return GST quarterly may:

·
continue to provide full quarterly reports of actual GST information. These businesses will report actual GST collected and paid (1A and 1B)[F3], sales/turnover (G1), exports (G2), other GST-free sales (G3), capital purchases (G10) and non-capital purchases (G11); or
·
provide a simplified quarterly report of only GST collected and paid (1A and 1B) and quarterly sales/turnover (G1). Businesses that choose this option will be required to lodge an annual information report showing exports (G2), other GST-free sales (G3), capital purchases (G10) and non-capital purchases (G11). This report is to be lodged at the same time as their annual income tax return, but no later than 28 February 2002 for those who do not lodge income tax returns.

9.9 From the January-March 2001 quarter, some businesses have the additional option of paying a quarterly GST instalment explained in paragraphs 9.19 to 9.22, followed by an annual GST return to be lodged at the same time as their annual income tax return. In the first (2000-2001) financial year, and for those who do not lodge income tax returns, the annual return is due no later than 28 February. This return will include actual GST collected and paid (1A and 1B), sales/turnover (G1), exports (G2), other GST-free sales (G3), capital purchases (G10) and non-capital purchases (G11) for the year.

9.10 Businesses will use the existing BAS to report and pay their GST for the January-March 2001 return, but with a reduced requirement to include information. From the fourth quarter, the quarterly BAS will be replaced by a new quarterly form which will use simpler language and have fewer labels to complete. The calculation sheet will be available as a separate worksheet, for those businesses who use the calculation sheet method to report their GST.

9.11 Businesses which lodge monthly will report on the new form from June 2001.

9.12 While these measures are mainly changes to the Commissioners administration of the approved form, there are associated amendments to this Bill which remove the requirement to state a net amount in the GST return and permit the Commissioner to require further returns which may require information for more than one tax period.

Extended due dates for quarterly payers

9.13 The quarterly due dates for lodgement and payment of indirect tax and other obligations reported and paid using the BAS will be extended for all entities which have any obligations reported on the BAS.

9.14 The extended due dates will apply to all of the following liabilities which are reported on the BAS:

·
GST;
·
luxury car tax;
·
wine equalisation tax;
·
PAYG withholding;
·
PAYG instalments;
·
GST instalments;
·
FBT instalments; and
·
deferred COIN.

9.15 Currently, the quarterly reports and payments for these obligations are due 21 days after the end of that quarter. Some businesses, particularly small businesses, have experienced difficulty in collating the required information in that timeframe, particularly in the case of the 21 January deadline. To overcome these difficulties, the due date for lodgement of the BAS and payment of BAS obligations will be extended by one week, with the exception of the Christmas quarter, in which case the deadline is extended by one month and one week to allow for the close down or holiday which many small businesses take during January.

Due dates falling on a Saturday, Sunday or public holiday

9.16 The measures will address uncertainty which has existed in relation to the time by which an obligation must be satisfied where the due date specified in the law for meeting that obligation falls on a Saturday, a Sunday or a public holiday. The law will be amended to provide that the obligation may be met on the next following day which is not a Saturday, a Sunday or a public holiday.

Quarterly returns for substituted accounting periods

9.17 Entities that have substituted accounting periods for income tax purposes are currently required to lodge monthly returns, even if their turnover is below the threshold for lodging quarterly. From 1 July 2001, these entities will be able to lodge quarterly returns if their turnover does not exceed the quarterly threshold of $20 million.

9.18 Entities will be able to take advantage of this concession from the commencement of the first quarterly period in the 2001-2002 income year. However, entities which meet the monthly turnover threshold will still be required to lodge monthly returns.

GST instalment option

9.19 The quarterly instalments option, which is similar to instalment arrangements under PAYG and FBT, will allow most taxpayers with a GST turnover of $2 million or less to pay quarterly GST instalments for a financial year and submit only one return on an annual basis.

