Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 4 - Payments of tax by small companies
Overview
4.1 Schedule 5 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to allow instalment taxpayers classified as small (including companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts) that balance on 30 June to pay:
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- their estimated tax liability on 15 December following the income year; and
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- the balance of their tax liability, if any, on the following 15 March.
Corresponding dates will apply to small companies that balance on dates other than 30 June.
4.2 Schedule 5 will also amend the system of classification of taxpayers as small, medium, or large so that, in the absence of any estimates being made, or tax return for the preceding year being lodged, before 1 March, a companys classification for the current income year will be determined on the earlier of the date of lodgment of the return for the preceding year and 15 March. Corresponding dates will apply to companies that balance on dates other than 30 June.
4.3 Schedule 5 will also make a minor clarificatory amendment to the definitions of small, medium and large taxpayer so that they operate as intended.
Summary of the amendments
4.4 The purpose of the amendments is to:
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- assist small companies by allowing instalment taxpayers classified as small to pay their final tax liability for an income year later than currently required; and
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- ensure that a companys classification can be based on its most recent years income tax return.
4.5 The proposed amendments to the instalment schedule are to take effect from the 1996-97 income year. The proposed amendments to the classification system are to take effect from the 1997-98 income year. The proposed clarificatory amendment to the definitions of small, medium and large taxpayers are to take effect from the 1994-95 income year for companies classified as small and medium, and the 1995-96 income year for companies classified as large. [Items 5 and 16]
Background to the legislation
4.6 Subsection 221AZK(2) of the Act prescribes the timing and amount of tax instalments payable by instalment taxpayers, including companies. In the case of instalment taxpayers classified as small (ie. instalment taxpayers with likely tax of less than $8000), the Act currently provides that tax is to be paid in one instalment on the first day of the eighteenth month following the commencement of the income year. For instalment taxpayers that balance on 30 June this will be 1 December following the end of their income year. The amount of the instalment is equal to the total amount assessed as payable for the current year.
4.7 Likely tax is determined by a companys own estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year. The date on which classification is currently determined is the first day of the ninth month of the current year of income (ie. 1 March of the current income year for instalment taxpayers balancing on 30 June).
4.8 The due date for lodgment of returns by instalment taxpayers is the date notified by the Commissioner of Taxation in the Commonwealth of Australia Gazette, as prescribed by section 161 of the Act. Unless the Commissioner provides an extension, the due date for lodgment of company income tax returns coincides with the due date for the payment of a companys final tax instalment.
Explanation of the amendments
How will the instalment schedule change?
4.9 The amendment will provide that instalment taxpayers classified as small that balance on 30 June will be required to pay:
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- their likely tax on 15 December following the income year; and
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- the balance of their tax liability, if any, on the following 15 March.
Corresponding dates will apply to small companies that balance on dates other than 30 June. [Items 7, 8, 9, 10, and 11; amended subsection 221AZK(2)]
4.10 For a small company with a 30 June balance date this will mean that likely tax is payable on 15 December following the end of the income year and the balance of their tax liability, if any, is payable on 15 March following the end of the income year.
4.11 This concessionary instalment schedule will apply only to instalment taxpayers that are genuinely small. As a result, the amendment will not apply to instalment taxpayers that are classified as small but whose actual tax payable for the income year exceeds $300,000. In these circumstances instalment taxpayers will continue to pay their full tax liability on the first day of the eighteenth month following the commencement of the income year (ie. 1 December following the end of the income year for companies that balance on 30 June). [Item 13; new subsection 221AZK(3A)]
What are the changes to the system of classification?
4.12 Deferring the final instalment date for instalment taxpayers classified as small to 15 March will have the effect of extending the due date for lodgment of returns to 15 March. Amendments to the system of classification are necessary because, without amendment, lodgment of the prior year return would occur after the current classification date. This would not be an appropriate outcome because the payment schedule should be based on the most recent years tax return.
4.13 As a result, the Act is to be amended to provide that, in the absence of an estimate, or tax return for the preceding year, lodged before the first day of the ninth month of the current income year, a companys classification will be determined on the reckoning day, namely, the earlier of the date of lodgment of the previous years return and the fifteenth day of the ninth month of the current income year (ie. the deferred date for payment of a small companys final tax liability). For small companies that balance on 30 June, classification will be determined either on or before 15 March of the current year. [Items 5, 8, and 12; amended section 221AZH, amended subsection 221AZK(2), and substituted paragraph 221AZK(3)(a)]
4.14 Consistent with the operation of the current classification system, where a company lodges an estimate of its likely tax on or before 1 March, that estimate will be used as the basis for determining the classification of the company.
Are the grouping provisions affected?
4.15 These amendments will not affect the operation of the grouping provisions under section 221AZMA. As a result, the determination of whether an instalment taxpayer is part of an instalment taxpayer group will continue to take place on the first day of month 9 of the current income year (ie. 1 March for 30 June balancing companies).
4.16 As a result of the changes to the instalment schedule and the system of classification two consequential amendments will also be made. Firstly, the definition of final instalment in section 221AZH will be amended to reflect the fact that instalment taxpayers classified as small will now pay tax in two instalments with their final instalment due on the fifteenth day of month 21 of the current income year. The definition will be further amended to take into account that, for instalment taxpayers classified as small but whose actual tax payable for the income year exceeds $300,000, a single instalment of tax is required on the first day on the month 18 of the current income year. [Item 1; amended section 221AZH]
4.17 Secondly, section 221AZKA, which deals with circumstances where a taxpayer attempts to gain an undue deferral of tax instalments by lodging two estimates, will be amended to reflect the changes to the system of classification. As a result, references to the term:
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- first day of month 9 will be omitted and replaced with the term reckoning day [Item 14; amended section 221AZKA] ; and
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- first day of month 11 will be omitted and replaced with the term end of two months after that day (for example, if a companys reckoning day is, say, 10 March, the relevant period runs until the end of 10 May) [Item 15; amended subsection 221AZKA(1)] .
