Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Payments of RPS, PAYE and PPS deductions to Commissioner
Overview
4.1 The amendments contained in Parts 1 and 2 of Schedule 4 provide for the rationalisation of the remittance obligations of withholders under RPS, PAYE and PPS.
Summary of the amendments
4.2 The amendments propose to insert new Division 1AAA into PartVI of the Income Tax Assessment Act 1936 (the Act).
4.3 The amendments will apply from 1 July 1998 [item 69, Part 3 of Schedule 4] .
Background to the legislation
4.4 As part of the 1997-98 Budget the Government announced changes to the RPS, PAYE and PPS withholding arrangements to rationalise the remittance obligations of withholders under the three systems. The changes provide compliance cost relief for many small businesses and, at the same time, improve the overall integrity of the tax system.
4.5 The RPS, PAYE and PPS arrangements impact on most Australian businesses. They are paper oriented, resource intensive and time consuming for business. In its report, the Small Business Deregulation Task Force noted that the burden of managing multiple taxation regimes is particularly onerous.
4.6 The proposal will relieve some of the burden that these arrangements place on business and bring the payment of tax deducted by large withholders more in line with modern business practices.
Summary of the essential features
4.7 The remittance obligations of withholders under RPS, PAYE and PPS are being rationalised by combining them under the one set of arrangements. The total of deductions made under each of the three systems is used as the basis for determining the three categories of remitters. The categories are:
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- large remitter - those whose total deductions in a previous financial year under the 3 systems was more than $1 million. Large remitters are required to remit by electronic transfer within an average of 7 days;
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- medium remitter - those who are not large remitters and whose level of total deductions exceeds $25,000. Medium remitters are required to remit on a monthly basis;
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- small remitter - those withholders whose total deductions do not exceed $25,000 remit quarterly.
4.8 The new arrangements are based on the existing remittance provisions in PAYE. The timing of the new arrangements resemble existing provisions in PAYE that apply to early, small and monthly remitters.
4.9 Many of the existing penalties as they relate to the failure of a person to remit deductions to the Commissioner are included in the new Division . It should be noted that the deduction and reporting obligations remain unique to each of the three systems and are not contained in new Division 1AAA .
4.10 Although the new arrangements are based on current PAYE obligations there are the following major differences:
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- the thresholds that apply under PAYE to determine remittance status apply to the total deductions made under the 3 systems (but with the $10,000 small remitter threshold increased to $25,000 and with the 'level of remittances' test for early remitters changing to 'the total of deductions made');
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- twice monthly remitters (early remitters under PAYE) are required to pay within an average of 7 days of making the deduction. Deductions from payments made on a Saturday, Sunday, Monday or Tuesday are to be remitted by the first following Monday and deductions made on a Wednesday, Thursday or Friday by the first following Thursday. A penalty for failing to use electronic transfer is calculated as an amount equivalent to 7 days interest on the unpaid amount or $500, whichever is the greater;
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- those PPS and RPS withholders remaining on a monthly remittance basis under the new arrangements are required to remit within 7 days rather than 14 days from the end of the month;
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- all new registrants are quarterly remitters automatically unless they exceed the $25,000 threshold, their quarterly status has been revoked through non-compliance or the Commissioner has exercised his discretion for another reason; this contrasts with the current arrangements where a new registrant is a monthly remitter unless PAYE remittances exceed $1 million or the employer applies for small remitter status.
Explanation of the amendments
4.11 The amendments implementing the new arrangements are contained in Schedule 4 of the Bill and apply for amounts deducted on or after 1 July 1998 [Item 69, Part 3 of Schedule 4].
4.12 These amendments remove the remittance obligations from Divisions 1AA, 2 and 3A and incorporate them in new Division 1AAA . The level of deductions that a person makes in accordance with Divisions 1AA, 2 and 3A is to be used as the basis for determining the rules under which the person will now remit amounts to the Commissioner. As mentioned above there will be three categories of remitters: large, medium and small [new Subdivision A] .
4.13 A large remitter is a person who has total deductions exceeding $1 million under RPS, PAYE and PPS in a financial year. The new requirements for large remitters are based on the PAYE early remitter provisions (sections 221EC and 221ED) except that they will remit within an average of 7 days. It is envisaged that a person who was an early remitter under PAYE will be a large remitter in accordance with new Division 1AAA .
Who is a large remitter - general
4.14 There are three situations in which a person will be a large remitter:
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- where the person has deductions in excess of the threshold;
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- where the person is part of a company group for which deductions exceed the threshold; or
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- where the Commissioner determines a person to be a large remitter.
4.15 In the first situation a person will be a large remitter if, before the start of that month, the person's total deductions for any financial year ending on or after 30 June 1998 exceeded $1 million [new paragraph 220AAB(1)(c)] .
4.16 The second situation provides that a person will be a large remitter in relation to a month if, before the start of that month, the person was included in a company group (see paragraphs 4.46 to 4.49) and the total deductions of the persons included in that company group at the end of any financial year ending on or after 30 June 1998 exceeded $1 million [new paragraph 220AAB(1)(d)] .
4.17 In the third situation a person will be a large remitter in relation to a month where the person is:
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- covered by a notice stating that the Commissioner has determined the person to be a large remitter (refer paragraphs 4.30 to 4.32); and
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- not covered by a notice determining the person is not a large remitter (refer paragraphs 4.24 to 4.29) [new paragraph 220AAB(1)(e)] .
