Senate

Explanatory Memorandum

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

Chapter 6 - PAYG instalments

Outline of chapter

6.1 Schedule 2 to this Bill explains amendments to simplify the PAYG instalments regime with a view to reducing the costs incurred by taxpayers in complying with that regime. The amendments implement measures - most of which were announced in Treasurers Press Release No. 7 on 22 February 2001. Schedule 5 to this Bill will make 2 technical corrections to subsection 45-30(2) of Schedule 1 to the TAA 1953. They ensure that the correct amount of PAYG instalments is credited against the payers assessment when taxpayers using the GDP-adjusted notional tax method vary their instalment(s).

Context of reform

6.2 The PAYG instalments regime has operated since the beginning of the 2000-2001 income year. The object of the PAYG instalments regime is to ensure the efficient collection of income tax, the Medicare levy and liabilities for debts arising under the higher education contribution and student financial supplement schemes. It requires taxpayers who have been given an instalment rate by the Commissioner to pay instalments over the course of the income year that are as close as possible to the total of the entitys liabilities for those amounts on assessment for that year.

6.3 The PAYG instalments regime currently provides that entities are required to pay quarterly instalments worked out using the instalment income times instalment rate (instalment income) method unless they are entitled to choose, and have chosen, to pay using another method. The instalment income method generally requires entities to keep track of the instalment income they earn each quarter. (Note: an entitys instalment income is generally its ordinary business and investment income, but there are special rules for some entities including superannuation funds.) Many entities, especially individuals who are either partners in partnerships or beneficiaries in trusts, have found the compliance costs incurred in doing this high.

6.4 Currently, certain entities can choose to pay quarterly or annual instalments that are worked out, and notified, by the Commissioner. For example, entities which are not registered, or required to be registered, for GST and whose notional tax (which in simple terms is the tax attributable to an entitys business and investment income for the previous income year) is less than $8,000 can pay an annual instalment equal to their notional tax. Further, individuals who are not registered, or required to be registered, for GST and who have a notional tax of $8,000 or more may pay their quarterly instalments based on an amount worked out, and notified, by the Commissioner. This method is known as the GDP-adjusted notional tax method.

6.5 The Government has decided to allow a broader range of entities to use the GDP-adjusted notional tax method of paying quarterly instalments. This will reduce the costs of complying with the PAYG instalments system because the affected entities will simply pay an amount worked out, and notified, by the Commissioner and will not have to keep track of the instalment income they earn each quarter.

Summary of new law

6.6 A much larger subset of PAYG instalment payers will become eligible to use the GDP-adjusted notional tax method. All of the following entities will be eligible to pay instalments worked out, and notified, by the Commissioner using the GDP-adjusted notional tax method following the amendments made by this Bill:

•

all individuals;

•

companies, superannuation funds and other entities that are taxed as companies that have $1 million or less in instalment income for their previous income year; and

•

companies, superannuation funds and other entities that are taxed as companies that have more than $1 million in instalment income for their previous income year and are eligible to pay annual instalments under the PAYG instalments regime but have not chosen to do so.

6.7 These amendments will reduce the costs these taxpayers incur in complying with their PAYG instalments obligations as they will no longer have to keep track of the ordinary income they earn each quarter.

6.8 The PAYG instalments legislation will also be amended so that certain individuals who either carry on primary production businesses or who earn income from sporting or artistic activities will only be required to pay 2, not 4, quarterly instalments each year. These 2 instalments will be payable at the end of the third and fourth quarters of the income year and will also be worked using the GDP-adjusted notional tax method. This change will give those individuals, whose income fluctuates from quarter to quarter during the income year, a way of paying PAYG instalments that addresses the fluctuating nature of their income flows.

6.9 Currently, the PAYG instalments provisions provide that a person will pay on the basis of the instalment income times instalment rate method unless they are entitled to choose, and have chosen to, pay using another method. The PAYG instalments legislation will be amended so that taxpayers who qualify to use the GDP-adjusted notional tax method will be required to pay their instalments on that basis. However, those entities will be entitled to pay annual instalments (if eligible) or to choose to pay instalments worked out using the instalment income method. They will generally be required to make that choice at the end of the first instalment quarter of their income year.

