Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

CHAPTER 1 - REPORTABLE PAYMENTS SYSTEM

Overview

1.1 The amendments contained in Division 2 of Part 2 of the Bill provide a legislative framework for a reportable payments system (RPS) in respect of specified transactions within certain industries. Regulations will specify the transactions to which the system will apply.

Summary of the amendments

Purpose of the amendments

1.2 The amendments propose to introduce a new Division 1AA into Part VI of the Income Tax Assessment Act 1936 (the Act) . Division 1AA will provide the legislative framework for a tax file number (TFN) based RPS in which details of certain payments of assessable income are reported to the Commissioner. [Clause 4 and new section 220AA]

Date of effect

1.3 The amendments will apply to payments made on or after 1November 1994. [New paragraph 220AF(1)(c), new subsection 220AJ(4)]

Background to the legislation

1.4 The Government's tax policy statement, circulated by the Treasurer on 16 September 1992, outlined strategies to assist taxpayers in meeting their taxation obligations and, where necessary, to enforce greater compliance with the taxation laws. To achieve an increased level of compliance, the statement foreshadowed an extension of information reporting using the TFN system.

Explanation of the amendments

1.5 Division 2 of Part 2 of the Bill will introduce new Division 1AA into Part VI of the Act. New Division 1AA contains the provisions for the RPS [clauses 4 and 5] . The new RPS will introduce a TFN based reporting system in relation to certain transactions within specified industries. Details of particular transactions (called "reportable payments" [new section 220AC] )will be reported annually to the Commissioner of Taxation. Some aspects of the new RPS are modelled on the existing arrangements contained in Part VA and the pay-as-you-earn (PAYE) and prescribed payments system (PPS) arrangements in Divisions 2 and 3A of Part VI of the Act.

1.6 The proposed RPS is outlined in new subdivision A [new sections 220AA and 220AB]. The main features are contained in new subdivisions B to H of new Division 1AA and include:

•

the introduction of new terms and definitions for interpretative purposes [new subdivision B] ;

•

the introduction of a tax file number declaration form to enable a payee to quote his or her TFN to a payer before a reportable payment is made [new subdivision E] ;

•

the inclusion of a specific TFN reporting exemption for persons receiving certain specified pensions or benefits [new subdivision F] ;

•

provisions which outline the obligations of payers who receive TFN or pensioner exemption declarations [new subdivision G] ;

•

an explanation of the obligations of payers making reportable payments to payees who have not quoted their TFN or been deemed to have quoted their TFN. In these circumstances payers will be required to deduct an amount from the reportable payment and remit the deduction to the Commissioner [new subdivision C] . New subdivision H provides that deductions will be refunded in special circumstances;

•

provision for information to be provided by payers in relation to reportable payments made by the payer [new subdivision D] such as;

•

an annual report to the Commissioner in respect of reportable payments made to each payee; and

•

a receipt or similar document to a payee as soon as practicable after making the payment. The document will detail the amount of the reportable payment and the deduction made.

1.7 New subdivisions I to M in Division 1AA contain the penalty and recovery provisions which will apply where payers, who are required to make deductions from reportable payments, fail to do so, or make deductions and fail to remit the deductions made to the Commissioner. New subdivision L provides payees with credits in respect of amounts deducted from reportable payments.

New definitions and scope for the RPS

1.8 In addition to usual terms such as payer, payee, payment and those associated with quoting TFNs, new definitions for an "exempt inter-corporate payment" and a "reportable payment" are also introduced. [New section 220AC]

1.9 The definition of "reportable payment" contained in new section 220AC specifies that the RPS will not extend to payments which currently fall within the PPS or PAYE arrangements or payments made between companies in a wholly owned company group. These latter payments are referred to as exempt inter-corporate payments and rely on the definition of "subsidiary" in section 221ED in relation to the PAYE arrangements. Where a payer and a payee in relation to a reportable payment are members of the same wholly owned company group, the RPS provisions will not apply.