4.18 To ensure a person knows under what category they are to remit deductions made on or after 1 July 1998 there are two transitional tests based on the level of deductions for the 1996-97 financial year. A person will be a large remitter:
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- where the total of deductions exceeded $1 million for the 1996-97 financial year; or
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- where at the end of the 1996-97 financial year the person was included in a company group (refer paragraphs 4.46 to 4.49) and the total of deductions of the persons included in that company group at the end of the year exceeds $1 million [new paragraphs 220AAB(1)(a) and 220AAB(1)(b)] .
4.19 A large remitter who satisfies the above tests will begin remitting electronically from 1 July 1998 for any deductions made on or after that date and will continue to be a large remitter until otherwise determined by the Commissioner.
Not a large remitter before certain times
4.20 While a person may be a large remitter under the tests outlined in new subsection 220AAB(1) , there are circumstances where a person will not be treated as a large remitter. These are:
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- a person cannot be a large remitter prior to 1 July 1998. As a consequence, the requirement to pay deductions to the Commissioner electronically will not apply to any deductions made before 1 July 1998 [new paragraph 220AAB(2)(a)] ; and
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- where a person first becomes a large remitter they will be given sufficient time to make the necessary administrative and accounting changes so as to be able to comply with the new rules [new paragraphs 220AAB(2)(b) and 220AAB(2)(c)] .
4.21 A person who has total deductions exceeding $1 million for the first time in the 1997-98 financial year and therefore satisfies the test of new paragraphs 220AAB(1)(c) or 220AAB(1)(d) will not be treated as a large remitter in relation to July or August 1998. Such a person will be a large remitter from 1 September and will begin remitting electronically from that time. This will give a person sufficient time to adjust to the new remitting obligations in respect of deductions made after that time [new paragraph 220AAB(2)(b)] .
4.22 Similarly, where a person first becomes a large remitter for any financial year ending on or after 30 June 1999 because total deductions exceeded $1 million the person will not be a large remitter in relation to July or August unless they were a large remitter in the immediately preceding June. The person therefore becomes a large remitter in relation to September of that year and begins remitting electronically from 1 September. As above this provides sufficient time to make the necessary adjustments in order to comply with the new obligations [new paragraph 220AAB(2)(c)] .
Where a person has deductions in excess of $1 million for the first time in the 1998-99 financial year, the person is not a large remitter in relation to June 1999. The person will therefore become a large remitter in relation to deductions made on or after 1 September 1999.
4.23 This rule only applies in the year in which a person first becomes a large remitter. Nor will it apply where a person is a large remitter because the Commissioner has made a determination under new section 220AAC (see paragraphs 4.30 to 4.32).
Commissioner's determination that person not a large remitter
4.24 The Commissioner may, by notice in writing, determine that a person is not a large remitter in relation to:
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- any month or months specified in the notice [new subparagraph 220AAB(3)(a)(i)] ; or
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- all months after and including the month specified in the notice [new subparagraph 220AAB(3)(a)(ii)] .
4.25 Large remitters so notified by the Commissioner will be freed from the obligations placed on large remitters for the period indicated in the notice.
4.26 In deciding to make a determination under new paragraph 220AAB(3)(a) the Commissioner could consider matters such as:
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- the permanency of any change in the number of employees or payees in respect of whom deductions are made and the amount of deductions; and
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- the location of the person; and
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- any undue costs that would be placed on the person in complying with the law.
4.27 It is not expected the discretion will be exercised, for example, merely because a person only pays salary or wages on a monthly basis or because compliance with the obligations will create a cash flow problem for the person.
4.28 The Commissioner may revoke or vary a determination that a person is not a large remitter [new paragraph 220AAB(3)(b)] . Such a determination can be initiated by the Commissioner or can be in response to the person lodging an application to cease to be a large remitter (see paragraph 4.33). Where a person is determined not to be a large remitter in relation to a month or months the person will generally be a medium remitter [new paragraph 220AAJ(1)(d)] .
4.29 Where the Commissioner issues a notice that the person is not a large remitter the notice will apply from the start of the month following the month in which it is received [new subsection 220AAB(4)] . For example, if a person receives a notice on 27 October that they are not a large remitter, the notice has effect from 1 November and the person can cease remitting electronically from that date.
Who is a large remitter - determination by the Commissioner
4.30 The Commissioner may determine that a person is a large remitter even though the person might not otherwise satisfy the requirements of being a large remitter, for example, where total deductions are less than $1 million (refer paragraph 4.14). Where the Commissioner varies or revokes such a determination he must give notice in writing [new subsection 220AAC(1)] .
4.31 The power given to the Commissioner to require a person to be a large remitter is intended to overcome arrangements entered into in an attempt to avoid the application of new Division 1AAA [new subsection 220AAC(3)] . New subsection 220AAC(3) outlines the matters which the Commissioner might consider in determining a person to be a large remitter. These are:
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- arrangements carried out after 15 August 1989 for the purposes of avoiding the application of new section 220AAE or paragraph 221F(5)(a). This might include the moving of employees into a new company that does not already qualify as a large remitter, while retaining only a few or no employees in the company that has qualified as a large remitter. (Note: the reference to avoiding the application of paragraph 221F(5)(a) relates to avoiding arrangements entered into after the announcement of the early remitter legislation on 15 August 1989 [new subsection 220AAC(4)] ;
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- the extent to which the person concerned pays any salary or wages or reportable or prescribed payments to persons to whom such amounts were previously paid by another person;
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- the amount of deductions the Commissioner thinks the person is likely to make over the next 12 months;
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- other matters.
