Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Fringe benefits tax instalments
Overview
2.1 Schedule 2 to this Bill will amend the FBTAA 1986 to complete the alignment of FBT instalments with other business tax instalment obligations. In ANTS, the Government announced the introduction of the PAYG system, which will align business tax obligations so that businesses will be able to complete a single compliance statement and make one payment either monthly or quarterly. A net payment will be made after creditable amounts have been offset against liabilities. The Government also announced that excess credits will be refunded and refund claims can be lodged on the first day after the quarter.
Summary of the amendments
2.2 The purpose of the amendments is to:
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- enable an employer to claim a credit for earlier FBT instalments where the notional tax amount is reduced during the FBT year; and
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- use an amount of tax that was assessed for the most recent year of tax as the notional tax amount in the calculation of an instalment of tax.
2.3 To achieve this, amendments are made to the following sections in Division 2 of Part VII of the FBTAA 1986:
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- section 105 which gives an employer a credit for each instalment payable [item 1] ;
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- section 110 which determines the notional tax amount of an employer [item 2] ;
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- section 111 which calculates the amount of an instalment of tax [items 3 to 6] ;
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- section 112 which provides rules for an employer estimating the tax liability for the year [item 7] ;
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- new section 112A which is inserted to provide a credit in certain cases where the amount of an instalment for a quarter is nil [item 8] ; and
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- new section 112B which is inserted to impose liability for the GIC and to calculate the charge on shortfalls in quarterly instalments that are worked out on the basis of estimated tax [item 8] .
2.4 The amendment to the credit measure will apply for the year of tax commencing 1 April 2000 and later years of tax. The amendment to the notional tax measure will apply for the year of tax commencing on 1 April 2001 and later years of tax.
Background to the legislation
2.5 An employer is liable to pay instalments of tax under section 102 of the FBTAA 1986.
2.6 Section 103, as amended by the PAYG Bill, sets out when instalments of FBT are payable:
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- the first instalment is due and payable on 21 July in that year of tax;
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- the second instalment is due and payable on 21 October in that year of tax;
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- the third instalment is due and payable on 21 January in that year of tax; and
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- the fourth instalment is due and payable on 21 April in the next year of tax.
2.7 Under section 111, the amount payable by an employer as an instalment of tax for a quarter is calculated as:
2.8 Subsection 111(2) provides that an instalment of tax is not payable in certain cases where the notional tax amount is less than a particular amount (currently $3,000).
2.9 The employers notional tax amount is currently defined in section 110 as the amount of tax that was assessed in respect of the employer for the immediately preceding year of tax. However, an employer may make an estimate of the amount of tax that will be payable for the FBT year under subsection 112(1). Where an estimate has been made, the notional tax amount equals the estimated tax amount (subsection 110(5)). It should be noted that GIC is payable where the employers estimate is less than 90% of the amount of tax assessed to the employer (section 112).
2.10 The relevant fraction is defined in section 109, as amended by PAYG Bill, as:
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- 0.25 for the first instalment;
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- 0.50 for the second instalment;
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- 0.75 for the third instalment; and
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- 1.00 for the fourth instalment.
2.11 Under section 105, as amended by PAYG Bill, an employer receives a credit upon assessment for each instalment that is payable for the year of tax, regardless of whether an instalment is paid. The credit arises upon assessment so as not to immediately eliminate the instalment liability.
Explanation of the amendments
2.12 Subsection 111(1) the calculation of an amount payable by an employer as an instalment of tax is repealed and replaced by new subsection 111(1) to take into account credits that may arise under new section 112A (see paragraphs 2.28 to 2.31 for an explanation of the credits). [Item 3]
2.13 Under new subsection 111(1) , the amount of an employers instalment of tax for a FBT year (the current instalment) is calculated as:
2.14 Where this calculation gives a positive result, the amount is due and payable 21 days after the end of the quarter. Where the result is negative, the amount of the instalment is nil.
2.15 New subsection 111(1A) defines the terms used in new subsection 111(1).
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- Notional tax amount means the employers notional tax amount for the year of tax, as defined in section 110, and is determined at the end of the last day of the quarter. The quarter is the one for which the current instalment is calculated.