6.10 An entity that pays instalments using the GDP-adjusted notional tax method, and who chooses (at the end of the first instalment quarter) to pay instalments worked out using the instalment income method, will continue paying on that basis from year to year. However, they may choose to revert to using the GDP-adjusted notional tax method at the end of the first instalment quarter of a subsequent income year provided they are eligible to use that method at that time.

6.11 The technical amendments that will be made by Schedule 5 ensure that the correct amount of PAYG instalments is credited against the payers assessment when a taxpayer using the GDP-adjusted notional tax method varies their instalment(s).

Detailed explanation of new law

6.12 The following diagram summarises the basis on which different entities pay PAYG instalments under the amended law and what choices they have.

Categories of instalment payers who pay instalments worked out, and notified, by the Commissioner using GDP-adjusted notional tax and new default rules

6.13 Subdivision 45-D of Part 2-10 of Schedule 1 to the TAA 1953 (which contains the rules used to determine which entities can use the GDP-adjusted notional tax method) will be amended to ensure that a much larger proportion of PAYG instalments payers will be entitled to pay instalments on an amount worked out, and notified to them, by the Commissioner. The entities that will be entitled to pay their quarterly instalments on this basis are:

•

all individuals;

•

companies, corporate limited partnerships and the trustees of corporate unit trusts, public trading trusts, eligible approved deposit funds, eligible superannuation funds and pooled superannuation trusts (all of which come within the definition of full self-assessment taxpayer provided their base assessment instalment income for the base year is $1 million or less; and

•

full self-assessment taxpayers whose base assessment instalment income for the base year is more than $1 million and that are entitled, but have not chosen, to be annual payers under the existing PAYG instalments provisions.

[Schedule 2, item 14, paragraphs 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(i)]

6.14 Note, for the purposes of the third dot point in paragraph 6.12, an entity is entitled to choose to pay annual instalments if it:

•

is not GST registered (whether in its own right or as a partner in a GST registered partnership or through a GST joint venture);

•

is not a member of an instalment group (i.e. a group of companies with 50% common ownership); and

•

has a notional tax of less than $8,000.

6.15 An entitys base assessment instalment income is so much of an entitys assessable income as the Commissioner determines is instalment income for the base year - see subsection 45-320(2). Instalment income is generally the ordinary income an entity derives, but only to the extent that that income is assessable income of the income year. However, the instalment income of a superannuation fund also includes its statutory income. Section 45-120 of the existing law defines instalment income.

6.16 A full self-assessment taxpayer that has $1 million or less in base assessment instalment income for the base year is automatically a quarterly payer who pays on the basis of GDP-adjusted notional tax unless it chooses to pay on another basis.

6.17 A full self-assessment taxpayer that has more than $1 million in base assessment instalment income can only be a quarterly payer who pays on the basis of GDP-adjusted notional tax if it is eligible to be an annual payer.

6.18 However, no individual or full self-assessment taxpayer will be a quarterly payer who pays on the basis of GDP-adjusted notional tax if, at the end of the starting instalment quarter in an income year, it is an annual payer [Schedule 2, item 14, paragraphs 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(ii)] . An entity will be an annual payer at the end of the starting instalment quarter if it is entitled to, and chooses to be, an annual payer by the due date for that instalment. It will also be an annual payer if it chose to pay annually, in an earlier income year, as that choice carries on from year to year until the entity ceases to be entitled to choose to pay annually or chooses not to pay on that basis.

6.19 An entity will not be a quarterly GDP-adjusted notional tax instalment payer if, at the end of the starting instalment quarter in an income year, it chooses to work out the amount of its quarterly instalments on the basis of instalment income. [Schedule 2, item14, paragraph 45-130(1)(a) and (b) and subparagraph 45-130(1)(c)(iii)]

6.20 The starting instalment quarter is generally the first instalment quarter of an income year. This will be the instalment quarter ending 30 September for all entities whose income year ends on 30 June. However, where an entity has not previously been liable to pay PAYG instalments, it is the instalment quarter in which the entity is first notified of its instalment rate by the Commissioner. If an annual payer becomes GST registered in a particular quarter, that quarter is also a starting instalment quarter. This is because the annual payers GST registration means that it stops being an annual payer and may become a quarterly payer who pays on the basis GDP-adjusted notional tax if it is eligible at the end of that instalment quarter. [Schedule 2, item 14, subsection 45-125(2)]

6.21 There are various provisions which state how and when you become, and stop being, a quarterly payer who pays on the basis of GDP-adjusted notional tax. They are needed to facilitate the interaction of the rules that are used to define the various groups of PAYG instalments payers. [Schedule 2, item 14, subsections 45-130(3) to (9)]

6.22 The effect of these rules is that all of the entities identified in paragraph 6.12 will pay quarterly instalments being an amount notified by the Commissioner unless they choose to pay their quarterly instalments using the instalment income method or choose to pay annually.

