Senate

Revised Explanatory Memorandum

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

Chapter 3 - Miscellaneous - technical amendments

Outline of Chapter

3.1 Schedules 2 to 5 to this Bill will make a number of technical amendments in relation to the RBA, GIC and PAYG withholding provisions.

3.2 The PAYG amendments are necessary so that the law accurately reflects the Government's PAYG policy. The more significant amendments concern:

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the obligation to withhold from payments where a supplier does not quote its ABN; and

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the requirement of payment summaries for certain payments covered by the PAYG withholding rules.

3.3 The RBA and GIC amendments are necessary to support the new tax system. The more significant amendments will allow:

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the truncation of amounts notified in approved forms;

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the rounding down to the nearest multiple of 5 cents of all penalties and liabilities assessed by the Commissioner; and

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the Commissioner to defer the due date for notification of BAS liabilities (discussed at paragraphs 1.166 to 1.168).

3.4 This Chapter also explains amendments being introduced to previously enacted areas of the law to support the new tax system from 1 July 2000. These amendments include:

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an extension to the provisions in the ITAA 1997 which provide an immediate write-off of GST related expenditure;

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an exclusion for wholly input taxed supplies from the no ABN withholding event in the PAYG withholding provisions in Schedule 1 to the TAA 1953; and

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a modification to the application provisions of the standardised collection and recovery rules in Schedule 1 to the TAA 1953.

3.5 References in this Chapter to the existing law are to the TAA 1953 including Schedule 1 to that Act, unless otherwise specified.

Summary of amendments

3.6 The amendments in Schedule 3 will:

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ensure that the obligation to withhold from a payment to a labour hire worker applies to arrangements made by a chain of labour hire firms [Schedule 3, item 1, subsection 12-60(1)] ;

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clarify the requirement to withhold from a payment for a supply of goods or services where the supplier does not quote its ABN [Schedule 3, items 3, 6 and 7, section 12-190] ;

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require a payer that is withholding from a payment, because a supplier has not quoted its ABN, to issue a separate payment summary when making the payment (or as soon as practicable afterwards) [Schedule 3, items 11 to 15, section 16-167] ;

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allow the Commissioner to relieve a particular payer or group of payers from issuing payment summaries if the circumstances warrant that relief [Schedule 3, item 16, section 16-180] ; and

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allow the Commissioner's withholding schedules to take into account financial supplement debts arising under the Student Financial Supplement Scheme [Schedule 3, item 10, subsection 15-25(1)] .

3.7 The amendments in Schedule 4 update references in the Corporations Law to reflect the PAYG withholding system.

3.8 Amendments in Schedules 3 and 5 ensure that the definitions of 'PAYE earner' and 'PAYE earnings' in the ITAA 1997 apply up to 30 June 2000.

3.9 Furthermore, Schedule 2 contains an amendment to allow the Commissioner to require information or evidence to be given on affirmation as well as on oath when exercising information-gathering powers.

Date of effect

3.10 The amendments to the PAYG withholding arrangements will apply to payments made on or after 1 July 2000.

3.11 The amendments made to the RBA and GIC provisions will apply from 1 July 2000.

3.12 The amendments to previously enacted areas of the law will generally apply from 1 July 2000. Amendments relating to FBT matters will apply from 1 April 2001.

Context of reform

3.13 The provisions for the PAYG withholding system are located in Part 2-5 in Schedule 1 to the TAA 1953.

3.14 In the PAYG withholding system, there is a new withholding event when a supplier of goods or services does not quote its ABN. Section 12-190, the no ABN withholding provision, provides for a number of exceptions where the payer does not need to withhold from payments even though the payee has not quoted its ABN.

3.15 One of the exceptions in paragraph 12-190(4)(a) is when the payer makes a payment that is of a private or domestic nature. This paragraph is being amended because it is narrower than the intended exception. The amended exception will rectify this problem by exempting a payer from a withholding obligation for a supply that is not in the course or furtherance of the payer carrying on an enterprise in Australia.

3.16 Another proposed amendment to the no ABN withholding event is to recognise the quoting of an agent's ABN if a supplier has made a supply through that agent.

3.17 The description of the no ABN withholding threshold is also being amended so that it excludes any GST component. The threshold was intended to be the same as the threshold for tax invoices under the GST law, which excludes any GST component.

