Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - PAYG withholding technical and consequential amendments
Overview
4.1 Schedule 4 to this Bill will make a small number of technical amendments to the provisions introducing the PAYG withholding arrangements. These provisions are contained in Schedule 1 to the PAYG Bill.
4.2 It will also further limit the application of withholding where a supplier does not quote an ABN so that it only applies to supplies all or part of which are made on or after 1 July 2000.
4.3 In addition, it will make consequential amendments to sections 202DH, 202DI and 202DJ of the ITAA 1936 to reflect the new PAYG withholding legislation.
4.4 The abbreviations used in this Chapter are in the Glossary.
4.5 References in this Chapter to regulations are to regulations in the ITR 1936.
Summary of the amendments
4.6 The amendments will:
- •
- ensure that the new No ABN withholding event in proposed section 12-190 of Schedule 1 to the TAA 1953 only applies to a payment for a supply all or part of which is made on or after 1 July 2000 [items 2 and 3] ;
- •
- make consequential amendments to sections 202DH, 202DI and 202DJ of the ITAA 1936 to remove references to regulations which will cease to apply from 1 July 2000. The amendments will replace these with references to equivalent arrangements applying from 1 July 2000 [items 4 to 9] ;
- •
- clarify when an entity receiving a dividend, interest or royalty payment on behalf of a foreign resident is required to withhold from the payment [items 21, 29 and 32] ;
- •
- incorporate the ETP group certificate rules currently in the ITR 1936 into the new PAYG withholding payment summary provisions. The new payment summary arrangements are to replace all group certificate obligations from 1 July 2000 [items 33 and 34] ;
- •
- limit the effect of proposed section 26-25 of the ITAA 1997 to interest or royalty payments from which an amount must be withheld under Subdivision12-F [item 14 to 16] ; and
- •
- add foreign resident to the list of basic terms not asterisked in the ITAA 1997 [item 13] .
4.7 The amendments will apply from 1 July 2000. [Subclauses 2(1) and(10)]
Background to the legislation
4.8 The provisions establishing the new PAYG withholding system were introduced on 30 June 1999 in the PAYG Bill. Once enacted, these provisions will be located in Schedule 1 to the TAA 1953.
4.9 Under the PAYG Bill, No ABN withholding will apply to payments made on or after 1 July 2000. An amendment is required to clarify that withholding under the No ABN arrangement will only be required from payments made on or after 1 July 2000 that relate to supplies made in whole or in part on or after 1 July 2000.
4.10 A small number of technical amendments are also needed to other PAYG withholding provisions to clarify their intended operation.
4.11 Consequential amendments are also needed to sections 202DH, 202DI and 202DJ of the ITAA 1936 to remove the references to a TFN statement as mentioned in subregulations 98(8) and 100. The TFN statements referred to in those regulations will become redundant from 1July 2000 because of the new TFN declaration arrangements being inserted into Division 3 of Part VA of the ITAA 1936. The amendments establishing the new TFN declaration arrangements are in Schedule 5 to the Tax Administration Bill.
Explanation of the amendments
4.12 Under proposed section 12-190 in the PAYG Bill, the requirement to withhold where a supplier fails to quote an ABN applies to payments made on or after 1 July 2000. Without some further rule, a business that made supplies and issued invoices without an ABN before 1July2000, would have a potential problem where invoices were still unpaid at the end of 30 June 2000. Unless the business issued new invoices containing its ABN, the No ABN event would require amounts to be withheld at the top marginal rate plus the Medicare levy from each payment relating to those invoices.
4.13 To address this problem, the application provision for the PAYG withholding provisions in item 3 of Schedule 1 to the PAYG Bill will be amended. The obligations to withhold will continue to apply generally to payments made on or after 1 July 2000. No ABN withholding will also apply to payments made on or after 1 July 2000, but only if some or all of the supply is made on or after 1 July 2000. The rules about when a supply is made will be the same as those in the GST transitional provisions. [Items 2 and 3]
Example 4.1
Company A supplies services to Company B on 15 May 2000 and Company A does not give Company B an invoice quoting Company As ABN. Company B pays the consideration of $1,000 on 15 July 2000. Company B does not have to withhold under the No ABN event because all of the supply was made before 1 July 2000.
4.14 Currently, subregulation 99I(3) requires a person making an ETP which is not entirely rolled over to give both the recipient of the ETP and the Commissioner an ETP group certificate detailing the payment.
4.15 From 1 July 2000 group certificate obligations will be replaced by the new payment summary rules in proposed sections 16-155 to 16-175 in Schedule 1 to the TAA 1953.
