Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Monthly Pay As You Go instalments

Outline of chapter

1.1 This Schedule amends Division 45 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to require certain large entities to pay Pay As You Go (PAYG) instalments monthly.

1.2 All legislative references in this chapter are to Schedule 1 to the TAA 1953, unless otherwise stated.

Context of amendments

1.3 The PAYG instalment system requires entities with business or investment income to pay instalments towards their income tax liability. It is designed to ensure the efficient collection of income tax, including the Medicare levy, Higher Education Loans Program (HELP) debts, and debts under the Student Financial Supplement Scheme and the Aboriginal Study Assistance Scheme (ABSTUDY). This continues a process of reform over decades to better align the timeliness of tax collections with economic activity, better match the regular nature of Government payments and to prevent taxpayers having large debts at the end of the income year.

1.4 Currently, most entities in the PAYG instalment system are required to pay instalments on a quarterly basis. If certain criteria are met, instalments may be made annually or biannually. Many of these entities are currently required to report and pay the goods and services tax (GST) on a monthly basis.

1.5 In the 2012-13 Mid-Year Economic Financial Outlook (MYEFO), the Government announced a process to reform the timing of PAYG instalment payments by large corporate entities. The purpose of the reform is to allow PAYG instalments to be more responsive to the economic conditions faced by businesses, and to better align PAYG instalment payments with the GST payments for most large companies. In response to concerns raised in consultation on the design of this measure, the Government announced in the 2013-14 Budget that it would extend the reforms to all large entities.

1.6 On 25 March 2012 the Government announced that it has commissioned Treasury and the Australian Taxation Office (ATO) to work with interested parties on longer term reforms to improve the PAYG system. This process will provide an opportunity for a more detailed examination of proposals that were submitted in response to the February 2013 Consultation Paper on this topic. It will also provide an opportunity for non-corporate entities to identify any improvements that would assist their transition to monthly payment arrangements, which commences from 1 January 2016.

Summary of new law

1.7 These amendments require large entities to pay PAYG instalments monthly rather than quarterly or annually. Entities will be transitioned into the monthly PAYG instalment system over a four year period, depending on the size and type of the entity:

•

from 1 January 2014, corporate tax entities (being companies, corporate limited partnerships, corporate unit trusts or public trading trusts) that meet or exceed the $1 billion threshold will be required to pay PAYG instalments monthly;

•

from 1 January 2015, corporate tax entities that meet or exceed the $100 million threshold will be required to pay PAYG instalments monthly;

•

from 1 January 2016:

-

all other entities, including superannuation funds, trusts and individuals, that meet or exceed the $1 billion threshold will be required to pay PAYG instalments monthly; and

-

corporate tax entities that meet or exceed the $20 million threshold may be required to pay PAYG instalments monthly; and

•

from 1 January 2017, all other entities, including corporate tax entities, superannuation funds, trusts and individuals that meet or exceed the $20 million threshold may be required to pay PAYG instalments monthly.

1.8 Entities that are not currently required to report and pay GST monthly will not be required to move to monthly PAYG instalments if they do not meet the $100 million threshold and are not a head company of a consolidated group or a provisional head company of a multiple entry consolidated group (MEC group). This exemption better aligns the reporting of GST and PAYG instalments for those entities.

1.9 The threshold used is the amount of base assessment instalment income (BAII) that the entity has for a particular income year. The meaning of BAII is discussed further at paragraph 1.27.

1.10 To ensure the threshold applies equitably to all entities, those entities that have financial arrangements to which Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) applies (hereafter referred to as Taxation on Financial Arrangements (TOFA) entities) may be required use an 'adjusted' BAII calculation.

1.11 Therefore, under these amendments TOFA entities whose BAII provided by the Commissioner of Taxation (Commissioner) does not exceed the threshold amount, are required to do a further calculation of their BAII using the gross income of their financial arrangements (rather than net amounts). This amended calculation of the BAII is referred to throughout this Chapter as the 'adjusted' BAII.

1.12 The amount of a PAYG monthly instalment is a function of the instalment income of the entity for the relevant month. The Commissioner has the power to determine alternative methods for monthly payers to calculate their instalment income. This flexibility facilitates efficient implementation of these changes, whilst maintaining the integrity of the PAYG instalment regime.

