Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 10 - Regulation impact statement - PAYG instalments
Scope of this regulation impact statement
10.1 Treasurers Press Release No. 7 of 22 February 2001 announced a package of measures which will ease the compliance burden for taxpayers in the PAYG system and simplify and streamline GST and reporting arrangements for small business and investors.
10.2 This RIS deals with the PAYG instalments measures in that package. It also deals with additional measures, not announced at that time, which also ease the compliance burden for PAYG instalments payers.
Policy objective
10.3 The objective of the measures is to achieve a significant and ongoing reduction in reporting costs and the compliance burden of PAYG instalments payers. The measures will enable them, for the first time, to pay an amount worked out, and notified, by the Commissioner. Importantly, the measures will accomplish this while maintaining optimal alignment between the GST system and PAYG instalments regime.
10.4 A key objective of the PAYG instalments regime is to collect appropriate instalments within the income year and to minimise the amount paid on assessment. These measures are intended to support that objective and to maintain the integrity of the PAYG instalments base.
Implementation options
10.5 Three options were considered and they are outlined in paragraphs 10.6 to 10.11. The third option forms the basis of the proposed amendments in this Bill. It is preferred because it strikes the best balance between relieving the compliance burden of the PAYG instalments payers and maintaining the integrity of the PAYG instalments base.
Option 1: Individual taxpayers
10.6 Under this option, new arrangements affecting the method by which individuals pay their PAYG instalments would be put in place. All individuals would be required to pay 4 quarterly instalments using the GDP-adjusted notional tax method [F4] . However, they would be able to choose, at the end of the first quarter in the income year, to pay:
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- an annual instalment (if they are eligible to pay on that basis at that time); or
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- on the instalment rate times instalment income basis.
10.7 Their choice would bind them indefinitely unless either they ceased to be eligible to pay using the chosen method or they made another valid choice at the end of the first quarter in a subsequent income year. In other words, in the absence of a valid choice, individuals would be required to pay using the GDP-adjusted notional tax method and this would be their default position.
10.8 This option would simplify the reporting requirements of individuals by enabling them to pay an amount worked out, and notified, by the Commissioner. Currently, the individuals identified in paragraph 10.7, and who are not annual payers, must work out their own instalment income each quarter and pay using the instalment rate times instalment income.
Option 2: Individual taxpayers, companies and superannuation funds with a base assessment instalment income of $1 million or less
10.9 The second option extends the first option to encompass all companies, entities taxed as companies, and superannuation funds which have a base assessment instalment income of $1 million or less [F5] . This option also extends to these entities which have a base assessment instalment income exceeding $1 million provided that they are eligible to pay annual instalments but have not chosen to do so [F6] .
10.10 The additional instalment payers encompassed by this option would enjoy, for the first time, the same benefits in terms of simplified reporting requirements as those identified under option 1.
Option 3: Individual taxpayers, companies and superannuation funds with base assessment instalment income of less than $1 million, with refinements for some individuals to pay only 2 instalments and more flexibility to swap between methods during the income year
10.11 The third option extends option 2 by requiring individuals to pay 2 quarterly instalments using the GDP-adjusted notional tax method if they satisfy either or both of the following:
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- they are a special professional (such as author or artist) under the ITAA 1997 in the income year and the assessable professional income of the base year exceeded the amount of so much of their deductions in that year that reasonably related to that income; and/or
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- they are carrying on a primary production business in the income year and the assessable income that was derived from, or resulted from, a primary production business that they carried on in the base year ,exceeded the amount of so much of their deductions in that year that are reasonably related to that income [F7] .
The 2 instalments would be due after the end of the third and fourth quarters of their income year. The instalment payable for the third quarter would be 75% of the GDP-adjusted notional tax and for the fourth quarter it would be 100% of their GDP-adjusted notional tax less their previous instalment. They would have the same rights to choose out of this method and to trigger the default to it as 4 instalment payers using the GDP-adjusted notional tax method.
