House of Representatives

Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Paul Keating, M.P.)

Main Features

Collection of tax in respect of certain payments for work (Clauses 24A-24M)

The proposed amendments will give effect to certain changed arrangements that were announced on 4 September 1984 following completion of the Government's review of the first six months' operation of the prescribed payments system (PPS). They also address the recommendations made by the Senate Standing Committee on Finance and Government Operations as a result of its separate review of the operation of the PPS.

The changes, which are basically administrative in nature, will further reduce the paperwork burdens on some taxpayers and generally facilitate taxpayer compliance with the requirements of the PPS.

The main features of the amendments proposed by clauses 24A-24M are -

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to provide a degree of flexibility in relation to an application for, and the expiry date of, deduction variation certificates. In future, a certificate issued in response to an application -

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lodged in the first four months of an income year will operate for the remainder of the month of issue and the succeeding 12 months; and

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lodged after the first four months of an income year will operate until the end of the fourth month of the succeeding income year (clause 24K);

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where a payee who is the holder of a deduction variation certificate that expires in a month after the end of a year of income receives an obligation transfer form from an eligible paying authority (in these notes referred to as a "payer"), that form will in practice also have effect until the same date (clause 24B);

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a payer using the obligation transfer form procedure will have the option of completing an annual deduction form for each payee rather than completing them on a monthly basis (clause 24D);

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a payer will be able to renew an obligation transfer form and to make deductions of tax at the 10 per cent rate (in lieu of the 25 per cent rate) until the payee lodges a deduction form authorising that rate or a lower rate of deduction (clause 24B);

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the terms of the declaration required to be made by tax agents and other prescribed persons in a client's application for a deduction exemption certificate will be changed to make it clearer that an absolute warranty is not required (clause 24L);

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the Commissioner of Taxation will be authorised to refund excess deductions of tax made due to genuine oversight or error (clause 24E);

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a liquidator of a company being wound-up and a trustee of a bankrupt estate will be excluded from the scope of the PPS, as both a payer and a payee (clause 24A);

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the "no tax to pay" basis of issuing deduction exemption certificates will be removed, and persons with no expected tax liability will in future apply for a deduction variation certificate with a "nil" rate (clause 24L).

In addition to the above changes, three minor technical amendments to the PPS are proposed to -

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establish rules for the allowance of credit for PPS deductions where a trust estate incurs a loss (clauses 24F and 24G);

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relieve householders dealing solely with a payee to whom the reporting exemption provisions apply from the obligation to notify completion of a construction project (clause 24C); and

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make it clear that the benefit of a deduction variation or exemption certificate can only be obtained in relation to prescribed payments made when the certificate is in force (clauses 24D and 24L).

Limitation on certain deductions (Clause 12A)

This amendment will delete a reference to section 121BA of the Principal Act which is consequential on the recent repeal of that provision.

More detailed explanations of each of the amendments are contained in the notes that follow.

Clause 12A: Limitation on certain deductions

The amendment to be made by this clause will delete a reference to section 121BA which was repealed by section 39 of Income Tax Assessment Amendment Act (No. 3) 1984.

Consistent with the repeal of section 121BA, the amendment will, under sub-clause (2), apply to assessments in respect of income of the year of income that commenced on 1 July 1984 and of all subsequent years of income.

Collection of tax at source in respect of certain payments for work

Clause 24A: Interpretation

Definitions and other interpretative provisions relevant to the PPS are contained in section 221YHA of the Principal Act. Each term defined in sub-section 221YHA(1) has its given meaning, unless the contrary intention appears.

"Payment" is defined in sub-section 221YHA(1) to mean a payment that is made, or is liable to be made, under a contract which, in whole or in part, involves the performance of work. The effect of paragraphs (a) and (b) of the definition is to exclude from the scope of the PPS a payment of salary and wages or a payment of exempt income respectively.