6.23 This contrasts with the PAYG instalments regime as it currently operates. It provides that entities will pay quarterly instalments that are worked out using the instalment income method. However, under the current regime certain individuals may choose to pay on the basis of GDP-adjusted notional tax.

GDP-adjusted notional tax payers may choose instalment income method

6.24 Entities that are eligible to pay quarterly instalments using GDP-adjusted notional tax method (whether they pay 2 or 4 instalments annually) will default into that method, that is, if they do not choose to pay on another basis, their instalments will be worked out using that method.

6.25 Entities that are defaulted into the GDP-adjusted notional tax method will be given the choice of working out their instalments on the basis of instalment income [Schedule 2, item 14, paragraph 45-125(1)(b)] . Those who are eligible to pay annual instalments, will still have the choice of paying annually.

6.26 An entity that wants to choose to pay on the basis of instalment income must make that choice by notifying the Commissioner in the approved form on or before the due date for payment of the instalment for the starting instalment quarter. [Schedule 2, item 14, subsection 45-125(4)]

6.27 Having notified the Commissioner of its choice, the entity becomes a quarterly payer who pays on the basis of instalment income just before the end of the starting instalment quarter. [Schedule 2, item 14, subsection 45-125(3)]

6.28 That choice remains in force from year to year unless the entity chooses to:

•

become an annual payer at the end of the first instalment quarter of a later income year [Schedule 2, item 14, paragraph 45-125(6)(a)] ; or

•

no longer be a quarterly payer who pays on the basis of instalment income at the end of the first instalment quarter of a later income year and becomes a quarterly payer who pays on the basis of GDP-adjusted notional tax. This choice would only be effective if the entity is eligible to be a quarterly payer who pays on the basis of GDP-adjusted notional tax [Schedule 2, item 14, paragraph 45-125(6)(b) and subsection 45-125(7)] .

6.29 An entity that, at the end of the first instalment quarter of a later income year, chooses to revert from paying on the instalment income basis to the GDP-adjusted notional tax method will become a quarterly payer who pays 2 or 4 instalments annually on the basis of GDP-adjusted notional tax as appropriate to its circumstances at the end of that quarter. [Schedule 2, item 14, subsections 45-132(2) and 45-134(2)]

GDP-adjusted notional tax payers must pay either 2 or 4 instalments

6.30 Most entities who are quarterly payers who pay on the basis of GDP-adjusted notional tax will be required to pay 4 instalments each year, which is consistent with the existing rules for the PAYG instalments regime. However, certain individuals will come within a new category of PAYG instalments payers who will be required to pay 2 instalments each year. Consequently, there will be a new rule which requires an entity to pay 4 quarterly instalments if it is a quarterly payer who pays on the basis of GDP-adjusted notional tax and it does not come within the new 2 instalments payer rules. [Schedule 2, item 14, subsection 45-132(1)]

6.31 Again, there are various provisions which state when an entity becomes, and stops being, a quarterly payer who pays 4 instalments annually on the basis GDP-adjusted notional tax. They are needed to facilitate the interaction of the rules that are used to define the various groups of PAYG instalments payers. [Schedule 2, item 14, subsections 45-132(2) to (5)]

GDP-adjusted notional tax payers who pay only 2 instalments

6.32 As stated in paragraph 6.29, a new category of quarterly payer who pays on the basis of GDP-adjusted notional tax will be created. These PAYG instalments payers will be required to pay 2 instalments each year. This will address the fact that some GDP-adjusted notional taxpayers have fluctuating income flows within the income year.

6.33 An individual will be required to pay only 2 instalments each year if, at the end of the starting instalment quarter in the income year, he or she is a quarterly payer who pays on the basis of GDP-adjusted notional tax, and the individual satisfies both of the following:

•

he or she is either or both:

-

carrying on a primary production business in the current year [Schedule 2, item 14, paragraph 45-134(1)(a)] ; or

-

an author, artist or other special professional in the current year [Schedule 2, item 14, paragraph 45-134(1)(b)] ; and

•

the assessable income that was derived from, or resulted from that business or those activities in the most recent income year that has been assessed exceeded so much of the deductions for that year that reasonably relate to that income [Schedule 2, item 14, paragraphs 45-134(1)(a) and (b)] .