4.32 Large remitters who are so notified will be subject for the period indicated in the notice to all the obligations imposed on large remitters including the requirement to remit electronically. To provide the person with sufficient time to make any necessary changes to be able to comply with obligations for a large remitter, such a determination will not come into effect until the start of the second month following the month in which it is received by the person [new subsection 220AAC(2)] .
A determination that a person is a large remitter received on 12 April will make the person a large remitter from 1 June.
Application to cease to be a large remitter
4.33 A person may apply in writing to the Commissioner to cease to be a large remitter. Where the Commissioner grants such an application he may consider all the factors discussed above at paragraph 4.31. Where a person is found not to be a large remitter they will generally be a medium remitter in accordance with new paragraph 220AAJ(1)(d) [new section 220AAD] .
4.34 Under the new arrangements for paying deductions to the Commissioner a large remitter will remit within an average of 7 days. The table in new subsection 220AAE(1) prescribes the days by which deductions made on particular days must be sent to the Commissioner.
4.35 Where a person pays an amount to the Commissioner it must be sent in sufficient time that in the ordinary course of events the Commissioner will receive the payment on or before the relevant payment day as prescribed [new subsection 220AAE(2)] .
A person who is a large remitter and makes deductions from salary or wages on Friday 30 October must send those deductions so that they are received by the Commissioner on or before Thursday 5 November.
If the person makes deductions from a prescribed payment on Monday 2 November the person must send those deductions so that they are received by the Commissioner on or before Monday 9 November.
4.36 A large remitter who fails to remit deductions by the due date will incur a penalty under new section 220AAV (refer paragraph 4.82). Where a large remitter, other than a Government body, intentionally or recklessly fails to send amounts to the Commissioner they will be committing an offence carrying a maximum penalty of 12 months imprisonment [new subsection 220AAE(3)] . Section 8ZE of the Taxation Administration Act 1953 (TAA) provides for administrative penalties not to be payable for an act or omission for which prosecution action has been instituted.
4.37 A large remitter must pay deductions made under RPS, PAYE and PPS by either a means of electronic transfer [new subsection 220AAF(a)] approved in writing or by some other means [new subsection 220AAF(b)] approved in writing, although a non-electronic payment will attract a penalty (refer paragraph 4.41). The means of electronic transfer approved by the Commissioner will include direct debit and direct credit . It is envisaged that the Commissioner will create an Instrument detailing the above types of electronic transfer methods to be used by large remitters. This will enable the Commissioner to update the list provided in the Instrument should other methods of electronic transfer emerge in the future.
4.38 Direct credit allows a person to remit by instructing their bank to transfer a payment amount from their account to credit the ATO account. This method of payment is the most common arrangement and generally considered the easier of the two.
4.39 Direct debit is a more complex method which requires a person to authorise the ATO to debit their bank account. Currently direct debit transactions for RPS, PAYE and PPS remittances can only be initiated through a tax agent with electronic transfer facilities.
4.40 The Commissioner is aware that changing technology in this area may open up new methods of payment which are more flexible and easier for remitters to use. As these methods develop the Commissioner will examine them for suitability as approved means of electronic transfer.
4.41 A large remitter may pay other than by electronic transfer [new subsection 220AAF(b)] . The provision enables the Commissioner to accept remittances from a large remitter even though the payment was not electronically transferred. However, a large remitter who chooses not to remit electronically will be liable for a penalty (refer paragraph 4.81) [new section 220AAW] .
4.42 A large remitter who does not pay by electronic transfer will be liable for a penalty equal to the greater of 7 days late payment penalty (based on the amount of the unremitted amount) or $500. The Commissioner has a discretion to reduce the penalty. However, the discretion may only be exercised in limited circumstances such as where the non-electronic remittance is due to circumstances beyond a large remitter's control. Examples of situations where the Commissioner may use his discretion would include power failure or equipment breakdown [new section 220AAX] .
4.43 A payment must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner. For example, the Commissioner may require a statement to be sent by means of electronic transmission and contain a break-up of the details of the amounts and type of deductions to which the payment relate. This provision is the same for medium and small remitters [new section 220AAG] .
4.44 The current law provides, broadly, for the Commissioner to vary any of the existing obligations imposed on group employers under the PAYE system. The provision is used to relieve compliance costs or undue burdens placed on taxpayers, not to tighten existing obligations. Under new section 220AAH the Commissioner has a general discretion to vary the requirements of a person, but not to his or her detriment. In cases other than those where the Commissioner extends a person's time to pay, this is achieved by requiring the variations to be with the agreement of the person. The provision is the same for medium and small remitters.
4.45 The Commissioner may use his discretion to vary requirements of a large remitter in the following cases:
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- to extend the payment times;
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- for large remitters the Commissioner may approve arrangements by reference to the remitters principal payroll payment date and allow small deductions of tax to be grossed up and remitted at the time the regular payroll deductions are paid.;
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- where a small or medium remitter changes to a large remitter, there may be instances where the remitter is required to begin remitting electronically from the beginning of the month. However, the large remitter may still have an obligation to remit as a small or medium remitter for the previous month. In these situations the discretion is to operate to relieve the remitter of the two payment obligations and require one payment for the overlapping period;
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- to allow a large remitter to remit other than by electronic transfer in exceptional circumstances, for example equipment breakdown or power failure. The penalty that would be imposed for not paying by electronic transfer will be remitted in these unusual circumstances;
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- to change the information contained in statements which must accompany each payment or to send the statements in a particular way.