Paragraph (a) of clause 24A is a drafting measure necessary as a consequence of the insertion, by paragraph (b) of this clause, of a new paragraph (c) in the definition of "payment" in sub-section 221YHA(1). New paragraph (c) of the definition of "payment" will exclude from the scope of the PPS a payment made to or by a trustee, but only where the trustee is the trustee of the estate of a bankrupt, or the liquidator of a company that is being wound-up. Prescribed payments made to or by a trustee appointed in a Part X arrangement under the Bankruptcy Act 1966, or to or by a liquidator, receiver, manager or official manager appointed under Part X or XI (as the case may be) of the Companies Act 1981, are not affected by this change.

Paragraph (c) of this clause proposes the insertion of a new sub-section - sub-section (7) - in section 221YHA. New sub-section (7) will make clear the time during which a payee will be taken to have properly furnished a deduction form under proposed new sub-section 221YHAA(3) (see notes on clause 24B), or the time at which a deduction form is to be completed by a payer under proposed sub-sections 221YHD(1E) and (1F) (see notes on clause 24D). The relevant time in a particular case will be determined by reference to the payee's "year of income". This term is defined in sub-section 6(1) of the Principal Act and, for practically all taxpayers, means a year ending on 30 June. Where, however, a taxpayer has, with the approval of the Commissioner, adopted an accounting period in lieu of a year ending on 30 June, the term refers to the period adopted in lieu of the normal year of income.

Sub-section 221YHA(7) will ensure that, unless a payee notifies a payer in writing, before the end of the first month in respect of which an obligation transfer form has effect, that the payee has adopted a substituted accounting period under the Principal Act, the payer may discharge his or her duties and obligations under the abovementioned provisions as if the reference to a "year of income" was to a year ending on 30 June.

Clause 24B: Special provisions relating to certain prescribed payments

Section 221YHAA of the Principal Act relieves payees of the obligation to complete and deliver deduction forms by deeming them to have properly furnished such forms in the circumstances described in the section. One of the circumstances specified is where a payer has issued to the payee an "obligation transfer form" in relation to prescribed payments to be made to that payee during a year of income.

The purpose of the obligation transfer form is to permit payers, for whom it is convenient to do so, to complete deduction forms in relation to a year of income on behalf of persons to whom they make prescribed payments. sub-section 221YHAA(3) ensures that in these cases the payee is taken to have properly furnished deduction forms in relation to those months of a year of income. Under the present law, however, a payer cannot renew an obligation transfer form for a new income year until the payee delivers a further deduction form in respect of a payment due in that year. Moreover, until the payee delivers the deduction form, the payer is required to deduct tax at the penalty rate of 25 per cent, even though the basic payee details (name, address and taxation file number) are known to the payer.

Clause 24B proposes the substitution of a new sub-section 221YHAA(3) that will widen the operation of the existing sub-section to -

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enable a payer to issue an obligation transfer form to a payee provided that, at any previous time, the payee has furnished a completed deduction form to the payer; and

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allow an obligation transfer form to continue to have effect for the month or months after the end of an income year, during which the payee's deduction variation certificate is in force.

In addition to the above changes, a technical deficiency in the existing sub-section in relation to the month in which an obligation transfer form can commence to have effect, will be corrected.

Paragraphs (a) and (b) of new sub-section 221YHAA(3) broadly restate the existing circumstances in which a payee will be relieved of the obligation to furnish deduction forms under the obligation transfer form procedure. However, under new paragraph (a), it will now only be necessary for a payee to have completed and delivered a deduction form to the relevant payer at any time since the introduction of the PPS rather than in each income year. This change will permit a payer to issue an obligation transfer form at any time after the payer has received one deduction form from a payee, and to issue further obligation transfer forms in subsequent years without the need for the payee to produce further deduction forms each year.

A payer who renews an obligation transfer form under these new arrangements, will thus be required to make deductions of tax from prescribed payments made to the payee at the maximum rate of 10 per cent unless, of course, the payee has furnished a deduction form to the payer containing a declaration in relation to a deduction exemption or variation certificate that is in force.

Where a payer who has received a deduction form from a payee in the circumstances set out in paragraph 221YHAA(3)(a), forwards to the payee an obligation transfer form, new paragraph 221YHAA(3)(b) will operate to determine the month that may be specified by the payer on the obligation transfer form, as the month from which it has effect.