How the 2 instalments system works

6.34 In general terms, individuals who are quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax (hereafter called 2 instalments payers) will pay instalments at the end of the third and fourth instalment quarters of their income years. The amount payable will be the amount worked out, and notified by, the Commissioner.

6.35 However, consistently with the existing GDP-adjusted notional tax method, the 2 instalments payer will be entitled to vary the amount of an instalment by estimating their expected tax liability for the year. An individual who varies the instalment amount may be liable to pay the GIC if the varied amount is too low. Paragraphs 6.35 to 6.61 explain in more detail how the 2 instalments will work.

When the 2 instalments will be payable

6.36 Subdivision 45-B currently contains rules that state both when an entitys first instalment, and subsequent instalments, are payable - see sections 45-50, 45-55 and 45-66. It also contains rules in section 45-60 which state when those quarterly instalments are due. Each of these sections will be repealed by amendments in Schedule 2 to this Bill and will be replaced by new rules that specify how many instalments are payable by an entity for an income year and when the quarterly instalments are due. [Schedule 2, items 5 to 7]

6.37 An individual who is a 2 instalments payer will be liable to pay instalments only at the end of the third and fourth instalment quarters of the income year. [Schedule 2, item 5, subsection 45-50(2)]

6.38 However, an entity cannot be liable to pay an instalment for an instalment quarter if:

•

that instalment quarter is earlier than the instalment quarter in which it is first notified of an instalment rate by the Commissioner; or

•

the Commissioner withdraws the entitys instalment rate before the end of that instalment quarter.

[Schedule 2, item 5, subsection 45-50(4)]

6.39 For example, if a 2 instalments payer has not previously been liable to pay PAYG instalments, and the Commissioner notifies the individual of an instalment rate in the fourth quarter of its income year, the individual will only be liable to pay an instalment for the fourth instalment quarter. Further, if the Commissioner withdraws the individuals instalment rate during the second quarter of the subsequent income year, the individual would not be liable to pay instalments for the second, third or fourth instalment quarter of that income year.

When the 2 instalments will be due

6.40 The due date for payment of the 2 quarterly instalments payable by a 2 instalments payer will depend on whether the individual is a deferred BAS payer and whether it has a substituted accounting period. The meaning of deferred BAS payer is discussed in Chapter 7.

6.41 The due dates are set out in Table 6.1.

How the amount of the 2 instalments will be worked out

6.42 The amount of the quarterly instalment that is payable by a 2 instalments payer will be worked out under subsection 45-112(1) in the same way as currently for those who are already entitled to pay on the basis of GDP-adjusted notional tax. That is, the amount payable will be:

•

the amount the Commissioner works out, and notifies, to the entity;

•

the varied amount the entity works out from its estimate of its benchmark tax (i.e. its expected tax liability for the year less any tax attributable to net capital gains expected to be included in assessable income and its PAYG withholding credits); or

•

the amount the Commissioner works out from an entitys estimate of its benchmark tax for an instalment quarter subsequent to an instalment quarter in which the entity varies its instalment amount.

This result arises from section 45-112 without the need for any consequential amendment.

Amount notified by the Commissioner

6.43 The Commissioner will generally work out the amount of an instalment as follows:

•

for the instalment payable for the third quarter - 75% of the entitys GDP-adjusted notional tax; and

•

for the instalment payable for the fourth quarter - 100% of the entitys GDP-adjusted notional tax less the previous instalment unless the amount is negative. If it is negative, the amount of the instalment is nil.

