House of Representatives

Explanatory Memorandum

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

Chapter 12 - PAYG instalments anti-avoidance rules

Outline of Chapter

12.1 This Chapter explains the amendments to the PAYG instalments regime which are contained in Schedule 7 to this Bill.

12.2 The PAYG instalments regime replaces the existing COIN and provisional tax systems with effect for the 2000-2001 income year and later income years. Broadly, the regime ensures that entities pay:

•

quarterly or annual instalments of their tax liabilities that reflect their current trading and investment conditions;

•

annual instalments based on last year's tax liabilities; or

•

quarterly instalments based on last year's tax liabilities and a GDP adjustment.

12.3 This Bill will amend Part 2-10 of Schedule 1 to the TAA 1953 to provide PAYG instalments anti-avoidance rules and to clarify the object of the Part.

12.4 Unless otherwise stated, legislative references are to provisions in Schedule 1 to the TAA 1953.

Context of reform

12.5 Business and investors currently pay instalments of their expected tax liabilities through the COIN or provisional tax systems. For example, companies, superannuation funds and some corporate unit trusts, public trading trusts and corporate limited partnerships pay tax instalments under the COIN system. Some trustees and individuals who carry on business or who have investment income are required to pay tax instalments under the provisional tax system.

12.6 Those in the COIN system mostly pay their tax instalments after the income year in which their income is earned. Taxpayers in the provisional tax system pay instalments of tax based on last year's tax and a provisional tax uplift factor within the income year.

12.7 The PAYG instalments regime is designed to achieve several aims including:

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to get business entities, both individuals and companies, paying their tax liabilities at the same time;

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to allow all entities with fluctuating incomes to make payments more closely aligned with their income receipts and trading conditions; and

•

subject to 2 limited exceptions, to collect instalments after the end of each quarter of the income year, based on the income earned in the quarter.

Summary of new law

12.8 The proposed anti-avoidance rules will support the integrity of the PAYG instalments regime. Further, the statement of the object of the PAYG instalments regime will be stated more clearly.

12.9 The PAYG instalments anti-avoidance rules are designed to apply where it would be concluded, on an objective view of a particular scheme and the surrounding circumstances, that an entity's sole or dominant purpose in entering into or carrying out the scheme is to obtain one or more tax benefits.

12.10 The provisions will penalise entities who obtain a tax benefit or tax benefits from schemes that avoid, reduce or defer PAYG instalments in ways that are inconsistent with the objects and purposes of the PAYG instalments regime. The anti-avoidance rules will not apply to a tax benefit that an entity gets from a straight-forward use of a structural feature of the PAYG instalments regime, for example, a choice to pay annually, if that use is in accordance with the purposes and objects of the regime.

12.11 The provisions will impose a penalty in the form of the GIC on twice the amount of the tax benefit or tax benefits. However, an entity will be allowed a credit which will effectively reduce the penalty if it gets one or more tax detriments arising from the scheme.

12.12 The Commissioner can remit the GIC where special circumstances exist that make it fair and reasonable to do so.

12.13 The provisions will apply to the 2000-2001 income year and later income years as does the PAYG instalments regime as a whole.

Detailed explanation of new law

Amendment of the object of the PAYG instalments regime

Object of Part 2-10

12.14 Section 45-5, which sets out the object of the PAYG instalments regime, will be amended to ensure that it sets out, in clearer terms, the object of Part 2-10. The object of the Part is to ensure that:

•

income tax, Medicare levy, higher education contribution scheme and student financial supplement scheme liabilities are collected efficiently through the application of the principles set out in the object [Schedule 7, item 2, subsection 45-5(1)] ;

•

with 2 limited exceptions, an entity pays PAYG instalments after the end of each instalment quarter on the instalment income that the entity earns in that instalment quarter [Schedule 7, item 2, subsection 45-5(2)] ;

•

an entity's instalments for an income year are as close as possible to the entity's tax liabilities for that year. Consequently, the amount payable on assessment will be small or nil [Schedule 7, item 2, subsections 45-5(3) and (4)] ;

•

the amount of each instalment for an income year is, as nearly as possible, the same proportion of the total of those instalments as the instalment income for that instalment quarter is of the total instalment income for the year [Schedule 7, item 2, subsection 45-5(5)] ; and

•

with some exceptions, when an instalment is payable and how it is worked out are determined on the same basis irrespective of the type of entity involved [Schedule 7, item 2, subsection 45-5(6)] .