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- Previous instalments is defined as the total of any tax instalments for the year of tax that have become due and payable before the due date of the current instalment.
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- Previous credits is the total of any credits that the employer has claimed under new section 112A because of any instalments for the FBT year that have become due and payable before the due date of the current instalment. [Item 3]
2.16 Subsection 111(2) currently provides that an employer is not required to pay an instalment in certain circumstances. Subsection 111(2) is amended to include an additional condition that must be met before an instalment of tax is not payable.
2.17 The amendment to subsection 111(2) provides that an instalment of tax that would otherwise be due and payable by the employer 21 days after the end of a quarter [item 4] is not payable if:
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- the instalment is calculated using the notional tax amount ascertained under subsection 110(1) (see paragraphs 2.19 to 2.27 for an explanation of the notional tax amount);
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- the notional tax amount is less than either $1,000 if a determination has not been made by the Commissioner or the amount determined by the Commissioner (currently $3,000); and
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- the instalment of the previous quarter was not payable because subsection 111(2) applied. This condition does not apply when the instalment calculated under section 111 is the first instalment of the year of tax. [Item 6, new paragraph 111(2)(c)]
2.18 This ensures that once an employer is liable to pay an instalment of tax for the FBT year, the employer continues to be liable to pay instalments for later quarters of the year even though the notional tax amount falls below the threshold level.
Example 2.1
An employer has a notional tax amount of $20,000 which is used to calculate the instalments for the first and second quarters of the FBT year. During the third quarter, the employer estimates that the tax payable for the FBT year will be $10,000. The calculation of each instalment for the year is:
Amount of Instalment Quarter 1
- ($20,000 * 0.25) - (0 - 0)
- = $5,000
Quarter 2
- ($20,000 * 0.5) - ($5,000 - 0)
- = 5,000
Quarter 3
- ($10,000 * 0.75) - ($10,000 - 0)
- = $2,500
- Because this result is negative, the amount of the instalment is nil [new subsection 111(1)] .
- Under new section 112A , the employer is entitled to claim a credit of $2,500.
Quarter 4
- ($10,000 * 1) - ($10,000 - $2,500)
- = $2,500
2.19 Schedule 2 repeals subsections 110(1) and 110(2) and inserts new subsection 110(1) . New subsection 110(1) replaces the definition of notional tax amount to enable the calculation of an instalment of tax where the employer has not had tax assessed in the immediately preceding FBT year. [Item 2]
2.20 Depending on the circumstances of an employer, the notional tax amount is determined in one of 4 ways by new subsection 110(1) . For most employers (the general case), the notional tax amount for a year of tax (the current year) at a particular time (the test time) is:
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- the amount of tax assessed for the most recent FBT year (the base year) for which an assessment has been made before the test time. [Item 2, new subsection 110(1), item 1 of the table]
2.21 This allows an assessment of an earlier year to be used as the notional tax amount when an assessment has not been made for the immediately preceding FBT year at the time that the instalment is calculated.
Example 2.2
An employer is calculating the first instalment for the FBT year commencing 1 April 2001. The employer has not lodged a return for the year commencing 1 April 2000, but has had tax assessed for the year commencing 1 April 1999 of $20,000. The first instalment for the year commencing 1 April 2001 will be calculated using a notional tax amount of $20,000.
2.22 Where an employer has not had tax assessed at any time before the current year, the notional tax amount is nil. This relates to employers who lodge a FBT return for the first time. [Item 2, new subsection 110(1), item3 of the table]
2.23 Where an employer has not had tax assessed for the immediately preceding FBT year but has had a nil assessment for an earlier year of tax, the notional tax amount is nil. This situation would arise where an employer has had a nil assessment for a year and then does not lodge a FBT return in the following year. [Item 2, new subsection 110(1), item 2 of the table]
2.24 Where the general case would otherwise apply but Parliament has changed the rate of tax for the current year from that of the base year and regulations provide for a variation in the notional tax amount for the current year, the notional tax amount is either:
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- where the instalment is due and payable before the day the tax rate change comes into effect the notional tax amount for the base year for which an assessment has been made; or
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- where the instalment of tax is due and payable on or after the day the tax rate change comes into effect the amount as varied in accordance with the regulations. [Item 2, new subsection 110(1), item 4 of the table]
2.25 Subsection 110(3) has been repealed and rewritten to reflect the changes in new subsection 110(1) [item 2] . New subsection 110(3) provides that the Commissioner may substitute his own estimate of the tax payable for the notional tax amount for the current year when the estimate will exceed:
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- the amount of the employers tax for the base year (that is, when the notional tax amount would be worked out under either item 1 or item 4 of the table in new subsection 110(1) ); or
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- nil when the notional tax amount would be worked out under either item 2 or 3 of the table in new subsection 110(1) .