Under sub-paragraph 221YHAA(3)(b)(i), the obligation transfer form may commence to have effect in the same month that it is given to the payee provided that -

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a prescribed payment has not been made to the payee at any stage during the month before the time when, in that month, the obligation transfer form is forwarded to the payee (sub-sub-paragraph (b)(i)(A)); or

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the payee has properly furnished a deduction form to the payer for the month in which the obligation transfer form is given to the payee, i.e., a deduction form was completed and delivered to the payer before any prescribed payment was made to the payee (sub-sub-paragraph (b)(i)(B).

In any other case, the obligation transfer form may only commence to have effect, by virtue of sub-paragraph (b)(ii), in a month after the month in which the obligation transfer form is given to the payee.

In the circumstances described, a payee shall be taken to have properly furnished deduction forms to the payer in relation to prescribed payments made to the payee for the month the obligation transfer form commences to have effect and for each subsequent month in the year of income - paragraph (c) of new sub-section 221YHAA(3).

There will be cases, however, where a payee is the holder of a deduction variation certificate which, under the amendment proposed by clause 24K (see notes on that clause) to sub-section 221YHP(1) of the Principal Act, will remain in force, unless revoked by the Commissioner, for up to 4 months after the end of the year of income of the payee.

New paragraph 221YHAA(3)(d) will operate to deem a payee to have properly furnished a deduction form to a payer in those months after the end of the year of income during which the payee is the holder of a deduction variation certificate that is in force, provided, of course, that the payee has previously delivered to the paying authority a deduction form containing a declaration in relation to that variation certificate.

Clause 24C: Provision of information to Commissioner

Section 221YHB of the Principal Act sets out the requirements for a payer (including a householder) to notify the Commissioner if the payer makes, or is liable to make, prescribed payments or enters into a contract under which such payments are to be made. One such requirement - contained in sub-section 221YHB(9) - is that a householder notify the Commissioner, in writing, within 14 days of the completion of a construction project to which the PPS applies.

Paragraph (a) of sub-clause (1) proposes an amendment to sub-section 221YHB(9) that is consequential upon the insertion of a new sub-section 221YHB(9A) to which the above requirement for a householder to notify completion of a construction project will be subject.

Paragraph (b) of sub-clause (1) will insert the new sub-section - sub-section 221YHB(9A) - in the Principal Act which will relieve a householder of the need to report the completion of a construction project where he or she believes, on reasonable grounds, that all prescribed payments made in connection with the project were covered by a current reporting exemption declaration or exemption approval number made or quoted by the payee. Put another way, the new sub-section operates if the householder was relieved of the obligation to report to the Commissioner details of any prescribed payments made to all payees concerned with the project.

By sub-clause (2), the amendments made by sub-clause (1) will apply in relation to householder construction projects that are completed after the date of commencement of the clause, that is, the date on which the Bill receives Royal Assent.

Clause 24D: Duties of eligible paying authorities

Section 221YHD of the Principal Act imposes obligations and duties on payers in relation to prescribed payments made by them during a calendar month.

Clause 24D will create a new set of rules for certain eligible payers who adopt the obligation transfer form procedure which is explained in the notes on clause 24B. These new rules, which are contained in proposed sub-sections 221YHD(1A) to (1F) inclusive, maintain the present fundamental monthly basis of operation of the PPS, but will allow payers using the obligation transfer form procedure the option of producing only one deduction form for the payees each year, in lieu of monthly forms.

New sub-section (1A) allows a payer, who proposes to adopt the obligation transfer form procedure, to make an election in a payee's obligation transfer form to the effect that the payer will treat the payee as a "prescribed payee" during each of the months that the obligation transfer form has effect.

A payee will be a prescribed payee in relation to a month, under new sub-section (1B), if an obligation transfer form given to the payee -

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contains an election under new sub-section (1A) - paragraph (a); and

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has effect during that month - paragraph (b).