4.46 A person that is part of a company group may be treated as a large remitter notwithstanding that the total amount of deductions made by the person is below $1 million. A company group is defined as consisting of 2 or more companies each of which is a group company in relation to the other [new section 220AAI] .
4.47 A company will be a group company in relation to another company if it satisfies either of the following tests:
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- one of the companies is a 100% subsidiary of the other; or
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- each of the companies is a 100% subsidiary of the same third company [new subsection 220AAI(2)] .
4.48 A company is taken to be a subsidiary of another company (the holding company) and therefore within the company group if all the shares of the company are beneficially owned by:
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- the holding company;
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- one or more 100% subsidiaries of the holding company; or
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- the holding company and one more subsidiaries of the holding company [new subsection 220AAI(3)] .
4.49 The operation of new subsections 220AAI(1), 220AAI(2) and 220AAI(3) is extended by establishing a group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a group relationship will be found between them [new subsection 220AAI(4)] .
4.50 Generally a person will be a medium remitter where total deductions under RPS, PAYE and PPS exceeded $25,000 but did not exceed $1 million for a particular year. A person who is a medium remitter will be required to remit on a monthly basis.
Who is a medium remitter - general
4.51 A person will be a medium remitter in relation to a particular month if any of the following apply:
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- the total deductions that a person makes under RPS, PAYE and PPS exceeded $18,750 for the period between 1 July 1997 and 31 March 1998 [new paragraph 220AAJ(1)(a)] ;
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- the total deductions exceeded $25,000 for any financial year ending on or after 30 June 1998 [new paragraph 220AAJ(1)(b)] ;
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- the Commissioner has served a notice on the person under new section 220AAK (refer paragraphs 4.63 and 4.64) requiring the person to be a medium remitter in respect of a particular period [new paragraph 220AAJ(1)(c)] ;
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- the Commissioner has determined that the person is not a large remitter under new subsection 220AAB(3) and the Commissioner has not determined that the person is not a medium remitter by virtue of new subsection 220AAJ(3) (refer paragraphs 4.57 to 4.61).
4.52 The purpose of new paragraph 220AAJ(1)(a) is to provide certainty to those persons whose total deductions are likely to exceed $25,000 for the year. By using the level of total deductions from 1 July 1997 to 31 March 1998 a person will know whether or not they will be required to remit on a monthly basis from 1 July 1998. This will also give them sufficient time to make the necessary changes to their systems. The Commissioner will use this figure to identify such persons and provide them with the appropriate stationery before they must start remitting as a medium remitter. The $18,750 figure is based on three quarters of the total deductions made for the financial year, that is $25,000.
Not medium remitter before certain times
4.53 While a person may be a medium remitter because of new subsection 220AAJ(1) , there are circumstances where a person will not be treated as a medium remitter. These are:
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- a person cannot be a medium remitter before the new arrangements come into effect on 1 July 1998 [new paragraph 220AAJ(2)(a)] ; and
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- where a person does become a medium remitter they will be given sufficient time to make the necessary administrative and accounting changes so as to be able to comply with the new rules [new paragraphs 220AAJ(2)(b) and 220AAJ(2)(c)] .
4.54 New paragraph 220AAJ(2)(b) applies to those persons who did not have total deductions exceeding $18,750 up to 31 March 1998 nor not been determined by the Commissioner to be a medium remitter, but who did have total deductions exceeding $25,000 for the 1997-98 financial year (refer paragraph 4.51). A person in these circumstances will not be treated as a medium remitter in relation to July, August or September 1998. This avoids confusion for those persons who were quarterly remitters in the prior financial year and has the added benefit of providing them time to make the necessary accounting and administrative to begin remitting on a monthly basis.
4.55 Similarly a person will not be a medium remitter in relation to July, August or September in a later financial year unless they were a medium remitter in the immediately preceding June. This will provide a person who first becomes a medium remitter because of the total level of deductions in a prior financial year time to make the necessary changes before having to comply with the medium remitter requirements [new paragraph 220AAJ(2)(c)] .
4.56 This rule only applies in the year in which a person first becomes a medium remitter. This rule does not apply where a person is a medium remitter because the Commissioner has made a determination under new section 220AAK .
In the 1998-99 financial year a person had total deductions in excess of $25,000 for the first time.
Where the person was not a medium remitter in relation to June 1999, the person will become a medium remitter in relation to deductions made on or after 1 October 1999.
Commissioner's determination that person not a medium remitter
4.57 The Commissioner may, by notice in writing, determine that a person is not a medium remitter in relation to;
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- any month or months specified in the notice [new subparagraph 220AAJ(3)(a)(i)] ; or
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- all months after and including the month specified in the notice [new subparagraph 220AAJ(3)(a)(ii)] .
4.58 Medium remitters so notified will be freed from the obligations placed on medium remitters for the period indicated in the notice.
4.59 In deciding whether to make a determination that a person is not a medium remitter the Commissioner could consider matters such as:
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- the permanency of any change in the number of employees or payees in respect of whom deductions are made and in the amount of deductions;
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- the location of the person; and
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- any undue costs that would be placed on the person in complying with the law.
4.60 As discussed previously, it is not expected the discretion will be exercised, for example, merely because a person only pays salary or wages on a monthly basis or because compliance with the obligations will create a cash flow problem for the person.