Comparison of key features of new law and current law

Detailed explanation of new law

1.13 These amendments introduce the monthly PAYG instalment rules. Under these rules, certain large entities will be liable for PAYG instalments on a monthly basis rather than quarterly or annually.

1.14 Generally, an entity that meets the monthly payer requirement at a particular time is a 'monthly payer' and liable for monthly PAYG instalments from the start of the first month of their next income year.

1.15 Monthly payers continue to be liable for monthly PAYG instalments until they no longer meet the monthly payer requirement and give notice to the Commissioner that they will no longer pay their monthly. Where notice has been given to the Commissioner the entity remains a monthly payer until the next income year. [ Schedule 1, items 3 to 8 and 19, sections 45-5, 45-20, 45-50 and 45-136 ]

1.16 Under the general provisions, the amount of a monthly instalment is the applicable instalment rate multiplied by the instalment income of the monthly payer for that instalment month. Instalment month means a month that starts on the first day of an income year and each subsequent month, which equates to each calendar month of the year. [ Schedule 1, items 9 and 11, section 45-65 and subsection 45-114(1 )]

1.17 The Commissioner calculates and provides the entity with an applicable instalment rate. Where the entity has chosen to use a varied instalment rate, then that is the applicable instalment rate. Furthermore, the rules that apply to the operation and administration of quarterly PAYG instalment payers also apply to monthly payers, including penalties where the varied instalment rate is too low. [ Schedule 1, items 11 and 21 to 24, sections 45-200 and 45-225 and subsection 45-114(2 )]

1.18 Instalment income for an instalment month is broadly equivalent to the entity's ordinary income derived during that calendar month (section 45-120). However, the Commissioner may determine by legislative instrument additional methods for calculating the amount of a monthly instalment. The Commissioner may also, in providing an additional method, restrict the eligibility of a certain method to a specific class of entity or circumstance and specify the period in which an entity is required to use the additional method. [ Schedule 1, item 11, subsections 45-114(3) to (6 )]

1.19 Where the Commissioner has provided additional methods for the calculation of an instalment amount, a monthly payer may choose to use an additional method (if eligible) or alternatively calculate their instalment income under the general provisions. An entity will not be restricted in changing methods for any month, unless such a restriction is prescribed by the Commissioner in the relevant instrument. [ Schedule 1, item 11, section 45-114 ]

Example 1.1

The Commissioner specifies by legislative instrument an additional method that superannuation funds may use to determine the amount of their monthly instalment. Also contained in this instrument is a requirement that, if a fund chooses to use that method, they must commence using that method at the start of a month and can choose no other method for the relevant income year.

1.20 Notification and payments of monthly PAYG instalments must be undertaken electronically on or before the 21st day of the next month, unless specified by other means by the Commissioner. If a monthly payer is a deferred Business Activity Statement (BAS) payer the payment must be made by the 28th day of the next month. [ Schedule 1, items 5, 9 and 10, sections 45-67 and 45-72 and subsection 45-20(2 )]

1.21 The payment, by a deferred BAS payer, of a December monthly PAYG instalment must be made on or before the 28th of February. [ Schedule 1, item 9, subsection 45-67(2 )]

The general monthly PAYG instalment rules

Who is required to be a monthly PAYG instalment payer?

1.22 An entity will generally be a monthly payer if its threshold amount is equal to or greater than $20 million (note that the threshold is different under the transitional rules, which are discussed at paragraph 1.45). The threshold level broadly aligns with the GST threshold for being a monthly GST reporter. [ Schedule 1, item 19, subsection 45-138(1 )]

1.23 However, if a taxpayer lodges a GST return on a quarterly or annual basis, they will only become a monthly payer if their threshold amount is equal to or exceeds $100 million. This exemption better aligns the GST reporting and PAYG instalment obligations of entities with a threshold amount of over $20 million and under $100 million. Where an entity is part of a GST group, it is the GST group representative member's GST reporting obligation that is relevant for determining eligibility for the exemption. [ Schedule 1, item 19, subsection 45-138(2 )]

1.24 A head company of a consolidated group or a provisional head company of a MEC group will be a monthly payer if their threshold amount is equal to or greater than the $20 million threshold, regardless of their GST reporting requirements. [ Schedule 1, item 19, paragraph 45-138(2)(b )]

What is the threshold?

