Senate

Explanatory Memorandum

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

Chapter 2 - Payment of GST by instalments

Outline of chapter

2.1 Part 2 of Schedule 1to this Bill explains the amendments to the GST Act and the TAA 1953 to simplify the GST return and lodgement systems. The amendments set up the GST instalment system for small businesses.

Context of reform

2.2 On 22 February 2001, the Government announced changes to simplify the way businesses will report and pay GST. These changes have been designed to help businesses by making it easier, especially for small businesses, to report their GST obligations.

2.3 The changes allow entities to continue their current way of reporting and paying GST or, if eligible, choose one of the other options from the quarter ending 31 March 2001. All entities report on the current BAS for the March quarter, but a new simplified BAS will be introduced from the quarter ending 30 June 2001.

2.4 An eligible entity may choose to pay GST by instalments and lodge an annual GST return. This choice involves:

•

paying a quarterly GST instalment worked out by the ATO on a quarterly form; and

•

accounting for any difference between actual GST liability and the total GST instalments for the year on an annual GST return covering the financial year.

Detailed explanation of new law

2.5 The amendments will allow an eligible small business to have the choice of annual GST reporting by simply paying a quarterly GST instalment (as calculated by the ATO or varied by the small business) and reporting their actual GST information for the financial year. [Schedule 1, Part 2, item 29]

Choosing to pay GST by instalments

Eligibility to choose to pay GST by instalments

2.6 Entities that meet all of the criteria specified in section 162-5 will be able to choose to pay their GST liability by instalments.

2.7 An entity will satisfy the criteria where it:

•

does not exceed the instalment turnover threshold;

•

is not obliged to meet its GST obligations on a monthly basis;

•

has lodged GST returns that cover at least 4 months worth of information (if the entity is a member of a GST group, the GST returns must be lodged for exactly the same group membership);

•

has complied with all its obligations to lodge GST returns; and

•

is not in a net refund position.

[Schedule 1, item 29, subsection 162-5(1)]

Criteria 1 - instalment turnover threshold

2.8 An entity may be eligible to choose to pay GST by instalments if its annual turnover does not exceed the instalment turnover threshold. [Schedule 1, item 29, paragraph 162-5(1)(a)]

2.9 The instalment turnover threshold is $2 million or such higher amount as the regulations specify [Schedule 1, item 29, subsection 162-5(2)] . Since reference to the instalment turnover threshold has been added to the table of turnover thresholds in section 188-5 and included in the turnover test provision in section 188-10, an entity will exceed this threshold where their annual turnover exceeds the instalment turnover threshold [Schedule 1, Part 1, items 30 and 32] .

2.10 Under subsection 188-10(2), an entitys annual turnover will not exceed the instalment turnover threshold if:

•

its current annual turnover is at or below $2 million, and the Commissioner is satisfied that the entitys projected annual turnover is not more than $2 million; or

•

its projected annual turnover is $2 million or less.

2.11 Current annual and projected annual turnover is calculated in the same manner as for other turnover thresholds in Division 188. That is, it is the sum of the GST exclusive value of the supplies that are made in a 12-month period except supplies that are:

•

input taxed;

•

not for consideration (and not made to associates);

•

not made in connection with an enterprise carried on by an entity; and

•

supplies made between group members of a GST group.

2.12 To determine an entitys current annual turnover, the entity needs to look at the 12-month period ending at the end of the current month. An entity will need to look at the 12-month period starting at the beginning of the current month if it wants to determine its projected annual turnover.

Example 2.1

Davis Co has a current annual turnover of $2.5 million. Its projected annual turnover is $1.95 million. Davis Co meets the instalment turnover threshold criteria by virtue of subsection 188-10(2) since its projected annual turnover is less than the instalment turnover threshold (of $2 million or less). Davis Co may be eligible to choose to pay GST by instalments if it meets all of the other criteria.

Criteria 2 - tax periods

2.13 To be eligible to choose to pay GST by instalments an entity must either account for GST on a quarterly basis or have an instalment tax period (i.e. just before making the choice, the entity was previously paying GST by instalments). This effectively means that to be eligible to elect to pay GST by instalments an entity must not be obliged to account for GST using monthly tax periods. [Schedule 1, item 29, paragraph 162-5(1)(b)]

2.14 An entity will have monthly tax periods if:

•

the Commissioner determines the entity must have monthly tax periods under section 27-10. For example, he must do this when the entitys annual turnover is at or above $20 million;

•

the entity makes an election that they want to have monthly tax periods under section 27-15, although an entity may be eligible to revert to 3-monthly tax periods; or

•

the entity has an annual turnover of $20 million or more and has requested a special determination of its tax periods under section 27-37.

Criteria 3 - GST lodgement record

2.15 To be eligible to choose to pay GST by instalments an entity must have a current GST lodgement record for at least 4 months [Schedule 1, item 29, paragraph 162-5(1)(c)] . A current GST lodgement record for an entity (other than an entity that is a member of a GST group or has previously been a representative member of a GST group), is the period immediately before the current tax period applying to the entity that is covered by GST returns [Schedule 1, item 29, subsection 162-10(1)] . This effectively means that the entity must have a lodgement record for at least a 4-month period before the current tax period. That is, the entity must have lodged at least:

•

4 monthly GST returns;

•

2 quarterly GST returns; or

•

1 quarterly and 1 monthly GST return,

for the tax periods before the current tax period. Accordingly most entities that have been lodging GST returns from 1 July 2000 will meet this criteria. This lodgement requirement ensures that the ATO has sufficient payment history for it to calculate future notified instalment amounts.

Example 2.2

Murtons Pty Ltd commences operations on 1 January 2001. This company has an annual turnover of $1 million and lodges quarterly GST returns. Murtons would like to pay its GST liability using the instalment system. This company will meet the lodgment requirement to elect to pay GST by instalments when it has lodged GST returns for at least 4 months preceding its current tax period. For this company, the earliest it could make an election would be after it has lodged its second quarterly GST return (i.e. quarter 4 return, due 28 July 2001).

Example 2.3

The Theobald Family Trust has lodged returns on a quarterly basis since 1 July 2000. On 13 April 2001 it wants to choose to pay GST by instalments. This entity will meet the lodgement record criteria because in the period preceding the March 2001 quarter it has lodged GST returns for a period of 6 months (i.e. for the tax periods ended 30 September 2000 and 31 December 2000).

Example 2.4

Taylor and Partners has been registered since 1 July 2000 and has elected to lodge GST returns monthly. However the partnership decides to use the quarterly system from 1 January 2001. Taylor and Partners has a lodgement record for at least 4 months preceding the current tax period at 21 April 2001, since it has lodged 6 monthly GST returns.

2.16 However an entity that is a member of a GST group will not be eligible to choose to pay GST by instalments if, during the period immediately preceding the current tax period applying to the entity, the membership of the GST group for which the entity is a member has changed. This is because the current GST lodgement record of a member of a GST group is the tax periods immediately preceding the current tax period applying to an entity, for which it has given GST returns and has the same GST group membership. [Schedule 1, item 29, subsection 162-10(2)]

Example 2.5

Shaz Castle Pty Ltd, Faccin Enterprises and Clancy & Co are all members of a GST group for which Faccin Enterprises is the representative member. They are registered for GST and account for GST on a quarterly basis. On 1 January 2001 Clancy & Co leave the GST group. Faccin Enterprises would like to pay GST by instalments but is ineligible to do so until 2 quarterly GST returns have been lodged in respect of the new group membership (of Shaz Castle Pty Ltd and Faccin Enterprises).

