SENATE

Explanatory Memorandum

TO THE BILL AS INTRODUCED (Circulated by authority of the Treasurer,the Hon Ralph Willis, MP)

CHAPTER 6 - Group certificates and other PAYE provisions

Overview

6.1 The amendments contained in Schedule 2 of the Bill are concerned with the group certificate and other Pay-As-You-Earn (PAYE) provisions of the Income Tax Assessment Act 1936 (the Act).

6.2 The amendments will bring the group certificate and other PAYE requirements in the tax law into line with current and future administrative practices that have evolved in response to taxpayer needs, perceived administrative efficiencies and changes in technology.

6.3 This chapter explains the amendments under the following headings:

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Provision of original group certificates to the ATO ;

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Removal of tax stamps ;

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Small remitters ;

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Removal of redundant provisions ;

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Other technical changes ; and

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Consequential amendments to other Acts .

Summary of the amendments

Purpose of the amendments

6.4 The amendments will alter the group certificate and other PAYE provisions of the Act to:

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require original group certificates to be sent to the Australian Taxation Office (ATO) by employers to facilitate electronic data capture of employment income information. This also necessitates a change in the basis of allowing tax instalment credits to a basis consistent with other collection mechanisms [item 13 - new subsections 221F(5A) to (5G)] ;

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offset excess PAYE credits against other liabilities owing to the Commissioner of Taxationincluding in his capacity as Child Support Registrar [item 24 - new subsections 221H(4) and (4A)] ;

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remove the requirement to return unused group certificates to the ATO [item 13] ;

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remove the tax stamp provisions as they relate to employers and replace them, as they relate to self employed persons, with a tax voucher system [item 27 - new section 221K] ;

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allow employers who remit less than $10,000 per annum in tax instalment deductions ("small remitters") to the ATO to remit quarterly [item 8 - new sections 221EDA to 221EDC] ; and

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remove redundant provisions relating to the Commissioner's former priority to recover unremitted PAYE deductions over all other debts in cases of insolvency [item 33] .

Date of effect

6.5 The group certificate, group employer and tax stamp amendments will generally apply from 28 days after Royal Assent. [Subitems 51(1), (2), (3), (4) and (5)]

6.6 The changes to provide for employers who remit less than $10,000 per annum to remit quarterly apply after Royal Assent.

6.7 The repeal of the redundant Commissioner's priority provisions of the Act does not apply to amounts that became payable under those provisions prior to Royal Assent. [Subitem 51(6)]

Background to the legislation

6.8 The ATO has been progressively updating the technology it uses in order to more efficiently undertake its task of improving compliance with Australia's income tax laws. One aspect of the updating has been the trialing of optical character recognition (OCR) equipment to assist with the capture of group employer data. This will allow the ATO to more quickly and accurately record and match that data with return form information, and so identify areas of potential non-compliance.

6.9 The use of OCR equipment requires original quality documentation to be sent to the ATO. In order to have original group certificates given to the ATO by employers, substantial recasting of the group certificate and related PAYE provisions of the Act is required.

6.10 The recasting has provided an opportunity to do a number of other amendments to the provisions to respond to other technological changes and taxpayer needs.

6.11 The opportunity has also been taken to bring the provisions of the Act relating to the application of credits up to date with more recent tax laws, as well as doing away with the need for employers to return unused group stationery to the ATO.

Explanation of the amendments

Provision of original group certificates to the ATO

6.12 The amendments change the group employer provisions so that an employer will be required to forward original group certificates to the ATO and give 2 copies to employees. This will enable the ATO to use electronic data capture equipment to capture the information contained on the group certificates, generating administrative efficiencies in this area. [Item 13 - new subsections 221F(5A), (5C), (5H) and (5J)]

6.13 In making amendments to the group employer obligations provisions, a general recasting has been necessary with renumbering and some modernising of language and general drafting style. In addition, the obligations imposed by these provisions are generally imposed on "employers" rather than group employers. Accordingly, even though an employer may not be registered as a group employer they will still be obliged to provide for their employee's tax deduction requirements. [Item 13]

6.14 Other changes made in line with this process include:

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The new definition of "group certificate form" inserted in subsection 221A(1) [item 3] ;

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The insertion of new subsection 221EAA(1A) in the provisions that make provision for penalty for failure to make PAYE deductions reflects modernised drafting [item 5] ;

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New subsections 221F(5E) and (5F) are a re-expression of the existing subsection 221F(5E) and new subsection 221F(5G) a re-expression of the existing 221F(5G) [item 13] ; and

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The amendments made to subsections 221F(7), (12), (14) and (15) are as a result of the renumbering [items 14, 16, 18 and 19] .