12.15 The amendment to the object of the PAYG instalments regime will help readers of PAYG instalments legislation to understand the objects and purposes of the regime. The amended object will also facilitate the interpretation and application of the new PAYG instalments anti-avoidance rules which will be inserted by this Bill.

Amendment to insert PAYG instalments anti-avoidance rules

12.16 A new Subdivision will be inserted into Division 45. It will contain anti-avoidance rules to support the integrity of the PAYG instalments regime. [Schedule 7, item 3, Subdivision 45-P]

Object of PAYG instalments anti-avoidance rules

12.17 The new Subdivision will contain a statement of its object, to help clarify in what circumstances the PAYG instalments anti-avoidance rules will apply.

12.18 The object of the PAYG instalments anti-avoidance rules is to penalise an entity whose tax position in relation to PAYG instalments is altered by a scheme that is inconsistent with the purposes and objects of the PAYG instalments regime, or any relevant provisions of the regime. It does not matter that the purposes and objects are not stated expressly in the provisions. [Schedule 7, item 3, subsection 45-595(1)]

12.19 The PAYG instalments anti-avoidance rules are not intended to apply to a straightforward use of the structural features of the PAYG instalments regime if that use is consistent with its purposes and objects. For example, no tax benefit that would attract the operation of the anti-avoidance rules would arise merely because of a choice to use a varied instalment rate, or to pay instalments on the basis of notional tax or GDP-adjusted notional tax. [Schedule 7, item 3, subsection 45-595(2)]

12.20 The PAYG instalments anti-avoidance rules are to be interpreted and applied according to the objects and purposes of those rules. [Schedule 7, item 3, subsection 45-595(3)]

Liability for GIC

12.21 An entity will be liable to pay a penalty by way of the GIC if:

•

that entity gets a tax benefit from a scheme;

•

the tax benefit relates to a component of that entity's tax position for an income year; and

•

having regard to specified matters, it would be concluded that the sole or dominant purpose of an entity that enters into or carries out the scheme (or a part of it) is for any entity (whether alone or together with others) to get one or more tax benefits from the scheme.

[Schedule 7, item 3, subsection 45-600(1)]

12.22 An entity will be separately liable to the GIC for each tax benefit arising from the scheme. [Schedule 7, item 3, subsection 45-600(4)]

12.23 An entity that obtains a tax benefit (which for ease of comprehension is sometimes referred to as entity A in this Chapter) is liable to pay the GIC even if:

•

entity A does not enter into, or carry out, the scheme (or a part of it) from which it gets the tax benefit or tax benefits;

•

the entity that enters into or carries out the scheme, or a part of it, did so alone or together with one or more other entities;

•

the scheme, or a part of the scheme, is entered into or carried out outside Australia; or

•

the tax benefit that entity A gets from the scheme is of a different kind from the tax benefit sought to be obtained from the scheme.

[Schedule 7, item 3, subsection 45-600(2)]

12.24 There are a number of elements to be established before liability to GIC arises, namely, that:

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there is a scheme; and

•

the scheme is entered into, or carried out, for the relevant purpose; and

•

a tax benefit, relating to a component of the entity's tax position, arises from the scheme.

Each of these separate elements is discussed immediately below.

Scheme

12.25 Scheme is effectively defined in subsection 995-1(1) of the ITAA 1997 to mean:

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any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings; or

•

any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Purpose of the scheme

12.26 The purpose of the scheme must be determined on an objective basis. An entity's purpose in entering into or carrying out the scheme to obtain one or more tax benefits must be the sole or dominant purpose for entering into or carrying out the scheme before the PAYG anti-avoidance rules will apply. [Schedule 7, item 3, paragraph 45-600(1)(c)]

12.27 The words 'dominant purpose' will have their ordinary meaning. 'Dominant' refers to a purpose that is 'ruling, prevailing or most influential'.

