House of Representatives

Explanatory Memorandum

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

Chapter 1 - Annual lodgement and payment

Outline of chapter

1.1 Schedule 1 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to provide small businesses and non-profit bodies that are voluntarily registered for the goods and services tax (GST) the option to report and pay their GST on an annual basis.

Context of amendments

1.2 The Government announced in the 2004-2005 Budget its intention to introduce GST measures aimed at reducing compliance costs for small businesses and non-profit bodies.

1.3 Registration for GST purposes is voluntary for most entities that have an annual turnover which does not meet the GST registration turnover threshold. The registration threshold is $50,000 for businesses and $100,000 for non-profit bodies. Under the current GST reporting and payment arrangements, GST registered entities must generally report and pay their GST on either a monthly or quarterly basis.

1.4 There are various reasons to explain why entities register for GST purposes even if they do not meet the GST registration turnover threshold. For instance, some entities may register in order to assist their business customer's accounting processes by eliminating the customer's need to distinguish between invoices and tax invoices.

1.5 Compliance costs for small businesses and non-profit bodies that voluntary register for GST purposes can be lowered by reducing the number of times that they are required to report and pay their GST. These types of small businesses and non-profit bodies may undertake a full analysis of their transactions at the time of completing their annual income tax return. Significant costs savings can be achieved for these entities by allowing them to lodge their GST return and pay any GST liability at the same time they complete their annual income tax return.

Summary of new law

1.6 This bill will amend the GST Act to allow an entity that is voluntarily registered for GST purposes the option to report and pay GST on an annual basis.

Comparison of key features of new law and current law

Detailed explanation of new law

1.7 Division 151 is inserted into the GST Act. This Division enables certain entities to have annual tax periods. Entities that elect to have annual tax periods will lodge their GST returns and pay their GST or receive refunds of GST on an annual basis. [Schedule 1, item 11, section 151-1]

Subdivision 151-A

1.8 Subdivision 151-A sets out the rules and procedures to enable an entity to make an annual tax period election. An entity will be eligible to make an annual tax period election if it is registered but not required to be registered at the time of its election. An entity with an annual turnover that does not meet the registration turnover threshold will be eligible to make an annual tax period election. The registration threshold is $50,000 for businesses and $100,000 for non-profit bodies. However, a taxi operator will not be eligible to have an annual tax period as it is required to be registered for GST purposes regardless of its annual turnover. In addition, the entity must not have made an election to use the GST instalment option. [Schedule 1, item 11, section 151-5]

1.9 An entity that is eligible to make an annual tax period election must notify the Commissioner of Taxation (Commissioner) of its election. Generally, an election must be made on or before 21 August for entities with monthly tax periods, and on or before 28 October for those with quarterly tax periods. These dates are the last dates for which the entity would normally be required to lodge a first GST return for the financial year. If an entity does not make its election within those dates it cannot make a valid annual tax period election until the next financial year. A valid election will generally take effect from the start of a financial year. [Schedule 1, item 11, section 151-10 and subsection 151-20(1)]

Example 1.1

Ivan has been registered for GST for two years. He reports and pays GST on a monthly basis. Ivan notifies the Commissioner on 12 August that he has made an initial annual tax period election. Ivan's GST return for the month of July is not due to be lodged with the Commissioner until 21 August. This is the last date for which Ivan could make an annual tax period election. His election takes effect from 1 July.

1.10 However, the Commissioner may allow an election to take effect from the commencement of some other tax period if appropriate. In the financial year commencing 1 July 2004, the Commissioner has a discretion to treat elections made in that financial year, but after the specified dates, as having effect for tax periods commencing 1 October 2004 for entities with quarterly tax periods and 1 November 2004 for entities with monthly tax periods. [Schedule 1, item 11, section 151-10 and paragraph 151-20(2)(b)]

1.11 Another exception to the general election rules will apply to an entity that has a GST lodgement record of six months or less that makes an annual tax period election after 21 August or 28 October as applicable. The election will take effect from the start of the earliest tax period for which the entity's GST is not yet due. [Schedule 1, item 11, section 151-10 and paragraph 151-20(2)(a)]

Example 1.2

Mary registered for GST on 15 July and lodged her first GST return on 28 October for the September quarter. On 20 November she then makes an annual tax period election. Mary's election takes effect from 1 October.

