House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Reduction in 2011-12 pay as you go instalments

Outline of chapter

1.1 Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to set the gross domestic product (GDP) adjustment for pay as you go (PAYG) instalment taxpayers who use the GDP adjustment method at 4 per cent for the 2011-12 income year, instead of 8 per cent.

Context of amendments

1.2 Under the PAYG instalments system, taxpayers earning business or investment income pay instalments during the year towards their final tax liability for that income year. Taxpayers may pay their PAYG instalments on the basis of GDP-adjusted notional tax (GDP adjustment method) or on the basis of instalment income. Under either method taxpayers can choose to vary their instalment amounts to more accurately reflect their expected tax liability for the income year.

1.3 The GDP adjustment method is available to individuals, multi-rate trustees and eligible small business entities. The method is also available to self-assessment entities (primarily companies and certain superannuation funds) with $2 million or less of instalment income for the previous income year, or self-assessment entities with more than $2 million of instalment income for the previous income year who are eligible to pay an annual PAYG instalment but have chosen not to (section 45-130 of Schedule 1 to the TAA 1953).

1.4 Taxpayers who pay PAYG instalments on the basis of the GDP adjustment method are generally quarterly payers who pay four instalments annually. However, primary production businesses and special professionals are allowed to pay two instalments a year under the GDP adjustment method (section 45-134 of Schedule 1 to the TAA 1953).

1.5 A quarterly payer who pays instalments on the basis of the GDP adjustment method will pay the instalment amount determined and advised by the Commissioner of Taxation (Commissioner). The Commissioner works out the amount of the instalments taxpayers pay in accordance with Subdivision 45-L of Schedule 1 to the TAA 1953.

1.6 The amount of the instalments payable depends on the taxpayer's GDP-adjusted notional tax which is worked out by the Commissioner (section 45-405 of Schedule 1 to the TAA 1953). Broadly, the GDP-adjusted notional tax amount is worked out by increasing the taxpayer's adjusted taxable income in the previous year by the GDP adjustment factor, which is generally a ratio representing the rate of nominal GDP growth between the previous two full calendar years.

1.7 For the 2011-12 income year, the GDP adjustment factor calculated under the current law would be 8 per cent. These amendments will set the GDP adjustment factor at 4 per cent for the 2011-12 income year. This will provide eligible taxpayers (including eligible small businesses) with a smoother transition from the 2 per cent GDP adjustment factor that applied for the 2009-10 and 2010-11 income years as the economy recovered from the global financial crisis.

1.8 Taxpayers whose 2011-12 income year commenced before 1 April 2011 are already paying PAYG instalments for the 2011-12 income year based on a 2 per cent GDP adjustment factor (calculated under the statutory ratio). They will continue to do that for the rest of the 2011-12 income year.

1.9 Taxpayers may themselves vary their instalment amounts calculated and notified by the Commissioner.

Summary of new law

1.10 The GDP adjustment factor to be used by the Commissioner to work out the GDP-adjusted notional tax amount will be set at 4 per cent for the 2011-12 income year.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 These amendments will set the GDP adjustment factor to be used by the Commissioner in calculating PAYG instalments for taxpayers who pay quarterly instalments on the basis of the GDP adjustment method at 4 per cent for the 2011-12 income year. The GDP adjustment factor for income years after 2011-12 is to be based on the current methodology. [Schedule 1, items 2 to 4, definition of 'GDP adjustment' in subsection 45-405(3) and subsection 45-402(1)]

Example 1.1

Aaron pays quarterly PAYG instalments on business and investment income he earns on the basis of the GDP adjustment method.

In the 2010-11 income year Aaron has business and investment adjusted taxable income of $50,000. If the current GDP adjustment factor of 8 per cent were used, then Aaron's PAYG instalments would be calculated using the adjusted taxable income of $54,000 for the 2011-12 income year.

However, applying the GDP adjustment factor of 4 per cent means that the adjusted taxable income for the 2011-12 income year will be only $52,000 and Aaron's PAYG instalments will be calculated on this lower amount.

1.12 Taxpayers may still vary their quarterly instalments under section 45-112 of Schedule 1 to the TAA 1953 if they consider their income is expected to be lower or higher than the amount determined by the Commissioner using the 4 per cent GDP adjustment factor.

1.13 To avoid leaving inoperative provisions in the tax laws well after they cease to have effect, the provisions in the TAA 1953 that give effect to a 4 per cent GDP adjustment factor for the 2011-12 income year will be automatically repealed on 1 July 2016. [Schedule 1, items 9 to 11]

Application and transitional provisions

1.14 These amendments apply for the purposes of working out the amount of an instalment that becomes due on or after the date of commencement, which is the day after the Bill receives Royal Assent. [Schedule 1, item 12]

1.15 However, the amendments do not apply to a small group of taxpayers whose 2011-12 income year commenced before 1 April 2011. These taxpayers will continue to pay PAYG instalments for the 2011-12 income year based on a 2 per cent GDP adjustment factor, which is worked out under the statutory formula in subsection 45-405(3) of Schedule 1 to the TAA 1953. [Schedule 1, item 12]

Consequential amendments

1.16 Consequential amendments are made to the sunsetting provisions in Schedule 1 to the Tax Laws Amendment (2009 Measures No. 3) Act 2009 (2009-10 instalment reduction). These amendments reflect the changes made by this Bill to the wording of the provisions to be automatically repealed on 1 July 2014 by Schedule 1 to the Tax Laws Amendment (2009 Measures No. 3) Act 2009 . [Schedule 1, items 5 to 8]

1.17 A minor amendment is made to ensure consistency in describing the current year within the provisions for working out quarterly instalments on the basis of GDP-adjusted notional tax. [Schedule 1, item 1, subsection 45-402(1)]