2.17 If an entity has been (and is not currently) a representative member of a GST group, any tax periods and GST returns that it has lodged in their capacity as representative member of a GST group is not counted towards the entitys current GST lodgement record. [Schedule 1, item 29, subsection 162-10(3)]

2.18 The reason behind these special eligibility criteria for GST groups and past representative members of GST groups, is that the payment history the ATO has on these entities will not be correct where the membership of a GST group changes, or the representative member leaves the GST group. This will mean that the ATOs calculation of the entitys future notified instalment amounts will be inaccurate and may lead to an entity receiving a notified instalment amount that is too high and does not accurately reflect the entitys new structure.

Criteria 4 - GST obligation requirement

2.19 To be eligible to pay GST by instalments an entity must have lodged all its previous GST returns as required. [Schedule 1, item 29, paragraph 162-5(1)(d)]

Criteria 5 - no net refund position

2.20 To be eligible to pay GST by instalments an entity must not be in a net refund position [Schedule 1, item 29, paragraph 162-5(1)(e)] . An entity will be in a net refund position if the sum of an entitys net amounts (excluding any special sales tax credits it has claimed) for a specified period is less than zero [Schedule 1, item 29, subsections 162-5(3) and (4)] .

2.21 Subsection 162-5(3) sets out the tax periods which must be taken into account when determining whether an entity is in a net refund position. The number of tax periods which must be taken into account varies according to an entitys current GST lodgement record. The longer the lodgement record, the longer the period that must be taken into account when determining the net refund position.

2.22 As a general rule, the number of months for which the net amounts (less any special sales tax credits claimed by an entity) will be taken into account to determine whether an entity is in a net refund position will be all of the previous months (up to a maximum of 12 months) for which a GST return was lodged, excluding the GST return(s) lodged for the first 3 months. For example, an entity with a lodgement record of 9 months will be in a net refund position if the total net amount for the 6 months preceding the current tax period (excluding special sales tax credits) is not less than zero. [Schedule 1, item 29, subsection 162-5(4)]

Example 2.6

Verity has been registered for GST since 1 July 2000 and has been lodging GST returns on a quarterly basis. The net amount on her first quarterly GST return was $1,000. Verity made some large equipment purchases in October and received a net refund of $2,000 in her second quarterly GST return. On 21 April 2001, Verity wants to choose the instalment system. She will not be eligible at this time because she is currently in a net refund position.

Verity has a net liability of $3,000 on her next quarterly GST return which is lodged on 28 April 2001. On 28 July 2001 Verity lodges her June GST return and has a net liability of $3,653. She would be eligible from this date to pay GST by instalments since she is now not in a net refund position. As Verity has a lodgement record of 12 months she must take into account the 9 months preceding the current tax period in determining her net refund position. That is, the total net amount for December 2000 ($2,000 refund), March 2001 ($3,000 payable) and June 2001 ($3,653 payable). [Schedule 1, item 29, subsection 162-5(3)]

Electing to pay GST by instalments

2.23 Entities that meet all of the eligibility criteria can choose to pay GST by instalments by making an election to the Commissioner in the approved form. [Schedule 1, item 29, subsection 162-15(1)]

2.24 The Commissioner has the discretion to disallow an election even if the entity has met all of the eligibility criteria if the entity has a history of failing to comply with their tax obligations [Schedule 1, item 29, subsection 162-15(2)] . If the Commissioner disallows an entitys election under subsection 162-10(1), the election is taken never to have had effect [Schedule 1, item 29, subsection 162-15(3)] .

2.25 Item 60 amends the TAA 1953 to ensure that the Commissioners decision under subsection 162-15(2) to disallow an entitys GST instalment election is a reviewable GST decision.

2.26 An entitys election to pay GST by instalments can only relate to one financial year and will only remain valid for that financial year. [Schedule 1, item 29, subsection 162-15(4) and section 162-30]

Elections by representative members of GST groups

2.27 A representative member of a GST group is only able to elect to pay GST by instalments if all the members of that GST group are eligible to choose to pay GST by instalments. [Schedule 1, item 29, subsection 162-20(1)]

2.28 Once the representative member of a GST group elects to pay GST by instalments for the GST group, every member in that group will have a tax period equal to the instalment tax period of the group (i.e. the length of time the representative members election remains valid). Only the representative member of the GST group will be liable to pay GST instalments. [Schedule 1, item 29, subsection 162-20(2)]

When an entity must make its election

2.29 An entity that wants to use the instalment system must make an election on or before 28 October in the applicable financial year, unless the Commissioner has allowed the entity to elect into the system part way through the financial year. [Schedule1, item 29, section 162-25]

2.30 The Commissioners decision to disallow an entity to elect into the GST instalment system part way through the financial year is a reviewable GST decision. [Schedule 1, Part 2, item 60]

2.31 However, if an entity first becomes eligible to elect to pay GST by instalments because it is has only just met the 4 month current lodgement requirements since it is a new GST registrant, the entity may still make an election provided that the entity makes its election on or before the GST return would be due for that quarter in which it first becomes eligible. [Schedule 1, item 29, subsection 162-25(2)]

2.32 For the third quarter of the 2000-2001 financial year, all entities will only have a maximum lodgement record of 6 months and will therefore be able to elect to pay GST by instalments by 28 April 2001. This election will mean that the entity pays instalments in the third and fourth quarters of the 2000-2001 financial year. An entity that does not elect to use GST instalments in the third quarter cannot make that election in the fourth quarter. However, if eligible, the entity could elect to pay GST by instalments for the 2001-2002 financial year.

Duration of the election

2.33 Where an entity elects to pay GST by instalments, it must remain paying GST by instalments for the whole of the financial year (or rest of the financial year if the entity elects part way through the financial year). This is the case even if the annual turnover of the entity rises to above $2 million during that year. Once an entitys annual turnover exceeds $2 million the entity will be ineligible to elect to pay GST by instalments for the following financial year, unless the entitys projected annual turnover at the time of the election is below $2 million. [Schedule 1, item 29, section 162-30]

2.34 However, there are special rules that apply to GST groups, entities that go bankrupt, into liquidation or receivership. These rules are discussed in paragraphs 2.43 to 2.49.

2.35 Generally an entitys election will remain valid for the whole of the financial year in which it is made [Schedule 1, item 29, subsection 162-30(1)] . However, if an entity makes an election part way through the financial year, it will only remain effective from the start of the GST instalment quarter in which the election was made, until the end of the financial year [Schedule 1, item 29, subsection 162-30(2)] .

Example 2.7

Mollie becomes eligible for the first time to use the instalment system on 28 February 2002 when she lodges her second GST return. If she elects to use the instalment system shortly after this date, it will apply from 1 January 2002 to 30 June 2002.

Consequences of choosing to pay GST by instalments

2.36 Subdivision 162-B discusses the consequences of choosing the GST instalment system. These consequences include:

•

making an entity a GST instalment payer for that part of the financial year in which its election has effect [Schedule 1, item 29, section 162-50] ;

•

changing the tax period for a GST instalment payer so that it is aligned with the length of their election [Schedule 1, item 29, section 162-55] ;

•

providing the due date an entity using the GST instalment system must lodge their annual GST return and pay their net amount and make GST instalment payments [Schedule 1, item 29, sections 162-60 and 162-110] ;

•

providing the due date an entity using the GST instalment system must pay their GST instalment amounts [Schedule 1, item 29, section 162-70] ; and

•

providing special rules for eligible primary producers and other income tax averaging entities [Schedule 1, item 29, section 162-80] .

