Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)Chapter 13 Provisional Tax Amendments
Overview
Splits the provisional tax credit into two components:
- (a)
- provisional tax on income other than salary or wages; and
- (b)
- provisional tax on salary or wages income.
Also makes technical amendments to the Act to clarify the operation of the provisional tax variation provisions.
13.1 . The Taxation Laws Amendment Bill (No 3) 1991, (the Bill) will make certain technical corrections to the provisions affecting the calculation of provisional tax.
Note: The Income Tax Assessment Act 1936 will be referred to as the "Act" throughout this chapter.
Summary of proposed amendments
13.2. For 1990-91 and subsequent years, taxpayers would be liable to provisional tax on salary or wages if they satisfy both parts of a simple test. The two conditions are that:
- •
- their balance to pay on assessment was $3,000 or more; and
- •
- the Pay-As-You-Earn (PAYE) deductions made from that salary or wages income were under-deducted by $3,000 or more.
13.3. When calculating the balance to pay on assessment, the whole of the previous year's provisional tax amount is currently allowed as a credit. The inclusion of this credit may result in a taxpayer having a balance to pay on assessment of less than $3,000, even though the taxpayer has a shortfall in PAYE deduction of $3,000 or more. In this situation a taxpayer would fail the test and provisional tax would not be raised on the salary or wages income. This gives rise to an inequity where some members of a class of taxpayers liable to provisional tax will escape the liability simply because provisional tax was raised in the previous year.
13.4. To resolve this inequity the Bill will split the provisional tax credit into two components:
- (a)
- provisional tax on income other than salary or wages; and
- (b)
- provisional tax on salary or wages income.
13.5. Only the provisional tax on income other than salary or wages will be allowed as a credit when calculating the balance to pay on assessment. This splitting will only occur for the purposes of determining whether or not the balance to pay on assessment is $3,000 or more. This split of the credit will not reduce any taxpayer's entitlement to have that provisional tax credit available to offset other income tax liabilities.
13.6. The Bill will also make technical amendments to the Act to clarify the operation of the provisional tax variation provisions.
Background to the legislation
Provisional tax raised on salary or wages income
13.7. Section 221YAB provides that certain taxpayers who receive salary and wage income may be liable to provisional tax on that income. Section 221YAB was designed to prevent certain taxpayers from receiving an income tax deferral. The section extended the liability for provisional tax under Subdivision A of Division 3 of Part VI of the Act for 1990-91 and subsequent years.
13.8. The method of calculating provisional tax on certain salary or wages income (section 221YAB) was inserted into the Act by Act No 87 of 1990.
13.9. As a result of the enactment of section 221YAB, provisional tax became payable on salary or wages income for a year of income where both parts of a two stage test are satisfied. Section 221YAB of the Act provides for the following tests:
- (a)
- the taxpayer has a balance to pay on assessment for the preceding year of $3,000 or more; and
- (b)
- the shortfall of Pay-As-You-Earn (PAYE) deductions from the salary or wages income of the preceding year is $3,000 or more.
13.10. Currently, when calculating the balance to pay on assessment, for the first test referred to in paragraph (a) above, the whole of the previous year's provisional tax credits are applied to reduce that balance.
13.11. This means that where a taxpayer paid provisional tax for 1990-91 (because there was insufficient PAYE deductions made from the taxpayer's 1989-90 salary or wages) the amount of the provisional tax reduces the taxpayer's liability to tax for the 1990-91 year.
13.12. The unintended effect of the inclusion of this credit in the calculation of the taxpayer's liability to tax could result in a taxpayer having a balance to pay of less than $3,000 on his or her assessment (the test referred to earlier in paragraph (a)), although the taxpayer may still have a shortfall of PAYE deductions of $3,000 or more (the test referred to earlier in paragraph (b)).
13.13. In this case, provisional tax for the 1991-92 year of income would not be raised because the test referred to earlier in paragraph (a) would not have been satisfied. This would recreate the deferral advantage in 1991-92 that section 221YAB of the Act was designed to overcome.
Amendments to the provisional tax variation provisions
13.14. A taxpayer would generally recalculate provisional tax where he or she expects his or her current year's income to be lower than that of the previous year. The current provisional tax variation provisions (section 221YDA of the Act) do not however specify all the rebates and credits that may be included in a taxpayer's recalculation of provisional tax.
13.15. The Bill will clarify which rebates and credits may be taken into account when a taxpayer varies his or her provisional tax.
Explanation of the proposed amendments
Provisional tax raised on salary or wages income
13.16. The test referred to earlier in paragraph (a) is proposed to be amended to reduce the amount of provisional tax paid in the preceding year which will be allowed as a credit for the purposes of the test, by the extent to which the provisional tax was attributable to salary or wage income. This will remove any potential for deferral.
13.17. The amended test operates by splitting the provisional tax credit into two components. The first component being provisional tax raised on income other than salary or wages. This component will be allowed as a credit in determining whether a taxpayer has a balance to pay on assessment of $3,000 or more (the first test referred to earlier in paragraph (a)).
* 13.18. The second component of the credit will be provisional tax raised on salary or wages income of the preceding year as a result of a shortfall in PAYE deductions. To resolve the inequity cause by the deferral advantage, subparagraph 221YAB(a)(vi) will be amended to excluded the provisional tax referrable to salary or wages income from the calculation of the first test in paragraph 221YAB(a). [Clause 71]*
(Editorial note: *Amended during passage through Parliament, refer Supplementary EM*)
Amendments to the provisional tax variation provisions
13.19. To clarify the operation of the provisional tax variation provisions section 221YDA of the Act is amended to include the following amounts, if applicable, in the calculation of a taxpayer's varied provisional tax:
- (a)
- the amount of tax that has been deducted from investment income by virtue of a taxpayer's failure to quote his or her Tax File Number (TFN) to an investment body (section 221YHZK);
- (b)
- foreign tax credits (section 160AF);
- (c)
- rebates on certain life insurance bonuses (section 160AAB); and
- (d)
- Commonwealth loan interest rebates (section 160AB).
[Paragraphs 73(a), (b), (d) and (e)]
Commencement date
13.20. The amendments will apply to the calculation of provisional tax (including instalments) payable in respect of income of the 1991-92 year of income and of all subsequent years of income.
13.21 . The amendments will apply to provisional tax for 1991-92 which is based on the income of the 1990-91 year of income. This is so because the first test in paragraph 221YAB(a) applies to income of the preceding year (1990-91). [Subclause 85(14)]
Clauses involved in the proposed amendments
Subclause 85(14) : provides that the amendments to the Act made by clause 71 and paragraphs 73(a), (b), (d) and (e) of the Bill will apply to provisional tax payable for 1991-92 and subsequent years.
Clause 71: amends section 221YAB of the Act to split the provisional tax credit into two components for the purposes of the first test in paragraph 221YAB(a).
Paragraphs 73(a), (b), (d) and (e) : amends section 221YDA of the Act to include certain rebates and credits in the calculation of a taxpayer's varied provisional tax.