1.25 The threshold is a measure of an entity's economic activity, designed to identify large entities required to pay PAYG instalments monthly. The threshold is measured by reference to an entity's BAII.

1.26 For most entities, the threshold will be their BAII as provided by the Commissioner. For TOFA entities, whose BAII given by the Commissioner does not exceed the threshold; their threshold amount is their 'adjusted' BAII.

1.27 Broadly speaking, the BAII of an entity is so much of the entity's assessable income for a year (base year), as worked out for the purposes of the base assessment, as the Commissioner determines is instalment income (subsection 45-320(2)). In general, instalment income is the amount of ordinary income less exempt and non-assessable non-exempt income. Some entities have statutory income included in their instalment income. The Commissioner calculates the BAII when producing an instalment rate for an entity.

Special rules for calculating BAII for some TOFA entities

1.28 TOFA entities, whose BAII given by the Commissioner does not exceed the threshold, must calculate their 'adjusted' BAII disregarding the impact of being a TOFA entity on the calculation. This 'adjusted' BAII is relevant for both determining if the entity exceeds the threshold and if it is eligible for the exemption for quarterly GST payers with a threshold amount under $100 million. [ Schedule 1, item 19, subsections 45-138(5) to (7 )]

1.29 For TOFA entities, the BAII given to them by the Commissioner may use net calculations for their TOFA arrangements rather than gross figures (subsection 45-120(2C)). Using the net amount of income from financial arrangements significantly reduces the BAII of TOFA entities. Requiring TOFA entities to test their 'adjusted' BAII ensues that the threshold is applied equitably to both TOFA and non-TOFA entities.

1.30 However, unlike the BAII that is provided by the Commissioner, this 'adjusted' BAII amount will need to be determined by the entity.

1.31 TOFA entities, that do not have a BAII exceeding the threshold but are monthly payers because of their 'adjusted' BAII, are required to notify the Commissioner that they are a monthly payer.

1.32 If the TOFA entity was already a PAYG instalment payer, it must notify the Commissioner before the start of its next income year. [ Schedule 1, item 19, paragraph 45-138(2)(b )]

1.33 If the TOFA entity was not already a PAYG instalment payer, it must notify the Commissioner on or before the end of the entity's starting instalment month. That is, by the end of the month after the month in which the rate is given to the entity by the Commissioner.

1.34 Failure to notify the Commissioner as required may result in the imposition of penalties. [ Schedule 1, item 19, paragraph 45-138(2)(a )]

Monthly Payer Requirement Test Day

1.35 For the purposes of meeting the monthly payer requirement, the threshold amount and GST reporting status of the taxpayer are tested at a particular point in time - which is the start of the entity's monthly payer requirement test day (MPR test day). When a MPR test day occurs will depend on whether or not the entity is already paying PAYG instalments.

1.36 The status of the entity on the MPR test day is absolute. Retrospective changes in the treatment of an entity that affect the monthly payer criteria, such as backdating of a GST registration, are disregarded. [ Schedule 1, item 19, subsection 45-138(3 )]

MPR test day - Entities already paying PAYG instalments

1.37 The MPR test day, for an entity already in the PAYG instalment regime, is the first day at the start of the third last month of the previous income year. Essentially, the test to be a monthly payer for a particular year is conducted at a point in time in an earlier year. The intervening three months between the test time and the start of the next income year allows the entity to prepare to be a monthly payer. [ Schedule 1, item 19, paragraph 45-138(4)(b )]

1.38 For a standard balancer (income year ending 30 June), the MPR test day for the 2017-18 income year will be 1 April 2017. For entities that are on substituted accounting periods, the MPR test day will depend on when their income year ends.

Example 1.2

In 2018, King Ltd is a quarterly PAYG instalment payer and a standard (30 June) balancer. When testing whether King Ltd is required to be a monthly payer for the 2018-19 income year, the MPR test day is 1 April 2018. This allows King Ltd three months to modify its accounting and payment systems in order to cater for the change to monthly instalments from the 1 July 2018.