GST instalment payer

2.37 An entity that has chosen under new section 162-15 to pay GST by instalments will be known as a GST instalment payer for the financial year, or that part of the financial year in which their choice has effect. [Schedule 1, item 29, section 162-50]

Tax periods

2.38 A GST instalment payers tax period will be the time the entitys choice to pay GST by instalments has effect [Schedule 1, item 29, subsections 162-55(1) and (2)] . The tax period of a GST instalment payer will be known as an instalment tax period [Schedule 1, item 29, subsection 162-55(3)] . While a GST instalment payer was required to have a quarterly tax period before being eligible to choose to pay GST by instalments, once that choice has effect, the tax period of the entity changes from being a quarterly tax period to an instalment tax period because of the special tax period rule in Division 162.

2.39 The special rule for tax periods contained in new section 162-55 has effect despite the normal tax period rules in Division 27, apart from the 7-day rule in section 27-35 and the concluding tax period rule in section 27-40. [Schedule 1, item 29, subsection 162-55(4)]

2.40 The maximum time a GST instalment payers election has effect will be a single financial year (since an election can only relate to one financial year and may have effect for the whole financial year under sections 162-25 and 162-30). Consequently, the longest tax period a GST instalment payer will have is one year.

Example 2.8

Peters Pots is eligible to pay GST by instalments and elects on 1 October to do so from the start of the 2001-2002 financial year. Peters Pots has changed the day on which their tax period ends to 7 days before the end of each tax period. As such, Peters Pots quarterly tax period before its election ended on 25 June 2001. Peters Pots instalment tax period for the 2001-2002 financial year will start on 26 June 2001 and end on 25 June 2002.

2.41 As the longest tax period an entity may now have is one year, item59 amends section 22 of the TAA 1953 to ensure that the Commissioner may make an assessment of any part of an entitys net amount. Under section 22 of the TAA 1953, the Commissioner may make an assessment of an entitys net amount for a tax period at any time. This amendment aligns the GST special assessment provision with that which currently exists for income tax.

2.42 While an entity may now have an annual tax period, the rules in the GST Act that applied to the entity when it accounted for GST on a quarterly basis remain the same. That is, an entity will still require tax invoices before being able to claim input tax credits relating to the instalment tax period. Where there has been an adjustment to the price of a supply in a tax period after which the entity made or acquired it, and that adjustment decreases the entitys net amount for a previous instalment tax period, the entity will need an adjustment note before claiming the decreasing adjustment in the next tax period.

Special rules for GST groups

2.43 The instalment tax period for members of a GST group will end on the date there is a change in the membership of the GST group. If a new member joins the GST group, or one leaves the GST group, the instalment tax period of the GST group will end. [Schedule 1, item 29, section 162-95]

2.44 The reason behind this provision is that at the time the membership changes, a GST group should account for its supplies and acquisitions and be able to offset the previous GST instalments paid by the group on behalf of these supplies or acquisitions. For example, if a member leaves a GST group, it should still be able to use a proportion of the GST instalments paid by the representative member to offset some of the GST payable by the leaving member for the supplies it made while being a member of the GST group. The only way this can occur is if the GST groups tax period ends on the date the member left so that the GST group can account for the GST payable on its supplies for the period the leaving member was still in the GST group.

2.45 The GST return for that tax period will be due on the 21st of the month following the end of the tax period (i.e. following the date the membership of the GST group changed). [Schedule 1, item 29, subsection 162-95(2)]

2.46 Since a GST group is not eligible to elect to pay GST by instalments where there has been a change in membership until GST returns covering at least 4 months have been lodged (under paragraph162-5(1)(c)), all members of the GST group must revert to quarterly tax periods when there has been a change in the GST groups membership. An entity leaving the GST group will also revert back to quarterly tax periods.

Example 2.9

Co A, Co B, Co C and Co D are members of a GST group. They have also elected to pay GST by instalments and their instalment tax period started on 1 July 2001. On 15 December 2001 Co D leaves the group. At this time the GST group has paid one GST instalment of $15,000. The instalment tax period of the GST group ends on 15 December 2001 and the GST group must lodge the GST return in respect of that tax period by 21 January 2002 (and pay any net amount for that tax period by this date). Co D and the new GST group of Co A, Co B and Co C will revert back to quarterly tax periods from the time the membership of the group changed. Both Co D and the representative member of the GST group will need to lodge a BAS for that part of the October to December quarter that they are on a quarterly tax period. After Co D and the new GST group have lodged 2 quarterly BASs, both may elect to pay GST by instalments (where they meet all the other eligibility criteria).

Concluding tax periods

2.47 In certain circumstances under the current legislation, a tax period will be the concluding tax period for an individual or other entity. If an entity dies, becomes bankrupt or goes into liquidation or receivership, the entitys concluding tax period is taken to have ended at the end of the day before the death, bankruptcy or liquidation. Where an entity ceases to carry on an enterprise or has its GST registration cancelled, the last day of the entitys concluding tax period is the day the entity ceased to carry on an enterprise or had its registration cancelled.

2.48 However, where an entity is a GST instalment payer and the entity is an individual who dies, an entity that ceases to carry on an enterprise, or has its registration cancelled, the normal rules (as noted in paragraph 2.47) for the entitys concluding tax period changes. In these circumstances the instalment tax period is not affected by the death, cessation or cancellation and will instead end at the end of the financial year. The entity will not be required to pay any GST instalments for GST instalment quarters that commence after the death, cessation of enterprise or cancellation of the entity (however, the entity will still be required to lodge an annual GST return for the tax period). [Schedule 1, item 29, section 162-85]

2.49 However, if an entity is a GST instalment payer and is an individual that becomes bankrupt, an entity that goes into liquidation or receivership or for some other reason ceases to exist, the entitys instalment tax period will end on the day before the date of bankruptcy, liquidation or receivership [Schedule 1, item 29, subsection 162-85(4) and section 27-40] . The GST return, and any payment of the net amount for the instalment tax period will be due on or before the 21st of the month following the end of that tax period (i.e. the date the entity went into bankruptcy, liquidation, receivership or cessation) [Schedule 1, item 29, subsection 162-90] .

Payment of GST by instalments

2.50 A GST instalment payer will have an obligation to pay the Commissioner a GST instalment for each GST instalment quarter in the instalment tax period, unless the entity is one for which only 2 instalments are required. [Schedule 1, item 29, subsection 162-70(1)]

GST instalment quarters

2.51 The GST instalment quarters for an instalment tax period are:

•

the 3 months ending on 30 September during the instalment tax period;

•

the 3 months ending on 31 December during the instalment tax period;

•

the 3 months ending on 31 March during the instalment tax period; and

•

the 3 months ending on 30 June during the instalment tax period.

[Schedule 1, item 29, subsection 162-70(2)]

2.52 If an instalment tax period is only for part of a financial year, those 3 month periods that are not within the instalment tax period are not GST instalment quarters. [Schedule 1, item 29, subsection 162-70(3)]

Due dates for GST instalments

2.53 A GST instalment payer must pay its GST instalments to the Commissioner by:

•

28 October(for the GST instalment quarter ending on 30 September);

•

28 February (for the GST instalment quarter ending on 31 December);

•

28 April (for the GST instalment quarter ending on 31 March); and

•

28 July (for the GST instalment quarter ending on 30 June).

[Schedule 1, item 29, subsection 162-70(4)]

2.54 GST instalments may be paid electronically if they are paid by way of electronic transmission approved by the Commissioner. A GST instalment that is not paid electronically must be paid in a manner the Commissioner has determined in writing. Generally this will mean sending in a cheque or providing direct debit authority. [Schedule 1, item 29, subsection 162-70(5)]

2.55 When making a payment of a GST instalment, the Commissioner may require a GST instalment payer to send in notice of the GST instalment in the approved form by the date the payment is required [Schedule 1, item 29, section 162-75] . If the entity pays a varied instalment amount to the Commissioner, the entity will be required to notify the Commissioner of this varied instalment amount (and the estimated annual GST amount) by the time the entity is required to pay the instalment [Schedule 1, item 29, section 162-140] .