9.20 The intention behind the $2 million instalment turnover threshold is to restrict eligibility for the quarterly instalment system to the smallest enterprises. Microbusinesses derive the greatest benefit from being relieved of their obligation to calculate GST amounts on a quarterly basis. This threshold was determined in consultation with business and is intended to provide the vast majority of quarterly GST payers with access to quarterly instalments, while excluding those quarterly payers from whom the largest amounts of revenue were derived; and who generally have more sophisticated business systems than microbusinesses, and better access to professional advice.

9.21 Entities which choose the quarterly instalment option will pay either a quarterly amount that has been advised to them by the ATO, or they may vary the amount for the quarter.

9.22 The amount of each instalment is either an amount worked out by the Commissioner or a varied amount of the taxpayers own choosing. Where the variation results in an underestimate of tax payable a penalty will apply in certain circumstances

Averaging entities

9.23 In view of the seasonal nature of their income, entities which average their income tax have a simplified payment schedule whereby they will only be required to lodge the final 2 quarterly instalments.

9.24 This simplified payment schedule reflects the particular difficulty in forecasting production levels early in the financial year for these taxpayers, and the volume and value of production is the primary determinant of the GST liability for these entities. For example, many primary producers do not derive the bulk of their income until the latter part of the financial year, the productive output is dependent on seasonal factors throughout the income year, and the amount of that income is dependent on market factors at the time of sale. For these reasons, averaging entities are often not able to estimate their production, and therefore their GST liability, in advance.

Correcting mistakes

9.25 The Commissioner will be provided with clear authority to permit taxpayers to correct an error in a BAS by making a compensating change in the next BAS.

9.26 Currently, the legislation does not provide a mechanism for correcting errors in GST returns, and it was arguable that errors, even where small, could only be made by lodging an amended return. Correcting an error in one return by making a compensating change in the next return was a practice which was commonly adopted in correcting errors in sales tax returns.

Assessment of impacts

9.27 The intention of the indirect tax measures in this Bill is to lessen the compliance costs to small business while still collecting information which is sufficient to maintain the integrity of the new tax system. In broad terms, while the changes in this Bill may require some short term adjustment by business to the changed reporting arrangements, they will provide immediate reductions in the costs of remitting and reporting GST for small businesses.

Impact group identification

9.28 The RIS for the GST Act identifies businesses, charities and government organisations as the key groups impacted by the GST. The impacts of these measures will be broadly similar for each of these taxpayer groups. The measures are intended to benefit small businesses and other entities who lodge their BAS on a quarterly basis. While monthly remitters of GST may gain a minor compliance cost benefit from some reduction in the detail required in GST reporting, the measures in the package do not impact significantly on monthly remitters of GST.

9.29 The main benefits from the GST and due date reforms in this Bill lie in:

·
the additional time for collecting and reporting information and the additional cash flow benefit provided by the extension in due dates;
·
the option for all quarterly remitters of GST to report limited information in their quarterly return with the balance being provided annually; and
·
the additional option for taxpayers with an annual turnover of $2 million or less to pay quarterly instalments of GST and lodge annual returns.

All GST registrants

9.30 All 2.1 million GST registrants will be able to use the simplified activity statement. They may also be covered by a Commissioners determination that would permit them to correct GST mistakes that were made in an activity statement in the next activity statement.

Quarterly remitters of GST

9.31 Currently, approximately 90% of entities who remit GST do not lodge monthly GST returns. Some entities lodge monthly returns despite not meeting the threshold for compulsory monthly lodgement, predominantly those who are in a net refund position and choose to lodge monthly to improve their cash flow position.

9.32 In addition to the existing arrangements, these entities will have the new option of lodging partial GST returns, with a further annual return containing the balance of the data.

Quarterly remitters who may choose instalments

9.33 Entities with a turnover which does not exceed $2 million, whose GST net amount is not a refund, who have a good lodgement history and have provided at least 4 months return form data will have the option of choosing GST instalments. This means that all entities under that threshold which have been registered for GST since 1 July 2000, have chosen to lodge quarterly, and have complied with their GST obligations will be able to choose the instalment option immediately. The vast majority of quarterly remitters are not in a GST refund position, and 95% of these net GST payers will be able to choose to adopt GST instalments because their turnover does not exceed the relevant threshold, subject to their lodgement history being satisfactory and sufficient GST return data being available.