1.10 The new arrangements will also apply to payments which are not made directly to a payee but which are reinvested, accumulated, capitalised or otherwise dealt with on behalf of the payee or at the direction of the payee. [New section 220AD]

Scope

1.11 Regulations will specify the transactions to which the RPS will apply [new section 220AC, definition of 'reportable payment'] . Initially it is expected that those regulations will describe certain payments in the fishing and clothing industries which represent assessable income to the recipient. This format is consistent with the way that prescribed payments are currently described for the purposes of the PPS provisions.

1.12 Subject to a specific exemption for payments made by or to a retailer for the sale of fish, it is anticipated that reportable payments in the fishing industry will include:

•

payments made for the sale or supply of fish where the fish is acquired by the payer for sale or supply to another person, or for use in carrying on a business; and

•

payments (other than salary or wages under the PAYE provisions) which relate to the taking or catching of fish.

For example, a payment made by a fish wholesaler to the owner of a fishing boat in return for fish will be a reportable payment under the proposed arrangements. However, a payment by the wholesaler to a fish processor who processes the fish and returns it to the wholesaler would not be a reportable payment. A retailer's payment to a processor for packaged fish would not be reportable because of the retailer exemption whereas the payment by the processor to the fishing boat owner would represent a reportable payment.

1.13 It is anticipated that reportable payments in the clothing industry will include:

•

payments relating to a process which forms part of the manufacture of an item of clothing; and

•

payments (other than salary or wages under the PAYE provisions) which relate to an agreement to carry out, or to organise to be carried out, a process in the manufacture of clothing.

For example, a payment by a manufacturer (other than a payment of salary or wages) to a contractor who either makes up or arranges for the making up of a specified article of clothing will be a reportable payment. The payment may be excluded from the scope of salary or wages because it is paid to an entity (ie a partnership or company) rather than to an individual. A payment by a retailer for 100 skirts "off a manufacturer's rack" will not be a reportable payment.

1.14 However, a payment which does not relate to the manufacture of an item of clothing will not be a reportable payment. For example, the alteration of a pair of trousers (which will occur after the manufacture of the item is completed), or the attachment of price tags by a retailer.

Quotation of TFNs in respect of reportable payments

1.15 The proposed RPS provisions which deal with the quoting of TFNs are similar to those provisions regarding the quotation of a TFN on an employment declaration (section 202CB in Division 3 of Part VA) and a PPS declaration (section 221YHB in Division 3A of Part VI). The RPS arrangements contain the following features in respect of TFN declarations:

•

in order to quote a TFN under the RPS, a payee must complete a "tax file number declaration form" [new sections 220AL and 220AM] ;

•

where the Commissioner is satisfied that a payee has quoted an incorrect TFN on a declaration, the Commissioner may notify the payer of the correct TFN of the payee [new section 220AO] ;

•

where a payer is so notified the payer must include the correct number on annual reports under new section 220AJ ; and

•

a payee is taken to have quoted a TFN by making a pensioner exemption declaration under new section 220AP .

Obligations on payees to provide correct information in declarations made under the RPS

1.16 The effectiveness of the proposed RPS arrangements will depend on the TFN and pensioner exemption declarations made by payees to the payers. The Taxation Administration Act 1953 provides for penalties on conviction (of up to $2,000 for the first offence) in situations where persons make false or misleading statements in relation to the operation of the taxation laws. Therefore if a payee was to provide false or misleading information on a TFN or pensioner exemption declaration form, the payee will be committing an offence and, if convicted, will be penalised.

TFN declaration

1.17 A TFN declaration form that has been given to a payer will remain in force until:

•

29 days pass from the date that the declaration is made to the payer in which no circumstance arises which requires the payer to forward the declaration to the Commissioner pursuant to new section 220AQ (see later notes) [new paragraph 220AN(1)(a)] ; or

Where the declaration has been forwarded to the Commissioner pursuant to new section 220AQ :

•

one year has elapsed in which no reportable payment is made by the payer to the payee [new paragraph 220AN(1)(b)] ;

•

the payee makes another TFN declaration to the payer [new paragraph 220AN(1)(c)] ; or

•

the Commissioner determines that all or a class of TFN declarations ceases to be in force [new paragraph 220AN(1)(d)] .