3.18 Under the current no ABN withholding rules, a payer is generally required to issue annual or part-year payment summaries. This is inappropriate for no ABN withholding, particularly for parties dealing on a one-off basis. The proposed amendment will require the payer to issue a separate payment summary for amounts withheld under no ABN withholding when it makes the payment or as soon as practicable afterwards.

3.19 Another significant amendment to the PAYG withholding provisions is to provide the Commissioner with the power to relieve a particular payer or class of payers from the obligation to give a payment summary. The absence of this power could impose an unnecessary compliance burden on some payers.

3.20 In addition, a small number of technical amendments are needed to other PAYG withholding provisions to clarify their intended operation.

Detailed explanation of the new law

PAYG withholding from payments under a labour hire arrangement chains of entities

3.21 Subsection 12-60(1) requires a labour hire firm to withhold from payments it makes to an individual who performs work or services directly for a client of the firm.

3.22 Consequently, the subsection does not require withholding from payments made where there are chains of labour hire firms involved. This is illustrated by Example 3.1.

Example 3.1

Labour hire firm 1 (LHF1) agrees to provide a certain number of workers to a client, but is unable to find enough suitable people on its records. LHF1 goes to another labour hire firm (LHF2) and hires some workers to fulfil its agreement with LHF1's client.

Under existing subsection 12-60(1), LHF2 would not be required to withhold from payments it makes to the workers supplied to LHF1. This is because the workers will not be performing work or services directly for a client of LHF2 rather the worker is performing work for a client of LHF1.

3.23 The amendment will overcome this problem by requiring LHF2 to withhold from the payments it makes to the workers that it supplies to LHF1. The amendment is intended to cover payments to an individual in a situation of on-hiring of labour to an end-user. It will not cover payments by a contractor to a sub-contractor. [Schedule 3, item 1, subsection 12-60(1)]

No ABN withholding agents

3.24 The no ABN withholding requirement will be amended to recognise an agent quoting its ABN where a supplier has made a supply through that agent.

3.25 Item 3 of Schedule 3 will ensure that where a supply is made through an agent, the payer need not withhold from the payment under the no ABN withholding requirements if:

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the agent has given the payer an invoice that relates to the supply and quoted the agent's ABN; or

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the payer has some other document relating to the supply on which the agent's ABN is quoted.

3.26 Subsection 12-190(3A) will also be inserted to ensure that a payer is not required to withhold where an ABN is quoted by an agent that does not in fact have an ABN, but the payer has no grounds to believe that the ABN quoted is invalid. [Schedule 3, item 6, subsection 12-190(3A)]

No ABN withholding exception for payers not carrying on an enterprise

3.27 Suppliers of goods and services that do not provide their ABN on their invoices will be subject to withholding at the top marginal rate plus Medicare levy (currently 48.5%).

3.28 A number of exceptions to this event are provided in section - 12-190. An important exception in paragraph 12-190(4)(a) is where the payment is for the payer of a private or domestic nature. This exception is too narrow because the policy intention was to apply no ABN withholding to 'enterprise-to-enterprise' transactions.

3.29 The proposed amendment specifies that withholding is not required under the no ABN withholding event where the payer makes the payment for a supply that is not in the course or furtherance of the payer carrying on an enterprise. [Schedule 3, item 7, paragraph 12-190(4)(a)]

3.30 This paragraph excludes payments that are wholly of a private or domestic nature for the payer. It also excludes payment made by an employee or a labour hire worker relating to their work in that capacity.

No ABN withholding description of threshold amount

3.31 Under paragraph 12-190(4)(b) of the current no ABN withholding provisions, payers need not withhold an amount if the payment does not exceed $50 (or such higher amount as is specified in the tax invoice regulations made under the GST law).

3.32 Under subsection 29-80(1) of the GST Act, a supplier does not have to issue tax invoices for a 'taxable supply' the 'value' of which does not exceed $50, or such higher amount as the regulations specify. The value of a taxable supply is defined in section 9-75 of the GST Act to be 10/11 of the price. Thus, the tax invoice threshold of $50 for GST purposes effectively excludes the GST component.

3.33 The threshold amount for the no ABN withholding arrangements was intended to be the same as that for the GST tax invoice requirements.