This method is used when an individual is a 2 instalments payer at the end of the first instalment quarter in an income year. [Schedule 2, item 29, subsections 45-402(1) to (3)]

6.44 The amount payable by a 2 instalments payer is reduced if the individual becomes a 2 instalments payer at the end of the second, third or fourth instalment quarter of the income year. This will happen if the individual is first notified of an instalment rate by the Commissioner during one of those quarters. This reduction ensures that the individual does not pay more than he or she would have been required to pay had they been a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax or if they had chosen to pay quarterly instalments on the basis of instalment income. [Schedule 2, item 29, subsections 45-402(4) to (6)]

6.45 If the individual is first notified of an instalment rate by the Commissioner during the second instalment quarter of the income year, the amount of the instalment is worked out as follows:

•

for the instalment payable for the third quarter - 50% of the entitys GDP-adjusted notional tax; and

•

for the instalment payable for the fourth quarter - 75% of the entitys GDP-adjusted notional tax less the previous instalment.

[Schedule 2, item 29, subsection 45-402(4)]

6.46 If the individual is first notified of an instalment rate by the Commissioner during the third instalment quarter of the income year, the amount of the instalment is worked out as follows:

•

for the instalment payable for the third quarter - 25% of the entitys GDP-adjusted notional tax; and

•

for the instalment payable for the fourth quarter - 50% of the entitys GDP-adjusted notional tax less the previous instalment.

[Schedule 2, item 29, subsection 45-402(5)]

6.47 If the entity is first notified of an instalment rate in the fourth instalment quarter of the income year, the amount of the instalment for the fourth instalment quarter is 25% of the entitys GDP-adjusted notional tax. [Schedule 2, item 29, subsection 45-402(6)]

Varying the amount notified by the Commissioner

6.48 An entity varies the amount of its instalment by estimating its benchmark tax in the same way as currently happens for both the existing GDP-adjusted notional tax payers and annual payers. An entitys benchmark tax is its tax liability for the year less the tax attributable to any net capital gain included in assessable income and its credits for amounts deducted from its withholding income.

6.49 Generally the amount of the varied instalment will be the amount worked out as follows (if it is positive):

•

if the individual varies the amount of the instalment payable for the third quarter - 75% of the individuals estimate of benchmark tax; and

•

if the individual varies the amount of the instalment payable for the fourth quarter - the individuals estimate of benchmark tax reduced by the previous instalment.

The amount of the instalment is nil, if the amount worked out is negative. [Schedule 2, item 34, subsections 45-412(1) to (4)]

6.50 The calculation of the varied instalment amount is also modified where the amount is being worked out in an income year in which the 2 instalments payer is first notified of its instalment rate in a quarter other than the first instalment quarter. The modifications operate in the same way as when the Commissioner works out the amount of the instalment. [Schedule 2, item 34, subsections 45-412(5) to (9)]

6.51 An individual may claim a variation credit under section 45-420 for an instalment, if the amount worked out for that instalment under section 45-412 is negative. This is achieved by a consequential amendment to section 45-420. [Schedule 2, item 35]

Penalty if the varied amount is understated

6.52 A 2 instalments payer who varies the amount of an instalment will be liable to pay the GIC if the estimate of the individuals benchmark tax is less than 85% of the individuals actual benchmark tax as worked out by the Commissioner after the end of the income year. The penalty will be payable under subsection 45-232(1), but no specific amendment is needed to achieve this.

6.53 Existing subsection 45-232(2) provides the formula for working out the amount of the GIC payable by a taxpayer and that calculation is based, in part, on the existing definition of an acceptable amount in subsection 45-232(3). This definition will be amended to provide that it only applies for a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax. [Schedule 2, item 89, subsection 45-232(3)]

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

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

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

•

the amount notified to the 2 instalments payer under paragraph 45-112(1)(a) as the amount for that instalment; and

•

75% of the benchmark tax for the income year.

[Schedule 2, item 90, paragraph 45-232(3A)(a) and table item 1]

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

•

the amount that the Commissioner would have notified to the 2 instalments payer under paragraph 45-112(1)(a) as the amount for that instalment (i.e. as if no variation(s) had been made); and

•

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

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

6.58 Special rules will be used to work out the acceptable amount for an instalment quarter in which the Commissioner first notifies a 2 instalments payer of its instalment rate in a quarter other than the first instalment quarter. These special rules operate as exceptions to new subsection 45-232(3A), but will work in essentially similar ways to that subsection. The only difference will arise when it is necessary to work out the acceptable amount of the instalment by reference to the percentage of a taxpayers benchmark tax.

6.59 The special rules align the benchmark tax percentages used in working out the acceptable amount with the percentages of the GDP-adjusted notional tax that are used by the Commissioner in working out the amount of the instalment payable by a 2 instalments payer under section 45-402. This has the effect of ensuring that a 2 instalments payer is not disadvantaged in relation to a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax.