12.28 Regard is to be had to a number of matters in determining, objectively, an entity's purpose in entering into or carrying out a scheme, namely:

•

the manner in which the scheme, or a part of the scheme, is entered into or carried out. This will include consideration of the method or procedure by which the particular scheme, or part of the scheme, is implemented [Schedule 7, item 3, paragraph 45-600(3)(a)] ;

•

the form and substance of the scheme. This will specifically include a consideration of the legal rights and obligations that have been created as a result of the scheme, and the economic and commercial substance of the scheme [Schedule 7, item 3, paragraph 45-600(3)(b)] ;

•

the purposes and objects of the PAYG instalments regime, and any relevant provisions of that regime. Tax benefits to which the PAYG instalments anti-avoidance rules will apply are those that are inconsistent with the purposes or objects of the PAYG instalments regime, whether or not the purposes and objects are stated expressly in that regime [Schedule 7, item 3, paragraph 45-600(3)(c)] ;

•

the timing of the scheme, and the period over which the scheme is entered into or carried out [Schedule 7, item 3, paragraphs 45-600(3)(d) and (e)] ;

•

the effect of the ITAA 1936, the ITAA 1997 and Schedule 1 to the TAA 1953 on the scheme without regard to the operation of the PAYG instalments anti-avoidance rules [Schedule 7, item 3, paragraph 45-600(3)(f)] ;

•

any change in entity A's financial position that results from, or may reasonably be expected to result from, the scheme [Schedule 7, item 3, paragraph 45-600(3)(g)] ;

•

any change that results from, or may reasonably be expected to result from, the scheme in the financial position of any entity that has, or had, a connection or dealing with entity A. The connection may be of a family, business or other nature [Schedule 7, item 3, paragraphs 45-600(3)(h)] ;

•

any other consequence for entity A or another entity with which entity A has, or had, a connection or dealing [Schedule 7, item 3, paragraph 45-600(3)(i)] ; and

•

the nature of the connection between entity A and another entity. This will specifically include a consideration of whether or not the parties are or were dealing at arm's length [Schedule 7, item 3, paragraph 45-600(3)(j)] .

12.29 It is not necessary to establish the existence of the sole or dominant purpose separately for each tax benefit where more than one tax benefit is obtained from a scheme.

Tax benefit

12.30 In simple terms, a tax benefit is a tax advantage that is obtained from a scheme.

12.31 A provision of the PAYG instalments anti-avoidance rules will prescribe how to work out whether an entity gets a tax benefit from a scheme and, if so, the amount of the tax benefit. [Schedule 7, item 3, subsection 45-605(1)]

12.32 First, an entity's actual tax position for an income year is worked out [Schedule 7, item 3, subsection 45-605(2)] . The actual tax position is the entity's tax position as a result of the scheme.

12.33 Next, an entity's hypothetical tax position is worked out. It is what would have been, or what could reasonably be expected to have been, the entity's tax position for the same income year if the scheme had not been entered into or carried out. [Schedule 7, item 3, subsection 45-605(3) and section 45-615]

12.34 Then, each component of the entity's actual tax position is compared with the corresponding component of the hypothetical tax position. If the amount of a component of the actual tax position is less than the amount of that component of the hypothetical tax position, the difference between the two amounts is a tax benefit from the scheme. If there is also a difference in relation to another component, that is a separate tax benefit. [Schedule 7, item 3, subsection 45-605(4)]

Component of a taxpayer's tax position

12.35 There are 4 different types of components of an entity's tax position:

•

the quarterly instalment component ,which is the instalment for each instalment quarter in the income year. There will be a quarterly instalment component regardless of whether an entity pays its instalments quarterly or annually;

•

the annual instalment component , which is the annual instalment for an income year. There will be an annual instalment component regardless of whether an entity pays its instalments quarterly or annually;

•

the variation credit component , which is the credit claimed by an entity under section 45-215 for an instalment quarter because it has chosen a lower instalment rate; and

•

the variation GIC component , which is the GIC payable under subsection 45-230(2) or 45-232(2) or 45-235(2) or 45-235(3) in respect of a varied instalment rate or an entity's estimated benchmark tax.

[Schedule 7, item 3, section 45-610]

12.36 The nature of a particular scheme will determine which of the components of an entity's tax position will need to be taken into account and how the amount of each component is worked out. For example, whether there is a variation GIC component of an entity's tax position will need to be determined having regard to whether a variation is part of the particular scheme under consideration.

12.37 The amount of each component is worked out separately [Schedule 7, item 3, section 45-610] . Examples 12.1 and 12.2 help illustrate how the components of an entity's actual tax position and hypothetical tax position are determined and how the amounts of those components are worked out.

