Senate

Explanatory Memorandum

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

Chapter 8 - Changes to the GIC and the benchmark interest rate

Outline of chapter

8.1 This chapter explains the amendments to the TAA 1953 and necessary consequential amendments to replace the benchmark rate used for the GIC and certain interest payments by the Commissioner, and to reduce the margin that is added to the benchmark rate in determining the GIC.

Context of reform

8.2 The GIC, provided for in Division 1 of Part IIA to the TAA 1953, is applied to relevant penalties and tax debts that are not paid on time. The rate at which the GIC is charged each day in a quarter is determined by adding 8 percentage points to a benchmark rate, presently described as the weighted average yield set at the last weekly tender for the 13-week Treasury Note before the end of the second month before the quarter commences. For example, the rate for November is used as the benchmark rate for the quarter commencing 1 January.

8.3 The Treasury Note yield rate is also used as the benchmark for interest payable by the Commissioner, such as interest on early payments, interest on overpayments and delayed refund interest, pursuant to the Taxation (Interest on Overpayments and Early Payments) Act 1983 .

8.4 On 26 June 2000, the Australian Office of Financial Management in conjunction with the RBA announced that it would no longer issue fixed term Treasury Notes. As such the benchmark rate, upon which interest rates charged and paid by the Commissioner are calculated, continues to be fixed at the yield set at the last tender of 13-week Treasury Notes in June 2000.

8.5 Further, tax professional bodies have expressed concerns that the GIC is excessive, because they consider the 8 percentage point margin is greater than necessary.

Summary of new law

8.6 The amendments provide for the necessary change of the benchmark rate that is applied for the purpose of calculating interest amounts charged by and paid to the Commissioner, to the monthly average yield of 90-day Bank Accepted Bills, as published by the RBA.

8.7 The amendments also provide for a reduction in the margin added to the benchmark rate for the purposes of the GIC from 8 to 7 percentage points. The Government considers that a 7 percentage point margin is sufficient to support the policy objectives that taxpayers should pay their tax liabilities on time and not use the Commonwealth as a lending authority.

8.8 The amendments do not alter the manner in which an interest amount (whether chargeable or payable) is calculated, nor the determination of whether this amount will in fact be charged or paid.

Detailed explanation of new law

Amendment to the benchmark rate applied for the purposes of the GIC and some interest payment regimes

8.9 The 90-day Bank Accepted Bill rate replaces the Treasury Note yield rate in providing a benchmark for formulating the GIC and amounts of interest paid by the Commissioner. This rate correlates closely to the Treasury Note yield rate, is of similar maturity length and is determined by the RBA on a regular basis using a consistent methodology.

8.10 New subsection 8AAD(2) of the TAA 1953 provides a definition for the term base interest rate, replacing the former Treasury Note yield rate. This is defined as the monthly average yield of 90-day Bank Accepted Bills. The replacement rate is published by the RBA in Table F1 of the Reserve Bank of Australia Bulletin . This subsection also provides a table identifying the appropriate monthly average to be used for each quarter. [Schedule 4, item 1]

8.11 Where the RBA has not published the specified rate by the start of a quarter, new subsection 8AAD(3) substitutes the last published monthly average. [Schedule 4, item 1]

8.12 New subsection 8AAD(1) of the TAA 1953 determines the GIC rate applicable to relevant penalties and tax debts that remain to be paid to the Commissioner. It currently refers to the Treasury Note yield rate. Amendment of this label to base interest rate will give effect to the intended change. [Schedule 4, item 1]

8.13 Similarly, new subsection 8AAD(4) of the TAA 1953 provides for the rounding of the base interest rate to the second decimal place, as was previously the case with the Treasury Note yield rate. [Schedule 4, item 1]

Amendment to the margin added to the benchmark rate for the purposes of the GIC

8.14 New subsection 8AAD(1) reduces the margin added to the base rate in calculating the GIC to 7 percentage points. [Schedule 4, item 1]

Application and transitional provisions

8.15 The amendments will have effect from the first full quarter following Royal Assent [Schedule 4, item 10] . Consequently, there are no transitional provisions required.

Consequential amendments

8.16 Consequential amendments are also necessary to provisions in other Acts which refer to the Treasury Note yield rate. These amendments, which replace Treasury Note yield rate with the new term base interest rate, are listed in Table 8.1.

[Schedule 4, items 2 to 9]