MPR test day - Entities not currently paying PAYG instalments

1.39 For entities entering the PAYG instalment regime (those given an instalment rate by the Commissioner for the first time), the MPR test day is the last day of the month in which the Commissioner has given them the instalment rate. The MPR test day is the last day of the month to allow for all of the criteria for determining if the entity is to be a monthly payer to be considered, including the entity's GST reporting cycle. [ Schedule 1, item 19, paragraph 45-138(4)(a )]

Example 1.3

Lalvey Ltd is given an instalment rate by the Commissioner on 10 February 2018. The MPR test day for Lalvey Ltd is 28 February 2018, being the last day of the month in which the instalment rate was given to Lalvey Ltd by the Commissioner.

When you become a monthly PAYG instalment payer

1.40 An entity currently paying PAYG instalments that satisfies the monthly payer requirement on a MPR test day becomes a monthly payer from the commencement of its next income year (the last day of the starting instalment month). That is, the income year commencing immediately after the MPR test day. If you are a PAYG payer on the last day of the month making you are liable to pay a PAYG instalment for that month. [ Schedule 1, item 19, subsection 45-136(3) and paragraph 45-136(2)(b )]

Example 1.4 .

From Example 1.2, if King Ltd satisfies the monthly payer requirement on 1 April 2018, then it will become a monthly payer from 31 July 2018 (the last day of the starting instalment month in its next income year). The effect of this is that King Ltd will have an instalment for the month of July which is payable in the following month of August.

1.41 Entities not currently paying PAYG instalments, that satisfy the monthly payer requirement at the relevant time, will become monthly payers from the last day of the month (the starting instalment month) after the month in which the Commissioner gives the entity their first instalment rate. This is the first month commencing immediately after the MPR test day. The entity may have to pay an instalment for that month. [ Schedule 1, item 19, paragraph 45-136(2)(a )]

Example 1.5

From Example 1.3, if Lalvey Ltd satisfies the monthly payer requirement on 28 February 2018, then it will become a monthly payer from 31 March 2018. The effect of this is that Lalvey Ltd will have a PAYG instalment liability for the month of March which is payable in the following month of April.

1.42 Once an entity is a monthly payer, they continue to be a monthly payer until such a time that they provide the Commissioner with a valid MP stop notice, as discussed at paragraph 1.43. [ Schedule 1, item 19, paragraph 45-136(4)(b )]

Example 1.6

XYZ is a non-TOFA entity with an income year that ends on 30 June. On 1 March the Commissioner gives XYZ its latest BAII relevant to its latest income tax year assessment. The BAII is above the $20 million threshold. Therefore XYZ is a monthly payer from the start of its next income year.

Example 1.7

ABC is a TOFA entity and a monthly GST reporter with an income year that ends on 30 June. On 1 March the Commissioner gives ABC its latest BAII for its latest income tax year assessment, which is below the $20 million threshold. ABC must consider the effect of its TOFA income on its instalment income for the last income tax return to which the Commissioner's BAII relates. ABC calculates it 'adjusted' BAII by disregarding the rules in subsection 45-120(2C) concerning the treatment of TOFA income for instalment income purposes.

ABC's 'adjusted' BAII exceeds the $20 million threshold. ABC notifies the Commissioner on 1 June that it is a monthly payer with effect from the start of its next income year.

If ABC was a quarterly GST reporter and its 'adjusted' BAII was under $100 million, then it would not be a monthly payer from the start of its next income year. Nor would it be required to notify the Commissioner.

How and when you stop being a monthly PAYG instalment payer

1.43 Where a monthly payer no longer meets the monthly payer requirement on a MPR test day, it may elect to stop paying monthly PAYG instalments. This election is made by notifying the Commissioner in the approved form. [ Schedule 1, item 19, subsection 45-136(4 )]

1.44 This notification (referred to as a MP stop notice) must be provided to the Commissioner prior to the commencement of the next income year. Where an MP stop notice is not provided, the entity will remain a monthly payer for the next income year. The entity will again need to satisfy the relevant criteria for giving a MP stop notice in the next year (re-test) before it can validly notify the Commissioner they elect to stop being a monthly payer.