Example 12.1

An entity varies its instalment rate at the end of the third instalment quarter of an income year because its expenditure has significantly increased during the year as compared with the previous year. It varies from the Commissioner's instalment rate of 10% to 5% but does not claim a variation credit. Further, during the final instalment quarter, the entity enters into a scheme to defer a one-off income receipt of $1 million that would otherwise be derived in that quarter to the next income year. This will enable the entity to take advantage of the company tax rate reduction from 34% to 30% and reduce its PAYG instalments for the income year. However, the entity still earns $1 million instalment income in that quarter.

For the fourth instalment quarter, the entity's quarterly instalment component of its:

•

actual tax position will be $50,000 (5% of $1 million); and

•

hypothetical tax position will be $100,000 (5% of $2 million).

There is a $50,000 tax benefit in relation to the quarterly instalment component for the fourth instalment.

The 5% instalment rate is used to work out the quarterly instalment component for the hypothetical tax position in this case because the variation of the instalment rate is not part of the scheme to obtain a tax benefit. However, because the entity has varied its instalment rate the variation GIC component has to be worked out for the entity's actual and hypothetical tax position.

For the fourth instalment quarter, the entity's variation GIC component of its:

•

actual tax position will be nil because, on assessment, the varied instalment rate of 5% is assumed, for the purposes of this example, to be more than 85% of the benchmark instalment rate; and

•

hypothetical tax position is assumed to be $10,000 because a variation penalty would have been imposed because the higher hypothetical instalment income would have resulted in a different benchmark instalment rate.

There is a $10,000 tax benefit in relation to the variation GIC component for the fourth instalment quarter.

Example 12.2

As per Example 12.1, but the entity only varies its instalment rate in the fourth instalment quarter as part of the scheme to defer $1 million to the subsequent income year. The entity claims a variation credit of $50,000.

In this case, the respective amounts of relevant components would be:

•

$50,000 (5% of $1 million) for the quarterly instalment component of the actual tax position;

•

$200,000 (10% of $2 million) for the quarterly instalment component of the hypothetical tax position which would not have included a variation of the instalment rate;

•

$50,000 for the variation credit component of the actual tax position;

•

nil for the variation credit component of the hypothetical tax position;

•

nil for the variation GIC component of the actual tax position because, on assessment, the varied instalment rate of 5% is assumed, for the purposes of this example, to be more than 85% of the benchmark instalment rate; and

•

nil, for the variation GIC component of the hypothetical tax position because in the hypothetical tax position in this example there would have been no variation.

Therefore, in this alternative situation, the entity would obtain the following tax benefits:

•

$150,000 in relation to the quarterly instalment component for the fourth instalment;

•

$50,000 in relation to the variation credit component for the fourth instalment; and

•

nil in relation to the variation GIC component for the fourth instalment.

Calculation of the GIC

12.38 Where an entity is liable to pay a penalty, that penalty is by way of the GIC on twice the amount of the tax benefit for each day in the period that:

•

starts on the day by which the instalment to which the component relates was due, or would have been due, to be paid; and

•

finishes on the due date for payment of the assessed tax.

[Schedule 7, item 3, subsections 45-620(1) and (2)]

12.39 The Commissioner must give an entity written notice of the GIC to which it is liable. The GIC must be paid within 14 days after the notice is given. [Schedule 7, item 3, subsection 45-620(3)]

12.40 If the amount of penalty in the Commissioner's notice is not paid at the end of the 14 day period, the amount unpaid will be subject to the late payment GIC for each day that it remains unpaid. This means that the late payment GIC applies both to the unpaid amount of penalty and to any late payment GIC. [Schedule 7, item 3, subsection 45-620(4)]

Credit entitlement if an entity gets a detriment from the scheme

12.41 A scheme that gives rise to one or more tax benefits may also give rise to one or more tax detriments.

12.42 An entity will be entitled to a credit if it is liable to the GIC because it gets one or more tax benefits from a scheme and the Commissioner is satisfied that:

•

the entity gets a tax detriment from that scheme; and

•

the tax detriment relates to a component of that entity's tax position for an income year.

It is irrelevant whether or not the income year in which the tax detriment or tax detriments arise is the same as the income year in which the entity got the tax benefit or tax benefits. [Schedule 7, item 3, subsection 45-625(1)]

12.43 The methods used to determine whether an entity gets a tax detriment from a scheme and the amount of the tax detriment are similar to the methods used in relation to tax benefits. It is necessary to work out the entity's actual tax position for an income year, the hypothetical tax position for the same income year, and then the amount of the components for both the actual tax position and the hypothetical tax position. If the amount of a component of the actual tax position is higher than the amount of the corresponding component of the hypothetical tax position, the difference between the 2 amounts is a tax detriment from the scheme. [Schedule 7, item 3, section 45-630]

12.44 The amount of the credit will be equal to the GIC on twice the amount of the tax detriment for each day in the period that:

•

starts on the day by which the instalment to which the component relates was due, or would have been due, to be paid; and

•

finishes on the due date for payment of the assessed tax.