By new sub-section (1C) a payer dealing with a prescribed payee will be relieved of the obligations contained in present paragraph 221YHD(1)(b). However, similar requirements to those contained in that paragraph, but tailored to meet the situation of a payer dealing with a prescribed payee, will now be provided for in new sub-sections 221YHD(1D) - (1F). All payers will still be required, on a monthly basis, by virtue of paragraph 221YHD(1)(a) of the Principal Act to deduct the relevant amount of tax from each prescribed payment made to a prescribed payee.

New sub-section (1D) allows a payer up to 14 days after the end of a month in which prescribed payments have been made by the payer to a prescribed payee or prescribed payees to comply with the obligations contained in paragraphs (1D) (a), (b) and (c).

Under paragraph (a), the payer is required to complete a reconciliation form in relation to all prescribed payments made to prescribed payees during that month.

Paragraph (b) provides that in cases where no deduction of tax is made from any prescribed payments, the payer is required to forward to the Commissioner the reconciliation form required by paragraph (a) together with such other information as the Commissioner, by notice published in the Commonwealth of Australia Gazette, requires. The information will be basically the same as that that would be provided if a deduction form was completed by the payer. In practice, it is expected that computer based payers who will be the primary users of this system will provide computer or other listings of prescribed payments and prescribed payees to the Commissioner.

Paragraphs (c) applies in those circumstances where tax has been deducted from some or all of the prescribed payments made. By sub-paragraph (i), a payer will be required to pay to the Commissioner all amounts deducted during the month from prescribed payments made to prescribed payees and, at the same time, under sub-paragraph (ii), forward to the Commissioner the reconciliation form required by paragraph (a), together with such information as the Commissioner, by notice published in the Commonwealth of Australia Gazette, requires. This will be the same information as that outlined above, except that details of deductions made will also be required.

Under the amendments proposed by clauses 24B and 24K, it is possible for an obligation transfer form to cease to have effect at the end of a month, other than the last month of a year of income (see notes on those clauses). For example, a prescribed payee whose income year ends on 30 June, may be the holder of a deduction variation certificate that ceases to be in force on 31 October.

Sub-section (1E) sets out the duties of a payer who, having forwarded an obligation transfer form to such a prescribed payee (paragraph (a)), does not, before the expiration of the form, where this would occur other than at the end of a year of income, forward another obligation transfer form to the payee the effect of which would be to continue to treat the payee as a prescribed payee (paragraphs (b) and (c)). The proposed sub-section allows the payer 14 days after the end of the month in which the obligation transfer form expires to comply with the obligations contained in paragraphs (d) to (h) inclusive.

Paragraph (d) requires the payer to complete the part of a deduction form applicable to the payee by transcribing the particulars provided in the last deduction form delivered to the payer by the payee. This requirement for the transcription of the payee's particulars onto a deduction form is necessary because the payee will usually not have personally completed and delivered to the payer a deduction form for the particular month. Under proposed paragraph (e), the payer is required to also complete that part of the deduction form applicable to the payer.

In the example referred to above, the payer would, under paragraph (f), have to specify in the deduction form -

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the total of all prescribed payments made to the prescribed payee during the months of July to October inclusive (sub-paragraph (i)); and

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the total of deductions of tax made from those prescribed payments (sub-paragraph (ii)).

Having completed a deduction form in accordance with paragraphs (d), (e) and (f), the payer is then required, also within 14 days of the end of the month, to forward the completed deduction form to the Commissioner (paragraph (g)) and deliver a copy of the form to the payee (paragraph (h)).

It should be noted again that the obligations under new sub-section (1E) do not arise for a payer who continually renews an obligation transfer form for each prescribed payee.

New sub-section (1F) must be complied with by a payer where an obligation transfer form given to a prescribed payee has effect during the last month of a year of income (paragraphs (a) and (b)) - usually 30 June (see earlier notes on paragraph (c) of clause 24A).

In keeping with new sub-sections (1D) and (1E), sub-section (1F) allows the payer 14 days to comply with the obligations contained in paragraphs (1F)(C) to (g) inclusive.

Paragraphs (c) and (d) are similar in operation to paragraphs (1E)(d) and (e) respectively (see earlier notes on those paragraphs) and require the payer to complete a deduction form for each prescribed payee.

