Entities to which TOFA applies are required to use a different methodology for calculating their instalment income for pay as you go instalment (PAYGI) purposes, following the enactment of subsection 45-120(2C) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).
Under the previous rules, an entity's instalment income generally included ordinary income derived during a period, to the extent that the ordinary income is assessable income of the income year that includes the period.
However, entities TOFA applies to are now required to remove TOFA gains from the amount calculated under previous rules, and include the difference between their TOFA gains and TOFA losses in their instalment income.
The result is that, generally, the entity's instalment income is lower than it would have been under previous rules. Therefore, to ensure that entities pay the correct instalment amounts, entities applying the TOFA PAYGI methodology will generally have higher instalment rates issued to them by the Commissioner.
For companies, the TOFA PAYGI methodology applies from the start of the income year following the year in which the company lodges a tax return that contains gains or losses the TOFA rules applied to.
Example: calculating PAYG instalments for a TOFA taxpayer
Bei Pty Ltd (Bei) is a TOFA taxpayer. In the first quarter of the 2014–15 income year, Bei receives $110 million in interest from a financial arrangement (a loan). Under a separate loan, Bei pays $100 million in interest.
Other than the amounts from financial arrangements, Bei also received $50 million in sales income.
When calculating the instalment income amount, a TOFA taxpayer is required to use a net methodology for their financial arrangements:
- Bei first adds all amounts of gross income ($110 million interest received and $50 million sales income equals $160 million total).
- From this amount Bei deducts the gross income from financial arrangements ($110 million), giving an amount of $50 million.
- Finally, Bei adds the net TOFA to this amount, being the difference between total TOFA gains and total TOFA losses from all financial arrangements (where positive). Here, the net TOFA figure is $10 million ($110 million interest received less $100 million interest paid).
Bei's instalment income for the quarter is $60 million, representing the $50 million in sales (non-financial arrangement) income and $10 million in net TOFA gains.
End of exampleSee PAYG instalments for TOFA entities.
TOFA entities who are monthly payers
Following a change in legislation, some entities that currently make PAYG income tax instalments quarterly will be required to start making these instalments monthly. These changes will be introduced progressively over 4 years from 1 January 2014, for affected entities that have a base assessment instalment income that exceeds various thresholds.
Entities to which TOFA applies are required to use a different methodology when determining whether they exceed these thresholds and are required to make PAYG instalments on a monthly basis. Rather than determining eligibility using the entity's base assessment instalment income, TOFA entities are required to use an adjusted base assessment instalment income.
This figure is calculated using the gross amount of ordinary assessable income that is derived in the previous income year. That is, an entity will use a gross-income-based calculation to determine whether they must pay PAYG instalments monthly, even though they use a net gain or loss-based calculation to actually work out their instalment income for a period.
If the adjusted base assessment instalment income exceeds the relevant threshold, the entity will need to pay its PAYG instalments monthly. If we can calculate this amount, we will advise affected entities in October.
However, most TOFA entities will need to calculate their adjusted base assessment income to determine if they are required to make monthly instalments. Those entities will need to notify us by 30 November each year.
Example: calculating whether a TOFA taxpayer must pay monthly PAYG instalments
Bei Pty Ltd (Bei) is a TOFA taxpayer. For the 2013–14 income year, Bei receives $110 million in interest from a financial arrangement (a loan). Under a separate loan, Bei pays $100 million in interest.
Other than the amounts from financial arrangements, Bei also received $50 million in sales income.
When determining whether it is required to report and pay PAYG instalments monthly, Bei must use a gross methodology, rather than the net methodology used to calculate instalment income for TOFA taxpayers.
Accordingly, Bei must add all amounts of gross income received that is ordinary income. That amount is $160 million, being the $110 million in interest received, and $50 million in sales income. This is the entity's adjusted base assessment instalment income.
Bei then compares this amount with the relevant monthly payer threshold.
The monthly payer thresholds provide that where the adjusted base assessment instalment income for a TOFA taxpayer is over $100 million for the previous income year, the taxpayer is required to report and pay PAYG instalments monthly (from 1 January 2015).
If the ATO is able to calculate Bei's adjusted base assessment instalment income, Bei will be advised of their requirement to report and pay monthly in October 2014. Otherwise, Bei must notify us that the amount calculated is in excess of the relevant threshold by 30 November 2014.
End of example