House of Representatives

Explanatory Memorandum

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

Chapter 4 - Changing from annual to quarterly payment of PAYG instalments

Outline of chapter

4.1 Schedule 4 to this Bill amends Division 45 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to simplify the movement of taxpayers from paying annual pay as you go (PAYG) instalments to paying quarterly PAYG instalments where they become ineligible to pay annual instalments in certain cases. These amendments apply in cases where ineligibility is the result of registering or becoming required to register under the goods and services tax (GST) law or, in the case of a company, becoming a member of an instalment group.

Context of amendments

4.2 Taxpayers who choose to pay PAYG instalments on an annual basis become ineligible to pay annually when they register or become required to register under the GST law or, in the case of a company, become a member of an instalment group. These rules are in section 45-150 of Schedule 1 to the TAA 1953. Currently, where taxpayers become ineligible to pay annually during an instalment quarter in an income year they must generally commence paying quarterly instalments from the current quarter. Taxpayers who are eligible to pay two quarterly instalments annually commence paying quarterly instalments from the latter of the current or third quarter in an income year.

4.3 Where taxpayers become ineligible to be annual PAYG instalment payers after the first quarter in an income year, they must still pay an annual PAYG instalment. The annual instalment is reduced by the total of the quarterly instalments for that income year.

4.4 The rules for changing from paying annual PAYG instalments to paying quarterly PAYG instalments due to GST registration or becoming a member of an instalment group and the requirement to pay both annual and quarterly instalments for the same income year has caused confusion for taxpayers and practical problems for the Australian Taxation Office. The amendments will simplify these rules and reduce compliance costs for taxpayers.

4.5 The rules in section 45-160 of Schedule 1 to the TAA 1953 that provide that taxpayers cease to be annual payers where they become the head company of a consolidated group are not amended and continue to apply in their current form.

Summary of new law

4.6 These amendments allow taxpayers to continue to pay only an annual PAYG instalment in the income year in which they become ineligible to be annual PAYG instalment payers. Generally, these taxpayers will begin paying quarterly PAYG instalments from the first instalment quarter of the following income year. Those taxpayers who are eligible to pay two quarterly instalments annually will commence paying quarterly PAYG instalments from the third quarter of the following income year.

Comparison of key features of new law and current law

Detailed explanation of new law

4.7 These amendments to the PAYG instalments rules in Division 45 of Schedule 1 to the TAA 1953 provide a similar outcome for affected taxpayers as that provided under section 45-180 of Schedule 1 to the TAA 1953 in respect of the first two years of The New Tax System, the 2000-01 and 2001-02 income years. Affected taxpayers will generally be those who become ineligible to pay annual PAYG instalments in an income year due to registering or becoming required to register under the GST law or becoming a member of an instalment group, for income years following the year of Royal Assent.

4.8 The note at the end of subsection 45-50(3) is repealed because under the amended provisions taxpayers who become ineligible to pay annual PAYG instalments will not be required to make both quarterly PAYG instalments and an annual PAYG instalment for the same income year. [Schedule 4, item 1]

4.9 Paragraph 45-125(2)(c) is repealed as it is only required for specifying the starting instalment quarter under the current law. Under the amended law the starting instalment quarter will be the first instalment quarter of the following year as specified by paragraph 45-125(2)(b). This may be either the first instalment quarter of the next income year, or, for those taxpayers who pay two quarterly instalments annually, the third instalment quarter of the next income year. [Schedule 4, items 2 and 3]

4.10 The current section 45-150 is repealed and a new section 45-150 is substituted. The first sentence of current subsection 45-150(1) refers to the 2002-03 income year as the year from which the rules commenced to apply. The reference to the 2002-03 income year is omitted from the substituted provision to avoid confusion over the commencement of the amendments. The substituted paragraphs 45-150(1)(a) to (e) which specify when an annual payer becomes ineligible to pay annually due to GST registration or, in the case of a company, becoming a member of an instalment group apply in an identical way to the current paragraphs 45-150(1)(a) to (e). [Schedule 4, item 4]

4.11 The substituted subsection 45-150(2) replaces the repealed subsections 45-150(2) and (3) to provide that where a taxpayer stops being an annual payer due to the operation of subsection 45-150(1) they will still be required to pay an annual instalment for the current year and they will commence paying quarterly instalments from the instalment quarter in the next income year as specified by the current PAYG instalments rules. Specifically:

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Taxpayers who are required to pay four instalments annually will commence paying quarterly PAYG instalments from the first instalment quarter of the following income year.

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Taxpayers who are eligible to pay two quarterly instalments annually as provided in section 45-134 will commence paying quarterly PAYG instalments from the third instalment quarter of the following income year.

Taxpayers will pay quarterly instalments in subsequent years where required to do so under the current provisions of the PAYG instalments system. [Schedule 4, item 4]

4.12 Substituted paragraph 45-150(2)(a) provides that taxpayers must still pay an annual instalment for the income year in which they become ineligible to be annual PAYG instalment payers. [Schedule 4, item 4]

4.13 Substituted subsection 45-150(3) replaces and is identical to the repealed subsection 45-150(4). The effect of this rule is not changed. Taxpayers may again choose to become an annual payer if they again satisfy the conditions to pay instalments annually.

Application and transitional provisions

4.14 The amendments apply to the income year following the income year in which this Bill receives Royal Assent and subsequent income years.

4.15 Item 5 of Schedule 4 is a saving provision to ensure that despite the repeal of paragraph 45-125(2)(c) and the repeal and substitution of section 45-150, those provisions continue to apply in relation to income years starting before the day on which the amendments receive Royal Assent. [Schedule 4, item 5]