Sub-Paragraphs (e)(i) and (ii) also operate in a similar way to sub-paragraphs (1E)(f)(i) and (ii) (see earlier notes on those sub-paragraphs). However sub-paragraphs (e)(i) and (ii) require the payer to specify in the deduction form details of all prescribed payments and deductions of tax made during the month or months in the year of income in respect of which the payee was a prescribed payee, other than prescribed payments and deductions of tax in respect of which a deduction form has been completed under sub-section (1E).

Paragraphs (f) and (q) are to the same effect as paragraphs (1E)(g) and (h) (see notes on those paragraphs) and require the payer to forward the completed deduction form to the Commissioner and to deliver a copy to the payee.

The Commissioner may, under paragraph 221YHD(2)(a) of the Principal Act, by notice in writing served on a payer extend the period of 14 days within which the payer is required to comply with paragraph 221YHD(1)(b). By paragraph (b) of this clause paragraph 221YHD(2)(a) will also apply in relation to new sub-sections 221YHD(1D), (1E) and (1F).

Paragraph 221YHD(2)(b) also allows the Commissioner to vary the requirements of paragraph 221YHD(1)(b), but only in its application in relation to prescribed payments made by a payer to the holder of a deduction exemption certificate. Paragraph (c) of clause 24D will include in paragraph 221YHD(2)(b) a reference to new sub-sections 221YHD(1D), (1E) and (1F).

Sub-section 221YHD(3) of the Principal Act sets out various fines and penalties in relation to a payer, other than a government body, convicted by a court of an offence of contravening or failing to comply with a requirement of sub-section 221YHD(1) (including the requirements of that sub-section as varied under sub-section 221YHD(2)). Where a payer fails, under new sub-sections 221YHD(1D), (1E) and (1F), to complete the applicable part of a deduction form, to furnish information to the Commissioner, to complete a reconciliation form, to deliver a copy of a deduction form to a payee or to deliver a deduction form to the Commissioner, the payer will, under paragraph (d) of this clause, be liable to a fine not exceeding $2,000.

Proposed sub-paragraph 221YHD(1D)(c)(i) explained above requires a payer to pay any tax deducted from a prescribed payment to a prescribed payee in a month to the Commissioner. Paragraph (e) of this clause will ensure that an individual who fails to comply with this requirement will be liable to a maximum fine of $5,000, or gaol for a period up to 12 months, or both. If the payer is not an individual, a fine not exceeding $25,000 will apply for such a failure.

It has always been a feature of the PPS that the holder of a prescribed certificate - a deduction exemption or deduction variation certificate - would be entitled to the benefit of the certificate i.e., no deductions of tax or reduced deductions of tax, in respect of prescribed payments made to the payee during the period that the prescribed certificate is in force.

Paragraphs (f) and (g) will omit existing sub-sub-paragraphs 221YHD(5)(a)(ii)(B) and (5)(a)(iii)(B) and substitute new sub-sub-paragraphs in their place to make it clear that a payee who is the holder of a deduction variation certificate is only entitled to the benefit of a reduced rate of deduction in relation to prescribed payments made to the payee during the period when the certificate is in force. Similar amendments are being proposed to the deduction exemption certificate provisions - sub-section 221YHQ(9) - of the Principal Act (see notes on clause 24L).

Clause 24E: Refund of deductions in certain cases

This clause proposes the insertion of a new section - section 221YHE - in the Principal Act, to authorise the Commissioner to refund excess deductions of tax made due to genuine oversight or error.

Under sub-section (1) of new section 221YHE, a person must apply in writing to the Commissioner for a refund. Where such an application is made the Commissioner, before authorising any refund, must be satisfied that tax was deducted from a prescribed payment made to the applicant (paragraph (a)), and that the whole or part of the amount of the deduction was made due to some act or omission of the applicant or another person (paragraph (b)). For example, an applicant who has been dealing regularly with a particular payer may have omitted to quote in a deduction form a deduction variation certificate that is in force and has been quoted in all earlier deduction forms furnished to that payer. In such a case, the payer would be required to deduct tax at the 10 per cent rate which would exceed the amount that would have been deducted but for the omission.

