Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 3 - Payment of goods and services tax by instalments
Outline of chapter
3.1 Schedule 3 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to remove the requirement for an eligible entity to make an annual election in order to continue to pay goods and services tax (GST) by instalments.
Context of amendments
3.2 The Government announced in the 2004-2005 Budget its intention to introduce GST measures aimed at reducing compliance costs for small businesses and non-profit bodies.
3.3 Currently, entities with an annual turnover of $2 million or less, that are also in a net GST payable position, can elect to pay their GST through quarterly instalments with an annual reconciliation. However, these entities are also required to make a new election each financial year.
3.4 In order to reduce compliance costs, an entity that wishes to continue to pay GST by instalments will no longer be required to make a new election each year. The entity's initial election will continue to apply while ever the entity continues to satisfy the eligibility requirements.
Summary of new law
3.5 This bill will amend the GST Act to simplify the annual election rule under the GST instalment option. An entity that continues to be eligible to pay its GST through instalments will remain subject to the instalment system unless the entity becomes ineligible or chooses to exit the instalment system.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| An entity that is eligible to elect to apply the GST instalment option is not required to make a new election each financial year. An entity that revokes its election, or is no longer eligible, must notify the Commissioner of Taxation (Commissioner) of the change in their circumstances. | An entity that is eligible to elect to apply the GST instalment option must make a new election each financial year. |
Detailed explanation of new law
3.6 An entity that is eligible to make a GST instalment payer election will continue to be required to notify the Commissioner of its election. Currently, an election cannot relate to more than one financial year. An entity wishing to continue with the instalment option is required to make a new election by 28 October each year. This requirement has been removed and the entity's initial election will be treated as an ongoing election.
3.7 An initial election will take effect from the start of the earliest tax period for which the entity's GST return is not yet due. That is, the election will apply to a tax period for which the entity has not yet lodged a GST return with the Commissioner. However, the Commissioner may allow the election to take effect from some other tax period. [Schedule 3, item 5, subsection 162-15(2)]
3.8 Once a valid GST instalment payer election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election, its annual turnover exceeds the instalment turnover threshold, the entity is in a net refund position, or the entity is the representative member of a GST group and the membership of the GST group changes. An entity's election will also cease to have effect at the end of an entity's concluding tax period. [Schedule 3, item 6, subsection 162-30(1)]
3.9 An entity may revoke its election by notifying the Commissioner of its revocation. If an entity notifies the Commissioner of the revocation on or before 28 October in a financial year, its election will cease to have effect from the start of that same financial year. If an entity notifies the Commissioner of its revocation after 28 October in a financial year, the election will cease to have effect from the start of the following financial year. This means the entity is either in or out of the instalment system for a full financial year. [Schedule 3, item 6, subsection 162-30(2)]
3.10 The Commissioner may disallow an entity's election to pay GST by instalments if the Commissioner is satisfied that the entity has failed to comply with one or more of their tax obligations. If the Commissioner disallows an entity's election during the financial year in which the election first took effect, the election will cease to have effect from the start of the tax period in which the election first took effect. For later financial years, if the Commissioner disallows an entity's election on or before 28 October, the disallowance will have effect from the start of that financial year. If the Commissioner disallows the election after 28 October the disallowance will take effect from the start of the next financial year. [Schedule 3, item 6, subsections 162-30(3) and (4)]
3.11 Once an entity has made a valid GST instalment payer election, the entity is required to determine on 31 July of each financial year whether its annual turnover exceeds the instalment turnover threshold of $2 million. The entity must also continue to establish if it is in a net refund position as determined under section 162-5 of the GST Act. The entity determines if it is in a net refund position in the first tax period that applies to the entity after the end of the previous financial year. An entity that does not meet these criteria will be ineligible to continue in the GST instalment system and its election will cease to have effect from the start of the financial year in which it becomes ineligible to continue in the GST instalment system. [Schedule 3, item 6, subsections 162-30(5) and (6)]
Consequential amendments
3.12 Subsection 62(2) of the Taxation Administration Act 1953 is amended to include the reference to the relevant subsections within Division 162 of the GST Act which refer to the Commissioner's disallowance of an election to pay GST by instalments and the Commissioner's refusal to allow a GST instalment payer election to take effect from the start of another tax period. [Schedule 3, item 8, subsection 62(2); item 9, subsection 62(2)]
3.13 Subsections 129-20(1) and 138-10(1) of the GST Act have been amended to ensure these subsections recognise an instalment payer's concluding tax period under subsection 162-85(1). [Schedule 3, item 2, subsection 129-20(1); item 3, subsection 129-20(1); item 4, subsection 138-10(1)]
Application and transitional provisions
3.14 These amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2005. [Schedule 3, item 10]