[Schedule 7, item 3, subsection 45-625(2)]

12.45 However, the credit allowed to an entity cannot exceed the total GIC the entity is liable to pay because it gets one or more tax benefits from a scheme. [Schedule 7, item 3, subsection 45-625(3)]

12.46 The credit is determined separately where there are 2 or more tax detriments. The total amount of all the credits must not exceed the total GIC payable in relation to the tax benefits obtained from the scheme. [Schedule 7, item 3, subsection 45-625(4)]

No tax benefit or tax detriment results from certain choices

12.47 Section 45-635 qualifies the concepts of tax benefit and tax detriment by ensuring that the difference between the amount of a component of the actual tax position and the amount of the corresponding component of the hypothetical tax position is not a tax benefit or tax detriment in certain circumstances. The difference is not a tax benefit or tax detriment to the extent that the difference results merely from an entity:

•

making an agreement, choice, declaration, election, or selection; or

•

giving a notice or exercising an option,

for which the income tax law expressly provides. [Schedule 7, item 3, subsections 45-635(1), (2) and (3)]

12.48 However, this is not the case if an entity enters into or carries out the scheme for the sole or dominant purpose of creating the circumstances or state of affairs necessary to enable that relevant choice or other action to be taken. [Schedule 7, item 3, subsection 45-635(4)]

12.49 Similarly, no tax benefit or tax detriment results from specific choices made under the capital gains and losses provisions of the ITAA 1997. [Schedule 7, item 3, subsections 45-635(5), (6) and (7)]

Remission of GIC

12.50 The Commissioner may remit the whole or a part of the GIC payable under section 45-620 if he or she is satisfied that there are special circumstances that would make it fair and reasonable to do so. [Schedule 7, item 3, subsection 45-640(1)]

12.51 If the Commissioner remits the GIC, the amount of the credit that is allowed under section 45-625 (because the entity got a tax detriment) is worked out as if the remitted amount had never been payable. This is necessary to ensure that the total amount of the credit does not exceed the amount of the GIC imposed on the tax benefit or tax benefits. [Schedule 7, item 3, subsection 45-640(2)]

Rights of review

12.52 There will be no right of review under Part IVC of the TAA 1953 in relation to the GIC imposed under the PAYG instalments anti-avoidance rules. This is because:

•

an entity that is liable to GIC will be entitled to a credit which effectively reduces the penalty imposed if the entity has a tax detriment arising from the scheme;

•

the Commissioner has a power to remit the penalty if satisfied that there are special circumstances that make it fair and reasonable to do so; and

•

such rights of review are not provided elsewhere in the income tax law in relation to the penalties imposed by way of GIC.

An entity that is dissatisfied with the imposition of the penalty or with a decision not to remit the penalty may seek a review of the decision under the Administrative Decisions (Judicial Review) Act 1977 .

Application and transitional provisions

12.53 The commencement of Schedule 7 to this Bill is linked to the commencement of earlier Acts which establish the PAYG instalments regime. Schedule 7 will commence immediately after the commencement of A New Tax System (Tax Administration) Act (No. 1) 2000 [Subclause 2(10) of this Bill] . That Act commenced immediately after the commencement of A New Tax System (Tax Administration) Act 1999 , which, in turn commenced immediately after Royal Assent was given to A New Tax System (Pay As You Go) Act 1999 . That occurred on 22 December 1999. This ensures that the amendments made by Schedule 7 to this Bill to Part 2-10 of Schedule 1 to the TAA 1953 apply for the 2000-2001 income year, and later income years, in the same way as Part 2-10 applies to those years.

Consequential amendments

12.54 Only one consequential amendment is necessary. Subsection 8AAB(5) of the TAA 1953 will be amended to insert a reference to the GIC imposed under section 45-600 and 45-620 of Schedule 1 to the TAA 1953. Subsection 8AAB(5) contains a list of provisions of Acts (other than the ITAA 1936) that deal with liability to the GIC. [Schedule 7, item 1, Table item 17H]