9.34 The instalment option is not available to entities who are in a net refund position because such entities do not have a net GST liability. Consequently, there is no instalment to calculate for these entities.

Entities with substituted accounting periods

9.35 There are currently 14,500 GST registrants who have substituted accounting periods. Of these, 82% will be relieved of their current obligation to remit GST monthly and may revert to quarterly payment of GST from the commencement of the 2001-2002 income year.

Analysis of costs/benefits

9.36 This section of the RIS considers the compliance, revenue and economic costs and benefits of the GST measures in the package.

Compliance costs and benefits

9.37 Overall, the measures in this Bill are expected to considerably reduce compliance costs for business, charities and government organisations by providing additional options to ease their reporting burden.

9.38 Overall, there is expected to be a significant, but unquantifiable reduction in compliance costs from these measures. Whilst all GST registrants will benefit from these changes, the degree to which individual taxpayers will benefit will depend on their circumstances.

9.39 Taxpayers will not have to report certain information, resulting in a reduction in the compliance burden of extracting, collating and supplying that information.

9.40 Where information needs to be reported annually rather than quarterly there is a reduction in the duplication of effort Taxpayers will also have considerable time to provide the information that is required with annual returns.

9.41 Linking the timing of the lodgement of additional GST information with the timing of lodgement of annual income tax returns is also designed to reduce professional costs. Taxpayers would commonly only need to visit their accountant once to deal with their GST and income tax reporting requirements.

Simplified BAS forms

9.42 There will be a reduction in the amount of information collected on the BAS, and some taxes, such as luxury car tax and wine equalisation tax, will not be shown for taxpayers who do not have a liability for such taxes.

9.43 Quarterly lodgers that choose to report some information annually need report only GST collected and paid and quarterly sales/turnover in the GST return section of each quarterly BAS. They will need to provide a further return on a short information statement.

9.44 While the form of the further return is something that is approved by the Commissioner from time to time, it is currently proposed that the further annual return of GST show exports, other GST-free sales, capital purchases and non-capital purchases. This annual statement can be lodged at the same time as their annual income tax return but no later than 28 February in 2002.

9.45 The majority of small business GST registrants also lodge income tax returns annually. While this is dependent in part on the nature of the lodgment requirements for income tax set by the Commissioner, the intention is that normally the further GST return and the income tax return will have the same due date and can be lodged at the same time. This alignment of due dates is intended to permit small businesses to visit their accountant once a year to deal with their income tax and GST workloads. This is expected to result in a reduction in the overall reporting workload for both businesses and tax professionals.

Extended due dates

9.46 The extension in the due dates for the quarterly BAS will allow affected entities more time to put together the information required for their BAS. These taxpayers include business taxpayers of all sizes and across all industry groups, but in particular small business taxpayers. This will also provide increased opportunity to fit their compliance workload in with other workloads.

9.47 In many cases, the reduction in the compliance workload from these measures can be expected to result in a further collateral benefit of reduced overtime costs.

Due dates falling on a Saturday, Sunday or public holiday

9.48 The further extension in the due dates for lodgement that would otherwise fall on a weekend or public holiday will provide the flexibility for entities to meet their reporting obligations either before, during or the day after, the weekend or holiday.

Quarterly returns for substituted accounting periods

9.49 Currently, entities that account for income tax using a substituted accounting period in place of a 30 June year end must lodge monthly GST returns, even if their turnover does not exceed the $20 million threshold for lodging quarterly returns.

9.50 From the first quarter of the 2001-2002 year, substituted accounting period entities will be able to lodge GST returns quarterly provided their turnover does not exceed the monthly turnover threshold. This will mean they will not need to lodge a BAS more than quarterly in most cases. This change will provide a significant reduction in compliance costs for the majority of substituted accounting period entities, who will be able to access the choices available to quarterly lodgers.