6.60 In such cases, the percentages of benchmark tax used in working out the acceptable amount depend on when a taxpayer is first given a PAYG instalment rate by the Commissioner. If this occurs in the second instalment quarter, the percentage of benchmark tax used to work out the acceptable amount of the third instalment quarter will be 50% [Schedule 2, item 90, subsection 45-232(3B), table item 1] . The percentage of benchmark tax used in the calculation of the acceptable amount of the fourth instalment quarter will be 75% [Schedule 2, item 90, subsection 45-232(3B), table item 2] .

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

Credit for instalments payable

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

6.63 The second amendment is consequential upon the first and repeals a non-operative note to subsection 45-30(2). [Schedule 5, item 2, subsection 45-30(2)]

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

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

•

balance earlier than 30 June;

•

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

•

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

6.66 Schedule 2 to this Bill extends the class of taxpayers who have access to the GDP-adjusted notional tax method. The corrections referred to in paragraph 6.62 will also ensure that taxpayers within this extended class will have the correct amount credited against their assessed tax.

Application and transitional provisions

6.67 The amendments made by Schedule 2 to this Bill will generally apply to the 2001-2002 income year, and later income years. [Schedule 2, item 40 and subitem 95(1)]

6.68 However, Schedule 2 to this Bill also contains transitional provisions that will allow the PAYG instalments payers affected by the amendments to take advantage of some of the proposed amendments sooner, including for an instalment quarter ending 31 March 2001. This will ensure that most of the affected instalment payers will benefit immediately from the reduced compliance costs that flow from these amendments. [Schedule 2, item 49]

6.69 The transitional provisions will also specify how the Commissioner will work out the amount of the instalment that is to be notified to the affected taxpayers for a brief transitional period that will cover any instalment quarter that ends on or after 31 March but not on or after 31 December 2001. This will allow the Commissioner to establish the computer systems needed to calculate the amount. Taxpayers will not be disadvantaged as a result of these transitional measures. [Schedule 2, item 51]

6.70 There will also be transitional rules that:

•

ensure that the individuals who chose to pay instalments for the 2000-2001 income year on the basis of GDP-adjusted notional tax are not excluded from that method if they become GST registered after the end of the first instalment quarter of that year [Schedule 2, item 50] ; and

•

specify how the new rules for 2 instalments payers will apply to individuals whose 2001-2002 income year ends before 30 June 2002 [Schedule 2, item 52] .

6.71 A power to make regulations is also provided in case additional rules are needed to give effect to the transitional rules. [Schedule 2, item 53]

Granting access to the GDP-adjusted notional tax method immediately

Certain PAYG instalments payers can choose to pay instalments on the basis of GDP-adjusted notional tax for the remainder of their 2000-2001 income year

6.72 At the end of each transitional quarter for which certain entities are liable to pay a PAYG instalment, the entities will be able to choose to become a quarterly payer who pays on the basis of GDP-adjusted notional tax [Schedule 2, subitem 49(1)] . Most entities will make this choice for the instalment quarter that ends on 31 March 2001 in respect of the instalment payable for the period 1 January 2001 to 31 March 2001. However, an entity will be entitled to make that choice for any instalment quarter that is a transitional quarter.

6.73 A transitional quarter is an instalment quarter that is an instalment quarter of the 2000-2001 income year and that ends on or after 31 March, but not after 31 December 2001 [Schedule 2, paragraph 49(1)(b)] . For example, an entity whose 2000-2001 income year ends on 30 June, will have 2 transitional quarters being the instalment quarters that end on 31 March and 30 June 2001. An entity whose 2000-2001 income year ends on 31 December 2001 (a late December balancer) will have 4 transitional quarters being the instalment quarters ending 31 March, 30 June, 30 September and 31 December 2001.

Which entities can make the choice?