4.16 For this reason, the obligation under subregulation 99I(3) to provide an ETP group certificate needs to be incorporated into the new payment summary rules.
4.17 New subsections 16-165(1) and (2) will achieve this by amending proposed section 16-165 so that it replicates the effect of current subregulations 99I(3) and 99I(4). [Item 33]
4.18 Under new subsection 16-165(1) an entity making an ETP will be required to provide a payment summary about the ETP to both the recipient and the Commissioner if all or part of the ETP comprises one or more retained amounts mentioned in subsection 27AC(2) of the ITAA 1936. In effect this requires a payment summary to be given for an ETP if it is not entirely rolled over by the recipient. This will maintain the current operation of subregulation 99I(3).
4.19 New subsection 16-165(2) will maintain the current exemption from this requirement in subregulation 99I(4). However, it will also introduce a new exemption not currently in the law. Under new subsection 16-165(3) , an entity will not need to provide an ETP payment summary if the payment is a death benefit made to a dependant of the deceased. This new exemption will allow the law to reflect the long-standing administrative practice for this type of ETP under which ETP group certificates have not been required by the ATO.
4.20 Items 34 will also amend proposed section 16-170 by adding new paragraphs 16-170(1)(f) and 16-170(1)(g) . These will ensure that where an ETP covered by section 16-165 is paid, the payment summary about that ETP contains all the information required by the Commissioner and is given in the approved form. The addition of these paragraphs will ensure ETP payment summaries are subject to the same rules about form and content currently prescribed in regulations 99J and 99K.
Dividends, interest and royalties received on behalf of foreign residents
4.21 Items 21 to 29 make technical corrections to proposed sections 12-215, 12-250 and 12-285 of the PAYG withholding arrangements. The corrections clarify that these provisions impose the same withholding obligations on an entity that receives a payment of a dividend, interest or royalty on behalf of a foreign resident as are currently imposed by subsections 221YL(2), 221YL(2B) and 221YL(2H) of the ITAA 1936. The corrections clarify that the obligation to withhold from these payments may arise when or after the entity receives the payment depending on when the foreign resident becomes entitled to the payment.
4.22 Item 32 amends note 2 to proposed section 16-5 in the PAYG Bill to reflect the effect of these technical corrections.
Technical improvement to proposed section 26-25 of the ITAA 1997
4.23 Under the existing law, section 221YRA of the ITAA 1936 prevents a taxpayer claiming a deduction for interest or a royalty subject to withholding tax until that tax has been paid. Proposed section 26-25, set out at item 5 of Part 2 to Schedule 1 to the PAYG Bill, is intended to replicate the effect of section 221YRA from 1 July 2000. However, in its present form section 26-25 could have a different effect to section 221YRA. This is because it could apply generally where there is an obligation to withhold from interest or a royalty, rather than only to interest or a royalty subject to withholding tax. For example, the section could apply to a financial institution required to withhold an amount from interest if the investor has not quoted its TFN (proposed section 12-140 of the PAYG withholding arrangements).
4.24 To overcome this problem, subsections 26-25(1) and (2) will be replaced by new subsections 26-25(1) and 26-25(2) to ensure that the proposed law has the same coverage as existing section 221YRA of the ITAA 1936. [Item 14]
4.25 There will also be a minor wording change to section 26-25 to clarify that the section can prevent a deduction for the incurring of an interest or royalty liability that has not yet been paid. [Items 15 and 16]
Consequential amendments to sections 202DH, 202DI and 202DJ
4.26 Items 4, 6 and 8 amend sections 202DH, 202DI and 202DJ of the ITAA 1936 respectively to:
- •
- remove the references to subregulation 98(8) and regulation 100 of the ITAA 1936 which will cease to apply from 1 July 2000; and
- •
- replace those references with references to the new TFN declaration arrangements applying from 1 July 2000. These new arrangements will replace the TFN statements referred to in subregulation 98(8) and regulation 100 of the ITAA 1936 from that date.
Addition of foreign resident to terms not asterisked in the ITAA 1997
4.27 In the ITAA 1997, most defined terms are identified by an asterisk. However, a small number of frequently used terms are not asterisked. Foreign resident is to be added to the list of terms not asterisked which is in subsection 2-15(3) of the ITAA 1997. The term foreign resident is used in a number of the new PAYG withholding provisions. [Item 13]
Collection of SFSS and ABSTUDY debts through PAYG withholding
4.28 This Bill will also make amendments to the PAYG withholding provisions to enable the collection of SFSS and ABSTUDY debts through the PAYG withholding arrangements from 1 July 2000. These amendments are explained in more detail at paragraphs 1.107 to 1.111. [Items 18 to 20, 30 and 31]