4.61 The Commissioner may revoke or vary a determination that a person is not a medium remitter. Such a determination can be initiated by the Commissioner or can be in response to the person lodging an application to cease to be a medium remitter (refer paragraph 4.65) [new paragraph 220AAJ(3)(b)] .
4.62 Where the Commissioner issues a notice that the person is not a medium remitter the notice will apply from the start of the month following the month in which it is received [new subsection 220AAJ(4)] .
Who is a medium remitter - determination by Commissioner
4.63 New section 220AAK operates in much the same as way as the equivalent large remitter provision, new section 220AAC (refer paragraphs 4.30 to 4.32). That is, the Commissioner can determine a person to be a medium remitter even though they might not otherwise meet the requirements. The Commissioner can, by notice in writing, revoke or vary such a determination. To provide the person with time to make any necessary changes in order that they can comply with the obligations for a medium remitter, such a determination will not come into effect until the start of the second month following the month in which it is received by the person [new subsections 220AAK(1) and 220AAK(2)] .
4.64 In deciding to make a determination under new subsection 220AAK(3) the Commissioner may consider the following matters:
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- whether the person failed to comply with any obligations such that the Commissioner considers the person should not remain a small remitter and therefore not have the option of paying deductions quarterly;
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- whether the person entered into an arrangement after the date of announcement of the new withholding arrangements (13 May 1997) to avoid being a medium remitter;
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- the extent to which the person pays salary or wages and prescribed or reportable payments to persons that previously received them from another person;
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- the likely amount of deductions to be made by the person in the next 12 months; and
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- any other matter.
Application to cease to be a medium remitter
4.65 New section 220AAL operates in the same way as new section 220AAD (refer paragraph 4.33). A person may apply to the Commissioner to cease to be a medium remitter. Where the Commissioner grants an application under this section he may consider all the factors discussed above at paragraph 4.64. Where the Commissioner determines that a person is not a medium remitter the person is a small remitter.
When amounts must be remitted - medium remitters
4.66 Deductions made by a medium remitter must be sent to the Commissioner in sufficient time that in the ordinary course of events the Commissioner will receive them no later than the 7th day after the end of the month in which the deductions were made [new section 220AAM] .
4.67 As for a large remitter, a medium remitter who fails to send deductions to the Commissioner by the due date will commit an offence and be liable for a penalty (refer paragraph 4.36) [new subsection 220AAM(3) and new section 220AAV].
4.68 A medium remitter has the option of paying by either electronic transfer or some other means approved in writing by the Commissioner. A medium remitter will not be subject to a penalty for not remitting electronically as is the case for a large remitter [new section 220AAN] .
4.69 As for large remitters, a payment made by a medium remitter must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner (refer paragraph 4.43) [new section 220AAO] .
4.70 Again, as for large remitters, the Commissioner may vary the requirements imposed on a medium remitter. The Commissioner may use his discretion to extend payment times or, with the agreement of the person, the requirements of how amounts must be paid or of statements to be sent to the Commissioner (refer paragraph 4.44) [new section 220AAP] .
4.71 A person is small remitter where total deductions do not exceed $25,000 for a particular year. The new requirements for small remitters are based around sections 221EDA, 221EDB and 221EDC - small remitters under PAYE.
4.72 A person is a small remitter if they are not a large remitter or a medium remitter [new section 220AAQ] .
When amounts must be remitted - small remitters
4.73 Deductions made by a small remitter must be sent to the Commissioner in sufficient time that in the ordinary course of events the Commissioner will receive them no later than the 7th day after the end of the quarter in which the deductions were made. Quarters end on 31 March, 30 June, 30 September and 31 December. In the same way as a small remitter under current PAYE rules must remit at least quarterly, the new arrangements provide a person with the option to remit more frequently than quarterly if they wish [new section 220AAR] .
4.74 As for large and medium remitters, a small remitter who fails to send deductions to the Commissioner by the due date will commit an offence and be liable for a penalty (refer paragraph 4.36) [new subsection 220AAR(3) and new section 220AAV].
4.75 A small remitter has the option of paying either by a means of electronic transfer or by some other means approved in writing by the Commissioner. A small remitter will not be subject to a penalty for not remitting electronically as is the case for a large remitter [new section 220AAS] .
4.76 As for large and medium remitters, a payment made by a small remitter must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner (refer paragraph 4.43) [new section 220AAT] .
4.77 Again, as for large and medium remitters, the Commissioner may vary the requirements imposed on a small remitter. The Commissioner may use his discretion to extend payment times or, with the agreement of the person, the requirements of how amounts must be paid or of statements to be sent to the Commissioner (refer paragraph 4.44) [new section 220AAU] .
4.78 The penalties existing under current arrangements for failure to remit amounts deducted in accordance with Divisions 1AA, 2 and 3A of Part VI of the Act are retained in new Division 1AAA . However, some minor changes to the offences and penalties in Divisions 1AA, 2 and 3A have been required in order to align them in the new Division .
4.79 The penalty and recovery provisions are contained in new Subdivisions E and F and cover:
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- penalties for failure to send deductions as a large, medium or small remitter to the Commissioner as required under new sections 220AAE, 220AAM and 220AAR [new section 220AAV] ;
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- failure to send statements to the Commissioner as required under new sections 220AAG, 220AAO and 220AAT [new section 220AAZ] ;
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- penalty for non-electronic payment as required under new section 220AAF [new section 220AAW] ;
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- provisions to enable the Commissioner to recover amounts payable.