2.56 If a GST instalment payer fails to pay some or all of its GST instalments by the due date for the GST instalment, the GST instalment payer will be liable for GIC on the unpaid amount [Schedule 1, item 29, section 162-100] . The GIC is based on a commercially realistic rate of interest together with a fixed culpability component.

2.57 The GIC will be calculated on a daily compounding basis from the time the GST instalment was due to be paid and finishes at the end of the last day on which either the GST instalment remains unpaid or the GIC on the instalment remains unpaid (whichever comes later). [Schedule 1, item 29, section 162-100]

2.58 However, the Commissioner has the ability to remit the GIC having regard to the circumstances specified in section 8AAG of the TAA 1953. These special circumstances may include things such as financial hardship as a result of a natural disaster.

2.59 Item 58 consequentially amends section 8AAB of the TAA 1953 to include reference to the new section 162-100 GIC penalty in the table of when the GIC applies.

Special rules for primary producers and certain income tax averaging entities

2.60 Since the supplies of primary producers and special professionals will be seasonal due to the nature of their enterprise, a special rule has been included in new Division 162 to ensure that these entities subject to very large inherent fluctuations in income patterns have access to a GST instalment system that, where possible, accommodates this fluctuation. Entities are only required to pay the last 2 GST instalments if:

•

they are eligible to elect to use the GST instalment system; and

•

they elect to use the GST instalment system and:

-

they are a primary producer that satisfies both of the conditions in paragraph 162-80(2)(a), or

-

they are a special professional in the current year and had at least $1 of net professional income in the base year. An individual will be a special professional if he or she is an author, inventor, performing artist, production associate or a sportsperson.

[Schedule 1, item 29, section 162-80]

2.61 A primary producer satisfies both of the conditions in paragraph 162-80(2)(a), if he or she:

•

is carrying on primary production business (as defined in the ITAA 1997) in the year in which the entity chooses to pay GST instalments; and

•

had at least $1 of net income from primary production in the entitys last income tax return.

2.62 The following are examples of primary production business (as defined in the ITAA 1997):

•

cultivating or propagating plants, fungi or their products or part;

•

maintaining animals for the purposes of selling them or their bodily produce;

•

manufacturing dairy produce from raw material that it produces; and

•

felling trees in a plantation or forest.

2.63 If an entity chooses to pay GST by instalments before it has lodged its income tax return for the previous income year, the last income tax return required to be lodged will be used for determining whether the entity has net primary production income of at least $1.

Example 2.10

Foreman owns and operates a dairy farm. On 28 October 2001 Foreman chooses to pay GST by instalments. While Foreman has not yet lodged its income tax return for the 2000-2001 income year, in its 1999-2000 income tax return it had $20,000 net income from its dairy farm. As Foreman carries on a primary production business in the 2001-2002 income year and had more than $1 of net income from its primary production business in its last income tax assessment, Foreman will be on the 2 instalment system.

On 31 October 2001 Foreman lodges its income tax return and has a net loss from its primary production business. As, at the time of it choosing to pay GST by instalments, its last income tax return assessed had a net profit from primary production, it will go on the 2 instalment system.

2.64 The instalments of those entities on the 2 GST instalment system will be due on 28 April and on 28 July.

2.65 Apart from only being required to pay 2 GST instalments, these entities will be subject to the same rules as other entities choosing to pay GST by instalments. That is, the entity will pay either the notified instalment amount or a varied instalment amount to the Commissioner by these due dates. However, to avoid being subject to an underestimation penalty, an entity on the 2 GST instalment system will need to ensure that:

•

their instalments ensure that at least 85% of their actual GST liability is paid by 28 July;

•

their estimated annual GST amount is at least 85% of their actual GST liability for the year;

•

75% of their estimated annual GST amount is paid by 28 April (if the variation occurs in the third GST instalment quarter); and

•

100% of their estimated annual GST amount less the instalment amount paid for the preceding quarter is paid by 28 July (if the variation occurs in the last GST instalment quarter).

2.66 More details of the underestimation penalty is provided in paragraphs 2.90 to 2.117.

Example 2.11

Terri Rod operates a family business and averages her income for income tax purposes. She is eligible and elects to pay GST by instalments from 1 July 2001. As a consequence of this she is only liable to 2 instalments, due on 28 April 2002 and 28 July 2002. The ATO tells her that her notified instalment amount for the third instalment quarter is $15,000 and the notified instalment amount for the fourth quarter is due on 28 July 2002 is $5,000.

She pays $15,000 on 28 April 2002, but decides to pay a varied instalment amount on 28 July 2002. She estimates her annual GST payable for the year to be $18,000 and works out that her varied instalment amount for the last quarter is $18,000 - $15,000 = $3,000.

Before lodging her annual GST return for the 2001-2002 instalment tax period she works out that the GST on the supplies she made was $40,000 while her input tax credit entitlement was $21,000. She works out her net amount for the instalment tax period as follows:

$40,000 - $21,000 - $15,000 - $3,000 = $1,000


Terri must pay $1,000 by the date her annual GST return is due. As she has varied her fourth quarter instalment amount Terri may be liable to a penalty if she has underestimated too much. However, since:

•

the amount of instalments she has paid over the year is within 85% of her actual liability;

•

her estimated GST payable for the year is within 85% of her actual liability; and

•

she ensured she had paid 100% of her estimate in the fourth quarter;

Terry is not liable to any underestimation penalties on her fourth quarter variation. Terri can not be liable to any penalties on her other instalment amount since she did not vary this amount but instead paid the notified instalment amount for that quarter.

GST return

2.67 Under section 31-5 all entities are required to give a GST return to the Commissioner for each tax period whether or not the entity is liable to pay any GST or has a zero net amount. A GST instalment payer must lodge their GST return for their instalment tax period by:

•

the time their income tax return is due; or

•

28 February in the year following the end of their tax period where the GST instalment payer is not required to lodge an income tax return.

[Schedule 1, item 29, subsection 162-60(1)]

2.68 However, for the 2000-2001 financial year, a GST instalment payers GST return for their instalment tax period must be lodged by the date the GST instalment payers income tax return is due or by 28 February 2002, whichever is earlier. [Schedule 1, item 29, subsection 162-60(2)]

2.69 The Commissioner has the ability to extend the due date of a GST return under section 388-55 in Schedule 1 to the TAA 1953.

2.70 The GST return for an instalment tax period may require entities paying GST by instalments to provide details for that instalment tax period and any previous tax period in the financial year in which the instalment tax period falls (if the instalment tax period is not the whole financial year). [Schedule 1, item 29, section 162-65]

2.71 It is envisaged that the approved form for the GST return for an instalment tax period will require entities to provide annual figures of 1A (GST payable), 1B (credits for GST paid), G1 (total sales), G2 (exports), G3 (other GST-free supplies), G10 (capital acquisitions) and G11 (other acquisitions) even if the entity is a GST instalment payer for only 3 months of the financial year.

Example 2.12

Pootie Mens Wear elects to pay GST by instalments on 28 April 2001 which means its instalment tax period runs from 1 January 2001 to 30 June 2001. Pootie Mens Wear lodges its GST return for the instalment tax period on 28 February 2002 (since its income tax return is not due until April 2002) and provides annual figures of 1A, 1B, G1, G2, G3, G10 and G11 since the approved form of the GST return required these annual figures.