3.34 Item 8 of Schedule 3 will bring the no ABN withholding threshold in paragraph 12-190(4)(b) in line with the GST tax invoice threshold by ensuring the threshold excludes any GST component.

3.35 It also clarifies that in working out whether a payment is under the threshold, it is necessary to take into account all the payments relating to the supply. Thus the withholding obligation will not be able to be avoided by breaking consideration for a supply into a series of small payments.

The Commissioner's power to make withholding schedules

3.36 Item 10 of Schedule 3 amends subsection 15-25(1) to enable the Commissioner to make withholding schedules and procedures for collecting financial supplement debts arising under the Student Financial Supplement Scheme, as well as the matters currently listed in that subsection. This completes the amendments to enable the collection of these debts through the PAYG withholding arrangements. Other amendments allowing for this are contained in Schedule 4 of the A New Tax System (Tax Administration) Act (No. 1) 2000 .

Payment summaries for no ABN event

3.37 Sections 16-155 and 16-160 specify that a payer in the PAYG withholding system has to issue annual or part-year payment summaries (except for eligible termination payments).

3.38 Thus the current PAYG withholding legislation requires a payer to issue annual or part-year payment summaries for amounts withheld under the no ABN withholding event in section 12-190. However, this is not an appropriate procedure for many businesses, especially those dealing on a 'one-off' basis. Paragraphs 16-155(1)(a) and 16-160(1)(a) are being amended to ensure these types of payment summaries need not be given for amounts withheld under section 12-190. [Schedule 3, items 11 and 12, paragraphs 16-155(1)(a) and 16-160(1)(a)]

3.39 However, if a payer makes a payment caught by the no ABN withholding event, the amendment at item 13 of Schedule 3 will require the payer to issue a separate payment summary for all such withholding payments. The payer must issue the payment summary (and a copy of it) to the recipient when the withholding payment is made or as soon as practicable afterwards.

Payment summaries the Commissioner's discretion to relieve obligation to issue

3.40 Under the payment summary provisions in sections 16-153 to - 16-175, the Commissioner does not have the power to relieve a payer of the obligation to give a payment summary. Under the PAYE system (which broadly will not apply to payments after 30 June 2000), subsection 221F(7) in the ITAA 1936 gives the Commissioner the power to vary any of the requirements relating to group certificates.

3.41 The amendment in item 16 will allow the Commissioner to relieve a particular payer or class of payers from the obligations under sections 16-153 to 16-175 to give payment summaries. The Commissioner will exercise this discretion having regard to the circumstances of the case or class of cases. In some cases where a nil amount is withheld by a payer, it may be appropriate for the payer not to issue a payment summary.

3.42 If the Commissioner decides that a payment summary is not required from a certain payer, he must notify them in writing. For a class of payer, the Commissioner must give each payer a written notice or publish a copy in the Gazette of the Commonwealth of Australia.

Repeal of definitions of 'PAYE earner' and 'PAYE earnings'

3.43 The definitions of 'PAYE earner' and 'PAYE earnings' in subsection 995-1(1) of the ITAA 1997 were repealed by items 26 and 27 of Schedule 18 to the A New Tax System (Tax Administration) Act 1999 from the date of Royal Assent, 22 December 1999.

3.44 The 2 definitions need to apply up to 30 June 2000, for example, in the rules that extend the operation of the substantiation rules to certain people who are not common law employees. The proposed amendment will ensure this result. [Schedule 3, subclause 3(3), items 17 and 18; Schedule 5, items 8 and 9]

No ABN withholding adding asterisks to the definition of 'supply'

3.45 In the ITAA 1997, defined terms are generally asterisked the first time they appear in a subsection. Items 2, 5 and 9 of Schedule 3 insert asterisks for the term 'supply' in section 12-190, the no ABN withholding provisions.

The Commissioner's powers to obtain information and evidence

3.46 The Commissioner has the power in subsection 353-10(2) to require information or evidence relating to the PAYG system (and other matters in Schedule 1 to the TAA 1953) to be provided on oath, and either orally or in writing.