4.80 New section 220AAV imposes a penalty for the failure of a person to send deductions to the Commissioner under new sections 220AAE, 220AAM , and 220AAR . It is based on the civil penalties that were imposed under RPS, PAYE and PPS. The criminal penalty under new sections 220AAE, 220AAM and 220AAR where a remitter acts intentionally or recklessly in failing to send deductions is consistent with the penalty for the failure to send deductions under RPS and PPS. The criminal penalty that was imposed under PAYE for the failure to send deductions has been changed for the purposes of the new Division . Section 8ZE of the TAA provides for administrative penalties not to be payable for an act or omission for which prosecution action is instituted.
4.81 Under new section 220AAW a large remitter, other than a government body, who does not pay by a means of electronic transfer that has been approved by the Commissioner will be liable for a penalty equal to the greater of 7 days late payment penalty (based on the amount of the unremitted amount) or $500 (refer paragraph 4.42).
4.82 New section 220AAX enables the Commissioner to remit penalties imposed under new sections 220AAV or 220AAW for either the failure of a person to send deductions to the Commissioner or the failure of a large remitter to pay by electronic transfer. Currently the Commissioner has the power to remit penalties under RPS, PAYE and PPS for the failure to send deductions (sections 221N, 221YHL and 221AU). The guidelines that currently exist for the remission of penalties are to be retained for the new arrangements.
4.83 It should be noted that in relation to the remission of the penalty imposed for non electronic payment the Commissioner is only able to exercise his discretion in limited circumstances. It is considered that the discretion may be exercised in situations where the non-electronic remission is due to circumstances beyond a remitter's control, for example, a power failure or equipment breakdown.
Reduction of late payment penalty where judgement debt carries interest
4.84 New section 220AAY will ensure that an amount of penalty for late payment under new section 220AAV continues to accrue in respect of unpaid principal amounts notwithstanding that judgment for payment of the principal amount has been given or entered in a court. Where, in such a case, the judgment debt itself carries interest, the penalty tax otherwise payable is to be reduced by the amount of judgment interest that relates to the unpaid principal amount. This new provision replicates provisions that existed under RPS, PAYE and PPS (sections 221NA, 221YHLA and 220AV).
Failure to send statements to Commissioner - offence
4.85 A person who fails to send a statement as required under new sections 220AAG, 220AAO and 220AAT is guilty of an offence [new section 220AAZ] . This does not apply to a person who is a government body for the purposes of new Division 1AAA .
Recovery of amounts of Commissioner
4.86 The machinery provision to enable the collection of amounts payable to the Commissioner are contained in new section 220AAZA . The provisions are based on the RPS recovery provisions. It should be noted that the RPS provisions combine elements of the PAYE and PPS provisions in relation to the acceptable means of providing evidence in a recovery proceeding.
4.87 By paragraph 264(1)(b) of the Act, the Commissioner of Taxation may, by notice in writing, require any person to attend and give evidence concerning the person's, or another person's, income or assessment. The Commissioner may require the person to produce all books, documents or other papers that may be in the person's custody or control. New section 220AAZB will extend the operation of paragraph 264(1)(b) to matters that are relevant to the administration or operation of new Division 1AAA . The new provision replicates similar provisions in Divisions 1AA, 2 and 3A.
4.88 New section 220AAZC makes it clear that forms used for any of the purposes of new Division 1AAA may be required to include a declaration that the content of the form is correct. By this means, a person making a false declaration in respect of information required under this new Division could be guilty of an offence against sections 8K, 8N or 8P of the TAA.
4.89 New section 220AAZD explains the new arrangements in relation to partnerships. Obligations under the new Division imposed on the partnership under the new Division are imposed on each partner and each partner is jointly and severally liable for amounts payable by the partnership. An offence by the partnership is an offence committed by each partner. A partner that was not involved in an act or omission of the partnership is not taken to have committed an offence.
4.90 In the case of unincorporated companies, new section 220AAZE includes special provisions to specify that obligations are 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. It is similar in nature to new section 220AAZD .
4.91 New section 220AAZF provides that a person dissatisfied with a decision made by the Commissioner in regard to the new Division may object against the decision in the manner set out in Part IVC of the TAA. The new provision lists the decisions which a person may object against. A similar provision exists in relation to the RPS, PAYE and PPS provisions although in relation to PAYE it only applies for a small remitter.
4.92 To ensure that the new arrangements cover all persons who are required to deduct and remit under the existing three withholding systems, a definition of person has been inserted in the new Division [new section 220AAZG] . For the purposes of the new Division a person means a company, a partnership, a person in a particular capacity of trustee, a government body or any other person. A government body means the Commonwealth, a State, a Territory or an authority of the Commonwealth, a State or a Territory. In addition, definitions of reportable payment, prescribed payment and salary or wages have also been inserted.
4.93 Part 2 of Schedule 4 in the Bill details the consequential amendments necessary as a result of inserting new Division 1AAA into Part VI. The amendments remove the remittance obligations of the RPS, PAYE and PPS systems and insert them in the new Division [items 8 to 13, items 22 to 26 and items 33 to 35 of Part 2] .
4.94 The remittance obligations include the classification of remitters, the timing of remittance. The associated penalty and remission of penalty provisions have also been removed from Divisions 1AA, 2 and 3A and inserted into the new Division [items 14 to 19, items 27 to 30 and items 36 to 44 of Part 2] .