Where these basic conditions are met, and the Commissioner, having regard to -

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the purposes of the PPS (sub-paragraph (c)(i));

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the nature of the act or omission by the applicant or other person (sub-paragraph (c)(ii)); and

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such other matters as he thinks fit (sub-paragraph (c)(iii)),

is satisfied that it would be fair and reasonable to refund the whole or part of the amount of any PPS deductions made from payments to the applicant, the Commissioner is authorised to make an appropriate refund.

New sub-section 221YHE(2) is a safeguarding measure to ensure that where an amount is refunded to a person under sub-section (1), credit in respect of that amount is not allowable to any person under section 221YHF of the Principal Act.

Clause 24F: Credits in respect of deductions from prescribed payments

Section 221YHF of the Principal Act establishes the circumstances under which a person will be entitled to credit in respect of deductions of tax made from prescribed payments received by the person. Sub-section (3) of that section specifically sets out the credit entitlement of a trustee of a trust estate, or of a beneficiary of a trust estate, as the case may be, in respect of deduction forms forwarded to the Commissioner in relation to deductions made in a year of income from prescribed payments made to the trustee of the trust estate.

Paragraphs 221YHF(3)(a), (b) or (c) by which credit is currently distributed between beneficiaries and trustees of a trust estate, depend for their operation on a trust estate deriving some net income. Simply stated, these paragraphs provide that credit for PPS deductions is shared between the beneficiaries and the trustee on the same basis they share the net PPS income of the trust.

Sub-clause (1) of this clause will insert a new paragraph - paragraph (d) - in sub-section 221YHF(3) of the Principal Act to clearly establish the basis for allowing credit to a trustee for any PPS deductions in any year of income in which the trust estate has no net income or sustains a loss.

The amendment proposed by sub-clause (1) will, by virtue of sub-clause (2), have effect in respect of any deduction forms received by the Commissioner after the date of commencement of the PPS, viz, 1 September 1983.

Clause 24G: Application of credits

This clause is consequential on the amendment proposed by clause 24F, and will amend section 221YHG of the Principal Act which sets out the rules for the application of credit to which a person is entitled under section 221YHF of that Act.

Paragraph (a) of clause 24G will insert in present sub-section 221YHG(2) a reference to proposed sub-section 221YHG(4A) to ensure that sub-section (2) will continue to apply to determine the basis for applying credit to which a person other than a beneficiary or trustee is entitled.

By paragraph (b) a new sub-section - sub-section 221YHG(4A) - will be inserted in the Principal Act. This new sub-section will authorise the Commissioner to apply credit to which the trustee of a trust estate is entitled by virtue of proposed paragraph 221YHF(3)(d) (see notes on clause 24F) in circumstances where the trust estate has no net income or sustains a loss in a year of income. In such cases, the credit is to be first applied in full or part payment of any tax liability of the trustee in respect of the net income or a part of the net income of the trust estate assessed to the trustee for any other year of income under sections 99 or 99A of the Principal Act. Any excess then remaining would be available for refund to the trustee (new paragraphs (4A)(a) and (b)).

Paragraph (c) of this clause proposes a technical amendment to sub-section 221YHG(5) of the Principal Act to insert a reference to new sub-section 221YHG(4A).

Clause 24H: Failure to pay amounts deducted to Commissioner

Section 221YHJ of the Principal Act contains a statutorily imposed penalty applicable in cases where a payer, other than the Commonwealth, deducts tax from a prescribed payment but fails to remit that tax to the Commissioner as required, and within the time specified, by section 221YHD of the Principal Act.

Clause 24H will insert in sub-section 221YHJ(1), a reference to the new requirement on payers to remit to the Commissioner amounts deducted from prescribed payments made to prescribed payees under new sub-paragraph 221YHD(1D)(c)(i) (see notes on clause 24D).

Clause 24J: Failure to furnish deduction form, etc.

Section 221YHK of the Principal Act imposes a penalty where a payer, other than a government body, fails to report, as required under section 221YHD, prescribed payments not subject to deduction of tax. Such payments are those made -

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by a householder; or

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to a payee who is the holder of a deduction exemption certificate.