9.51 As the threshold for monthly remittance of PAYG withholding depends on a different measure of turnover (amounts withheld during the previous financial year) to the threshold for lodging GST returns monthly, a small minority will still be required to remit PAYG withholdings monthly.

GST instalments

9.52 Many small businesses who must currently report actual GST data on a quarterly basis will now be able to lodge their GST returns annually and pay quarterly instalments worked out for them by the ATO.

9.53 The new alternative annual return option available to quarterly lodgers with an annual turnover of $2 million or less was designed to be as simple as possible and give people the choice of only visiting their accountant once to meet their income tax and GST responsibilities.

9.54 Under this system, taxpayers will no longer have to review their records or visit their accountant to calculate their quarterly payment amount. They will have the certainty of knowing exactly how much they need to set aside for their quarterly payment as the Commissioner will advise the amount of the quarterly instalment.

Varying instalments

9.55 The design of the variation mechanism, and the penalty for underestimation, is at the heart of any flexible and robust system for payment of a tax by instalment in advance of its quantification. An effective variation mechanism will provide reasonable latitude for taxpayers to estimate their liability, while also providing a disincentive to defer tax by underestimating liability. Because ultimate liabilities cannot be precisely quantified until the end of the tax period, too small a margin for error will make it difficult for taxpayers to avoid the possibility of penalty. However, because of the potential for deferral of revenue from one year to the next, or from early to late in the financial year, too generous a margin for error will result in a significant cost to the public purse because of the PDI cost where revenue is deferred for any period and the effect on the budget where revenue is deferred from one year to the next.

9.56 The GST instalment system will provide this flexibility for taxpayers whose circumstances change during the financial year and for whom the instalment determined by the Commissioner is inappropriate. The variation mechanism operates on the same principles as the GDP-adjusted instalment option under the PAYG system of which many businesses are already familiar.

9.57 The underestimation penalty is modelled on the PAYG underestimation penalty, where instalments are less than 85% of the appropriate amount. The 15% margin for error is more generous than underestimation penalties under some other systems; for example, under the company instalment system which existed before PAYG was introduced, the margin for error was only 10%. To remove the incentive to defer tax by varying down then later varying up, a penalty may also be payable where a particular instalment is too low when compared with annual GST liability, or where the instalment is not calculated by reference to the estimate of annual tax. A greater margin for error of 25% is provided for the September 2001 quarter instalment only, and taxpayers may minimise any liability to penalty by making a top-up payment in a later quarter to cover an earlier underestimate. This is to recognise the difficulties in varying that instalment as the ATO notified amount will be based only on the December 2000 GST payment.

Averaging entities

9.58 Entities which average their income tax, such as farmers, authors and sportspersons, will be able to defer payment of the first and second instalment that would otherwise be payable. This would result in a small reduction in compliance costs through only having to pay 2 instalments rather than 4, and not having to work out early in the financial year whether the instalment determined by the Commissioner is inappropriate.

9.59 These entities may derive a cash flow benefit from the deferral of 2 instalments of GST. This benefit exists because of the seasonal and often unpredictable nature of the income of many of these entities. If these taxpayers were required to pay the first 2 instalments and the instalment notified by the Commissioner was excessive, it would often be impracticable for them to determine an appropriate varied instalment because the seasonal and fluctuating nature of trade in these industries makes it particularly difficult for them to forecast production volumes and values early in the financial year.

Correcting mistakes

9.60 As this amendment is aimed at facilitating an existing practice under GST and previously under sales tax, it is expected to have no impact on compliance costs.

9.61 The measures which ensure that entities will be able to correct minor mistakes in their next GST return would considerably reduce the compliance burden that would be faced by taxpayers if they were required to correct every error, no matter how small, by lodging an amended BAS. It also removes the disincentive to comply with the law that results from the greater compliance cost that would otherwise occur.

9.62 As errors can be corrected which resulted in a calculated liability that was either too high or too low, individual businesses may derive a very small cash flow cost or benefit depending on the nature of the error corrected.

Implementation costs

9.63 There will be minor costs to businesses and charities in implementing the recommendations, but these are likely to be negligible when compared with the overall reduction in compliance costs from the new measures.