1.18 The declaration will also cease to be in force if, the Commissioner is satisfied that the TFN quoted in the declaration is not the TFN of the payer and is satisfied that the payer does not have a TFN [new subsection 220AN(2)] .

Pensioner exemption

1.19 New section 220AP provides that recipients of reportable payments who are paid certain pensions or benefits will not be required to quote their TFN under the RPS. The pensions and benefits to which the exemption applies are listed in new subsection 220AP(1) and are identical to those set out at subsection 202EA(5), which relates to employment declarations.

1.20 By new subsection 220AP(2) if, in relation to a reportable payment, a person has made a "pensioner exemption declaration" (as defined by new subsection 220AP(3) ) which states that they are the recipient of a pension or benefit, the pensioner or beneficiary will be taken to have quoted their TFN in relation to the payment.

1.21 A payer who has made a reportable payment to a payee who has made a pensioner exemption declaration, will be required to specify in the annual report to be forwarded to the Commissioner pursuant to new section 220AJ that the payee is a person who is entitled to receive a pension or benefit.

1.22 New subsection 220AP(4) specifies the time at which a pensioner exemption declaration will be taken to have been made is when the pensioner gives the declaration form to the payer. By new subsection 220AP(5) the pensioner exemption declaration will remain in force (and therefore the payee will be taken to have quoted their TFN in respect of any reportable payment made in the period) from that date until:

•

29 days pass in which no circumstance arises which requires the payer to forward the declaration to the Commissioner pursuant to new section 220AQ (see notes below) [new paragraph 220AP(5)(a)] ; or

Where the declaration has been forwarded to the Commissioner pursuant to new section 220AQ :

•

12 months has elapsed in which no reportable payment is made by the payer to the payee [new paragraph 220AP(5)(b)] ;

•

the payee makes another pensioner declaration or a TFN declaration to the payer [new paragraphs 220AP(5)(c) and (e)] ;

•

the Commissioner determines that all or a class of pensioner declarations ceases to be in force [new paragraph 220AP(d)] ; or

•

the pensioner or beneficiary becomes no longer entitled to receive a pension or benefit in relation to which the exemption applies [new paragraph 220AP(5)(f)] .

1.23 Where a pensioner declaration has ceased to have effect because the payee is no longer entitled to receive a pension or benefit, the payee is required to inform the payer in writing that the declaration is no longer in force as soon as is practicable [new subsection 220AP(7)] .

1.24 The Commissioner is also empowered to inform the payer and the payee that a pensioner exemption declaration is no longer in force, and to explain the reasons for and the consequences of the cessation [new subsection 220AP(6)].

Payers' obligations in relation to TFN and pensioner exemption declaration forms

1.25 The obligations of payers are identical in relation to both TFN declaration forms and pensioner exemption declaration forms. These obligations are set out in new section 220AQ .

1.26 In all cases a payee must have completed the TFN declaration form or pensioner exemption declaration form prior to the receipt of a reportable payment in order for their TFN to be taken to have been quoted in relation to the payment. [New sections 220AL and 220AP]

1.27 The obligations of the payer in dealing with the declarations will vary depending on whether or not there have been previous dealings (but not necessarily the making of reportable payments) between the payer and the payee. This distinction is intended to avoid the situation in which a potential payer is required to action declarations from people with whom they have had no previous dealings and to whom they may never make a reportable payment.

Where the payer and payee have had prior dealings

1.28 A payee may provide a TFN or pensioner exemption declaration form to a payer or potential payer at any time. By new subsection 220AQ(1) , if the payee has entered into an arrangement which could give rise to a reportable payment by the payer within the previous 12 months (whether or not any payment was actually made in the period) the payer must complete and forward the original form so that it reaches the Commissioner within a period of 14 days. The Commissioner has a discretion to extend the period.

1.29 For these purposes the term "arrangement" is defined broadly in new section 220AC to include any understanding or undertaking, whether or not legally enforceable or intended to be legally enforceable.

1.30 The TFN or pensioner exemption declaration will not apply to deem a TFN to have been quoted in relation to any reportable payments made in the 12 month period before the declaration was given to the payer.