1.12 Special rules apply to elections made by representative members of GST groups. These rules ensure that an election can only be made if each member of the group satisfies the eligibility criteria and the annual tax period will apply to each member of the group. [Schedule 1, item 11, section 151-15]

1.13 Once a valid annual tax period election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election, the entity is required to be registered on 31 July in a financial year, or the entity is the representative member of a GST group and the membership of the GST group changes. An annual tax period election will also cease to have effect at the end of an entity's concluding tax period. [Schedule 1, item 11, subsection 151-25(1)]

1.14 An entity revokes its annual tax period election by notifying the Commissioner of its revocation. If an entity notifies the Commissioner of its revocation on or before 28 October in a financial year, the annual tax period election will cease to have effect from the start of the financial year in which the revocation is made. This means that the entity will be required to lodge GST returns for the tax periods that started at the beginning of the financial year. If the entity notifies of the revocation after 28 October in a financial year, the annual tax period election will cease to have effect from the start of the following financial year. The entity will remain in the annual reporting and payment option for the full financial year. [Schedule 1, item 11, subsection 151-25(2)]

1.15 The Commissioner may disallow an entity's annual tax period election if the Commissioner is satisfied that the entity has failed to comply with one or more of their tax obligations. This ensures that non-compliant entities are not able to take advantage of the longer reporting period. [Schedule 1, item 11, subsection 151-25(3)]

1.16 Where the Commissioner disallows an entity's election during the financial year in which the election first took effect, the election will cease to have effect from the start of the tax period in which the election first took effect. For later financial years, if the Commissioner disallows an entity's election on or before 28 October, the election will cease to have effect from the start of the financial year in which the disallowance is notified. However, if in a later financial year the Commissioner disallows an entity's election after 28 October, the election will cease to have effect from the start of the financial year following the year of notification. This means that the entity remains in the annual GST reporting and payment system for the full financial year in which the Commissioner notified it of the disallowance. [Schedule 1, item 11, subsection 151-25(4)]

Example 1.3

Jim has been in the annual reporting and payment system for a number of financial years. On 15 November the Commissioner has reason to notify Jim that his election has been disallowed. Jim's election will cease to have application from 1 July in the financial year immediately following the year in which the Commissioner notified him of the disallowance.

If the Commissioner had notified Jim of the disallowance on 15 September, his election would have ceased to have effect from 1 July in the financial year of the notification.

1.17 Once an entity has made a valid annual tax period election, the entity is required to determine on 31 July of each financial year whether it is required to be registered for GST. If an entity determines on this date that it is required to be registered, the entity will be ineligible to continue with the annual GST lodgement and payment option. The annual tax period election will cease to have effect from the start of the financial year in which 31 July falls. This means that the entity will be required to lodge a monthly or quarterly GST return for the tax period commencing at the start of that financial year. [Schedule 1, item 11, subsection 151-25(5)]

Subdivision 151-B

1.18 Subdivision 151-B sets out the consequences that apply to an entity that makes an annual tax period election. An entity that makes a valid election will have a tax period that is a financial year. The tax period is referred to as the entity's annual tax period. Where an election takes effect during a financial year the entity will have an annual tax period that consists of the remainder of the financial year. The date the annual tax period commences will depend on the date the election takes effect under section 151-10. [Schedule 1, item 11, section 151-40]

1.19 An entity that has made an annual tax period election must lodge its GST return for the annual tax period no later than the date required to lodge its annual income tax return with the Commissioner. Entities that are not required to lodge income tax returns must lodge their GST return on or before 28 February in the financial year following the end of the relevant annual tax period. [Schedule 1, item 11, section 151-45]

Example 1.4

Kerry satisfies the Commissioner's criteria to be exempt from lodging an annual income tax return. Therefore, Kerry must lodge her annual GST return no later than 28 February in the financial year immediately following the end of the financial year to which the GST return relates.

1.20 If an entity's net amount for the annual tax period is greater than zero, the entity must pay that net amount on or before the time that the entity is required to give the Commissioner its GST return. [Schedule 1, item 11, section 151-50]

1.21 Where an individual who has made an annual tax period election dies, or where an entity ceases to carry on an enterprise, or has its registration cancelled, the annual tax period is not affected by the death, cessation or cancellation, but will instead apply until the end of the financial year in which the event took place. [Schedule 1, item 11, section 151-55]

1.22 If an individual becomes bankrupt, or is an entity that goes into liquidation or receivership, or for some other reason ceases to exist, the entity's annual tax period will end on the day before the bankruptcy, liquidation or receivership. The GST return will be due and any GST payable for the annual tax period on or before the 21st day of the month following the end of the annual tax period (i.e. the date the entity went into bankruptcy, liquidation, receivership or cessation). Similar rules apply when a change is made to the membership of a GST group. [Schedule 1, item 11, sections 151-60 and 151-65]

1.23 Where the membership of a GST group changes on a date that is not the end of the financial year, the remainder of the financial year will consist of one or more tax periods that apply to the members as if the annual tax period election had never taken effect. Division 48 has been amended to enable the membership of a GST group to change part-way during a financial year. The remaining tax periods will commence on the day following the end of the annual tax period. The tax periods will be the normal GST monthly or quarterly tax periods. [Schedule 1, item 11, section 151-70; item 7, section 48-85]

Example 1.5

ABC and XYZ are members of a GST group with a valid annual tax period election. ABC leaves the group on 15 January. The annual tax period ends on 15 January. The new tax period for each entity will commence on 16 January.