9.64 Affected taxpayers may incur upfront costs in familiarising themselves with, and evaluating, the additional options provided by the new law. This upfront compliance cost is expected to be smaller than that which occurs for other tax changes of a similar magnitude. As part of the communication and education campaign, the Commissioner will advise affected taxpayers of the availability of the new options by letter, and flyers will accompany the first simplified forms. Entities who adopt the streamlined quarterly reporting option will simply use new reporting stationery which shows information similar to that currently collected, with the exception that less information will be reported, while some information will be reported less often. Most businesses affected by the GST instalment system will already be familiar with instalment payment systems, which have existed for income tax and FBT for many years. The GST instalment system has been largely modelled on the PAYG instalment system.

9.65 Adoption of the new arrangements is also optional for business, as those businesses that are satisfied with the existing system may continue to use the existing arrangements. The BAS forms will become less complex.

9.66 In some cases, businesses will seek professional advice. This decision is a matter for the individual business to take, having regard to the upfront cost of such advice, which may be outweighed by the benefits, such as improved cash flow and better business management which may result from professional advice.

9.67 To the extent practicable, the GST instalment system operates on the same principles as the GDP-adjusted instalment option under the PAYG system, with which many businesses will be familiar. Instalment systems have been a feature of income tax and FBT for many years, and many businesses and most tax professionals will have some familiarity with concepts such as variations and underestimation penalties.

9.68 The costs of familiarisation will be considerably ameliorated by an appropriately targeted education and information campaign which the ATO has already commenced to familiarise businesses and tax professionals. In addition, taxpayers can take advantage of a wide range of other free services such as call centres, advisory visits by ATO staff and web site information provided by the ATO and other organisations.

9.69 Businesses deciding to take advantage of the options provided by the new arrangements may need to update computer software. The cost will depend on the nature of the licence in the software and the agreement with the software provider. There may be no additional costs where businesses have an existing, ongoing maintenance agreement with the software provider that covers these changes.

9.70 In addition, the ATO has been working with software providers to help them update BAS reporting software, which forms a part of many standard small business accounting packages.

Administration costs and benefits

9.71 The ATO has commenced an education and information campaign, which will include television, press and radio advertisements to ensure immediate community awareness of the changes.

9.72 There will be an upfront cost to the ATO in making appropriate changes to its systems and processes, together with other administrative costs and corporate flow ons. With the exception of the education campaign referred to in paragraph 9.68, the implementation costs will be met from existing budgets. The administrative systems and instructional material will change to provide forms that are more customised to user requirements over the next 6 to 9 months. These changes will be coupled with further marketing and publicity, mainly directly targeted rather than mass media.

9.73 These administration costs of implementation cannot be fully quantified at this stage. However, additional allocations of $12 million in 2000-2001 and $40 million in 2001-2002 have been made to defray these costs.

Revenue impact

9.74 The revenue impacts for the measures are set out in the general outline and for convenience those measures which are dealt with by this RIS and which have a revenue cost are repeated in Table 9.1. The table does not deal with administrative and economic costs, which are detailed elsewhere.

Table 9.1
Revenue Impact 2000-2001 $m 2001-2002 $m 2002-2003 $m 2003-2004 $m 2004-2005 $m
GST instalments option -65 -130 -15 -15 -15
Allowing substituted accounting periods with a turnover of less than $20 million to account for GST on a quarterly basis nil -80 -5 -5 -5
TOTAL -65 -220 -20 -20 -20

9.75 There is some reduction in gross GST revenue, mainly in the 2001-2002 financial year, as the measures permitting GST instalments and quarterly lodgement by substituted accounting periods will result in some deferral of tax payable. However, as deferral benefits in outyears are balanced by revenue deferred from the previous year, the long term cost is minimal and limited to growth in the deferred amount from year to year. In addition, the 25% tolerance for the September 2001 quarter will result in a revenue cost in 2001-2002 of $10 million to be recouped in the 2002-2003 year.