[Item2]
2.26 A definition of notional tax amount is inserted in subsection 136(1). Notional tax amount has the meaning given by section 110. [Item9]
2.27 Because subsection 110(2) has been repealed by item 2 of this Bill, a consequential amendment is made to paragraph 111(2)(a) to remove a reference to subsection 110(2). [Item 5]
Credit in certain cases where amount of instalment is nil
2.28 New section 112A is inserted to allow an employer to claim a credit in relation to instalments of tax in certain circumstances. [Item 8] This credit is available to offset other business tax liabilities or to be refunded where there are excess credits in accordance with Division 3 of Part IIB of the TAA 1953.
2.29 Under new subsection 111(1) , the calculation of an instalment of tax may result in a negative amount, in which case the amount of the instalment is nil (see paragraphs 2.12 to 2.14). Where the result is negative, new subsection 112A(1) entitles an employer to claim a credit equal to that amount. [Item 8]
2.30 The calculation of an instalment of tax may give a negative result where:
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- an employer makes an estimate of tax for the FBT year that is less than the notional tax amount used for the calculation of an earlier instalment for the year; or
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- during a FBT year, an employer has tax assessed for the most recent preceding year of tax that is less than the tax assessed for an earlier year of tax and the tax assessed for the earlier year of tax was the notional tax amount used in the calculation of an instalment.
2.31 Where an employer is entitled to claim a credit, the amount must be claimed in the approved form (which is the BAS) on or before 21 days after the end of the quarter. [Item 8, new subsection 112A(2)]
Example 2.3
Using the information contained in Example 2.1, the calculation of the third instalment gives a negative result, that is, -$2,500. The employer is entitled to claim a credit of $2,500 in relation to the third instalment. The credit is applied in accordance with Division 3 of Part IIB of the TAA 1953.
Liability to GIC on shortfall in quarterly instalment worked out on the basis of the estimated tax
2.32 New section 112B makes an employer liable to pay the GIC where the notional tax amount has been underestimated for the purposes of calculating an instalment of tax [item 8] . New section 112B replaces subsections 112(4), (4A) and (5) which have been repealed by item 7 of Schedule 2 . GIC is defined in subsection 136(1) as the charge worked out under Division 1 of Part IIA of TAA 1953.
2.33 An employer is liable for the GIC when:
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- in working out the amount of an instalment of tax (the underpaid instalment), an amount (the actual amount) was worked out under new subsection 111(1) ;
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- the employer made an estimate of tax under section 112 which was taken to be the notional tax amount for calculating the actual amount (subsection 110(5));
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- that notional tax amount is less than 90% of the employers tax assessed for the year of tax; and
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- that tax assessed has become due and payable.
[Item 8, new subsection 112B(1)]
2.34 Under new subsection 112B(2) , the employer is liable to the GIC on any amount by which the actual amount is less than the amount worked out using the formula:
([Minimum tax amount * Relevant fraction]) - ([Previous instalments - Previous credits])
The employer is liable to pay the charge for each day in the GIC period that there is a shortfall [item 8] . GIC period is defined in section 109 to be the period starting at the beginning of the day that the instalment became due and payable and ending at the end of the last day of the quarter.
2.35 New subsection 112B(3) defines the terms used in new subsection 112B(2).
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- Minimum tax amount is the lesser of:
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- the amount that would have been the notional tax amount had the employer not made an estimate under section 112 when calculating the actual amount; and
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- the amount of tax assessed to the employer for the year.
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- Previous instalments means the total of instalments for the FBT year that became due and payable before the due date of the underpaid instalment or, if the underpaid instalment was a nil instalment, the due date that would have applied if the actual amount had been positive.