6.15 The provision of original group certificates to the ATO necessitates amendments to the PAYE crediting provisions. At present entitlement arises from presentation to the Commissioner of a group certificate. This is no longer appropriate given the employee will only be issued with copies of the certificate and not the original. The amendments will make the basis of entitlement to credit the fact of deductions having been made. This places the PAYE provisions on a similar footing to other more recently enacted collection systems, such as the prescribed payments system. [Item 24 - new subsection 221H(2)]

6.16 Existing subsections 221F(9) to (11) provide for a situation where the Commissioner allowed credit, on the basis of what was shown in a group certificate, in excess of the tax instalments that were actually deducted from the employee's pay. The subsections allowed the Commissioner to recover the discrepency from the employer and then the employer to recover the amount from the employee. The subsections are removed as inappropriate with the new basis of allowing credit [item 15] . Wrongly credited amounts will now be recovered from the employee who received the benefit under new subsection 221H(5) [item 24] .

6.17 The definition of "group certificate" in subsection 221A(1) is amended to remove the reference to section 221S. Section 221S allows the Commissioner to enter into arrangements with Australian based authorities of other countries for PAYE purposes in respect of any locally engaged staff. Under such an arrangement a group certificate was not necessarily issued to an employee, however, the Commissioner was obliged to apply the crediting arrangements as if one were. This is no longer appropriate because of the basis of entitlement to credit no longer being tied to the group certificate. [Items 1 and 34]

6.18 The amendmentsrepeal section 221Q that allowed the Commissioner, not having received a group certificate from an employee because their employer did not issue one, to allow credit for tax instalments deducted if he was satisfied that the deductions had been made. The provision is no longer necessary because of the new basis of allowing credit [items 33, 39 and 41] . Similarly, subsection 221F(8) permits the Commissioner, where he has released an employer from the obligation to issue a group certificate in certain circumstances, to apply the crediting provisions in respect of the relevant employee as if a group certificate had issued for the purposes of allowing credit. The provision is being amended to reflect the new basis for allowing credit [item 15] .

6.19 Where a taxpayer has excess PAYE credits upon assessment, the amendmentsallow the Commissioner to apply the excess credit to amounts owed by the taxpayer to the Commissioner, such as for child support, sales tax, fringe benefits tax and group tax, before issuing a refund. This aligns the PAYE credit application provisions with similar more recent provisions in the fringe benefits and income tax laws. [Item 24 - new subsections 221H(4) and (4A)]

6.20 The PAYE provisions contain offence provisions that deal with improperly obtaining credits for tax instalments by, for example, presenting false group certificates. These offence provisions are being amended to reflect that employees will only be presenting copies of group certificates, or tax vouchers, under the proposed changes. [Item 37 - new subparagraph 221V(f)(i)]

6.21 The group certificate, group employer obligations and crediting changes will apply from 28 days after Royal Assent. This will mean that if Royal Assent were, for example, on 15 December, then the changes apply to any employer required to complete a group certificate, or credits the Commissioner applies, after 12 January. This is so even though the deductions may have been made before 12 January. [Subitems 51(1), (3), (4) and (5)]

Removal of tax stamps

6.22 For PAYE purposes, the ATO now registers all employers as group employers irrespective of the number of employees. Compared to tax stamps, the group employer arrangements are a more efficient means of accounting for tax for employees, both for the employer and the ATO. Tax stamps have been unavailable from the ATO for employment purposes since early 1993. As the relevant provisions of the income tax law are effectively redundant, they are repealed by this Bill. [Item 21]

6.23 Because of the removal of tax stamps, subsection 221A(1) is amended to remove definitions relevant to that system. [Item 2]

6.24 In recent years, tax stamps have been sold to self employed persons seeking to make provision for their end of year tax liability under section 221K of the Act. Included in the amendments are measures to provide for a new tax voucher system to replace this use of tax stamps. [Item 27 - new section 221K]

6.25 Under the tax voucher amendments, the ATO will issue a voucher to the value of any payment made by a self-employed person in providing for their end-of-year tax liability. There will be an original and two copies of the tax voucher produced; the original for inclusion in the purchaser's income tax return [items 22 and 23] , one copy to be retained by the ATO and one copy for the purchaser's records. Credit for the value of all tax vouchers purchased by the taxpayer in a year of income will be allowed against the income tax liability assessed to the taxpayer. These changes are reflected in the recast section 221H [item 24] .

6.26 Subsection 221A(1) contains most of the definitions for the PAYE provisions. A new definition of "tax voucher" has been inserted. [Item 3]

6.27 The PAYE provisions contain offence provisions that deal with improperly obtaining credits for tax stamps. The amendments align these provisions with the new tax voucher system. [Items 36 and 37 - new subparagraph 221V(f)(ii)]

6.28 The shortfall test to determine imposition of provisional tax on salary or wages income (section 221YAB) is amended to remove reference to tax stamp credit from the definitions of 'credited amounts' and 'PAYE deductions' because of the removal of tax stamps [items 40 and 42] . As the application of tax voucher credit is provided for under section 221H, there is no change to the operation of the provisional tax shortfall test because of the change from tax stamps to tax vouchers.