Reflecting the amendments proposed to section 221YHD by clause 24D (see notes on that clause), this clause will insert in paragraph 221YHK(1)(a) references to new paragraphs 221YHD(1E)(g) or (1F)(f) under which a payer is to report to the Commissioner by lodging deduction forms covering prescribed payments made to prescribed payees.

Clause 24K: Deduction variation certificates

The purpose of a deduction variation certificate is to allow a person for whom the rate of deduction prescribed in the Income Tax Regulations - 10 per cent - is too high, to have that rate reduced to take account of special circumstances that exist in relation to that person.

Section 221YHP of the Principal Act allows the Commissioner to issue a deduction variation certificate, but only in relation to a year of income, or a part of a year of income (sub-section 221YHP(1)). In practice, therefore, a taxpayer who seeks to continue to have a lower rate than the prescribed rate apply to payments received must re-apply for a deduction variation certificate each year, and before the time when an existing certificate ceases to have effect, now on 30 June.

Paragraph (a) of clause 24K proposes to amend section 221YHP of the Principal Act to introduce a degree of flexibility into the present arrangements by modifying the period in relation to which the Commissioner may issue a deduction variation certificate. The amendment proposed by paragraph (a) will cater for taxpayers whose year of income is the normal financial year as well as those who have adopted a substituted accounting period under section 18 of the Principal Act.

It is proposed that a deduction variation certificate issued in response to an application for such a certificate will operate for the remainder of the month during which the certificate commences to be in force and for the succeeding 12 months, provided that the commencement month is any of the first 4 months of a year of income. Where the commencement month is other than the first four months of the year, the certificate will run until the end of the fourth month in the succeeding year of income. For example, in the usual case where the applicant's year of income ends on 30 June, a deduction variation certificate which commences on 10 September 1985 would operate until 30 September 1986. A deduction variation certificate issued to the applicant with a commencement date after 31 October in the year of income e.g., 1 December 1985, would only operate until 31 October 1986. As noted above, similar rules will apply to taxpayers who operate on a substituted accounting period approved by the Commissioner of Taxation.

As a transitional measure, the Commissioner will, towards the end of the 1984-85 financial year, issue a further variation certificate to all holders of current certificates due to expire on 30 June 1985. These further certificates will apply from 1 July to 31 October 1985 and will authorise the same rate of deduction shown on the current certificate. During the July to October period in 1985, taxpayers whose year of income ends on 30 June will be able to establish a date of expiry of future deduction variation certificates other than the presently inflexible 30 June. It is, of course, still open to taxpayers, should they choose, to apply for deduction variation certificates before the end of an income year and for those certificates to expire at the end of the year of income.

Paragraph (b) proposes the omission of sub-section 221YHP(2) of the Principal Act and the substitution of a new sub-section.

Existing sub-section 221YHP(2) provides that the Commissioner shall not issue a deduction variation certificate unless he is satisfied that, because of the special circumstances of the applicant, the prescribed rate of tax to be deducted from prescribed payments received by the applicant should be reduced.

The substituted sub-section 221YHP (2) will make it clear that the Commissioner may issue a deduction variation certificate to a person where he is satisfied, as at present, that the prescribed rate of tax to be deducted from prescribed payments received by the applicant should be reduced (paragraph (2)(a)), or that no amount of tax should be deducted from prescribed payments received by the applicant (paragraph (2)(b)). This latter amendment is consequential on the amendment proposed to section 221YHQ to remove the "no tax to pay" basis of issuing exemption certificates - see notes on next clause.

Clause 24L: Deduction exemption certificates

Section 221YHQ of the Principal Act sets out the conditions that are to be satisfied by an applicant for a deduction exemption certificate, and the requirements to be satisfied before a payer may act upon that certificate and make a prescribed payment to the holder of a certificate without deduction of tax.

Under the present arrangements, the issue of deduction exemption certificates is confined to -

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those persons who have been in business for a significant period and are able to demonstrate that, during that time, a satisfactory taxation record has, in all respects, clearly been maintained; or

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those persons who, in the opinion of the Commissioner, will have no tax liability in relation to the year of income to which the certificate, if issued, will relate.