Simplified BAS

9.76 The simplified BAS forms will have no impact on revenue, as these changes do not change taxpayers liability to tax but merely the extent to which that liability is explained in each return.

Extended due dates

9.77 The extension in lodgement and payment dates for quarterly substituted accounting period remitters will defer the receipt of GST remittances. However, as the change does not shift GST revenue from one income year to another, there is no impact on overall revenue in any particular year.

Quarterly returns for substituted accounting periods

9.78 Permitting entities with substituted accounting periods to defer some revenue from a monthly to quarterly payment profile will have a revenue impact in the first year of its introduction. Payments that would have been due for April and May 2002 (in May and June respectively) will be deferred until July 2002. The total revenue estimated to be deferred from 2000-2001 to the 2001-2002 year is $80 million. There is a small effect on revenue in later years due to growth, which has been estimated at $5 million per annum.

GST instalments

9.79 The introduction of the measure relating to GST instalments is expected to result in some deferral of revenue from one year to the next as taxpayers may vary their liability down but are not required to vary their liability up where the GST component of transactions increases. The deferral is greater in the 2001-2002 year because revenue from more instalments is deferred in that year.

9.80 The concession to averaging entities which permits them to pay the amount that would be due for the first, second and third quarters as a single payment in the third quarter is expected to slightly increase the deferral of revenue in the 2001-2002 year, as this is the first year in which this option becomes available.

Correcting mistakes

9.81 Permitting taxpayers to correct GST mistakes in their immediately succeeding return would have a small but unquantifiable cost to revenue where underpayment errors in one financial year are deferred to the next financial year. The precise revenue impact of the measure is dependent on the manner in which the Commissioner administers the concession, and errors which result in deferral from underpayment can be expected to be cancelled out, in part, by revenue brought forward from overpayment errors.

9.82 In the case where the Commissioner considers that the error correction concession is being abused, an assessment of tax may be issued.

Economic impact

9.83 As some of the GST measures in the package will allow entities to defer payment of GST for short periods, there is a financing cost to the Commonwealth by way of PDI. This cost to the Commonwealth will provide a commensurate benefit to businesses, who will be able to defer payments.

Simplified BAS and correcting mistakes

9.84 There is no impact expected from the simplified BAS measure and negligible impact expected from the correcting errors measure.

Extended due dates

9.85 There is a PDI cost from the later receipt of revenue through the due date concession. This cost is estimated as being $140 million in the 2001-2002 financial year, of which $26 million relates to GST.

Quarterly returns for substituted accounting periods

9.86 The PDI cost of allowing eligible substituted accounting periods to pay their GST liability on a quarterly basis rather than on a monthly basis is expected to be less than $5 million per annum.

GST instalments

9.87 As there is expected to be negligible effect on revenue from the introduction of the GST instalment regime, the PDI cost is also expected to be negligible.

9.88 The PDI cost of allowing averaging taxpayers to defer paying what would have been their first and second instalments until the due date for their third instalment is estimated at $8 million.

Consultation

9.89 Since the implementation of the GST, the government and the ATO have consulted extensively with business, charities and tax professionals on the impact of the system. The GST measures in this package are based on the results of that consultation, which focussed particularly on the needs of small business in the light of experience gained from the first 2 quarterly returns under the new tax system.

Chapter 10 - Regulation impact statement - PAYG instalments

Scope of this regulation impact statement

10.1 Treasurers Press Release No. 7 of 22 February 2001 announced a package of measures which will ease the compliance burden for taxpayers in the PAYG system and simplify and streamline GST and reporting arrangements for small business and investors.

10.2 This RIS deals with the PAYG instalments measures in that package. It also deals with additional measures, not announced at that time, which also ease the compliance burden for PAYG instalments payers.

Policy objective

10.3 The objective of the measures is to achieve a significant and ongoing reduction in reporting costs and the compliance burden of PAYG instalments payers. The measures will enable them, for the first time, to pay an amount worked out, and notified, by the Commissioner. Importantly, the measures will accomplish this while maintaining optimal alignment between the GST system and PAYG instalments regime.

