House of Representatives

Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - PAYG instalments

Outline of chapter

2.1 This chapter explains amendments to Schedule 2 to the Bill concerning amendments to Schedule 1 to the TAA 1953 that relate to the PAYG instalments regime. The amendments will insert provisions to provide the basis of calculation of the GIC payable when there is a shortfall in instalments following a variation by a taxpayer who pays 2 instalments annually on the basis of GDP-adjusted notional tax (a 2-instalment payer2 instalment payer).

2.2 Consequential amendments additional to those in the Bill will be made to Schedule 1 to the TAA 1953 and also to the ITAA 1936 to take account of the amendments described in Chapter 5 of the explanatory memorandum to the Bill.

2.3 The Bill is also amended by the insertion of new Schedule 5 which makes 2 technical corrections to subsection 45-30(2) of Schedule 1 to the TAA 1953. They ensure that the correct amount of PAYG instalments is credited against the payers assessment when a taxpayer using the GDP-adjusted notional tax method varies their instalment(s).

2.4 Finally, a cross-referencing error in one of the measures contained in Schedule 2 to the Bill will be corrected.

Summary of new law

2.5 These amendments make consequential amendments that are additional to those already contained in Schedule 2 to the Bill. They will make amendments to Schedule 1 to the TAA 1953 to provide for the calculation of the GIC payable by a 2-instalment payer2 instalment payer when there is a shortfall in PAYG instalments following a variation. They will also make amendments to the ITAA 1936 to allow Part IIIAA, Franking of Dividends, to have its intended operation consequential upon the PAYG instalments measures in the Bill.

2.6 Two technical amendments are also being made. They ensure that the correct amount of PAYG instalments is credited against the payers assessment when a taxpayer using the GDP-adjusted notional tax method varies their instalment(s). Both amendments are consequential upon the PAYG instalments measures contained in A New Tax System (Tax Administration) Act 1999 and were omitted in error from it. They will apply with effect for the 2000-2001 income year and later income years as do the amendments made by that Act.

Detailed explanation of new law

GDP-adjusted notional tax payers who pay 2 instalments annually

Amount on which GIC is payable under section 45-232

2.7 New provisions will be inserted in the Bill as amendments to Schedule 1 to the TAA 1953 to ensure that the GIC is calculated on the correct amount where a 2-instalment payer2 instalment payer becomes liable to pay GIC under section 45-232. That section imposes GIC on a shortfall in a quarterly instalment worked out on the basis of estimated benchmark tax. The GIC is payable separately in relation to each instalment for which there is a shortfall.

2.8 Existing subsection 45-232(2) provides the formula for working out the amount of the GIC payable by a taxpayer and that calculation is based, in part, on the existing definition of an acceptable amount in subsection 45-232(3). The definition of acceptable amount contained in existing subsection 45-232(3) will be amended to provide that it only applies for a 4-instalment payer4 instalment payer. [Amendment 4, item 89, subsection 45-232(3)]

2.9 New subsections will be inserted into section 45-232 which define acceptable amount for the purposes of working out the amount on which GIC is payable by a 2-instalment payer2 instalment payer. They take account of the fact that a 2-instalment payer2 instalment payer only pays instalments after the end of the third and fourth instalment quarters. [Amendment 4, items 88 and 90, subsections 45-232(2) and (3A) to 3(D)]

2.10 When a 2-instalment payer2 instalment payer does not vary the instalment payable for the third instalment quarter of an income year, the acceptable amount of that instalment will be the amount notified by the Commissioner as the amount of the instalment for that quarter. [Amendment 4, item 90, paragraphs 45-232(3A)(b), (3B)(d) and (3C)(d)]

2.11 If a 2-instalment payer2 instalment payer varies the amount of the instalment that would otherwise be payable for the third instalment quarter, the acceptable amount of the instalment for that instalment quarter is the lower of:

•

the amount notified to the instalment payer under paragraph 45-112(1)(a) as the amount for that instalment; and

•

75% of the benchmark tax for the income year.

[Amendment 4, item 90, paragraph 45-232(3A)(a) and table item 1]

01 If a 2-instalment payer2 instalment payer varies the amount of the instalment for either the third or fourth instalment quarter, the acceptable amount of the instalment for the fourth instalment quarter is the lower of:

•

the amount that the Commissioner would have notified to the instalment payer under paragraph 45-112(1)(a) as the amount for that instalment (i.e. as if no variation(s) had been made); and

•

100% of the benchmark tax for the income year less the amount that is the acceptable amount for the third instalment quarter.