Even though Pootie Mens Wear has previously reported 1A, 1B, G1, G2, G3, G10 and G11 for the first half of the financial year in its 2 previous GST return covering the July-September and October-December tax periods, it must still provide annual figures. This is because that is what the Commissioner has required in the approved form instructions.

Balancing payments or refunds for GST instalment payers

2.72 At the end of the financial year, when a GST instalment payer works out their actual GST liability they may have paid too much GST to the ATO or too little. Therefore, the Commissioner will either require the entity to pay the balancing amount (section 162-110 ) or will be required to pay that amount to the entity (section 35-5).

2.73 For the purpose of calculating this balancing amount, the net amount for an instalment tax period of a GST instalment payer (which is generally GST less any input tax credits) is reduced by subtracting from this amount the sum of all GST instalments payable for the GST instalment quarters in the instalment tax period. [Schedule 1, item 29, section 162-105]

2.74 If this amount is a positive amount, a GST instalment payer must pay this amount to the Commissioner on or before the due date of its GST return for the instalment tax period. [Schedule 1, item 29, section 162-110]

Example 2.13

Hari runs a personal fitness service and has elected to pay GST by instalments on 28 April 2001. He pays the notified instalment amount ($5,500) on 28 April 2001 and 28 July 2001. Before lodging his GST return for the instalment tax period he calculates that he is liable for $33,000 GST on the taxable supplies he has made from 1 January 2001 to 30 June 2001 and is entitled to $11,000 input tax credits. His net amount for the instalment tax period is:

$33,000 - 11,000 - $5,500 - $5,500 = $11,000


Hari is required to pay $11,000 by the date his income tax return is due or 28 February 2002, whichever is earlier.

2.75 However, if this amount is negative, the Commissioner must pay this amount to the GST instalment payer after it lodges its GST return for the instalment tax period by virtue of section 35-5. If the Commissioner takes more than 14 days after an entity lodges its return to refund this amount, he will generally be liable to interest under the Taxation (Interest on Overpayments and Early Payments) Act 1983 .

Example 2.14

Uma is the sole proprietor of a law firm and elects to pay GST by instalments for the 2001-2002 financial year. She pays the notified instalment amount of $9,000 for each of the GST instalment quarters of the instalment tax period.

At the end of the financial year she calculates that the GST on taxable supplies she has made in the instalment tax period is $50,000 and she is entitled to the input tax credits of $18,000.

Umas net amount is:

$50,000 - $18,000 - $36,000 = -$4,000


After Uma lodges her GST return for the instalment tax period the Commissioner is required to refund $4,000 to her.

GST instalments

2.76 Subdivision 162-C provides details of a GST instalment.

What is a GST instalment?

2.77 A GST instalment is defined in subsection 162-70(1) to be the amount that a GST instalment payer must pay to the Commissioner each GST instalment quarter. This amount will be worked out under subsections162-130(2) and 162-130(3) and will be:

•

if the GST instalment is for the first GST instalment quarter in an entitys instalment tax period:

-

the amount the ATO has told the GST instalment payer to pay (the notified instalment amount); or

-

the amount as varied by the GST instalment payer (the varied instalment amount) [Schedule 1, item 29, subsection 162-130(2)] ;

•

if the GST instalment is for any other GST instalment quarter in an entitys instalment tax period and the entity has paid a notified instalment amount for the previous GST instalment quarter:

-

the amount the ATO has told the GST instalment payer to pay (the notified instalment amount); or

-

the amount as varied by the GST instalment payer (the varied instalment amount) [Schedule 1, item 29, paragraph 162-130(3)(a)] ; or

•

if the GST instalment is for any other GST instalment quarter in an entitys instalment tax period and the entity has paid a varied instalment amount for the previous GST instalment quarter:

-

25% of the GST instalment payers previous estimated annual GST amount; or

-

a different varied instalment amount [Schedule 1, item 29, paragraph 162-130(3)(b)] .

2.78 However, if a GST instalment payer pays a varied instalment amount to the Commissioner, it may be liable to a penalty under Subdivision 162-D where it has underestimated their instalment amount by too much. Further details of these penalties are provided in paragraphs 2.90 to 2.117.

Notified instalment amount

2.79 A GST instalment payers notified instalment amount for a GST instalment quarter will be the amount as worked out by the Commissioner and notified to the GST instalment payer before the due date of their first GST instalment for the GST instalment quarter. If an entity pays the notified instalment amount to the Commissioner for their first GST instalment quarter (i.e. they do not vary their instalment amount), the Commissioner will notify the entity of their notified instalment amount for the next GST instalment quarter. [Schedule 1, item 29, section 162-135]

2.80 Once an entity pays a varied instalment amount to the Commissioner for a GST instalment quarter, the Commissioner will not work out or notify the entity of a notified instalment amount for each GST instalment quarter after their varied instalment amount. This is because by varying the instalment, the entity has indicated that the past data the ATO relied on to calculate the notified instalment amount is not representative of the current financial years trading. [Schedule 1, item 29, subsection 162-135(2)]

Varied instalment amount

2.81 An entity is able to vary their instalment amount to any amount that is not less than zero [Schedule 1, item 29, subsection 162-140(2)] . An entitys varied instalment amount is:

•

the amount it substitutes for its notified instalment amount;

•

the amount it substitutes for its previous quarters varied instalment amount; or

•

25% of its preceding quarters estimated annual GST amount [Schedule 1, item 29, subsection 162-140(1) and paragraph 162-140(5)(a)] .

2.82 However, if an entity underestimates their variation by too much it may be subject to an underestimation penalty.

2.83 Therefore, an entity that varies their instalment amount must calculate their varied instalment amount with reference to their estimated annual GST amount otherwise they may be subject to penalties for underestimating their variation. The estimated annual GST amount is the GST instalment payers estimate of their annual GST liability. [Schedule 1, item 29, subsection 162-140(4) and section 162-145]

2.84 Where an entity chooses to pay GST by instalments part way through the financial year, it would have lodged BASs for the tax periods in the financial year it was not paying GST by instalments (otherwise it would be ineligible to choose to pay GST by instalments). An entitys early net amounts for the financial year are its net amounts for those tax periods which it lodged BASs in the financial year before it chose to pay GST by instalments. [Schedule 1, item 29, subsection 162-145(3)]

Example 2.15

NG Enterprises chooses to pay GST by instalments from the third quarter of the 2000-2001 financial year as they meet the eligibility requirements.

The ATO notifies NG Enterprises their notified instalment amount for the GST instalment quarters ending 31 March 2001 and 30 June 2001 is $30,000. As NG Enterprises wishes to vary their notified instalment amount it must first calculate its estimated annual GST amount relating to the GST instalment quarter. This means that NG Enterprises need to estimate their GST payable for the full financial year (1 July 2000 to 30 June 2001).

This is because the instalment tax period for NG Enterprises is from 1 January 2001 to 30 June 2001, while its early net amounts will be the net amounts for the 1 July 2000 to 30 September 2000 quarter and the 1 October 2000 to the 31 December 2000 quarter.

As NG Enterprises paid $27,000 of GST in its September BAS and $38,000 of GST in its December BAS, it estimates that its annual GST liability for the 2000-2001 financial year will be $120,000. It varies its third quarter instalment amount to:

($120,000 * 75%) - $27,000 - $38,000 = $25,000


2.85 However, when calculating the estimated annual GST amount, a GST instalment payer must do so carefully. If, at the end of the instalment tax period it turns out that the GST instalment payers estimate is not within 85% of their actual GST payable for the financial year, the entity will be liable for underestimation penalties outlined in Subdivision 162-D.