Where there have been no prior dealings

1.31 New subsection 220AQ(2) applies where a TFN or pensioner exemption declaration form is provided by a person who has had no dealings with the potential payer in the previous 12 months that could be described as an arrangement that could give rise to a reportable payment (whether it did so or not). If a reportable payment is made by the payer to that person within a period of 28 days from when the declaration was made, the payer must forward the original declaration form so that it reaches the Commissioner within a period of 14 days from the date of the payment.

What will happen where an incorrect TFN is provided?

1.32 In relation to TFN declaration forms:

•

where the Commissioner is satisfied that a payee has quoted an incorrect TFN on a declaration, the Commissioner may notify the payer of the correct TFN of the payee [new section 220AO] ;

•

where a payer is so notified, the payer must include the correct number on annual reports under new section 220AJ ;and

•

where the Commissioner is not satisfied a payee has a TFN, then the Commissioner may notify the payer (and the payee) that the payee is to be treated as not having quoted a TFN [new subsection 220AN(2)] .

Consequences where no TFN has been quoted or been deemed to have been quoted to the payer of a reportable payment

1.33 Where a payee has not quoted their TFN, or been deemed to have quoted their TFN, to a payer in respect of a reportable payment, the new RPS will require the payer to deduct a percentage of the reportable payment made [new section 220AF] . The percentage of the reportable payment to be deducted will initially be 48.4%. This percentage represents the top marginal tax rate plus medicare levy and is consistent with the percentage deducted from payments of salary or wages, prescribed payments and interest payments to payees who have not quoted their TFN in relation to those payments.

Payer obligations

1.34 In circumstances where:

•

a payee's TFN is not quoted in respect of a reportable payment or the payee has not made a pensioner exemption declaration [new sections 220AL and 220AP] ; and

•

a payer makes a deduction (of 48.4%) from a reportable payment [new section 220AF] ;

the payer will be required to:

•

provide the payee with a written document detailing the amount of the reportable payment and the deduction made [new section220AH] ; and

•

send all amounts deducted in a given month, together with a remittance statement, to the Commissioner within 14 days after the end of the month in which the deductions were made [new sections 220AG and 220AI] .

Under the RPS, payees will not receive a group certificate or payment summary form from the payer (as is the case with the PAYE and PPS arrangements) detailing payments received and deductions made in a year of income. The payer's document or documents (where there has been more than one deduction made from a reportable payment) received under new section 220AH can be used by the payee to substantiate his or her credit to be claimed in respect of deductions made [new sections 220AZ, 220AZA and 220AZB] .

General provisions

Payer annual reports

1.35 Under the RPS, payers will be required to provide an annual report to the Commissioner in relation to all payees who have received reportable payments during a financial year whether or not the payees TFN has been quoted or has been deemed to have been quoted in relation to the payment [new section 220AJ] . The information contained in the annual reports will be matched with the information provided by taxpayers in their annual tax return. The taxpayer's TFN will be the key to the income matching process.

Signing of documents under the new RPS

1.36 The four documents requiring the signature of the payer under the proposed RPS are the:

•

TFN declaration under new sections 220AM and 220AQ ;

•

Pensioner exemption declaration under new sections 220AP and220AQ ;

•

payer monthly statement accompanying deductions to be sent to the Commissioner under new section 220AI ; and

•

receipt or other similar document issued to the payee under new section 220AH when a payer is required to make a deduction from a reportable payment under new section 220AF .

1.37 New section 220AE provides that where the payer is a natural person, the signature will be the natural person's or a person declared in the regulations to be a signatory. Where the payer is not a natural person, such as in the case of a Government Body, company or partnership, the documents are to be signed by a person declared in the regulations to be a signatory.

Payer records

1.38 Payers must retain copies of annual reports and monthly statements sent to the Commissioner for at least 5 years after the end of the financial year in which the reportable payments to which they relate were made [new section 220AK] . Although the information contained in the receipt provided to the payee and detailing a reportable payment and deduction made in accordance with new section 220AH will also be contained in the annual report, the normal record keeping requirements (5years) under section 262A would apply to the copy of the receipt to be provided by the payer pursuant to new section 220AH .