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- Previous credits is the total of any credits that the employer has claimed under new section 112A because of any instalments for the year of tax that have become due and payable before the due date of the underpaid instalment.
[Item8]
2.36 The amount of the GIC is additional tax payable. [Item8, new subsection 112B(4)]
2.37 A consequential amendment is made to subsection 8AAB(5) of the TAA 1953 to refer to new section 112B [item11] .
Example 2.4
Using the information in Example 2.1, an employer has an amount of tax assessed for the year of $25,000. The notional tax amount used for the first 2 quarters of the year was $20,000, but in the third quarter the employer made an estimate of tax payable of $10,000. Because $10,000 is less than 90% of the tax assessed (i.e. $25,000), the employer has a liability to GIC.
For the third quarter, the GIC is calculated on the amount by which the actual amount (see Quarter 3 in Example 2.1 for the calculation of this amount) that is, -$2,500 is less than:
($20,000 * 0.75) - ($10,000 - 0) = $5,000
which is $7,500. Therefore, GIC is calculated on an amount of $7,500.
For the fourth quarter, the GIC is calculated on the amount by which the actual amount (see Quarter 4 in Example 2.1) that is, $2,500 is less than:
($20,000 * 1) - ($10,000 - $2,500) = $12,500
which is $10,000. Therefore, GIC is calculated on an amount of $10,000.
Credit for instalments payable
2.38 Section 105 is repealed and replaced to take account of the credits that an employer may claim under new section 112A . [Item1]
2.39 New subsection 105(1) provides that an employer is entitled to a credit upon assessment of tax for a year. The amount of the credit is calculated in new subsection 105(2) as:
2.40 An employer is still liable to pay an instalment of tax regardless of the fact that an assessment has been made and an entitlement to a credit has arisen. [Item1, new subsection 105(3)]
2.41 The amendments made by Schedule 2 to this Bill apply for the year of tax commencing on 1 April 2001 and all later years of tax. [Item 10]
Regulation impact statement
2.42 In the Governments ANTS package released on 13 August 1998, it was announced that business tax obligations would be aligned so that businesses will be able to complete a single compliance statement either once a month or once a quarter and make one payment. The payment will be a net amount after creditable amounts have been offset. The Government also announced that excess credits will be refunded and refund claims can be lodged on the first day after the quarter. This is known as the PAYG system.
2.43 The policy objective of this measure is to complete the alignment of FBT instalments with PAYG. Where there is a reduction in the employers notional tax amount, an employer will be able to claim a credit for earlier FBT instalments at the time that the credit arises. The credit may be used to offset other taxation liabilities and excess credits will be refunded.
2.44 There is only one implementation option to complete the alignment of FBT instalments with PAYG. Employers must be able to claim a credit for earlier FBT instalments where there is a reduction in the notional tax amount. This credit may be offset against other business tax liabilities or refunded where there are excess credits. This is in line with the policy intent of PAYG.
2.45 Only quarterly FBT payers will be affected by this measure; that is, approximately 46,000 FBT payers. In addition, it is estimated that 15,000 PBIs will be affected to the extent that they provide fringe benefits in excess of the threshold that is proposed in the ANTS package.
2.46 The revenue impact of this measure is expected to be nil as instalment credits will be either claimed or offset in the same year as if the credit had been refunded on assessment.
2.47 This measure will add to the ATOs administrative costs which have been estimated for PAYG.
2.48 This measure may provide a cash flow benefit to employers with an estimated FBT liability because they will be able to claim a credit for an instalment in the quarter that it arises rather than on assessment.
2.49 It is not possible to separately identify the incremental compliance costs of introducing this measure. However, it is likely to be small, especially given that those affected have to comply with PAYG for their other business tax obligations.
2.50 Broad exposure of PAYG has already been achieved through release of ANTS. Consultation on the PAYG measures has also been undertaken since the introduction of the PAYG Bill into Parliament.
2.51 The alignment of FBT instalments with other business tax instalment obligations will be completed by enabling employers to claim a credit for earlier instalments where there has been a reduction in the notional tax amount. This credit will be available for offset against other business tax liabilities or where there are excess credits, a refund will be made.