Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
General Outline and Financial Impact
The Taxation Laws Amendment (Self Assessment) Bill 1992 implements the Government's decision, announced in the Treasurer's statement of 13 December 1990 and in the 1991-92 Budget, to improve existing self assessment arrangements.
The Bill proposes changes to the law to:
- introduce a new system of binding Public Rulings applicable to income tax, Medicare levy, withholding taxes, franking deficit tax and fringe benefits tax;
- introduce a new system of binding Private Rulings for transactions or arrangements that are proposed, have commenced or are completed. The new system will also apply to income tax, Medicare levy, withholding taxes, franking deficit tax and fringe benefits tax;
- introduce a new system of reviewable Private Rulings which will generally allow taxpayers to have Private Rulings reviewed by the Administrative Appeals Tribunal (AAT) or a court;
- limit objection rights against an assessment to prevent a review of a matter that is already the subject of a review of a Private Ruling;
- extend the period within which a taxpayer can object against assessments and related determinations from 60 days to 4 years, and provide a broadly similar objection period for Private Rulings;
- allow the Commissioner, in making assessments, to rely on statements made by taxpayers other than in tax returns (eg., in a request for an amendment);
- introduce a new system of penalties for understatements of income tax and franking deficit tax liability. The penalties will be based on the requirement that taxpayers exercise reasonable care in carrying out their tax obligations. A more rigorous standard, the reasonably arguable position test, will apply to items which affect tax by more than $10 000;
- introduce a new interest system for underpayments and late payments of income tax, based on commercial principles and market interest rates;
- reduce late payment penalties to take into account the new interest system. This will allow for the separation of interest and penalties while providing an incentive for taxpayers to pay income tax on time;
- provide deductibility to all taxpayers for interest payments made to the Australian Taxation Office (ATO); and
- remove, in most cases, the requirement for taxpayers to lodge notices of elections or other notifications with the Commissioner.
The purpose of the Bill is to improve the self assessment system of taxation which Australia has had since 1986 so as to make that system fairer and more certain for taxpayers.
The Bill will apply to all taxpayers.
Taxpayers who are uncertain about the tax effect of an arrangement that is proposed, commenced or completed will be able to seek a Private Ruling from the Commissioner. The Commissioner will be bound by the ruling in that the tax that would be payable by the taxpayer will be reduced to reflect the ruling.
The Commissioner will continue to issue Public Rulings. These will be binding in the same way as Private Rulings will be binding on the Commissioner.
The Commissioner will only be able to withdraw the benefit of a ruling on arrangements that are not under review, or that have not yet been entered into, except where it would be grossly inequitable to allow a taxpayer to continue to benefit from an incorrect ruling.
A taxpayer will be able to have a Private Ruling, even on a proposed arrangement, reviewed by the AAT or the courts. When the review process is finalised, the decision of the AAT or court will be legally binding and conclusive as to the application of the ordinary provisions of the law to an actual arrangement not materially different from the proposal or arrangement to which the Private Ruling related.
Taxpayers will have 4 years to object against an assessment. Taxpayers will be able to object against a Private Ruling within the period ending:
- 60 days after receipt of the ruling; or
- 4 years from the last day allowed for the lodgment of the relevant return.
The Bill extends the period within which a taxpayer can object against an assessment from 60 days to 4 years, and provides a similar objection period for Private Rulings.
Taxpayers will have full rights of review against a Private Ruling where there is no assessment covering the matter which is the subject of the Private Ruling; they will be able to object against an assessment except to the extent that the taxpayer has already objected against a Private Ruling in respect of that matter.
The Commissioner will be able to rely on statements made by the taxpayer in a request for an amendment in amending the taxpayer's assessment (a 'self amendment') in the same way as the Commissioner can now rely on statements made by the taxpayer in a return when making an assessment (a 'self assessment'). However, the Commissioner may decide not to accept statements in the request for amendment and, for example, make enquiries as to whether the amendment is necessary.
The Commissioner is obliged to amend the taxpayer's assessment where the Commissioner is satisfied that the amendment is necessary to reflect the correct tax.
Where a taxpayer 'self amends' the Commissioner will have 4 years to review the item amended.
Taxpayers who have exercised reasonable care will not be, in the vast majority of cases, subject to understatement penalties. However, for large issues which involve questions of law, taxpayers will also have to satisfy the reasonably arguable position standard.
There will be a specified level of penalties for categories of 'non-compliance'. These may be increased or decreased by 20% depending on whether there are aggravating or mitigating factors. Special rules apply where a taxpayer has entered into an arrangement with the dominant purpose of avoiding tax.
The Commissioner will continue to have the power to remit the penalty in whole or in part.
Where a taxpayer uses a tax agent the taxpayer will remain primarily liable for any penalty arising from the negligence of the tax agent. However, the taxpayer is entitled under section 251M of the Income Tax Assessment Act (ITAA) to recover the penalty in any court of competent jurisdiction.
The penalty for late payment is to be reduced from the current 20% per annum to 8% per annum, but will be complemented by the new interest system.
This penalty does not apply to debit amendments other than late payment of the increase in tax. Like other penalties, the Commissioner will have the power to remit the penalty in whole or in part.
The Bill will provide for interest to be paid by taxpayers in relation to the underpayment and late payment of tax.
Interest for underpayment will apply irrespective of whether a taxpayer is subject to understatement penalties.
The Commissioner will have the power to remit interest.
Interest paid by all taxpayers to the ATO will be tax deductible.
In most cases taxpayers will no longer be required to prepare and lodge written notices of elections. However, the records of taxpayers will need to reflect the decisions taken in calculating the taxable income.
There will be revenue costs associated with the introduction of the new interest system (including reduced late payment penalties and deductibility for interest payments made by taxpayers to the ATO); otherwise the measures are generally revenue neutral.
The costs associated with the new interest system are estimated to be $20m in 1993-94, and $64m in 1994-95 and subsequent years. As these estimates are based on current market interest rates, the actual costs involved will vary according to the actual interest rates for any particular period.
These estimate are based on the current late payment penalty of 20% per annum, and interest on underpayments of 14.026% per annum, both of which are non deductible. Accordingly, any change in these rates would affect the costs of these measures. For example, a reduction in these rates would reduce the revenue costs.