Assessment of impacts
10.12 Paragraphs 10.13 and 10.14 focus on the impact of option 3. However, each of the options would result in essentially the same benefits to the affected taxpayers. The options only differ as to the number, and kind, of taxpayers that will be affected.
10.13 The intention of the measures in this Bill is to lessen the compliance costs of small businesses and investors while still collecting appropriate PAYG instalments during the year of income and minimising payments on assessment.
10.14 The measures do this by requiring affected taxpayers to pay quarterly instalments on the basis of GDP-adjusted notional tax unless they choose to pay on the basis of instalment income times instalment rate or annually. This reverses the default position in the existing law under which these taxpayers must pay on the instalment income times instalment rate basis (unless they choose to pay on the basis of GDP-adjusted notional tax or annually). The effect of this reversal is that affected taxpayers no longer have to work out the amount they have to pay quarterly.
10.15 The following individuals will be given access to the GDP-adjusted notional tax method for the first time and irrespective of the level of their business and investment income:
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- those who are not registered, or required to be registered, for GST, and whose notional tax is less than $8000; and
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- those who are registered, or required to be registered for GST in their own right, or are a partner in a partnership which is registered, or required to be registered, for GST.
10.16 In addition, the changes will give superannuation funds, companies and entities taxed like companies access to the GDP-adjusted notional tax method for the first time if their base assessment instalment income was $1 million or less in the previous income year.
10.17 In total some 1.5 million PAYG instalments payers will be eligible to benefit from the measures.
10.18 There will be a potential reduction in the compliance costs of some 1.5 million taxpayers. This is because taxpayers who pay using the GDP-adjusted notional tax method as a result of these changes will be able to pay an amount worked out, and notified, by the Commissioner for the first time. Some will pay a notified amount 4 times each year but others will only pay a notified amount twice each year.
10.19 This should result in lower compliance costs for the affected taxpayers. Those who would have paid using the instalment income times instalment rate method under the existing regime, would have had to work out the amount of their instalment income 4 times each year. For many of the affected taxpayers, this has required assistance from their tax agents, especially where they are partners in partnerships or beneficiaries in non-fixed trusts. There is, therefore, a reduction in the compliance costs previously borne by these taxpayers if they pay an instalment worked out, and notified, by the Commissioner.
10.20 Base assessment instalment income will be used as a proxy for the concept of turnover which applies in the GST legislation. It has not been possible to align the GST legislation and the PAYG instalments measures which are the subject of this RIS in this respect. This is because there are practical difficulties in structuring a turnover test to cover the wide range of entities covered by the PAYG instalments regime, many of whom are not in business.
10.21 For example, the Courts have held that most superannuation funds are not in business. For most taxpayers, their base assessment instalment income is the total of their ordinary investment and business income. In the case of a superannuation fund, it is its total assessable income, which includes statutory income such as capital gains.
10.22 Under the proposed PAYG instalments amendments, the Commissioner will advise affected taxpayers of their quarterly instalment amount. Changes to the ATO systems will be required for this to take place. This is expected to involve a cost of $10 million per annum.
10.23 The proposed amendments are expected to result in a one-off revenue cost of $220 million in the 2001-2002 year and $10 million in subsequent years. The cost arises because the change will result in a deferral of revenue from PAYG instalments in that year to the following year on assessment of the 2001-2002 income tax returns.
10.24 As some of the measures in the package will allow taxpayers to defer payment of PAYG instalments during the year of income, there is a PDI cost to the Commonwealth. This cost will provide a commensurate benefit to business and investors who will be able to defer payments.
10.25 Some special professionals and primary producers will be able to take the benefit of the 2 instalment payment default position giving them greater flexibility in dealing with the fluctuations in their income flows during the year of income.
10.26 These measures were developed following limited consultation between the Government, professional and industry bodies, members of the public and the Commissioner.
Conclusion and recommended option
10.27 The PAYG instalments amendments in this Bill which give effect to option 3 are recommended because they provide an appropriate balance between the objective of minimising compliance costs for taxpayers while maintaining the integrity of the PAYG instalments regime.