10.4 A key objective of the PAYG instalments regime is to collect appropriate instalments within the income year and to minimise the amount paid on assessment. These measures are intended to support that objective and to maintain the integrity of the PAYG instalments base.

Implementation options

10.5 Three options were considered and they are outlined in paragraphs 10.6 to 10.11. The third option forms the basis of the proposed amendments in this Bill. It is preferred because it strikes the best balance between relieving the compliance burden of the PAYG instalments payers and maintaining the integrity of the PAYG instalments base.

Option 1: Individual taxpayers

10.6 Under this option, new arrangements affecting the method by which individuals pay their PAYG instalments would be put in place. All individuals would be required to pay 4 quarterly instalments using the GDP-adjusted notional tax method[F4]. However, they would be able to choose, at the end of the first quarter in the income year, to pay:

·
an annual instalment (if they are eligible to pay on that basis at that time); or
·
on the instalment rate times instalment income basis.

10.7 Their choice would bind them indefinitely unless either they ceased to be eligible to pay using the chosen method or they made another valid choice at the end of the first quarter in a subsequent income year. In other words, in the absence of a valid choice, individuals would be required to pay using the GDP-adjusted notional tax method and this would be their default position.

10.8 This option would simplify the reporting requirements of individuals by enabling them to pay an amount worked out, and notified, by the Commissioner. Currently, the individuals identified in paragraph 10.7, and who are not annual payers, must work out their own instalment income each quarter and pay using the instalment rate times instalment income.

Option 2: Individual taxpayers, companies and superannuation funds with a base assessment instalment income of $1 million or less

10.9 The second option extends the first option to encompass all companies, entities taxed as companies, and superannuation funds which have a base assessment instalment income of $1 million or less[F5]. This option also extends to these entities which have a base assessment instalment income exceeding $1 million provided that they are eligible to pay annual instalments but have not chosen to do so[F6].

10.10 The additional instalment payers encompassed by this option would enjoy, for the first time, the same benefits in terms of simplified reporting requirements as those identified under option 1.

Option 3: Individual taxpayers, companies and superannuation funds with base assessment instalment income of less than $1 million, with refinements for some individuals to pay only 2 instalments and more flexibility to swap between methods during the income year

10.11 The third option extends option 2 by requiring individuals to pay 2 quarterly instalments using the GDP-adjusted notional tax method if they satisfy either or both of the following:

·
they are a special professional (such as author or artist) under the ITAA 1997 in the income year and the assessable professional income of the base year exceeded the amount of so much of their deductions in that year that reasonably related to that income; and/or
·
they are carrying on a primary production business in the income year and the assessable income that was derived from, or resulted from, a primary production business that they carried on in the base year ,exceeded the amount of so much of their deductions in that year that are reasonably related to that income[F7].

The 2 instalments would be due after the end of the third and fourth quarters of their income year. The instalment payable for the third quarter would be 75% of the GDP-adjusted notional tax and for the fourth quarter it would be 100% of their GDP-adjusted notional tax less their previous instalment. They would have the same rights to choose out of this method and to trigger the default to it as 4 instalment payers using the GDP-adjusted notional tax method.

Assessment of impacts

10.12 Paragraphs 10.13 and 10.14 focus on the impact of option 3. However, each of the options would result in essentially the same benefits to the affected taxpayers. The options only differ as to the number, and kind, of taxpayers that will be affected.

10.13 The intention of the measures in this Bill is to lessen the compliance costs of small businesses and investors while still collecting appropriate PAYG instalments during the year of income and minimising payments on assessment.

10.14 The measures do this by requiring affected taxpayers to pay quarterly instalments on the basis of GDP-adjusted notional tax unless they choose to pay on the basis of instalment income times instalment rate or annually. This reverses the default position in the existing law under which these taxpayers must pay on the instalment income times instalment rate basis (unless they choose to pay on the basis of GDP-adjusted notional tax or annually). The effect of this reversal is that affected taxpayers no longer have to work out the amount they have to pay quarterly.