6.74 All individuals, and multi-rate trustees, will be able to choose to pay on the basis of GDP-adjusted notional tax for their transitional quarters unless they have already chosen to pay an annual instalment for the 2000-2001 income year or to pay on the basis of GDP-adjusted notional tax for that year. [Schedule 2, paragraph 49(2)(a)]

6.75 Full self-assessment taxpayers will also be entitled to choose to pay on the basis of GDP-adjusted notional tax for their transitional quarters if their base assessment instalment income for the base year is $1 million or less. However, if such an entity has already chosen to pay an annual instalment for the 2000-2001 income year it cannot choose to pay on the basis of GDP-adjusted notional tax. [Schedule 2, paragraph 49(2)(b)]

6.76 Full self-assessment taxpayers that:

•

have a base assessment instalment income of more than $1 million for the most recent income year that has been assessed; and

•

are eligible to be annual payers under the existing PAYG instalments provisions but have not chosen to be annual payers,

can choose to pay instalments on the basis of GDP-adjusted notional tax for their transitional quarters of the 2000-2001 income year. [Schedule 2, paragraph 49(2)(c)]

Machinery provisions to support the main transitional provisions

6.77 There are several machinery provisions that are needed to support these transitional rules, including rules to:

•

require an entity making the choice to pay on the basis of GDP-adjusted notional tax for a transitional quarter to notify the Commissioner of the choice in the approved form, on or before the due date for the relevant instalment [Schedule 2, subitem 49(3)] ;

•

state when an entity becomes, and stops being, a quarterly payer who pays on the basis of GDP-adjusted notional tax and to treat the entity as such a payer for all purposes of Division 45 for the 2000-2001 income year [Schedule 2, paragraphs 49(4)(a) and (b)] ;

•

ensure that the entities who become GDP-adjusted notional tax payers in the 2000-2001 income year as a result of the transitional rules are not subjected to the eligibility rules for paying on that basis in subsections 45-125(1) to (3) [Schedule 2, paragraph 49(4)(c)] ;

•

ensure that GST registration does not stop an entity being a quarterly payer who pays on the basis of GDP-adjusted notional tax by preventing section 45-130 from applying to any entity who becomes such a payer under these transitional rules [Schedule 2, paragraph 49(4)(c)] ; and

•

enable the consequential amendments to Part IIIAA of the ITAA 1936 (Franking of Dividends) to apply to instalments that are payable in respect of transitional quarters (as that term is defined by item 49) worked out on the basis of GDP-adjusted notional tax [Schedule 2, subitem 95(2)] .

Individuals already paying quarterly instalments on the basis of GDP-adjusted notional tax

6.78 Section 45-130 states that an individual stops being a quarterly payer who pays on the basis of GDP-adjusted notional tax if it becomes registered, or required to be registered, for GST whether in their own right or as a partner in a partnership. It effectively requires an individual to revert to the instalment income basis for working out quarterly instalments if the individual becomes GST registered.

6.79 GST registration becomes irrelevant in determining an entitys eligibility to pay quarterly instalments using GDP-adjusted notional tax under the proposed amendments, both for the 2001-2002 and later income years under the amended law and for the transitional quarters of the 2000-2001 income year under item 49. Therefore, it is not appropriate to require an individual who has chosen to pay its 2000-2001 quarterly instalments on the basis of GDP-adjusted notional tax and who becomes GST registered in that income year to stop paying their instalments on that basis.

6.80 Consequently, section 45-130 will not apply to an individual who has chosen to pay its 2000-2001 quarterly instalments on the basis of GDP-adjusted notional tax under the existing law and who becomes GST registered in a transitional quarter in that income year. [Schedule 2, item 50]

Calculating the amount of the instalment

6.81 The Commissioners existing administrative and computer systems are not structured to enable the calculation of the GDP-adjusted notional tax figure needed for the new categories of PAYG instalments payers who will be eligible to pay instalments on the basis set out in existing section 45-400. Consequently, the amount that the Commissioner notifies will be calculated in a different way for a short period of time until the necessary administrative and computer system changes are implemented.

6.82 These transitional arrangements will apply to any instalment quarter of the 2000-2001 or 2001-2002 income year that ends on or after 31 March 2001 but not on or after 31 December 2001. For example, they will apply for the third and fourth quarters of a 30 June balancing entitys 2000-2001 income year and the first quarter of its 2001-2002 income year. [Schedule 2, subitem 51(2)]

6.83 The transitional calculation method will affect all the additional entities that will be eligible to become quarterly payers who pay on the basis of GDP-adjusted notional tax under either subitem 49(2) of Schedule 2 to this Bill or Division 45 as amended by this Bill. These entities are called transitional payers for the purposes of this particular transitional provision. [Schedule 2, subitem 51(4)]

6.84 The amount of the instalment payable by a transitional payer will be calculated using the following formula:

notional tax * (1 + GDP adjustment) / 4


The terms notional tax and GDP adjustment will take their meanings from the meanings given to those terms under the existing Division 46. [Schedule 2, subitem 51(2)]

6.85 This calculation differs from the calculation of GDP-adjusted notional tax under the existing law in 2 key aspects. First, this calculation applies the GDP adjustment to an entitys notional tax. The existing law increases the entitys adjusted taxable income and adjusted withholding by the GDP adjustment and then calculates the entitys notional tax from those adjusted amounts.