2.86 Once an entity has paid a varied instalment amount to the ATO, it must vary its notified instalment amount for all subsequent GST instalment quarters in the instalment tax period. When varying their GST instalment, a GST instalment payer must notify the Commissioner of its varied instalment amount and its estimated annual GST amount in the approved form by the time its GST instalment is due. [Schedule 1, item 29, subsections 162-140(1), (3) and (4)]

Guidelines on how an entity should determine their varied instalment amount

2.87 When estimating a varied instalment amount, an entity will first need to work out what it estimates its GST liability will be for the year (known in Division 162 as the entitys estimated annual GST amount). An entity will need to make this estimate with some accuracy since if, at the end of the year, it turns out that this estimate was not within 85% of their actual GST liability, the entity will be subject to a penalty (at the rate of the GIC) for each quarter that their estimate was not within 85% of the actual GST liability for the year.

2.88 After the entity has estimated their GST liability for the year, it works out its varied instalment amount as follows:

•

if the variation is for the first quarter (ending 30 September):

varied instalment amount = estimated annual GST amount * 25%;


•

if the variation is for the second quarter (ending 31 December):

varied instalment amount = (estimated annual GST amount * 50%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts);


•

if the variation is for the third quarter (ending 31 March):

varied instalment amount = (estimated annual GST amount * 75%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts); or


•

if the variation is for the fourth quarter (ending 30 June):

varied instalment amount = (estimated annual GST amount * 100%) - the previous GST the entity has paid or is payable for the financial year (both instalments and earlier net amounts).


2.89 An entity should also ensure that, by the end of the financial year, 85% of the actual GST liability for the year has been paid.

Example 2.16

Elizabeth, an electrician, is eligible to pay GST by instalments and chooses to do so on 28 April 2001. Her instalment tax period is therefore from 1 January 2001 to 30 June 2001. In her first quarterly BAS she paid the ATO $18,000 GST and in her second quarterly BAS she paid $25,000. The ATO advises her that her notified instalment amount for the third and fourth GST instalment quarters of the 2000-2001 financial year is $25,000. Elizabeth estimates that her GST liability for the 2000-2001 financial year to be $80,000. She then decided to vary her third quarter GST instalment and works out her varied instalment amount for the third quarter to be:

($80,000 * 75%) - $25,000 - $18,000 = $17,000


In the fourth quarter she revises her estimated GST liability for the year and believes it will be $85,000. As she has varied in the third quarter, she must vary in the fourth quarter as well and works out that her varied instalment amount for the fourth quarter to be:

($85,000 * 100%) - $25,000 - $18,000 - $17,000 = $25,000


At the end of the year she calculates that her actual GST liability for the year is $90,000. Elizabeth is not liable to any penalties as 85% of this ($76,500) was paid by the end of the year and all her estimates of GST liability for the year were within 85% of $90,000. Elizabeth will need to make a final payment of GST of $90,000 less $85,000 (her previous GST instalments and net amounts) by the time she must lodge her GST return for the instalment tax period (i.e. the earlier of when her income tax return is due or 28 February 2002).

Example 2.17

Linda operates a civil engineering firm and chooses to pay GST by instalments from 1 July 2001. The ATO informs her that her notified GST instalment for the first GST instalment quarter is $50,000. Before paying her GST instalment for the first quarter, Linda estimates her GST liability for the year to be $175,000. She decides to pay a varied instalment amount to the ATO for the first quarter and works it out to be:

($175,000 * 25%) = $43,750


In the second quarter she revises her estimate of her annual GST liability to $185,000 and works out that her varied instalment amount for that quarter to be:

($185,000 * 50%) - $43,750 = $48,750


In the third quarter she estimates that her annual GST liability for the year to remain at $185,000. Her varied instalment amount for that quarter is:

($185,000 * 75%) - $43,750 - $48,750 = $46,250


In the fourth quarter she revises her annual GST liability for the year to $190,000. Her varied instalment amount for the fourth quarter is:

($190,000 100%) - $43,750 - $48,750 - $46,250 = $51,250


Linda works out that her actual GST liability for the year to be $215,000. As she has paid more than 85% of this by the end of the 2001-2002 financial year, she is not liable to a section 162-175 penalty. Her estimates of her GST liability for quarters 2 to 4 were within 85% of this amount, so she is not liable to any penalties for those quarters. Due to the transitional rule for the 2001-2002 financial year, Linda only needs to ensure that her first quarter estimate is within 75% of her actual GST liability for the year (75% of $215,000 is $161,250). As her estimated annual GST amount for this quarter was above this amount, she is not liable for any penalties for underestimating her GST liability.

Linda will only need to make a final payment of GST of $25,000 ($215,000 - $190,000; her previous GST instalments for the year) by the time she must lodge her GST return for the instalment tax period (i.e. the time her income tax return is due).

Example 2.18

Walker Co sells hiking gear to the general public. It is eligible and chooses to pay GST by instalments from 1 January 2001 to 30 June 2001. Walker Cos GST payable on its September 2000 BAS was $35,000 while on its December 2000 BAS was $50,000. The ATO informs Walker Co that its notified instalment amount for the March and June GST instalment quarters is $50,000.

In the third quarter, Walker Co estimates their GST liability for the year to be $155,000 and decide to pay a varied instalment amount for that quarter of:

($155,000 * 75%) - $35,000 - $50,000 = $31,250


However, in May and June 2001 Walker Co experiences an unexpected and huge surge in sales of hiking gear after an extensive marketing campaign by health groups on the benefits of hiking for all persons. Therefore Walker Co now estimates that their GST liability for the quarter to be $200,000. Their varied instalment amount for the fourth quarter is:

($200,000 100%) - $35,000 - $50,000 - $31,250 = $83,750


At the end of the year Walker Co lodges its GST return with an actual GST liability for the year of $210,000. While they have ensured that 85% of this was paid by the end of the fourth quarter, their estimate for the third quarter was well below $178,500 (85% of $210,000).

However, after the ATO notifies them of the penalty they are subject to for this estimation, they contact the ATO and ask that the Commissioner remit the penalty, in whole or in part. They notify the ATO that at the third quarter, Walker Cos estimated GST liability for the year was both fair and reasonable and the only reason it was incorrect was because of an unexpected upturn in sales in the fourth quarter. The Commissioner decides to remit all of the penalty since Walker Co is able to adequately prove that their estimated annual GST amount for the third quarter of $155,000 was both a fair and reasonable estimate of their liability at that time.

Walker Co must still ensure that they pay the difference between the GST that they have paid and what they should have paid ($210,000 - $200,000) to the ATO by the earlier of when their income tax return is due or 28 February 2002.

Underestimation penalties if varied instalment amounts are too low

2.90 A GST instalment payer that pays a varied instalment amount for a GST instalment quarter may be subject to penalties if they underestimate their variation by too much. Subdivision 162-D provides the details of the penalties that may apply to an entity paying GST by instalments that has varied their instalment amount and underestimated it by too much. An entity will never be subject to a penalty under Subdivision 162-D if it pays the ATO notified instalment amount for each quarter in the instalment tax period.

2.91 To ensure that the varied instalment amount is not subject to an underestimation penalty, a GST instalment payer should ensure that:

•

the total of what they have paid (including their instalment payments) is not below 85% of their annual GST liability;

•

their estimated annual GST amount is not below 85% of their annual GST liability; and

•

their varied instalment amount is a correct proportion of their estimated annual GST amount.