Impact group identification

10.15 The following individuals will be given access to the GDP-adjusted notional tax method for the first time and irrespective of the level of their business and investment income:

·
those who are not registered, or required to be registered, for GST, and whose notional tax is less than $8000; and
·
those who are registered, or required to be registered for GST in their own right, or are a partner in a partnership which is registered, or required to be registered, for GST.

10.16 In addition, the changes will give superannuation funds, companies and entities taxed like companies access to the GDP-adjusted notional tax method for the first time if their base assessment instalment income was $1 million or less in the previous income year.

10.17 In total some 1.5 million PAYG instalments payers will be eligible to benefit from the measures.

Analysis of costs / benefits

Compliance costs

10.18 There will be a potential reduction in the compliance costs of some 1.5 million taxpayers. This is because taxpayers who pay using the GDP-adjusted notional tax method as a result of these changes will be able to pay an amount worked out, and notified, by the Commissioner for the first time. Some will pay a notified amount 4 times each year but others will only pay a notified amount twice each year.

10.19 This should result in lower compliance costs for the affected taxpayers. Those who would have paid using the instalment income times instalment rate method under the existing regime, would have had to work out the amount of their instalment income 4 times each year. For many of the affected taxpayers, this has required assistance from their tax agents, especially where they are partners in partnerships or beneficiaries in non-fixed trusts. There is, therefore, a reduction in the compliance costs previously borne by these taxpayers if they pay an instalment worked out, and notified, by the Commissioner.

10.20 Base assessment instalment income will be used as a proxy for the concept of turnover which applies in the GST legislation. It has not been possible to align the GST legislation and the PAYG instalments measures which are the subject of this RIS in this respect. This is because there are practical difficulties in structuring a turnover test to cover the wide range of entities covered by the PAYG instalments regime, many of whom are not in business.

10.21 For example, the Courts have held that most superannuation funds are not in business. For most taxpayers, their base assessment instalment income is the total of their ordinary investment and business income. In the case of a superannuation fund, it is its total assessable income, which includes statutory income such as capital gains.

Administration costs

10.22 Under the proposed PAYG instalments amendments, the Commissioner will advise affected taxpayers of their quarterly instalment amount. Changes to the ATO systems will be required for this to take place. This is expected to involve a cost of $10 million per annum.

Government revenue

10.23 The proposed amendments are expected to result in a one-off revenue cost of $220 million in the 2001-2002 year and $10 million in subsequent years. The cost arises because the change will result in a deferral of revenue from PAYG instalments in that year to the following year on assessment of the 2001-2002 income tax returns.

Economic affects

10.24 As some of the measures in the package will allow taxpayers to defer payment of PAYG instalments during the year of income, there is a PDI cost to the Commonwealth. This cost will provide a commensurate benefit to business and investors who will be able to defer payments.

10.25 Some special professionals and primary producers will be able to take the benefit of the 2 instalment payment default position giving them greater flexibility in dealing with the fluctuations in their income flows during the year of income.

Consultation

10.26 These measures were developed following limited consultation between the Government, professional and industry bodies, members of the public and the Commissioner.

Conclusion and recommended option

10.27 The PAYG instalments amendments in this Bill which give effect to option 3 are recommended because they provide an appropriate balance between the objective of minimising compliance costs for taxpayers while maintaining the integrity of the PAYG instalments regime.


The GST return is the document on which GST is regularly reported. Under the new arrangements, some GST returns will continue to form part of the BAS, while annual GST returns may be lodged separately in some cases.


In this statement, the BAS and IAS are referred to collectively as the BAS.


References are to the label field identifiers in the existing BAS.


Revenue impact: this change would have a one-off revenue cost of $100 million in 2001-2002. The measure would affect approximately 1.1 million taxpayers.


Revenue impact: this change would have a one-off revenue cost of $200 million in 2001-2002 being the $100 million arising from option 1 and a further $100 million from the additional entities. The measure would affect approximately 1.5 million taxpayers.


Revenue impact: the addition of this group will have an insignificant impact on the revenue.


Revenue impact: nil.


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