4.95 New Division 1AAA also contains a provision to enable the Commissioner to recover amounts payable under the new arrangements. Consequential amendments remove the relevant provisions of the recovery provisions in relation to remittance obligations under the three withholding systems [items 20, 21, 31, 32 and items 45 to 47 of Part 2] .
4.96 Sections of Divisions 8 and 9 of the Act that deal with prompt recovery and penalties for directors of non-remitting companies have been amended to include references to new Division 1AAA and the recovery provision under the new arrangements [items 48 to 65 of Part 2] .
4.97 In addition, items 6 and 7 insert "Division 1AAA" into a definition of tax under subsections 216(6) and 218(6B) of Division1 of PartVI for the recovery of tax payable.
4.98 Consequential amendments are required to other Acts administered by the Commissioner namely, Taxation (Interest on Overpayments and Early Payments) Act 1983, Crimes (Taxation Offences) Act 1980 and the Child Support (Registration and Collection) Act 1988. The amendments remove references to sections in RPS, PAYE and PPS that are being repealed and inserts references to the appropriate new sections in new Division 1AAA [items 2 to 5 and items 66 to 68 of Part 2] .
Regulation impact statement
4.99 The Government announced in the 1997-98 Budget its intention to amend the Reportable Payments System (RPS), Pay-As-You-Earn (PAYE) and Prescribed Payment System (PPS) withholding arrangements to simplify the range of withholding tax systems imposed on business by aligning the three systems. To achieve this, the new arrangements propose changes to the timing of remittances and to the thresholds (see below under Implementation for a summary of changes).
4.100 The current withholding arrangements are paper oriented, resource intensive and time consuming for business. The systems lack the flexibility to cater for the increased demand of electronic commerce. Also, some 10% of businesses have obligations in more than one withholding arrangement. These businesses find it difficult to reconcile why obligations are disparate across systems. In its report, the Small Business Deregulation Task Force noted that the burden of managing multiple taxation regimes is particularly onerous, even overwhelming.
4.101 The basis of the existing PAYE remittance legislation is that an employer is required to remit on a monthly basis unless:
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- the employer is an early remitter (annual remittances exceed $1 million). These employers remit on the 7th and 21st of each month; or
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- the employer is a small remitter (deduction obligations under $10,000 and Commissioner has approved small remitter status). These employers remit quarterly.
That is, an employer is a monthly remitter unless another status applies.
4.102 The new arrangement combines remittance obligations of RPS, PAYE and PPS. A person may remit on a quarterly basis unless:
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- the person is a large remitter (annual remittances under RPS, PAYE and PPS combined exceed $1m); or
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- the person is a medium remitter (annual remittances under RPS, PAYE and PPS combined exceed $25,000); or
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- the person is a non-compliant remitter (their small remitter status has been revoked by the Commissioner).
4.103 The large increase in the quarterly remitter status threshold, as indicated in 1997-98 Budget Paper No. 2, will result in a significant increase (approximately 311,000) in the number of remitters who will come under that new threshold. In excess of 80% of total remitters will now qualify. A small remitter who wishes to remain remitting on a monthly basis can do so without informing the ATO.
4.104 It is not appropriate for those 311,000 remitters who will now be eligible for quarterly remitter status under the new arrangements to apply for that status as is currently required. Consequently, the new provisions will operate on the basis that a remitter has quarterly remitter status unless his or her remittance obligations exceed the $25,000 or the $1 million thresholds. A quarterly remitter will now be called a small remitter , a remitter who exceeds the $1 million threshold a large remitter , while a remitter with withholding obligations in between the two thresholds will be called a medium remitter .
4.105 Remitters who do not comply with their withholding obligations and who otherwise would be small remitters may have that status withdrawn. Such non-compliant remitters would then be required to remit monthly in accordance with the medium remitter obligations. This is consistent with existing provisions.
4.106 The Government is keen to encourage all small remitters to adopt the quarterly payment arrangements to obtain the benefits of reduced cash flow costs. The benefits will be emphasised by the use of advertising as well as educational material such as Payer Books and mail-outs. The ATO will have in place the appropriate enforcement strategies to manage taxpayers on this basis. Taxpayers who have opted for quarterly remittance and do not remit by the required date will be issued with a final notice.
4.107 Revenue brought forward into the 1998-99 year is expected to be $330 million.
4.108 Large or medium remitter status under the new arrangements is generally determined on the basis of remittance obligations during the previous income year. Two or three months are allowed for a remitter to review his or her status and then to operate under the obligations applicable to any new status.
4.109 The new arrangements are to operate from 1 July 1998. In order that a remitter can determine his or her status from that date under the new arrangements, transitional provisions operate as follows:
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- a remitter will be a medium remitter from 1 July 1998 where his or her withholding obligations in the period 1 July 1997 to 31 March 1998 exceeded $18,750 (that is, of $25,000); or
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- a remitter will be a large remitter from 1 July 1998 where his or her withholding obligations in the 1996-97 income year exceeded $1 million.
4.110 The current small remitter threshold is to be relaxed and this will reduce the compliance costs of approximately 311,000 businesses. These businesses will now be able to make their remittances later than is currently required without any other change in procedures. This will provide the businesses with a cost of funds saving in addition to compliance cost savings. It is not expected that there will be any disincentives for a firm near a threshold to grow, possibly changing remittance obligations.
4.111 The extension of the current PAYE $1 million early remitter threshold to remittance obligations under the 3 withholding systems is estimated to affect only slightly more than 100 businesses. Those businesses, together with the estimated 5,400 businesses already above the threshold, will be required to make remittances within an average of 7 days after amounts have been withheld.