6.29 The amendments made by items 4, 9, 10, 11, 25, 26, 28, 29, 30, 31, 32, 35, 38, 47, 48 and 49 are amendments to the Act that are partly or wholly consequential to the removal of tax stamps.

6.30 The tax stamp amendments will apply from 28 days after Royal Assent [subitem 51(2)] . To the extent that a tax deduction sheet was required to be kept before that time, the law as currently enacted will continue to apply.

6.31 The tax voucher amendments apply from Royal Assent. [Subitem 51(3)]

Transitional

6.32 Item 53 continues the former tax stamp crediting arrangements for tax stamps purchased before the commencement of the amendments. That is, tax stamps purchased before the commencement of the amendments will need to be surrendered in order to qualify for credit. Where they were before, tax stamps credited in accordance with this transitional provision will continue to be taken into account for provisional tax purposes.

Small remitters

6.33 The current group employer provisions require employers to remit tax instalments deducted during a month by the seventh day of the following month unless they are classified as an 'early remitter'. Early remitters are required to remit more frequently.

6.34 However, by virtue of a discretion available to the Commissioner to vary an employer's obligations, the ATO's administrative practice has been to allow small employers to remit tax instalment deductions on a quarterly basis. The quarterly remittance cycle for small employers has been in operation since 1 July 1990.

6.35 The amendments provide for:

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an employer to become a small remitter by application. The conditions to be satisfied for an application to be accepted are that the employer:

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has total PAYE remittances in the last full financial year less than $10,000; or

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estimates that total PAYE remittances will be less than $10,000 for the year in which the employer wishes to become a small remitter;

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acceptance or rejection of the application by the Commissioner with notification;

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revocation of the small remitter status with notification. Small remitter status will be revoked where the employer does not comply with one or more of their PAYE obligations and the Commissioner considers it appropriate to revoke or the Commissioner is satisfied that the employer's PAYE remittances will be $10,000 or more; and

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appeal rights for the employer dissatisfied with any of the decisions or notifications. [Item 8 - new sections 221EDA to 221EDC]

6.36 The benefit of being a small remitter is that small remitters pay to the Commissioner tax instalment deductions made:

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between 1 July and 30 September - by 7 October;

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between 1 October and 31 December - by 7 January;

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between 1 January and 31 March - by 7 April; and

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between 1 April and 30 June - by 7 July;

instead of normal monthly remittance. [Item 13 - new subsection 221F(5)]

6.37 New definitions, to support the small remitter legislative framework, have been inserted in subsection 221A(1). [Item 3]

6.38 The changes to provide for employers who remit less than $10,000 per annum to remit quarterly apply after Royal Assent of this Bill.

Transitional

6.39 Item 52 provides that employers who are now making quarterly remittances can continue to do so as small remitters under the new law without the need to reapply.

Removal of redundant provisions

6.40 The amendments repeal section 221P of the Act which formerly dealt with the Commissioner's priority to recover unremitted tax instalments deducted in cases of insolvency. [Item 33]

6.41 Section 221P's function has been replaced by the approach provided by the Prompt recovery - estimates and agreements provisions in Division 8 of Part IV of the Act which allow the Commissioner to serve an estimate of the unremitted group tax owed by an employer, for which the employer (director/s) become personally liable. These provisions have applied since July 1993.

6.42 The references to section 221P in the Commissioner's priority provisions in the prescribed payments (subsection 221YHJ(4)) and certain natural resource payments (subsection 221YHZD(4)) provisions are removed as a consequence of the repeal of the section. [Items 43, 44, 45 and 46]

6.43 The repeal of the Commissioner's priority provisions and omission of references does not apply to amounts that became payable under those provisions prior to Royal Assent of this Bill. [Subitem 51(6)]

Other technical changes

6.44 The tabulated amendments made by item 50 reflect drafting policy regarding provisions referring to a person of either gender. The amendments add to any references to a person in the masculine only, the feminine equivalent and have no other substantive effect.

Consequential amendments to other Acts

6.45 The Schedule also makes consequential amendments to the Bankruptcy Act 1966 , Child Support (Registration and Collection) Act 1988 , Crimes (Taxation Offences) Act 1980 , Crown Debts (Priority) Act 1981 and Taxation (Interest on Overpayments and Early Payments) Act 1983 in line with:

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the forwarding of original group certificates to the ATO by employers,

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the removal of the redundant Commissioner's priority to unremitted group tax provisions, and

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the removal of tax stamps. [Items 54 to 55, 57 to 63]

6.46 The changes to the Bankruptcy Act 1966 apply to group certificates or copies of group certificates (whichever the taxpayer was issued with) referable to contribution assessment periods that end 28 days or more after Royal Assent. [Item 56]

6.47 Amounts that became payable or creditable under these provisions before the amendments commenced remain so payable or creditable. [Item 64]