Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)Payment of instalments by companies and certain trustees
Overview
8.1 This Bill will amend the Income Tax Assessment Act 1936 (ITAA) to provide rules for grouping instalment taxpayers for the purpose of the new company tax instalment arrangements. These company tax instalment arrangements, which were introduced in the Taxation Laws Amendment Act (No. 2) 1993, provide for quarterly payments of company tax commencing from the 1994-95 year of income. The new arrangements are contained in Division 1C of Part VI of the ITAA.
8.2 This Bill will also make an amendment to the penalty provision of Division 1C.
Summary of the amendments
8.3 The amendments will provide rules to prevent instalment taxpayers within large groups taking advantage of the more generous payment arrangements for smaller instalment taxpayers. Broadly, where an instalment taxpayer is part of a group that has combined likely tax for a payment year exceeding $300,000, and that instalment taxpayer's likely tax is not less than $8,000, the instalment taxpayer will be required to pay according to the rules for large instalment taxpayers.
8.4 The penalty provision of the new company tax instalment arrangements will also be amended to ensure that the penalty for under-estimation of tax cannot be avoided by lodging two estimates in quick succession.
8.5 The Bill will also make some minor technical amendments to Division 1C of Part VI of the ITAA.
8.6 The grouping rules will apply from the 1995-96 year of income. The other amendments will apply from the 1994-95 year of income.
Background to the legislation
8.7 Under the new company instalment arrangements, the timing and amount of instalments due depend upon the amount of the instalment taxpayer's likely tax for the payment year. This information is set out in the following table:
| Amount of likely tax on first day of Month 9 | Date & amount of first instalment | Date and amount of second instalment | Date and amount of third instalment | Date and amount of final instalment |
|---|---|---|---|---|
| Less than $8,000 "Small" taxpayer | * Month 18 * 100% of assessed tax | |||
| $8,000 to $300,000 "Medium" taxpayer | * Month 12 * 25% of likely tax | * Month 15 * 25% of likely tax | * Month 18 * 25% of likely tax | * Month 21 * Assessed tax less previous payments |
| More than $300,000 "Large" taxpayer | * Month 9 * 25% of likely tax | * Month 12 * 25% of likely tax | * Month 15 * 25% of likely tax | * Month 18 * Assessed tax less previous payments |
8.8 As the table shows, instalment taxpayers are categorised into 'small', 'medium' and 'large'. These categories are based on the amount of the instalment taxpayer's likely tax on the first day of month 9. As indicated by the timing and amount of payments, the new arrangements are more concessional for 'small' instalment taxpayers than for 'medium' instalment taxpayers. In turn, 'medium' instalment taxpayers receive more concessional treatment than 'large' instalment taxpayers.
8.9 Months are reckoned from the start of the current year of income. For example, if the current year starts on 1 July 1995 then month 12 will be June 1996 and month 15 will be September 1996.
8.10 Instalment taxpayers include not only companies but also trustees of certain trusts and funds.
8.11 Table 2 in subsection 221AZN(1) sets out what an instalment taxpayer's likely tax is at a particular time. Broadly, this table provides that if a taxpayer has lodged an estimate, the likely tax is the estimated amount (or the last estimated amount if 2 estimates have been lodged). If the taxpayer has not lodged an estimate, the likely tax is the previous year's tax amount. If a taxpayer has not lodged an estimate and there is not a previous year's tax amount, but there is an earlier year's tax amount, the likely tax is the earlier year's tax amount. In any other case, the likely tax is nil.
8.12 Division 1C of Part VI of the ITAA provides for penalties for the under-estimation of instalments payable.
8.13 The company tax instalment arrangements apply from:
- •
- the 1994-95 year of income - for small or medium instalment taxpayers;
- •
- the 1995-96 year of income - for large instalment taxpayers.
Explanation of the amendments
8.14 Larger instalment taxpayers are able to arrange themselves in such a way that they can take advantage of the more generous payment arrangements for smaller instalment taxpayers under Division 1C. That is, if a large instalment taxpayer structures itself into a series of related medium instalment taxpayers, it can defer payment of instalments by 3 months.
8.15 This Bill will amend Division 1C so that, broadly, all instalment taxpayers within a group whose combined likely tax for a payment year exceeds $300,000 will be required to pay according to the rules for large instalment taxpayers for that year [Clause 45] . However, instalment taxpayers with likely tax of less than $8,000 (i.e. a small instalment taxpayer) will not be covered by this requirement even though their likely tax will be included in the combined likely tax of the group.