Refund provisions

1.39 New section 220AR will enable the Commissioner to refund a deduction where he or she is satisfied that:

•

there are special circumstances involved [new paragraph 220AR(4)(a)] ; and

•

it would be fair and reasonable to do so having regard to matters which would include the purpose of the RPS and the reasons why the deduction was made [new paragraph 220AR(4)(b)] .

An example of a situation in which a deduction may be refunded is where a payer, not realising the payee's TFN had been quoted, has made a deduction from a reportable payment and forwarded the deduction to the Commissioner.

1.40 A refund will generally not be allowed in a year of income following the year in which the deduction was made. In these circumstances, it could be expected that an assessment for the year of income in which the deduction was made has been, or soon will be, made and that the payee would have already received (or will soon receive) a credit for the deduction made through the assessment process.

1.41 No credit will be available to a taxpayer at the end of the year of income in relation to amounts which have been deducted but subsequently refunded under these provisions. [New subsection 220AR(5)]

Penalty, credit, recovery and miscellaneous provisions

1.42 As discussed above, the new RPS requires payers to make deductions [new section 220AF] from reportable payments when the payee has not quoted his or her TFN or completed a pensioner exemption declaration form.

1.43 The legislation contains penalty provisions for situations where a payer does not deduct an amount from a reportable payment as required, or deducts an amount and does not remit the amount deducted to the Commissioner.

1.44 The penalty, credit, recovery and miscellaneous provisions are contained in new subdivisions I to M and include:

•

penalties for failure to make deductions and failure to forward those deductions to the Commissioner as required [new subdivision I - new sections 220AS to 220AW] ;

•

civil protection to payers who make deductions [new subdivision J - new section 220AX] ;

•

provisions to enable the Commissioner to recover amounts payable under the new RPS [new subdivision K - new section 220AY] ;

• e

provision for tax credits to payees for deductions made [new L - new sections 220AZ to 220AZC] ;

•

other miscellaneous matters [new subdivision M - new sections 220AZD to 220AZH] .

1.45 The legislative framework in these new subdivisions in Division 1AA is generally similar to the existing arrangements contained in the PAYE and PPS provisions in Divisions 2 and 3A of Part VI of the Act. However, the development of these Divisions over different periods has resulted in some minor differences in comparable provisions.

1.46 The following paragraphs discuss the differences in relation to the new RPS provisions.

Recovery of amounts payable

1.47 In relation to the recovery of amounts owing under the PAYE provisions, the production of a certificate stating that:

•

the person named in the certificate is an employer [paragraph 221R(2)(a)]; and

•

a specified sum is owing at the date of the certificate [paragraph 221R(2)(b)];

is prima facie evidence of the matters stated in the certificate.

1.48 In contrast, the PPS provisions [section 221YHN] apply the provisions of section 8ZL of the Taxation Administration Act 1953 to a proceeding to recover amounts owing. Section 8ZL, which deals with prosecutions for prescribed taxation offences, enables prima facie evidence of any relevant matter (other than the intent of the defendant) to be given by statement or averment contained in a claim by the Commissioner.

1.49 The recovery proceedings under the proposed RPS in subdivision K of new Division 1AA [new section 220AY] will combine elements of both the PAYE and PPS provisions to recover amounts. The combination of the PAYE evidentiary certificates [new subsection 220AY(7)] and the PPS averment statements [new subsection 220AY(6)] will provide an administratively convenient method of presenting evidence to a Court. As the evidence facilitated by these provisions is still only prima facie, it will in no way limit or restrict a taxpayer in presenting evidence as a defence.

Application to partnerships and unincorporated bodies

1.50 Under the PAYE arrangements, an employer, in the case of a partnership, includes each partner [subsection 221A(1)]. Section 221X further provides that a partner cannot be punished for a contravention by the partnership of a provision where another member of the partnership has already been punished for that contravention.

1.51 In the PPS, a paying authority is defined [subsection 221YHA(1)] as a person who makes, or is liable to make, a prescribed payment. Further, the PPS arrangements contain special provisions relating to partnerships [section 221YHZ]. Section 221YHZ deals with offences committed by, and obligations imposed on, the partnership. As well, the section provides that each partner is jointly and severally liable for amounts payable by the partnership to the Commissioner.