3.47 The amendment will allow the Commissioner to require information or evidence to be given on affirmation as well as on oath when exercising the information gathering powers. [Schedule 2, item 118, subsection 353-10(2)]

Consequential amendments to the Corporations Law

3.48 Amendments to the Corporations Law are necessary to ensure its correct operation in relation to the new PAYG withholding arrangements, which will commence from 1 July 2000. [Schedule 4, items 1 to 4]

Amendments to RBA, GIC and other PAYG provisions

Truncation of amounts in approved forms

3.49 These 3 amendments to the FBTAA 1986, the ITAA 1936 and the TAA 1953 allow taxpayers or entities to truncate to the nearest dollar any amount in an approved form which is required by the form to be expressed in whole dollars. [Schedule 2, items 8, 24 and 143, section 388-85]

3.50 The amendment will apply to any approved form which has to be given to the Commissioner, including an income tax return or BAS, and will provide legislative support for the Commissioner's practice of not having cents returned by taxpayers or entities.

3.51 The Commissioner generally disregards cents when making an assessment of a taxpayer's liabilities. For example, section 170B of the ITAA 1936 eliminates cents in assessing taxable income, and taxpayers currently do not show cents when returning components of assessable income and deductions on their income tax returns. A similar practice exists with FBT returns, where employers do not show cents when returning the value of taxable benefits.

3.52 Subsection 101(4) of the FBTAA 1986 currently provides for FBT instalments to be rounded to the nearest dollar.

3.53 As a result of this amendment, truncation will extend to all BAS amounts. That is, entities will round down to the nearest dollar all tax debts and credits notified to the Commissioner in returns and in the BAS.

Rounding of small amounts

3.54 An amendment to section 16B of the TAA 1953 will ensure that the Commissioner will reduce a tax liability to the nearest multiple of 5 cents only in relation to penalties or amounts that are assessed by the Commissioner under a taxation law. [Schedule 2, item 81, section 16B]

3.55 Section 16B of the TAA 1953 currently allows the Commissioner to round down any tax liability to the nearest multiple of 5 cents. From 1 July 2000, this provision would result in the unintended situation of entities rounding down each GST transaction to the nearest multiple of 5 cents.

3.56 This amendment has the effect of narrowing the meaning of 'tax liability' in section 16B so that it applies only to amounts assessed by the Commissioner, or imposed as a penalty. A GST liability is effectively excluded from the operation of section 16B because it is not assessed by the Commissioner.

3.57 The GIC and RBA deficit amounts in Parts IIA and IIB respectively of the TAA 1953 are excluded from operation of this section because they are debts which change daily.

3.58 Taken together, these amendments provide 2 generic rounding provisions in the taxation law;

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a provision that allows taxpayers to truncate tax-related liabilities and credits notified in returns, in the BAS and in other approved forms to the nearest dollar; and

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a provision that allows the Commissioner to reduce assessed tax liabilities and penalties imposed by the taxation law to the nearest multiple of 5 cents.

Refund of overpaid amounts and credits

3.59 These 3 amendments apply the provisions of Part IIB of the TAA 1953 to the following sections:

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refund of overpaid income tax paid to a non-resident beneficiary [Schedule 2, item 15, subsection 98A(2)] ;

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overpayment of tax following an amendment to reduce an income tax liability [Schedule 2, item 25, paragraph 172(1)(b)] ; and

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credits arising under T(IOEP)A 1983 [Schedule 2, item 121, section 13] .

3.60 Divisions 3 and 3A of Part IIB of the TAA 1953 contain the general refund provisions for refunding overpaid tax and credits. The effect of these amendments is that these refunds or credits may be applied against any tax debts owed by the entity.

General interest charge on estimates

3.61 This amendment to the ITAA 1936 clarifies that, for the purpose of the GIC, an estimate made under Division 8 of Part VI of the ITAA 1936 is due to be paid on the due date for payment of the underlying liability. [Schedule 2, item 27, paragraph 222AJA(3)(a)]

3.62 Subsection 222AJA(3) of the ITAA 1936 makes a person liable to pay GIC on estimates made under Division 8 of Part VI of the ITAA 1936. The interest period is calculated from the beginning of the day on which the estimate was due to be paid. The day on which the estimate is due to be paid is the same day that the underlying liability is due for payment.

3.63 The effect of the amendment is that the GIC is calculated from the beginning of the day on which the underlying liability is due for payment.