Example 1.8 : Non-TOFA entities

Catleap Enterprises is a corporate tax entity that has a substituted accounting period ending on 31 July. It is not a TOFA entity and is a monthly payer. At 1 May 2018 (the MPR test day), Catleap Enterprises has a BAII of $18 million and therefore does not meet the monthly payer requirement. Catleap Enterprises notifies the Commissioner that it no longer wishes to be a monthly payer on 18 May 2018 and subsequently becomes a quarterly payer from 31 August 2018 (the last day of the starting instalment month for quarterly payers in the next income year). However, the month of August will form part of the first instalment quarter for Catleap Enterprises.

If Catleap Enterprises had not notified the Commissioner by way of MP stop notice or notifies the Commissioner on or after 1 August 2018, it would remain a monthly payer for the 2018-19 income year.

Example 1.9 : TOFA entity

Assume Catleap Enterprises in Example 1.8 is a TOFA entity. Although Catleap Enterprises has a BAII under $20 million, it must determine its 'adjusted' BAII amount as it is a TOFA entity.

Catleap Enterprises determines that for the base year of its most recent BAII provided by the Commissioner, its 'adjusted' BAII amount is $60 million. Therefore, Catleap Enterprises is not eligible to issue the Commissioner with an MP stop notice and must continue to be a monthly payer for the 2018-19 income year.

The transitional rules

Who is required to be a monthly PAYG instalment payer during the transitional period

1.45 As announced by the Government in the 2013-14 Budget, the measure will be phased in over four years (the transitional period).

•

from 1 January 2014, all corporate tax entities with a threshold amount of $1 billion or more will be required to pay PAYG instalments monthly;

•

from 1 January 2015, all corporate tax entities with a threshold amount of $100 million or more will be required pay PAYG instalments monthly;

•

from 1 January 2016:

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all corporate tax entities with a threshold amount of $20 million or more will be required pay PAYG instalments monthly (subject to the GST reporting exemption discussed in paragraph 1.23); and

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all non-corporate tax entities with a threshold amount of $1 billion or more will be required pay PAYG instalments monthly; and

•

from 1 January 2017, all non-corporate tax entities with a threshold amount of $20 million or more will be required to pay PAYG instalments monthly (subject to the GST reporting exemption).

[Schedule 1, item 45 and subitem 47(1)]

1.46 During the transitional period, entities that meet the monthly payer requirement may become monthly payers by either of two MPR test day rules:

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a MPR test day under the general monthly PAYG instalment rules - the start of the third last month of the income year, or the last day of the month in which the Commissioner gives the entity its first instalment rate; or

•

an additional (transitional) MPR test day - as set out in paragraph 1.47 which tests whether an entity is required to become a monthly payer, from either 1 January 2014, 1 January 2015, 1 January 2016 and 1 January 2017.

Additional MPR test day

1.47 To ensure that, during the transitional period, an entity that meets the monthly payer requirement becomes a monthly payer from the relevant 1 January, rather than at the commencement of the next income year, there is an additional MPR test day for each stage in the transition period. These additional MPR test days are aligned with the phase in of the measure and occur on:

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1 October 2013;

•

1 October 2014;

•

1 October 2015; and

•

1 October 2016.

[Schedule 1, subitems 48(1) and (2)]

1.48 The phase in of the transitional threshold applies the additional MPR test days as follows:

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1 October 2013 - corporate tax entities with a threshold amount equal to or exceeding $1 billion will be required to be monthly payers from 1 January 2014;

•

1 October 2014 - corporate tax entities with a threshold amount equal to or exceeding $100 million will be required to be monthly payers from 1 January 2015;

•

1 October 2015 - corporate tax entities with a threshold amount equal to or exceeding $20 million, and all other entities with a threshold equal to or exceeding $1 billion, will be required to be monthly payers from 1 January 2016 (subject to the GST reporting exemption); and

•

1 October 2016 -all entities with a threshold equal to or exceeding $20 million will be required to be monthly payers from 1 January 2017 (subject to the GST reporting exemption ).