4.112 In most cases, businesses that are above the $1 million threshold would already conduct transactions using electronic funds transfers. The new remittance procedures merely bring the remittance of tax amounts withheld in line with this modern business practice. Businesses with remittance levels lower than $1 million are less likely to have introduced electronic fund transfer procedures and, accordingly, existing arrangements are maintained for those businesses.
4.113 Approximately 15,500 RPS and PPS remitters will be affected by the alignment of payment dates of remittance obligations. The arrangements change the due date for payment for the remaining monthly remitters from the 14th to the 7th of the month. However, these remitters on average have an annual business turnover of $16.5 million.
4.114 All remitters will be given precise details about their obligations under the new arrangements at the time they are provided with the appropriate remittance stationery or electronic procedural information. Such stationery or information is usually provided around April in each income year.
4.115 The possibility of the withdrawal of small remitter status as discussed at paragraph 4.105 above provides small remitters with an incentive to comply with their remittance obligations. The incentive for medium and large remitters is contained mainly in the penalty rgime applicable to all late payments (including those by small remitters). A large remitter who does not remit electronically faces a minimum penalty that compares with the maximum cost of installing electronic transmission equipment.
4.116 The RPS, PAYE and PPS systems impact on about 900,000 Australian businesses. The new arrangements will provide compliance cost benefits for 311,000 businesses and will require earlier payment by some 5,500 businesses. The payment obligations of businesses with obligations under PAYE as well as RPS or PPS are to be aligned to produce compliance cost reductions.
Changes in Administrative Costs
4.117 The administrative cost savings for the ATO are estimated to be $9 million next year and $11 million in subsequent years. These savings result from reducing the number of remitters requiring monthly monitoring and can be transferred to incorporate greater audit and enforcement activities with no overall increase in costs.
4.118 The initial costs of the changes will arise from learning about the new payment arrangements and the acquisition of software by some large remitters to enable them to remit electronically.
4.119 Large remitters will have to pay by electronic means. It is estimated that 95% of these remitters already pay salaries to employees by electronic means. As the cost of paying electronically is less than transaction charges for cheque payments, this is not thought to cause great concern amongst large remitters.
4.120 However, the remaining 5% of large remitters will incur an initial cost in acquiring software needed to facilitate electronic payments. This initial outlay would be between $75 and $440, depending on the financial institution. The initial costs borne by large remitters are considered relatively small.
4.121 The value of the initial costs borne by small remitters is in the order of $5 million, being costs associated with learning about the new payment arrangements. However, there are reduced compliance costs because of the reduction in frequency of remittances for many small remitters, and the benefit of having only one system to understand.
4.122 The recurrent costs are the changes to the number of times a year that taxpayers are obliged to remit RPS, PAYE and PPS deductions and the alignment of remittance dates for these systems.
4.123 Some large taxpayers will have to remit more frequently and will subsequently incur increased costs of compliance. At the most this will involve a doubling of transactions, at a cost of 10 - 20 cents per electronic transaction, which is equivalent to the cost of a cheque payment. The increase in compliance costs will not be substantial and will be countered by the savings in reducing the three systems to one system.
4.124 For many employers and businesses who will be classified as small there will be a significant reduction in the cost of compliance because they will remit quarterly instead of monthly. Due to the large number of remitters in this category the reduction in the costs of compliance is estimated to be $18 million per year.
4.125 Approximately 15,550 medium remitters in RPS and PPS will be required to remit 7 days earlier. While these remitters will incur increased costs of compliance these costs will be relatively small due to the minor nature of the change.
4.126 In addition, businesses who have multiple obligations under the current withholding arrangements will also have compliance costs reduced through alignment of the three systems.
4.127 Large remitters will be required to remit on average every 7 days instead of 14 days as is the case under the current arrangements. As a result large remitters will incur a reduction in cash flow benefits. The after tax cash flow benefits will be approximately halved from around $50 million to around $25 million.
4.128 Approximately 311,000 small remitters will now remit on a quarterly basis rather than once a month. For these taxpayers there will be an increase in cash flow benefits. The after tax cash flow benefits will be approximately doubled from around $5 million to around $10 million.
4.129 The net effect of the changes on small remitters is a saving of $18 million. The initial costs of learning about the new payment arrangements are expected to be offset by the increased cash flow benefits, with the resulting saving coming from remitting quarterly instead of monthly. Medium remitters will not be significantly affected, and the net effect on large remitters is a cost of $25 million, due to reduced cash flow benefits.
4.130 The changes to the withholding arrangements represents an important first step towards reducing the range of withholding tax systems imposed on business with a view to ultimately establishing an efficient, modern interface between the Australian Taxation Office and the business taxpaying community. For large businesses, it brings withholding tax remittance into line with modern commercial practices by replacing the current paper oriented and resource intensive arrangements with a more flexible method reflecting contemporary business customs. For small business, the measure represents a further significant reduction in compliance costs and reduces the frequency of their transactions with the Australian Taxation Office.
4.131 Implementation of this tax measure will remove the present requirement for a person to apply for small remitter status and will deem all remitters to be small remitters unless they are required to remit as a medium or a large remitter. More than 80% of all remitters will fall within the new small remitter category. Application of the new thresholds will be achieved by combining current remittance obligations under the 3 systems into one set of remittance obligations.
4.132 The ATO and Treasury will monitor this measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional associations, small business associations and other taxpayer consultation forums.