Paragraph (a) of sub-clause (1) will amend sub-section 221YHQ(2) of the Principal Act to remove the authority of the Commissioner to issue a deduction exemption certificate where he is satisfied that there is no reasonable likelihood that tax will be payable by the applicant for the certificate. An example of the kind of situation where an exemption certificate would have been issued on these grounds in the past would be where the applicant has a significant carry-forward loss from a previous year which, when set off against projected income of the year, would result in the applicant having no tax to pay for that year. In future, persons who would have applied for a deduction exemption certificate on these grounds will be required to apply for a deduction variation certificate with a "nil" rate under section 221YHP (see notes on clause 24K).

As a consequence of the amendment proposed by paragraph (a), the Commissioner will now only be authorised to issue a deduction exemption certificate where the applicant satisfies the relevant tests remaining in sub-section 221YHQ(2). Depending on the nature of the taxation records maintained by an applicant, one of the tests to be met by all applicants under the sub-section requires a declaration by a prescribed person (e.g., a registered tax agent) that he or she has examined the applicants records, or such other statements as are required under sub-section 221YHQ(2), and is satisfied as to the accuracy of the applicant's last return of income furnished to the Commissioner.

Paragraph (b) will amend paragraph 221YHQ(2)(b) and sub-paragraphs 221YHQ(2)(c)(iii) and (2)(d)(iii) of the Principal Act to make it clear that, in each case, the declaration required of a prescribed person does not amount to an absolute warranty as to the accuracy of an applicant's taxation return. Rather, by the amendments proposed, the prescribed person must be satisfied that, to the best of his or her knowledge and belief based on an examination of the applicant's records (including such statements as are required in relation thereto) that the last return of income accurately discloses the assessable income and allowable deductions of the applicant.

Existing paragraph 221YHQ(3)(a) of the Principal Act is an interpretative provision which sets out, for the purposes of sub-section 221YHQ(2), the meaning of the reference in that sub-section to the Commissioner being satisfied that there is no reasonable likelihood that tax will be payable by an applicant for a deduction exemption certificate. Paragraph (c) will repeal paragraph 221YHQ(3)(a) and is consequential on the amendment proposed by paragraph (a) of this clause (see notes above).

Amendments being made to sub-section 221YHQ(9) of the Principal Act by paragraphs (d) and (e) of this clause mirror similar amendments already discussed in relation to section 221YHD in respect of the requirements to be satisfied before an eligible paying authority may vary the rate of deduction of tax from a prescribed payment to that specified in a payee's deduction variation certificate (see notes on clause 24D). Paragraphs (d) and (e) will substitute new sub-paragraphs (9)(a)(i) and (b)(i) respectively in section 221YHQ, the effect of which will be to require that, whether or not payment is made to a payee in person, the payment must be made during the period specified by the payee in the deduction form as the period during which a deduction exemption certificate is in force. If this requirement is not met, the payment cannot be made without deduction of tax.

Sub-clause (2) will ensure that any deduction exemption certificates issued under section 221YHQ, prior to the operation of the amendments effected by sub-clause (1), will remain in force in respect of prescribed payments to which the certificates relate, as if the proposed amendments had not been made.

Clause 24M: Reporting exemptions

Under section 221YHR of the Principal Act, a payee who is the holder of a deduction exemption certificate on the grounds of good tax compliance may avoid the need to complete and deliver deduction forms to payers. In such cases, payers are also relieved from reporting details of payments made to the payee each month.

As was explained earlier in the notes on clause 24L, the issue of deduction exemption certificates is to be confined to persons with a record of good compliance with the taxation laws and such certificates will not be available on the grounds of no tax to pay. Sub-clause (1) of clause 24M will remove from sub-section 221YHR(1) of the Principal Act the reference to the good compliance tests in section 221YHQ as, by the amendments proposed by paragraph (a) of clause 24L, those will be the only tests on which a deduction exemption certificate will be issued.

Sub-clause (2) will ensure that the amendment made by sub-clause (1) only applies in relation to deduction exemption certificates issued after the date of Royal Assent to the Bill.