Amendment of the Commissioner's GIC remission discretion

3.64 This amendment to the TAA 1953 allows the Commissioner to remit the GIC in a wide range of circumstances. [Schedule 2, item 72, subsection 8AAG(5)]

3.65 The effect of the amendment is to give the Commissioner a broader discretion to remit the GIC than under the current provision.

Registering a government entity as a PAYG withholding branch

3.66 This amendment to Schedule 1 to the TAA 1953 allows the Commissioner to register a branch of a government entity or a non-profit sub-entity as a PAYG withholding branch. [Schedule 2, item 88, subsection 16-142(2); Schedule 5, items 6 and 7]

3.67 Under the PAYG system, entities with a PAYG withholding liability are required to register with the Commissioner. A branch of a registered entity which has an ABN (or has applied for one) may also be registered as a PAYG withholding branch.

3.68 The effect of this amendment is that a branch or a non-profit sub-entity of a government entity (e.g. schools, hospitals, or divisions of departments) may also be registered as a PAYG withholding branch.

3.69 The amendment is consistent with the ABN and GST laws, which enable branches of government entities to register for ABN and GST purposes.

Review of penalty remission decisions

3.70 These 3 amendments to the TAA 1953 are consequential upon the introduction of subsection 298-20(3) into Schedule 1 to the TAA 1953. [Schedule 2, items 98 to 100, section 20-80]

3.71 Current items 15 and 20 in the table in section 20-80 in Schedule 1 to the TAA 1953 provide review rights for an entity dissatisfied with the Commissioner's decision in relation to the remission of penalties imposed under the PAYG withholding system. These review rights are now provided in the machinery provisions for administrative penalties, at subsection 298-20(3) of Schedule 1 to the TAA 1953.

3.72 The amendments remove items 15 and 20 from the table, as they are no longer required, and provide a signpost to the review rights provisions.

General interest charge on underestimates of PAYG instalments

3.73 This amendment to the TAA 1953 permits the GIC on underestimates of PAYG instalments to be calculated on the underestimation up to the due date for payment of the tax assessed. [Schedule 2, items 102 to 105, paragraphs 45-230(3)(b), 45-232(4)(b), 45-233(5)(b) and 45-235(4)(b)]

3.74 Currently the period for calculating the GIC on underestimates of PAYG instalments ends on the earlier of the day the assessed tax is paid or the due day for payment. Under this provision it is possible for the GIC to be calculated beyond the due date for payment. The effect of the amendment is to limit the period during which the GIC is calculated to the due date for payment.

3.75 If payments of assessed tax are made earlier than the due date for payment, the GIC in respect of the period from the day when the early payment is made until the due date for payment will be remitted.

Transitional provision to apply to special priority credits

3.76 This transitional provision ensures that the Commissioner gives priority to a HECS or an FS assessment debt under Part IIB of the TAA 1953 for the 1999-2000 year and earlier years of income. [Schedule 2, item 129]

3.77 The general refund provisions of Part IIB of the TAA 1953 currently allow credits to be first applied against HECS and FS assessment debts, before being applied against other non-RBA debts.

3.78 Following the implementation of the PAYG system, the current provisions will no longer apply after 30 June 2000. From 1 July 2000, PAYG credits will be applied to HECS and FS assessment debts in priority to other non-RBA debts under section 8AAZLD of the TAA 1953.

3.79 This transitional provision is necessary because the Commissioner will continue to make assessments after 30 June 2000 for the 1999-2000 year and earlier years of income.

Interest on delayed refunds of sales tax credits

3.80 A BAS provision is defined in the Dictionary in subsection 995-1(1) of the ITAA 1997. This definition is being amended to insert the term 'sales tax law'. The term has the same meaning as in section 5 of the STAA 1992. This amendment will enable interest to be payable on delayed refunds of sales tax credits under Part IIIAA of the TAA 1953. [Schedule 5, item 1A]

Amendments to support the new tax system

Extension of immediate write-off of GST related expenditure

3.81 The Parliament has already enacted an immediate income tax deduction for small and medium sized businesses for expenditure incurred between 1 July 1999 and 30 June 2000 in acquiring or upgrading plant or software to prepare for the GST. The deduction is available where the annual turnover of an entity (including any connected entities) does not exceed $10 million.