8.16 Amendments will be made to the definitions of 'large taxpayer' and 'medium taxpayer' contained in section 221AZH of Division 1C to ensure that the classification of an instalment taxpayer as either 'large' or 'medium' is subject to the application of the grouping provisions [Clause 43] . An amendment with the same purpose is made to paragraph 221AZK(3)(a) which provides for the classification date for instalment taxpayers [Clause 44] .
8.17 The amendments will treat instalment taxpayers as part of the same group if:
- •
- one has a controlling interest in the other;
- •
- one has a controlling interest in several other taxpayers;
- •
- one has a controlling interest in another instalment taxpayer, which in turn has a controlling interest in other taxpayers [Section 221AZMB].
8.18 An instalment taxpayer ( the controlling taxpayer ) will be taken to have a controlling interest in another instalment taxpayer ( the related taxpayer ) if:
- •
- the related taxpayer is a company and the controlling taxpayer:
- (i)
- is in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the related taxpayer; or
- (ii)
- has the power to appoint the majority of directors of the related taxpayer; or
- (iii)
- the related taxpayer or the directors who are entitled to exercise a majority of the voting power at meetings of the related taxpayer are accustomed, or under an obligation, whether formally or informally, to act in accordance with the directions, instructions or wishes etc. of the controlling taxpayer.
- •
- the related taxpayer is a trust and the controlling taxpayer:
- (i)
- is beneficially entitled to, or is able, directly or indirectly, to control 50% of the interests in the trust property or income; or
- (ii)
- has the power to appoint or remove the trustee, or any of the trustees of the related taxpayer; or
- (iii)
- the trustee of the related taxpayer is accustomed or under an obligation, whether formally or informally, to act according to the directions, instructions or wishes of the controlling taxpayer [Section 221AZMC].
8.19 The 'controlling interest test' will be applied on the same date that instalment taxpayers determine if they are 'medium' or 'large', i.e. the first day of the 9th month [Section 221AZMA].
Penalties for under-estimation of tax
8.20 Subsection 221AZP(1) provides for penalties for the under-estimation of tax under the new company tax instalment arrangements.
8.21 Under subsection 221AZO(1), an instalment taxpayer can lodge up to two estimates for any year. The amount of an instalment due, for a medium or large instalment taxpayer, is based on these estimates. If an instalment taxpayer has not lodged an estimate, the amount upon which instalments are levied will be the previous year's tax amount or the tax amount of the most recent earlier year. An instalment taxpayer may lodge an estimate, up until and including its 3rd instalment payment, of its income tax payable in the current year of income.
8.22 As set out in subsection 221AZP(1), if an estimate made by the instalment taxpayer turns out to be more than 10% below a specified amount (referred to as the base amount) a penalty is payable. Under subsections 221AZP(2) & (3) the penalty applies to the difference between an estimated amount and the base amount.
8.23 The base amount is specified in paragraphs 221AZP(1)(a) and (b) as effectively being the lesser of the following amounts:
- (a)
- the likely tax for the current year, immediately before the taxpayer lodged the estimate;
- (b)
- the actual tax payable.
8.24 In the case of a first estimate, the penalty is applied to the period starting on the date the estimate is lodged (or the date the first instalment was due, if later) and ending on the date another estimate is lodged (or the date of the last instalment, if earlier). The base amount will be the lesser of the previous year's tax amount and the actual tax payable.
8.25 In the case of a second estimate, the penalty is applied to the period starting on the date of lodgement of the second estimate (or the date the first instalment was due, if earlier) and ends on the date of the last instalment. The base amount is the lesser of the amount of the first estimate and the actual tax payable.
8.26 Paragraph 221AZP(1)(a) can operate in such a way that the penalty for the under-estimation of tax can be avoided. This can be achieved by lodging two estimates in quick succession, and for the second estimate to be at least 90% of the value of the first. As the penalty period for the first estimate ceases when the second estimate is lodged there will be no penalty from the date when the second estimate is lodged (as it is at least 90% of the first estimate).
8.27 Paragraph 221AZP(1)(a) will be amended accordingly so that the base amount which applies to a second estimate is the same as that for the first estimate, i.e., the lesser of the previous year's taxable income or the taxable income of the most recent year [Clause 46] .
8.28 These amendments will remedy an incorrect citation of Division 1C in subsection 166A(2) [Clause 42] and insert the word 'the' in paragraph 221AZT(a) between 'if' and 'taxpayer' [Clause 47] .