[Schedule 1, item 29, section 162-170]

2.92 There are 3 mutually exclusive penalties an entity may be subject to if they vary their notified instalment amount. While the penalty will apply the GIC to the GST instalment shortfalls, it will not make an entity liable to the GIC [Schedule 1, Part 2, item 29, section 162-205] . Penalties under Subdivision 162-D are income tax deductible [Schedule 1, Part 2, items 56 and 57] .

The GST paid for the year is less than 85% of its actual GST liability for the year

2.93 The first penalty looks at the amount of instalments a GST instalment payer has paid over the year in which it chooses to pay GST by instalments, and compares this to the actual GST it should have paid for the year. Where the total of what an entity has paid (including their instalments payments) is less than 85% of the entitys actual GST liability for the year, the entity will be subject to a penalty at the rate of the GIC. [Schedule 1, item 29, section 162-175]

2.94 The penalty is levied for each quarter in which an entity pays the ATO a varied instalment amount. The amount of this penalty for a particular day, is worked out by applying the GIC to an entitys GST instalment shortfall. An entitys GST instalment shortfall is worked out as follows for each quarter:

•

first quarter:

(annual GST liability * 25%) - GST already payable;

•

second quarter:

(annual GST liability * 50%) - GST already payable;

•

third quarter:

(annual GST liability * 75%) - GST already payable; and

•

fourth quarter:

(annual GST liability * 100%) - GST already payable.

2.95 The GST already payable is the sum of:

•

the varied instalment amount;

•

all other instalments amounts for the earlier GST instalment quarters in the financial year (if any); and

•

all other early net amounts for the financial year (if any).

[Schedule 1, item 29, subsection 162-175(3)]

2.96 If an entity is liable to this penalty for more than one GST instalment quarter in the financial year, the amount of the GST instalment shortfall for the later GST instalment quarters is reduced by the amount of the preceding quarter(s) GST instalment shortfall. Where the sum of the GST instalment shortfalls for the previous GST instalment quarters is greater than the amount of the GST instalment shortfall for the later GST instalment quarter, the entity is not liable for a penalty for that GST instalment quarter under section 162-175. [Schedule 1, item 29, subsection 162-175(4)]

2.97 However, the amount of the GST instalment shortfall (which is applied to the penalty) will be reduced if:

•

an entitys notified instalment amount is less than 25% of its annual GST liability; or

•

the entitys notified instalment amount would have been less than 25% of its annual GST liability (had the Commissioner had notified the entity of one).

[Schedule 1, item 29, subsection 162-195(1)]

2.98 The reduction in the GST instalment shortfall will be the difference between the annual GST liability that should have been paid in a particular quarter, and the sum of the entitys notified instalment amounts (or what would have been the entitys notified instalment amounts had the Commissioner notified the entity of one) that it should have paid by that quarter. [Schedule 1, item 29, subsection 162-195(2)]

2.99 However if, because of the reduction, an entitys GST instalment shortfall for the GST instalment quarter is less than zero, the entity is not liable for a penalty under section 162-175 in relation to that quarter. [Schedule 1, item 29, subsection 162-195(3)]

Example 2.19

Owango Co chooses to pay GST by instalments from 1 July 2001. It pays the notified instalment amount ($12,000) for the first quarter but pays a varied instalment amount for the second quarter to the fourth quarter of $10,000, $11,000 and $12,000 respectively.

At the end of the year Owango Co lodges its GST return with an actual GST liability of $55,000. As the amount of GST Owango Co has paid over the year ($45,000) is less than 85% of $55,000 ($46,750), Owango Co is liable for a penalty under section 162-175 for each GST instalment quarter it varied its instalment amount (i.e. the second quarter to the fourth quarter).

Assuming the Commissioner would have notified Owango Co to pay an instalment of $12,000 in each GST instalment quarter of the instalment tax period, the reduction in any GST shortfall amount will be:

•

second quarter:

(50% * $55,000) - ($12,000 + $12,000) = $3,500;

•

third quarter:

(75% * $55,000) - ($12,000 + $12,000 + $12,000) = $5,250; and

•

fourth quarter:

(100% * $55,000) - ($12,000 4) = $7,000

The amount on which the penalty will be applied (taking into account these reductions) is calculated as:

•

second quarter:

($55,000 * 50%) - ($22,000) - $3,500 = $2,000;

•

third quarter:

($55,000 * 75%) - ($33,000 + $2,000) - $5,250 = $1,000; and

•

fourth quarter:

($55,000 * 100%) - ($45,000 + $2,000 + $1,000) - $7,000 = $0

2.100 An entity will only be subject to the second penalty if it has varied its instalment amount and is not subject to the first penalty. The second penalty looks at what a GST instalment payer has provided as its estimated annual GST amount (i.e. its annual estimate) and compares it to its actual annual GST liability. An entity will be subject to a penalty for each quarter in which the estimate is not within 85% (or 75% if the estimate is made in the GST instalment quarter that ends on 30 September 2001) of the entitys actual annual GST liability. [Schedule 1, item 29, section 162-180]

2.101 The amount of the penalty is calculated by way of a formula and is dependant on which quarter the underestimation occurred. The penalty applies the GIC to the GST instalment quarters GST instalment shortfall. If the underestimation occurred in the first quarter of the financial year (ending on 30 September) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 25%


2.102 Where the underestimation occurs in the second quarter of the financial year (ending 31 December) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 50%


2.103 Where the underestimation occurs in the third quarter of the financial year (ending 31 March) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 75%


2.104 Where the underestimation occurs in the fourth quarter of the financial year (ending 30 June) the amount of the GST instalment shortfall is:

(annual GST liability - estimated annual GST amount) * 100%


2.105 However, if an entity is liable to this penalty for more than one GST instalment quarter in the financial year, the amount on which the penalty is based for the later GST instalment quarters is reduced by the penalty amount (excluding GIC) for the entity, that was calculated in respect of the previous GST instalment quarters. Where the sum of those amounts for the previous GST instalment quarters is greater then the amount on which the penalty will be applied for the later GST instalment quarter, the entity is not liable for a penalty for that GST instalment quarter under section 162-180. [Schedule 1, item 29, subsection 162-180(4)]

Example 2.20

Rebecca is a plumber registered for GST and chooses to pay GST by instalments from 1 July 2001. The ATO notified instalment amounts for the first 2 quarters was $25,000 each quarter. Rebecca varies her instalments in the third quarter to $10,000 (based on an annual estimate of $80,000). In the fourth quarter she varies upwards to $25,000 (based on an annual estimate of $85,000). The total of her instalment payments is $85,000.

At the end of the financial year she lodges her annual GST return and works out that her GST payable was $95,000 (85% of this is $80,750). Since the total of her instalments paid was over 85% of her actual GST liability, Rebecca is not subject to a section 162-175 penalty. However, in the third quarter, Rebeccas annual estimate of GST was less than 85% of the actual amount of $95,000. She is liable to a section 162-180 penalty for the quarter in which the underestimation occurred (the third quarter). The amount on which the penalty is applied is:

($95,000 - $80,000) = $11,250


2.106 The amount of the GST instalment shortfall (which is applied to the penalty) will also be reduced if:

•

an entitys notified instalment amount is less than 25% of its annual GST liability; or

•

the entitys notified instalment amount would have been less than 25% of its annual GST liability (had the Commissioner notified the entity of one).

