ATO Interpretative Decision

ATO ID 2006/295

Income Tax

PAYG instalment rate: varying the rate upwards and the general interest charge
FOI status: may be released
Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Will the company be liable for the general interest charge (GIC) under section 45-230 of Schedule 1 to the Taxation Administration Act 1953 (TAA) if it varies its pay as you go (PAYG) instalment rate upwards and it is less than 85% of its benchmark instalment rate for the income year?

Decision

Yes. The company will be liable for the GIC under section 45-230 of Schedule 1 to the TAA if it varies its PAYG instalment rate upwards and it is less than 85% of its benchmark instalment rate for the income year.

However, in the circumstances it is appropriate for the Commissioner to exercise his discretion to remit the whole of the GIC payable under section 45-240 of Schedule 1 to the TAA because it is fair and reasonable to do so.

Facts

The company was notified by the Commissioner on 28 April 2006 that its PAYG instalment rate with effect from 1 April 2006 was 0%. Previously, the company was notified by Commissioner on 28 April 2005 that its PAYG instalment rate with effect from 1 April 2005 was also 0%.

On 28 April 2006, the company varied its PAYG instalment rate upwards pursuant to section 45-205 of Schedule 1 to the TAA. The company then paid PAYG instalment amounts for the March and June quarters based on the varied rate.

The company's income tax return year ended 30 June 2006 is due to be lodged in February 2007. Due to a recent business decision, the company is anticipating that it will now pay a greater amount of tax when it lodges its income tax return. As a result, it is expected that its varied rate will be less than 85% of its benchmark instalment rate for the year ended 30 June 2006.

The company did not vary its instalment rate downwards at any time during the year. The company is not part of a consolidated group for income tax purposes.

Reasons for Decision

Under subsection 45-230(1) of Schedule 1 to the TAA, an entity is liable to pay the GIC if:

the entity uses the instalment rate (the varied rate) under section 45-205 of Schedule 1 to the TAA to work out the amount of its instalment for an instalment quarter (the variation quarter) in an income year; and
the varied rate is less than 85% of the entity's benchmark instalment rate for that income year that the Commissioner works out under Subdivision 45-K of Schedule 1 to the TAA.

The company has varied its instalment rate upwards. However its varied rate is expected to be less than 85% of its benchmark instalment rate.

GIC is payable on the amount worked out using the formula in subsection 45-230(2) of Schedule 1 to the TAA:

[Rate discrepancy * Your *instalment income for the variation quarter] + Credit Adjustment

'Rate discrepancy' means the difference between the varied rate and the lesser of:

the most recent instalment rate given to the entity by the Commissioner before the end of the variation quarter; and
the entity's benchmark instalment rate for that income year.

The most recent instalment rate given to the company by the Commissioner before the end of the variation quarter was 0%. As the Commissioner's notified rate is 0%, this will always be less than the company's benchmark instalment rate for the income year. Therefore, the rate discrepancy will be the difference between the company's varied rate and 0%.

The wording of section 45-230 of Schedule 1 to the TAA indicates that a taxpayer will be liable to GIC whenever the varied rate differs from the instalment rate worked out by the Commissioner, irrespective of whether the difference favours the taxpayer or not. As 'difference' is not defined in the TAA or the Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999, it is appropriate to consider its ordinary meaning.

'Difference' is defined as 'Mathematics the amount by which one quantity is greater or less than another' (Macquarie Dictionary 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW). Although the varied rate is greater than the Commissioner's notified rate, the 'difference' is an absolute value. The rate discrepancy is the amount by which the varied rate is greater or lesser than the Commissioner's rate of 0%. If for example the varied rate was 10%, the rate discrepancy would be 10%.

Therefore, the company is liable to pay the GIC under subsection 45-230(1) of Schedule 1 to the TAA. However, the Commissioner may remit the GIC under 45-240 of Schedule 1 to the TAA.

Remission of GIC

The Commissioner may remit the GIC under section 45-240 of Schedule 1 to the TAA if he is satisfied that because special circumstances exist, it would be fair and reasonable to do so.

A decision by the Commissioner to remit GIC because it is fair and reasonable must be considered in view of the intent of the PAYG instalment system. Not only must the exercise of the power to remit be fair to the entity concerned, it must be fair to the whole community. In other words, an entity should not be given an advantage over those taxpayers who organise their affairs to ensure they pay correct instalment liabilities. An entity will need to demonstrate that it is fair and reasonable to remit the GIC, having regard to the nature of the specific event or decision.

The General Outline in the Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999 provides an overview of the intent of the PAYG instalment system. Broadly, this includes:

taxpayers making payments that reflect their current trading and investment conditions or are based on last year's tax
eliminating large end-of-year tax bills, and
ensuring that Government has the revenue it needs during the year to provide benefits and services.

The company was not required to vary its instalment rate but chose to do so. By varying its instalment rate upwards, the company paid greater PAYG instalments than it otherwise would have. Even though the varied rate is expected to be less than 85% of its benchmark rate, if the company had not varied its instalment rate it would not have paid any instalment amounts, as its notified rate was 0%.

The company's actions were consistent with the overall intent of the PAYG instalment system. That is, it made payments that reflected its current trading and investment conditions, thereby eliminating large end-of-year tax bills and ensuring that Government had the revenue needed during the year to provide benefits and services. The company does not have an unfair advantage over other taxpayers who will pay the correct instalment liabilities. It appears that an unintended outcome of subdivision 45-G of Schedule 1 to the TAA is that an entity that only varies its rate upwards but not high enough, is liable for the GIC. It is fair and reasonable for the Commissioner to remit the GIC in these circumstances.

Amendment History

Date of Amendment Part Comment
6 April 2018 Legislative references Correct reference from Division 45-K to Subdivision 45-K
Other references Insert reference to PS LA 2011/12 and removed reference to archived ATO Receivables Policy
Decision Update to highlight that the discount on the rights is assessable income.
Facts Updated to take into account the repeal of Division 13A of the ITAA 1936 and its replacement with Division 83A of the ITAA 1997.

Date of decision:  6 October 2006

Year of income:  Year ended 30 June 2006

Legislative References:
Taxation Administration Act 1953
   section 3AA
   subsection 3AA(3)
   section 45-205
   Subdivision 45-G
   subsection 45-230(1)
   subsection 45-230(2)
   section 45-240
   Subdivision 45-K

Income Tax Assessment Act 1997
   section 950-100
   subsection 950-100(1)

Acts Interpretation Act 1901
   section 15AA

Other References:
Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999
Macquarie Dictionary 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
PS LA 2007/21

Keywords
PAYG system
PAYG instalments
Calculating PAYG instalments
PAYG instalment rate
Varying PAYG instalment rates
Tax administration
General interest charge
Penalties
Remission of penalties

Siebel/TDMS Reference Number:  5445186; 1-5UH1AE; 1-DMN3EGR

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  27 October 2006
Date reviewed:  7 March 2018

ISSN: 1445-2782