Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)Chapter 3 - GST instalment system
Outline of chapter
3.1 Schedule 3 amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to enable those entities that are paying their GST by instalments, and that subsequently move into a net refund position to continue to use the GST instalments option if they wish.
3.2 The amendments also provide that entities that move into a net refund position and wish to continue to pay GST by instalments have an instalment amount each quarter of zero.
3.3 Entities that are currently not using the instalment option and are in a net refund position continue to be ineligible to pay their GST by instalments while they remain in a net refund position.
Context of amendments
3.4 The GST instalment option, contained in Division 162 of the GST Act, allows an eligible entity to choose to pay GST by quarterly instalments worked out by the Australian Taxation Office or an alternative amount nominated by the entity. The entity then lodges an annual GST return in which it accounts for any difference between the actual GST liability and the total GST instalments paid for the year.
3.5 The instalment amounts are generally based on the previous year's GST liability, and are generally notified to the taxpayer by the Commissioner of Taxation.
3.6 The instalment option was introduced in 2001 to make it easier for small businesses to meet their tax reporting requirements. Specifically, the measure seeks to reduce compliance costs for those GST instalment payers by allowing them to lodge a BAS annually rather than quarterly or monthly.
3.7 Currently, the GST legislation excludes a taxpayer from choosing to pay GST by instalments if that entity is in a net refund position. Similarly, an entity that moves into a net refund position while using the instalment option is no longer able to use this option. A net refund position is one in which a business is entitled to receive more input tax credits on its acquisitions than it is required to pay GST on its sales and other supplies during the relevant tax period.
3.8 In 2008, a small business representative advised through the Taxation Issues Entry System (TIES 022/2008), that the exclusion of businesses from the instalment system, because they move into a net refund position, may make compliance with the GST law more difficult for these businesses. This is because the increased compliance costs which is inconsistent with the intention of the instalments system.
3.9 The amendments allow entities that use the instalment option and move into a net refund position to choose to continue to pay GST by instalments and therefore retain the compliance cost advantages of reporting annually.
3.10 The choice to remain in the GST instalment system provides the entity with the compliance cost advantages of not having to complete quarterly BASs. The amendments result in those entities that decide to remain in the GST instalment system receiving their refund after they have submitted their annual GST return.
Summary of new law
3.11 Schedule 3 amends the GST Act to maintain access to the GST instalment option for those entities that have elected to pay their GST obligations by instalments (GST instalment payers) and move into a net refund position. Specifically, Schedule 3 removes the requirement that entities in the GST instalment system must not be in a net refund position.
3.12 Schedule 3 also amends the GST Act to provide that GST instalment payers that move into a net refund position and wish to continue to pay GST by instalments receive a zero instalment amount each quarter that they remain in a net refund position.
3.13 This measure applies to GST instalment quarters starting on or after the first 1 July that is on or after Royal Assent of this Schedule.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| GST instalment payers are allowed to continue using the GST instalment method, if they move into a net refund position. | Currently, the GST Act prevents an entity from paying GST by instalments if that entity is in a net refund position or moves into a net refund position. |
Detailed explanation of new law
3.14 The amendments to Division 162 of the GST Act enable eligible entities that are already paying GST by instalments to choose to continue to use this method if they move into a net refund position.
3.15 The amendments ensure that an election by an entity to pay GST by instalments does not cease to have effect in the first tax period in which a net refund arises. Similarly, the timing rule which sets out when entities in a net refund cease to be entitled to be GST instalment payers is repealed. This enables these GST instalment payers in a net refund position to avoid the additional compliance costs associated with reverting to quarterly reporting. [Schedule 3, items 1 and 2, paragraph 162-30(1(d)) and subsection 162-30(6)]
3.16 The consequence of choosing to remain in the GST instalment system for those entities that move to a net refund position is that they have an instalment amount each quarter of zero, and not less. No instalment amount is therefore paid unless an entity varies the instalment amount upwards. This is achieved by an amendment to the definition of estimated annual GST amount which requires this amount to be zero in net refund quarters if it would otherwise be less than zero. [Schedule 3, items 3 and 6, subsections 162-135(1) and 162-140(6)]
3.17 Entities that are not paying GST by instalments and are already in a net refund position, remain ineligible to use the instalment option.
3.18 As a consequence of the amendments an additional note is added and the reference to the location of the definition of estimated annual GST amount in the GST dictionary is updated. [Schedule 3, items 4, 5 and 7, subsection, 162-140(4) and section 195-1]
Example 3.5 : Quarterly instalment system applies
Ashley operates a shop selling home wares and is eligible to pay GST by instalments.
She has paid GST by instalments continuously from the quarter ending September 2010. Ashley made a large equipment purchase in August 2015. On 31 July 2016 she lodges her annual GST return and receives a refund because she is entitled to more input tax credits on her purchases than she is required to pay GST on her sales.
Ashley wants to continue paying GST by instalments from the quarter ending September 2016 despite being in a net refund position when she lodged her most recent annual GST return.
As she was paying GST instalments in the previous year she is eligible to continue to use the GST instalment system. She is offered an instalment amount of zero in the quarter ending September 2016. Ashley may choose to vary the instalment amount upwards from zero to better reflect her trading conditions.
Example 3.6 : Quarterly instalment system cannot be applied
Ricardo has been operating a small commercial development business for the past three years. Ricardo has not previously made an election to pay GST by instalments.
Due to the initial development costs and no sales to date, Ricardo's business is in a net refund position, that is, Ricardo's business is entitled to receive more input tax credits on its purchases than it is required to pay GST on its sales.
Prior to the new financial year Ricardo decides that he would like to pay GST by instalments. However, as his business is in a net refund position and he was not already using the GST instalment system, his business is ineligible to elect to pay GST by instalments under paragraph 162-5(1)(e) of the GST Act.
Application and transitional provisions
3.19 The amendments made by this Schedule apply in relation to GST instalment quarters starting on or after the first 1 July that occur on or after Royal Assent of this Bill. The amendments apply from this time to coincide with the beginning of the financial reporting year for many small businesses that may be affected by these amendments. [Schedule 3, item 8]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
GST instalment system
3.20 Schedule 3 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .
Overview
3.21 Schedule 3 to this Bill amends the GST law to enable entities that are paying their GST by instalments, and that subsequently move into a net refund position, to continue to pay their GST by instalments if they choose to do so.
Human rights implications
3.22 This Schedule does not engage any of the applicable rights or freedoms.
Conclusion
3.23 This Schedule is compatible with human rights as it does not raise any human rights issues.
Assistant Treasurer, the Hon David Bradbury