[Schedule 1, item 29, subsection 162-195(1)]

2.107 The reduction in the GST instalment shortfall will be the difference between the annual GST liability that should have been paid in a particular quarter, and the sum of the entitys notified instalment amounts (or what would have been the entitys notified instalment amounts had the Commissioner notified the entity of one) that it should have paid by that quarter. [Schedule 1, item 29, subsection 162-195(2)]

2.108 However if, because of the reduction, an entitys GST instalment shortfall for the GST instalment quarter is less than zero, the entity is not liable for a penalty under section 162-180 in relation to that quarter. [Schedule 1, item 29, subsection 162-195(3)]

Shortfall where the GST instalments are worked out with reference to the estimated annual GST amount

2.109 The last penalty ensures that an entitys varied instalment amount is a correct proportion of their estimated annual GST amount. A correct proportion of an estimated annual GST amount for the first quarter is 25%, for the second quarter is 50% (less previous payments), for the third quarter is 75% (less previous payments) and for the fourth quarter is 100% (less previous payments). An entity will only be subject to this penalty where it is not liable for any of the other 2 penalties for the quarter. [Schedule 1, Part 2, item 29, section 162-185]

2.110 This penalty ensures that an entity that correctly estimates its annual GST amount cannot vary their instalments to zero in the first 3 quarters and then pay 100% of the estimated annual GST liability in the last quarter. By doing this the entity would avoid the first 2 penalties but will be subject to this last penalty.

2.111 To ensure that the varied amount is the correct proportion of an entitys estimated annual GST amount, the entity must ensure that it is not less than:

•

25% of their estimated annual GST amount (if the variation occurs in the first GST instalment quarter);

•

50% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarter (if the variation occurs in the second GST instalment quarter);

•

75% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarters (if the variation occurs in the third GST instalment quarter); and

•

100% of their estimated annual GST amount less the GST paid (either as an instalment or net amount) for the preceding quarters (if the variation occurs in the last GST instalment quarter).

[Schedule 1, item 29, section 162-185]

2.112 The penalty applies the GIC to the GST instalment shortfall for the GST instalment quarter. The GST instalment shortfall for each quarter will be as follows:

•

first quarter:

(estimated annual GST amount * 25%) - GST already paid or payable;

•

second quarter:

(estimated annual GST amount * 50%) - GST already paid or payable;

•

third quarter:

(estimated annual GST amount * 75%) - GST already paid or payable; and

•

fourth quarter:

(estimated annual GST amount * 100%) - GST already paid or payable.

2.113 An entitys GST already paid or payable is the varied instalment amount for the GST instalment quarter, plus any GST instalment it has paid (or is liable to pay) for the earlier GST instalment quarters (if any), plus any early GST net amounts it has paid (or is liable to pay) for other tax periods in the financial year (if any). [Schedule 1, item 29, paragraph 162-185(1)(c)]

Example 2.21

Amenko Pty Ltd chooses to pay GST by instalments from 1 January 2001. Its notified instalment amount in the third quarter is $25,000. In the fourth quarter it estimates its annual GST liability to be $85,000. However, it varied its fourth quarter instalment to $21,000. In the first quarter and the second quarter of the 2000-2001 financial year it paid the ATO an amount of $10,000 and $25,000 respectively. Amenko Pty Ltd works out its actual GST liability for the year to be $95,000. It is therefore not subject to a section 162-175 or 162-180 penalty as both 85% of total GST liability was paid by the end of the year and Amenko Pty Ltds estimate was within 85% of $95,000. However, since for the fourth quarter, the varied amount of $21,000 is less than 100% of ($85,000 less $60,000), they are liable to a section 162-70 penalty. The amount on which the penalty is applies is:

($85,000 * 100%) - ($21,000 + $25,000 + $25,000 + $10,000) = $4,000


The period for which an entity is liable to a penalty

2.114 The penalty is imposed at the rate of the GIC for each day in the period:

•

starting on the due date for the GST instalment for the GST instalment quarter; and

•

finishes the day before the end of the due date on which the entity must pay its net amount to the Commissioner under section 162-60. This day is generally the day before an entity is required to give the Commissioner its income tax return, or 28 February. For the 2000-2001 financial year this day will be the day before the earlier of either when an entity is required to give its income tax return or 28 February 2002.

[Schedule 1, item 29, section 162-190]

2.115 However, where an amount of a GST instalment shortfall for a varied GST instalment is made up in a later GST instalment quarter, the period for which the penalty is imposed will end on the day before the shortfall amount was made up. [Schedule 1, item 29, section 162-200]

Example 2.22

Brad Danes Pty Ltd chooses to pay GST by instalments from 1 July 2001. Its notified instalment amount is $2,300. Brad Danes Pty Ltd chooses to vary its GST instalments for all quarters and pays the following:

•

first quarter:

$1,375 (based on an estimated annual GST amount of $5,500)


•

second quarter:

$2,625 (based on an estimated annual GST amount of $8,000)


•

third quarter:

$2,000 (based on an estimated annual GST amount of $8,000)


•

fourth quarter:

$2,000 (based on an estimated annual GST amount of $8,000)


At the end of the financial year it works out that its annual GST liability for the 2001-2002 financial year was $8,000. While it has paid over 85% of this amount by the due date of the last GST instalment quarter, its estimated annual GST amount in first quarter was less than 75% of its annual GST liability. The amount on which the penalty applies is:

($8,000 - $5,500) * 25% = $625


Brad Danes Pty Ltd makes up this shortfall amount in the second quarter because the instalment paid in the second quarter ($2,625) exceeds 25% of the annual GST liability ($8,000). Therefore, the penalty Brad Danes Pty Ltd is liable to for its underestimation in the first quarter runs from the date the first quarter GST instalment was due (28 October) and will end on the day before it paid the $2,625 to the ATO.

Machinery provisions for civil penalties

2.116 Division 298 in Schedule 1 to the TAA 1953 provides generic machinery provisions for all civil penalties in the taxation law that are expressed as penalty units. The civil penalties in the taxation law are imposed where an entity has failed to satisfy a particular requirement. The matter is not an offence and, as such, does not require prosecution. Item59 amends section 298-5 to include reference to the underestimation penalties in it, so that the requirements Division 298 imposes on the Commissioner are also imposed on him for Subdivision 162-D penalties. [Schedule 1, Part 2, item 61]

2.117 Consequently, where an entity is subject to a Subdivision 162-D penalty:

•

the Commissioner is obliged to serve a notice of the penalty on the entity (the notice can be included in any other notice that the Commissioner gives the entity under that section);

•

the penalty will become due on the day specified in the notice which must be at least 14 days after service of the notice on the entity; and

•

the Commissioner will be able to remit the penalty, in whole or in part:

-

where the Commissioner decides not to remit the penalty or to remit only part of the penalty he must give written notice of the remission decision to the entity; and

-

if an entity is dissatisfied with the Commissioners remission decision and the penalty payable after the remission decision is more than 2 penalty units, the entity can object against the decision under Part IVC of the TAA 1953.

Consequential amendments

2.118 Items 23 to 27 insert references to Division 162 in sections 17-99, 27-99, 31-99, 33-9 and 37-1 respectively. This ensures that readers are aware of the special rules relating to an entitys net amount, tax period, GST return, payment of GST and the checklist of special rules because of the new GST instalment system.

2.119 Item 28 inserts a note about Division 162 in Division 126 so that a reader is aware how their net amount is reduced by GST instalments. Items 33 to 55 amend the GST Dictionary in section 195-1 to insert the new terms used in Division 162 into that Dictionary.

Application and transitional provisions

2.120 The amendments in this chapter (apart from those relating to the income tax deductibility of the underestimation penalties) apply, and are taken to have applied, in relation to GST returns, and net amounts, for tax periods ending on or after 22 February 2001. [Schedule 1, Part 2, subitem 62(1)]

2.121 The amendment to make the underestimation penalties income tax deductible apply to income tax assessments for the 2000-2001 income year and later income years. [Schedule 1, Part 2, subitem 62(2)]