[Amendment 4, item 90, paragraph 45-232(3A)(a) and table item 2]

2.13 However, special rules will be used to work out the acceptable amount of an instalment for an instalment quarter of an income year in which the Commissioner first notifies a taxpayer of its instalment rate in a quarter other than the first instalment quarter. These special rules operate as exceptions to new subsection 45-232(3A), but will work in essentially similar ways to that subsection. The only difference that will arise will occur when it is necessary to work out the acceptable amount of the instalment by reference to the percentage of a taxpayers benchmark tax.

2.14 The percentages of benchmark tax used in working out the acceptable amount depend on when a taxpayer is first given a PAYG instalment rate by the Commissioner. If the taxpayer gets an instalment rate for the first time during the second instalment quarter, the percentage of benchmark tax used to work out the acceptable amount of the third instalment quarter is 50% [amendment 4, item 90, subsection 45-232(3B), table item 1] . The percentage of benchmark tax used in the calculation of the acceptable amount of the fourth instalment quarter is 75% [amendment 4, item 90, subsection 45-232(3B), table item 2] .

2.15 Similarly, if the taxpayer is first given an instalment rate during the third quarter, the percentages of benchmark tax are 25% and 50% for the third and fourth instalment quarters respectively [amendment 4, item 90, subsection 45-232(3C), table items 1 and 2] . If the instalment rate is first notified to the taxpayer during the fourth instalment quarter, the benchmark tax percentage for that quarter is 25% [amendment 4, item 90, paragraph 45-232(3D)(d)] .

2.16 The amendments align the benchmark tax percentages used in working out the acceptable amount with the percentages of the GDP-adjusted notional tax that are used by the Commissioner in working out the amount of the instalment payable by a 2-instalment payer2 instalment payer under section 45-402. This has the effect of ensuring that a 2-instalment payer2 instalment payer is not disadvantaged in relation to a 4-instalment payer4 instalment payer.

Credit for instalments payable

2.17 Amendment 9 inserts Schedule 5 to the Bill which makes 2 minor technical corrections to subsection 45-30(2) of Schedule 1 to the TAA 1953. The first amendment prevents a taxpayer who has varied their benchmark tax from obtaining a double benefit from a credit arising as a result of that variation. It does this by providing that a credit claimed under section 45-420 of Schedule 1 to the TAA 1953 because of a variation of a quarterly GDP-adjusted notional tax instalment, is properly taken into account in working out the amount of the credit for PAYG instalments against assessed tax under section 45-30(2). [Amendment 9, item 1, subsection 45-30(2)]

2.18 The second amendment is consequential upon the first and repeals a non-operative note to subsection 45-30(2). [Amendment 9, item 2, subsection 45-30(2)]

2.19 Both of these corrections are consequential upon the amendments to PAYG instalments made by A New Tax System (Tax Administration) Act 1999 but were omitted from that Act in error. They will be retrospective to the date of effect of those amendments and will apply for the 2000-2001 income year and later income years.

2.20 Few (if any) PAYG instalment payers have so far been affected by the anomalous situation arising as a result of the unintended omission of these consequential amendments. The only group of taxpayers who could have been affected prior to introduction of the Bill is the limited class of individuals who are currently entitled to use the GDP-adjusted notional tax basis of paying PAYG instalments and who:

•

balance earlier than 30 June;

•

have already varied their benchmark tax for the 2000-2001 income year; and

•

whose assessments for the 2000-2001 income year have been issued and a credit applied against that assessment as a result of that variation.

2.21 Schedule 2 to the Bill extends the class of taxpayers who have access to the GDP-adjusted notional tax method. The amendment will also ensure that taxpayers within this extended class will have the correct amount credited against their assessed tax.

Correction of an error

01 Item 8 of Schedule 2 to the Bill will amend the note to subsection 45-90(1). The amendment as drafted refers to subsection 45-50(5). As there is no subsection 45-50(5), the Bill will be amended to correctly refer to subsection 45-50(4). [Amendment 3]

Application and transitional provisions

2.23 Part 3 of Schedule 2 to the Bill, which will be inserted by amendment 4, will apply for the 2001-2002 income year and later income years. In addition, the amendments made to the ITAA 1936 by Part 3 of Schedule 2 apply in respect of instalments payable for an instalment quarter of the 2000-2001 income year that is a transitional quarter within the meaning of item 49 in Part 2 of Schedule 2 to the Bill. [Amendment 4, item 95]

2.24 The amendments made by Schedule 5 to the Bill apply for the 2000-2001 income year and later income years. [Amendment 9, item 3]

Consequential amendments

2.25 Additional consequential amendments will be made to Schedule 1 to the TAA 1953 to take account of the amendments described in Chapter 5 of the explanatory memorandum to the Bill. These amendments are described in Table 2.2.

2.26 Consequential amendments will also be made to the ITAA 1936 (Table 2.1) to state how an entity that is liable to keep a dividend franking account must take account of a variation credit which arises when that entity pays instalments using the GDP-adjusted notional tax method.