Consequential amendments

1.24 Subsection 62(2) of the Taxation Administration Act 1953 has been amended to include items 37AD, 37AE and 37AF to ensure that the Commissioner's refusal to allow an annual tax period election to take effect from the start of another tax period or refusing a request to make an annual tax period election on a specified day, and the Commissioner's disallowance of an entity's annual tax period election are reviewable GST decisions. [Schedule 1, item 15, subsection 62(2)]

1.25 Subsections 129-20(1) and 138-10(1) of the GST Act have been amended to ensure these subsections recognise the concluding annual tax period under subsection 151-55(1). [Schedule 1, item 8, subsection 129-20(1); item 9, subsection 129-20(1); item 10, subsection 138-10(1)]

Application and transitional provisions

1.26 The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 October 2004 for entities with quarterly tax periods and 1 November 2004 for all other entities. [Schedule 1, item 16]

Regulation impact statement

Policy objective

1.27 The objective of enabling eligible entities to lodge their GST return on an annual basis is to achieve a significant and ongoing reduction in reporting costs and their compliance burden. This will be achieved by providing entities that are not required to be registered for GST, but who voluntarily register, an alternative reporting and payment method in addition to those that are currently available under the new tax system.

1.28 As the information collected on the GST return is essential to the integrity of the new tax system, the measure is also intended to avoid unduly risking the integrity of the system. Entities will continue to provide sufficient information, in a suitable timeframe, to ensure that necessary appropriate compliance verification can continue.

Implementation options

1.29 The recommended option is to allow GST registered entities with an annual turnover that does not meet the registration turnover threshold ($50,000 for businesses and $100,000 for non-profit bodies) to pay GST or claim refunds annually via the lodgement of an annual GST return.

1.30 This was the only option considered because it meets the aim of reducing compliance costs for those entities that are voluntarily registered for GST purposes, while preserving the integrity of the GST system.

1.31 It is intended that entities would be able to take advantage of this concession in the 2004-2005 income year.

Assessment of impacts

Impact group identification

1.32 The measure is intended to particularly benefit small businesses and non-profit bodies that currently lodge their GST returns on a quarterly basis. The impact of this measure would be broadly similar for each of these taxpayer groups.

1.33 There are approximately 740,000 businesses and 30,000 non-profit bodies that have annual turnovers which do not meet the registration turnover threshold and which are registered for GST purposes. Some of these entities lodge monthly returns despite not meeting the threshold for compulsory monthly lodgement. These entities are predominantly in a net refund position and choose to lodge monthly to improve their cash flow position. However, entities that are in a net refund position may still choose to report and pay their GST on an annual basis if they assess that the compliance cost saving from reporting annually is outweighed by the cash flow impact from reporting monthly.

Analysis of costs / benefits

1.34 This measure is expected to reduce compliance costs for small business and non-profit bodies, who currently lodge GST returns quarterly or monthly, by providing an additional option to ease their reporting burden. There is expected to be a significant but unquantifiable reduction in compliance costs as these entities will only need to report and pay their GST at the same time they lodge their income tax return.

1.35 There will be minor costs to businesses and charities in implementing the recommendations but these are likely to be negligible when compared with the overall reduction in compliance costs from the new measure. Affected taxpayers may incur upfront costs in familiarising themselves with and evaluating the additional reporting and payment option. This upfront compliance cost is expected to be small. Adoption of the new arrangements is also optional and entities that are satisfied with the existing system may continue to utilise their existing arrangements.

1.36 In some cases, businesses will seek professional advice. This decision is a matter for the individual business to take, having regard to the upfront cost of such advice, which may be outweighed by the benefits, such as improved cash flow and better business management which may result from professional advice.

1.37 There will be an upfront cost to the Australian Taxation Office in making appropriate changes to its systems and processes, together with other administrative costs and corporate flow-ons. The administrative costs of implementation cannot be quantified at this stage.

1.38 The introduction of this measure is expected to result in a deferral of GST revenue from one year to the next. This measure is expected to result in a deferral in GST revenue of $219 million in 2004-2005 and $127 million in 2005-2006. The deferral in GST revenue in later financial years is expected to be between $17 million and $18 million.

Consultation

1.39 Whilst there has been no consultation on this specific proposal, the measure is a variant on proposals that have been made by various tax professional bodies in respect of introducing annual reporting cycles for small business.

Conclusion and recommended option

1.40 The intention of this measure is to lessen the compliance costs on small business and non-profit bodies while still collecting information that is sufficient to maintain the integrity of the new tax system. In broad terms, while this measure may require some short-term adjustment by business and non-profit bodies to the changed reporting arrangements, it would provide immediate reductions in the costs of remitting and reporting GST for small businesses and non-profit bodies.

1.41 This option would address the concerns raised by small businesses and tax practitioners regarding the compliance costs for those who are not a significant risk to the system or who do not gain significant cash flow advantages from being required to report more frequently.