1.52 An unincorporated body (for example an association or club) comes within the definition of "company" in subsection 6(1) of the Act. An unincorporated body is thus an employer for PAYE purposes [subsection 221A(1)] and a paying authority for PPS purposes [subsection 221YHA(1)].

1.53 In the case of an unincorporated body, the definition of employer under the PAYE provisions includes the manager or principal officer of the body [subsection 221A(1)]. Although not specifically referring to an unincorporated body or an officer in the body, the PPS provisions refer to an unincorporated body through the general definition of paying authority referred to above. The PPS provisions do not specifically refer to the person in the body who would be liable for amounts payable to the Commissioner.

1.54 For partnerships, the proposed RPS arrangements in subdivision M in new Division 1AA follow the PPS framework and new section 220AZF , like section 221YHZ in the PPS, contains special provisions which provide that:

•

obligations imposed on the partnership are imposed on each partner [new paragraph 220AZF(1)(a)] ;

•

each partner is jointly and severally liable for amounts payable by a partnership to the Commissioner [new paragraph 220AZF(1)(b)] ; and

•

each partner is taken to have committed an offence committed by the partnership [new paragraph 220AZF(1)(c)] .

1.55 In a prosecution against a partner, new subsection 220AZF(2) provides that a statutory defence is available if the partner shows (on the balance of probabilities) that the partner:

•

did not procure, counsel, abet or aid the offence; and

•

was not knowingly concerned in, or party to, the offence.

1.56 In the case of unincorporated companies, new section 220AZG in the proposed RPS arrangements includes special provisions to specify that obligations imposed on (and offences committed by) the unincorporated company are imposed on (and committed by) each member of the committee of management of the company.

Consequential amendments

1.57 Subdivision C of Division 2 of Part 2 in the Bill details the consequential amendments necessary as a result of incorporating New Division 1AA into Part VI. The amendments are technical in nature but are necessary because the new RPS requires payers to make deductions from reportable payments when a payee's TFN is not quoted.

1.58 The making of deductions, on account of payees, and the fact that payees could be individual taxpayers, a company or a partnership has an impact on other provisions in the Act and other Acts administered by the Commissioner.

1.59 For example, a taxpayer who is subject to provisional tax in respect of interest income where no TFN has been quoted to the investment body receives a credit in the provisional tax calculation for the tax deducted by the investment body. The TFN credit is allowed under section 221YHZK and reflected in the provisional tax calculation under paragraphs 221YCAA(2)(m) and (q).

1.60 In the same way, the RPS credits to be given to payees under new sections 220AZ, 220AZA and 220AZB for deductions made by payers under new section 220AF will require a consequential amendment to section 221YCAA. This consequential amendment is No. 5 in Part 2 of the Schedule in the Bill.

1.61 In addition, consequential amendments Nos. 2 to 4 and 6 to 12 of Part 2 of the Schedule are necessary so that deductions from reportable payments are treated, for provisional tax purposes, in the same way as PAYE and PPS deductions under Divisions 2 and 3A of Part VI in the Act.1.62 In recovering tax payable by a taxpayer under sections 215 [from trustees including liquidators] and under section 218 [from persons owing money to the taxpayer], the Commissioner is able to notify the trustee or person of the amount owed by the taxpayer. Consequential amendments under Item 1 in Part 1 of the Schedule will enable those notifications to include payments due to the Commissioner under the new RPS arrangements contained in Division 1AA.

1.63 Further consequential amendments are required to sections 221YAB and 221ZY in the Act. Both sections rely on amounts credited to a taxpayer for their application. Section 221YAB contains the tests which, if satisfied, will result in PAYE taxpayers coming within the provisional tax arrangements. Section 221ZY requires any credits under a "relevant provision" [including PAYE, PPS or TFN crediting provisions] to be applied against a Higher Education Contribution (HEC) or student Financial Supplement (FS) assessment debt before being applied, for example against the tax payable by the taxpayer, as required under the relevant crediting provision. Item 3 in Part 1 of the Schedule contains the consequential amendment to include RPS credits, for when deductions are made, with the other credits already affected by sections 221YAB and 221ZY.