Explanatory Statement

Issued by Authority of the Minister for Revenue and Assistant Treasurer

Taxation Administration Act 1953

Taxation Administration Amendment Regulations 2001 (No. 2)

Section 18 of the Taxation Administration Act 1953 (the Act) provides that the GovernorGeneral may make regulations for the purposes of the Act.

Subsection 15-50(1) of Schedule 1 to the Act provides that an individual who expects to receive a payment to which the pay as you go (PAYG) withholding system applies may make a declaration about certain prescribed matters for the payer to have regard to in determining the amount to withhold.

Subsection 12-60(2) of Schedule 1 to the Act provides that amounts are to be withheld from payments prescribed in the regulations.

The amendments to the Taxation Administration Regulations 1976 refine and clarify the mechanisms by which recipients of certain payments (payees) that are subject to the PAYG withholding system may fulfil their obligations under the income tax law. The amendments also clarify the obligations of persons making the payments (payers).

Many payees who have an expected Pay As You Go (PAYG) instalment liability have been entering into agreements with payers to withhold additional amounts from payments made to them in order to avoid falling into the PAYG instalment system. However, these agreements are not recognised by the current law.

Members of the advertising industry have expressed their confusion as to how to treat payments made to models, actors and other performing artists (known in the industry as talent providers) who participate in promotional activities. The confusion arises as it can be difficult to determine whether talent providers are independent contractors or common law employees. Independent contractors must fulfil their tax obligations under the PAYG instalment system, whereas a common law employee falls within the PAYG withholding system. Extensive consultation revealed there was a clear preference within the industry that these payments be subject to withholding. The amendments address these issues as follows:

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the amendment to regulation 26 allows taxpayers to make a declaration to their payer which authorises the payer to withhold an amount as specified by the taxpayer in addition to those otherwise required to be withheld under the Act; and

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the amendments to regulation 44 bring payments made to an individual performing artist for performing in a promotional activity into the PAYG withholding system.

The amendment to regulation 26 applies from the date of Gazettal.

The amendments to regulation 44 apply to payments made on or after 1 April 2002, to allow time for educational programs to be provided to industry. This date was also chosen to coincide with the beginning of the fourth GST and PAYG instalment quarter so that minimal adjustments would be required.

The amending Regulations commenced from the date of Gazettal.

A detailed explanation of the amendments is attached.

Taxation Administration Amendment Regulations 2001 (No. 2)

Declaration for additional amount to be withheld

Regulation 26 of the Taxation Administration Regulations 1976 has been amended to prescribe an agreement entered into between an entity (the payer) and an individual (the payee), that an amount greater than that specified under the withholding schedules be withheld under Division 12 of Schedule 1 to the Act, as a matter about which an individual can make a declaration under subsection 15-50(1) of Schedule 1 to the Act.

The PAYG withholding system provisions contained in Part 2-5 of Schedule 1 to the Act replace the pay as you earn (PAYE) system, and 8 other systems for withholding, from 1 July 2000. Under the PAYE system many salary and wage earners with business and investment income entered into agreements with their employers to have amounts withheld in excess of those required to be withheld, in order to provide for their final tax liability for the income year. By doing so they would ensure that they were not drawn into the provisional tax system which was replaced by the PAYG instalment system, contained in Part 2-10 of Schedule 1 to the Act, from 1 July 2000.

The PAYG instalment system applies to business and investment income. Changes to the PAYG instalment system exclude from the requirements of the system those individuals who derive income from business and investments, and who for the prior income year received a refund or had an amount owing less than $250 on assessment. Taxpayers may now wish to enter into agreements with persons making payments to them under the PAYG withholding system, similar to those agreements under the PAYE system, in order to be excluded from the PAYG instalment system.

Section 16-70 of the Act provides that a payer is required to pay to the Commissioner of Taxation (Commissioner) the amount withheld under Division 12. Division 15 specifies that the amount to be withheld under Division 12 is set by the tax tables, regulations or as varied under section 15-15 of the Act.

The agreements made for additional amounts to be withheld, similar to those entered into under the PAYE system, are not appropriate under the PAYG system for 2 reasons.

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The credit entitlement provision, section 18-15 of Schedule 1 to the Act, refers to amounts withheld. The definition of this term describes amounts withheld under Divisions 12,13 or 14 of Schedule 1. The additional amounts withheld from a payment under the agreements between the payer and the payee do not come within the definition of amounts withheld for the purposes of the Act. Therefore, under PAYG withholding taxpayers would not be entitled to a credit for the additional amount withheld.

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The recovery provisions in Part 4-15 of Schedule 1 to the Act apply to withheld amounts that have not been paid to the Commissioner pursuant to section 16-70. As the additional amounts withheld are not amounts withheld for the purposes of the Act, the Commissioner would not be able to recover them from the payer where the payer has failed to pay them to the Commissioner.