3.82 Under the current legislation, it is a precondition for the immediate write-off that before 1 July 2000 a taxpayer use the plant or software, or install it ready for use, to produce assessable income. Where a taxpayer is acquiring plant, it is also necessary that the taxpayer becomes the owner before 1 July 2000.

3.83 It was announced in Treasurer's Press Release No. 40 of 23 May 2000 that these conditions will be relaxed.

3.84 A taxpayer will qualify for the immediate deduction if the taxpayer enters into a contract to purchase the plant or software before 1 July 2000. A taxpayer that is making or upgrading plant or software 'in-house' will also qualify if it incurs the expenditure before 1 July 2000. Consequently, it will not be necessary that the taxpayer has paid for the plant or software. [Schedule 4A, items 1 to 3, 6, 11 and 12, subsections 25-80(1) and 42-168(1) of the ITAA 1997]

3.85 To protect the extension of the concession against possible abuse, before 1 July 2001 taxpayers will have to use the plant or software (or install it ready for use) to produce assessable income. For a taxpayer acquiring plant, it will also be necessary that the taxpayer become the owner before 1 July 2001. If a taxpayer has already obtained an immediate deduction in an assessment but fails to satisfy these conditions, the Commissioner can amend the assessment to disallow the deduction. [Schedule 4A, items 4, 7 and 12, subsections 25-80(1) and 42-168(1)]

3.86 There will also be a technical amendment of section 25-80, which covers expenditure on upgrading plant to prepare for the GST. This amendment will ensure that the immediate deduction is only allowable to the extent that the taxpayer uses the upgraded plant to produce assessable income. The acquisition of plant or software and the upgrading of software are covered by the depreciation provisions which, under section 42-170, already reduce the deduction allowable to the extent that the plant or software is not used to produce assessable income (e.g. if it is used for private purposes). [Schedule 4A, item 9, subsections 25-80(4) and (5)]

3.87 The extension of the concession to apply where a taxpayer has not acquired the plant or software by 30 June 2000 has necessitated supplementary rules about plant or software not used exclusively to produce assessable income. Where the taxpayer does not yet have the plant or software at 30 June 2000, any reduction in the deduction for non-income producing use will be determined by what can reasonably be expected at 30 June 2000. [Schedule 4A, items 9 and 16, subsections 25-80(5), 42-170(4) and (5)

Exclusion of input taxed supplies from no ABN withholding arrangements

3.88 The A New Tax System (Pay As You Go) Act 1999 , introduced the new PAYG withholding system into the TAA 1953 for the collection of income tax. An element of the system is the no ABN withholding obligation provided in section 12-190 of Schedule 1 to the TAA 1953. Under that provision, an enterprise is required to withhold from a payment for a supply of goods or services by another enterprise where the supplier does not quote its ABN (unless one of the exceptions applies).

3.89 Section 12-190 of Schedule 1 to the TAA 1953 is being amended to exclude from its operation supplies which are wholly input taxed under the GST legislation. The amendment will ensure that the no ABN withholding event does not apply to those transactions in respect of which it produces minimal compliance benefit and places an unnecessary burden on taxpayers. Input taxed supplies include those related to financial services, residential rent and sales of residential property, precious metals and supplies by tuckshops as well as those specified by particular Acts. [Schedule 3, item 8A, paragraph 12-190(4)(d)]

3.90 To support this amendment, the term 'input taxed' is being inserted into the Dictionary in subsection 995-1(1) of the ITAA 1997. The term will have the same meaning as in the GST law.

Standardised collection and recovery rules

3.91 Part 4-15 in Schedule 1 to the TAA 1953 contains standardised rules for the collection and recovery of tax-related liabilities and other amounts. These rules will generally apply from 1 July 2000. In particular, it was intended that the procedural and evidentiary rules would apply to all recovery proceedings after 1 July 2000.

3.92 The application provisions of the A New Tax System (Tax Administration) Act 1999 provide for these rules to apply to continuing proceedings which were commenced before 1 July 2000, and to new proceedings for tax-related liabilities arising on or after 1 July 2000. However, the application provisions did specifically not address those proceedings which commence on or after 1 July 2000 for tax-related liabilities arising before that time.

3.93 This amendment ensures that the new procedural and evidentiary rules will apply to these proceedings. The standardised rules will then apply to all recovery proceedings on or after 1 July 2000. [Schedule 2, item 1A]