6.86 For example, suppose an entitys adjusted taxable income is $50,000 and the GDP adjustment is 10%. The GDP-adjusted notional tax amount worked out under the existing law is the tax that would be payable on $55,000, which is $13,480 at 2000-2001 income tax rates. The transitional method will require the Commissioner to work out the notional tax on $50,000 which is $11,380, and increase that by the GDP adjustment of 10%. The result would be a GDP-adjusted notional tax figure of $12,518.

6.87 Secondly, the existing law requires each instalment to be worked out as a percentage of the GDP-adjusted notional tax figure, where the relevant percentage increases with each quarter and the quarterly instalment payable takes account of the amount of any earlier instalment payable for the income year. That is, the first instalment is 25% of the GDP-adjusted notional tax, the second is 50% of that amount less the previous instalment and so on. The transitional method will simply require the Commissioner to advise the entity of an amount being 25% of the GDP-adjusted notional tax figure.

6.88 Machinery provisions will ensure that the amounts calculated under this transitional method apply for the purposes of Subdivision 45-L which states how the Commissioner works out the amount of a GDP-adjusted notional tax quarterly instalment [Schedule 2, subitem 51(3)] . In particular, an entity will be able to vary the amount of an instalment in the usual way by estimating its benchmark tax [Schedule 2, subitem 51(4)] .

6.89 However, if an entity does vary the instalment amount for a transitional quarter, the Commissioner will not be required to take account of the entitys variation when working out the instalment for a subsequent transitional quarter. Further, the entity will not be able to claim a variation credit under section 45-420 in respect of a variation made for a transitional quarter. [Schedule 2, subitem 51(5)]

Special rule for quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax and whose income year ends before 30 June

6.90 The Commissioners existing administrative and computer systems are not structured to enable him to identify immediately which individuals will become quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax. This will not be a problem for those entities whose 2001-2002 income years end on 30 June 2002 or a later date, but it will be a problem for those whose 2001-2002 income years end before that date (i.e. for the early balancing individuals).

6.91 Therefore, special rules will apply to those individuals who would otherwise become quarterly payers who pay 2 instalments annually on the basis of GDP-adjusted notional tax at the end of the first instalment quarter of their 2001-2002 income year where that instalment quarter begins before 1 July 2001. [Schedule 2, subitem 52(1)]

6.92 The transitional rules will provide that:

•

such an individual will not become a 2 instalments payer at the end of the first instalment quarter of their 2001-2002 income year [Schedule 2, paragraph 52(2)(a)] ; and

•

instead, the individual will be treated as if it is a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax before the end of that quarter [Schedule 2, paragraph 52(2)(b)] .

6.93 However, the rules will also provide that the individual will become a quarterly payer who pays 2 instalments annually on the basis of GDP-adjusted notional tax for the first instalment quarter of its income year that commences on or after 1 July 2001. [Schedule 2, paragraphs 52(2)(c) and (d)]

6.94 Most of the PAYG instalments payers who will be affected by this transitional provision will have 2001-2002 income years ending on 31 March 2002. As a result of this provision, these instalments payers will pay 3 instalments for their 2001-2002 income year, being for the instalment quarters ending 30 June 2001, 31 December 2001 and 31 March 2002. They will not pay more than they would otherwise have paid had they paid only 2 instalments for the 2001-2002 income year.

Consequential amendments

6.95 Various consequential amendments will be made to the TAA 1953 (Table 6.2) and the ITAA 1997 (Table 6.3) to take account of the amendments described in this chapter. Consequential amendments will also be made to the ITAA 1936 (Table 6.4) to state how an entity that is liable to keep a dividend franking account must take account of a variation credit which arises when that entity pays instalments using the GDP-adjusted notional tax method.