4.18 The second consequential amendment will ensure that the changes made to subsection 221AZK(2) relating to the new system of classification (and in particular the introduction of the term reckoning day) will have the appropriate flow-on effect for the operation of section 221AZKA.
4.19 Schedule 5 of the Bill will also make a minor clarificatory amendment to the definitions of small, medium and large taxpayers in section 221AZH. As a result, the definition of:
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- large taxpayer will be amended so that it includes companies classified as large under the anti-avoidance provision contained in section 221AZKA; [Item 2; amended section 221AZH]
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- medium taxpayer will be amended so that it operates subject to section 221AZKA, or includes companies classified as medium under the anti-avoidance provision contained in section 221AZKA; [Items 3 and 4; amended section 221AZH] and
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- small taxpayer will be amended so that it operates subject to the anti-avoidance provision contained in section 221AZKA. [Item 6; amended section 221AZH]
Regulation Impact Statement
Specification of policy objective
4.20 The policy objective of this measure is to assist small companies in managing their cash flow by extending the time in which they can meet their tax obligations.
Identification of implementation options
4.21 Under the company tax instalment system a companys classification (ie. small, medium or large) and the instalment amount that it is required to pay is based on its likely tax (ie. a companys estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year).
4.22 For companies classified as small (ie. likely tax of less than $8,000), the Act currently provides that a single instalment of tax equal to the tax assessed for the income year is due on 1 December following the end of their income year (for 30 June balancing companies). Corresponding dates apply to companies that balance on dates other than 30 June.
4.23 Special administrative arrangements have applied to instalment taxpayers classified as small for the 1994-95 and 1995-96 income years. The effect of these arrangements is that, for companies balancing on 30 June, these companies pay their likely tax on 15 December and the balance, if any, together with lodgment of their return on 1 March. The Commissioner of Taxation has relied upon his discretion under section 206 of the Act to allow these administrative arrangements.
4.24 For companies classified as medium (ie. likely tax between $8,000 and $300,000) or large (ie. likely tax greater than $300,000), quarterly instalments of tax are required to be paid earlier than the payment schedule that applies to companies classified as small.
4.25 In its response to the report of the Small Business Deregulation Task Force, the Government announced that the Act will be amended to provide more time for small companies to meet their tax obligations. They will be allowed to pay:
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- their likely tax on 15 December; and
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- their final tax liability, if any, together with lodgment of their returns on 15 March.
4.26 Corresponding dates will apply to small companies that balance on dates other than 30 June.
4.27 To achieve this policy objective there is one implementation option only.
4.28 This is to extend and codify the special administrative arrangements that have applied to instalment taxpayers classified as small for the past two income years (see above).
4.29 Because these changes will result in the returns for some small companies being lodged after the 1 March classification date that applies under the existing law, it is also necessary to change the system of classification. As a result, in the absence of any estimate, or tax return for the preceding year, being lodged before 1 March, a companys classification for the current income year will be determined on the earlier of the date of lodgment of the return for the preceding year and 15 March. Corresponding dates will apply to companies that balance on dates other than 30 June.
Assessment of impacts (costs and benefits) of the implementation option
4.30 The policy objective will positively affect taxpayers classified as small under the company tax instalment system (ie. likely tax under $8,000). This group will include companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts who are classified as small for the purposes of the company tax instalment system.
4.31 The policy objective may also positively affect tax agents and accountants who help the above taxpayers meet their tax obligations.
Analysis of the costs and benefits of the implementation option
4.32 The primary advantage of the implementation option is that it provides taxpayers with certainty because the instalment schedule will be specified in the Act. This will result in reduced compliance costs which cannot be quantified.
4.33 Importantly, this implementation option allows a more generous instalment schedule because necessary amendments can also be made to the system of classification. The more generous instalment schedule will also assist small companies manage their cash flow.
4.34 Members of the tax profession have, in the past, expressed concern about the uncertainty associated with relying on a Commissioners discretion to establish the payment schedule for companies. Some members have argued that this would allow the Commissioner to change the instalment schedule each year and, consequently, create uncertainty and impose additional compliance costs. These costs are not capable of being quantified.
4.35 This implementation option will defer only a small amount of tax and, as a result, the interest cost to the revenue is expected to be insignificant. The amendment to the classification system will result in a small bring forward in revenue, resulting in a small interest gain to the revenue.
Consultation
4.36 The Tax Office consulted with representatives of the tax profession in various forums (including the Commissioners National Tax Liaison Group). Representatives of the tax profession argued that small companies should be able pay their final tax liability and lodge their tax returns on 15 March (in the case of 30 June balancing companies).
4.37 The implementation option achieves the objective of allowing instalment taxpayers classified as small more time to meet their tax obligations. It will also provide greater certainty and give instalment taxpayers classified as small a more generous instalment schedule than under the existing law (or under the Commissioners administrative arrangements).
4.38 The ATO and the Treasury will monitor this taxation measure, as part of the whole taxation system, on a continuing basis. In particular, the ATO will closely monitor developments to detect any significant revenue loss/deferral or unreasonable compliance costs arising from this proposal. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and other taxpayer bodies.