Under the PAYG withholding rules taxpayers may apply to the Commissioner for a variation of the amounts to be withheld under section 15-15 of Schedule 1 to the Act. Taxpayers may currently apply to the Commissioner for a variation of the amounts to be withheld. However, this process is administratively difficult as the Commissioner has discretionary power to consider each variation application on its merits. In practice, the Commissioner requires an Application for variation of amounts required to be withheld under PAYG Income Tax Withholding to be completed by the taxpayer. The application then has to be processed and the applicant provided with a reply.

The amendment to regulation 26 allows for an entity and an individual to form an agreement, by means of a declaration, to the effect that an amount greater than that detailed under the withholding schedules be withheld under Division 12. The specific requirement for the agreement will be specified in the declaration form. The agreement must be in the approved form, signed by both parties and each party must keep a copy from the time it was made until 5 years after making the last payment covered by the agreement.

The Regulation does not require the Commissioner to be a party to the variation process. This avoids the administrative concerns associated with the withholding variation process. In addition, the Regulation is made subject to subsection 15-50(1) therefore, the withholding event occurs under Division 12 that brings them under the definition of amounts withheld. This ensures the amounts withheld due to variations upwards are covered under the credit entitlement provisions of section 18-15 of Schedule 1 to the Act, and the recovery provisions in Part 4-15 of Schedule 1 to the Act.

Withholding from payments for talent services

The amending Regulations inserted a new subregulation into regulation 44 of the Taxation Administration Regulations 1976 to clarify uncertainty that has arisen as to the application of the PAYG withholding system to individuals providing talent services. The uncertainty is clarified by subregulations 44(1)(c) and 44(2) of the Taxation Administration Regulations 1976, clearly making the payments for talent services a category of specified payment to which withholding will apply.

The PAYG withholding provisions are contained in Part 2-5 of Schedule 1 to the Act and apply from 1 July 2000. The PAYG withholding system has the same scope as the PAYE system, except PAYE extends to payments under a contract wholly or principally for the labour of the person paid. These contract payments were excluded from PAYG withholding because the scope of the expression wholly or principally for the labour of a person was considered ambiguous. Paragraph 221A(2)(c) of the Income Tax Assessment Act 1936 covered the application of the PAYE system to payments to individuals providing certain services under contract, however a similar rule was not included for PAYG withholding. The persons to whom paragraph 22 1 A(2)(c) formerly applied were persons such as models, actors and other types of entertainers, known in the industry as 'talent'.

The concept of withholding from payments to independent contractors was considered to be inconsistent with the design of the new PAYG system under which systematic withholding would apply to certain withholding events such as a payment for salary and wages to a common law employee, while independent contractors (enterprises) would make payments towards discharging their income tax liability through the PAYG instalments system (contained in Part 2-10 of Schedule 1 to the Act).

Under the PAYG withholding system, withholding from payments to independent contractors for work or services performed by a contractor will be required if.

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the payments are subject to a voluntary agreement to withhold (section 12-55 of Schedule 1 to the Act);

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the payments are made under a labour hire arrangement (subsection 12-60(1) of Schedule 1 to the Act);

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the payments are specified by regulations (subsection 12-60(2) of Schedule 1 to the Act); or

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the contractor does not quote his/her Australian Business Number on an invoice or some other document when required to do so (section 12-190 of Schedule 1 to the Act).

Consultation with industry bodies revealed that there was uncertainty and confusion as to the correct withholding treatment that should be applied to payments under a contract wholly or principally for the labour of the person paid where the person provides talent services. These talent services refer to the exercise of intellectual, artistic, musical, physical or other personal skills. A further condition of this Subregulation is that the payments are in relation to participation in promotional activities other than as a production associate or a sportsperson. They are a subset of those formerly covered by paragraph 221A(2)(c).

In order to clearly specify the treatment of payments for talent services under PAYG withholding, a new specified payment Regulation has been inserted in accordance with subsection 12-60(2) of Schedule 1 to the Act. This Regulation clarifies that amounts must be withheld by an entity from a payment to an individual under a contract for talent services.

The payments specified in the Regulation are those made to an individual under an arrangement for participation in a promotional activity requiring the exercise of intellectual, artistic, musical, physical or other personal skills. The participation may be in the presence of an audience, in or on a film, tape, disc, print media or in a television or radio broadcast. To ensure that this description is not interpreted as extending the payments made to persons other than the actors, models or performers involved in the promotional activity, such as camera and sound equipment operators, writers and directors. Therefore, the payments to which this Regulation applies is narrowed by excluding payments to those who do not play a performance role in the promotional activity and also payments to sportspersons.

The Regulation will apply to payments made on or after 1 April 2002 to allow time for educational programs to be provided to industry. This date was also chosen to coincide with the beginning of the fourth goods and services (GST) quarter so as to allow for minimal adjustments necessary to entities currently registered in the GST system.

The amending Regulations commenced from the date of Gazettal.