[Schedule 1, item 48, and subitem 47(1)]

1.49 Where a MPR test day (under the general monthly PAYG instalment rules) occurs between the additional MPR test days, the threshold applied at the earlier date is relevant.

1.50 For instance, the general MPR test day of a corporate tax entity falls on 1 August 2014. The threshold amount for a corporate tax entity to become a monthly payer on or after 1 October 2013 is $1 billion. The $100 million threshold only applies from the additional MPR test day on or after 1 October 2014.

1.51 TOFA entities that satisfy the monthly payer requirement on an additional MPR test day because of their 'adjusted' BAII (where the BAII given to them by the Commissioner does not exceed the threshold), commence being a monthly payer and are required to notify the Commissioner before 1 January. This is similar to the notification requirement under the general provisions. [Schedule 1, subitem 49(2)]

How and when you become a monthly PAYG instalment payer during the transitional period

1.52 Where an entity satisfies the monthly payer requirement on a MPR test day, it will commence being a monthly payer in accordance with the general monthly PAYG instalment rules.

1.53 If an entity is not already a monthly payer and it satisfies the monthly payer requirement on an additional MPR test day, it will start being a monthly payer from the last day of its first instalment month commencing after 1 January. However, entities will not be required to start monthly instalments partway through an instalment quarter.

•

For standard 30 June balancers, this means that they will be liable for monthly instalments from January of the following year and each subsequent month. This is because their previous instalment quarter ends on 31 December.

•

Entities with substituted accounting periods, with an instalment quarter that does not commence on one of the specified application days (that is, with an instalment quarter of 1 November to 31 January), will begin paying monthly instalments once their current instalment quarter has ended.

•

For annual instalment payers, they will commence being a monthly payer from the start of their next income year.

[Schedule 1, subitems 48(3) and (4)]

Example 1.10 : Standard 30 June balancer

Wishart Co. is a corporate tax entity, a quarterly PAYG instalment payer, not a TOFA entity and is a standard 30 June balancer. On 1 October 2013, Wishart Co. has a BAII of $1.2 billion. As Wishart Co.'s BAII exceeds $1 billion and its PAYG instalment quarter ends on 31 December 2013 (the next instalment quarter commences on 1 January 2014). It will be a monthly payer from 31 January 2014 and be liable for a PAYG instalment for the month of January, being its starting instalment month.

Example 1.11 : Substituted accounting period balancer

Assume Wishart Co. in Example 1.10 has a substituted accounting period with an income year ending on 30 August. Consequently, Wishart Co. has an instalment quarter that ends on 28 February 2014. As Wishart Co. satisfied the requirements on 1 October 2013 to be a monthly payer, it will have monthly PAYG instalments from 1 March 2014 instead of 1 January 2014. This is because it does not commence being a monthly payer until the end of its instalment quarter.

Example 1.12 : Annual payer

Assume Wishart Co. in Example 1.10 is an annual PAYG instalment payer. On 1 October 2013, Wishart Co. has a BAII of $1.2 billion. As Wishart Co.'s BAII exceeds $1 billion and is an annual PAYG instalment payer, it will have monthly instalments from 1 July 2014.

1.54 The following examples demonstrate how the monthly payer rules will apply during the transitional period.

Example 1.13 : Standard 30 June balancer

TBlack is a corporate tax entity that is the head company of a consolidated group. TBlack pays its PAYG instalments quarterly and is a standard 30 June balancer. At 1 January 2013 TBlack's BAII, as provided by the Commissioner, is $18 million.

TBlack has an additional MPR test day on 1 October 2013. As TBlack's BAII is under $1 billion it is not a monthly payer from 1 January 2014.

On 20 January 2014, TBlack is provided by the Commissioner with a BAII of $21 million.

On 1 April 2014, which is three months before the end of its current income year, TBlack has a MPR test day to determine whether it is a monthly payer for the 2014-15 income year. As TBlack's BAII is under $1 billion, it is not required to be a monthly payer from the commencement of the 2014-15 income year.

TBlack has an additional MPR test day on 1 October 2014. As TBlack's BAII is under $100 million it is not a monthly payer from 1 January 2015.

On 25 January 2015, TBlack is provided by the Commissioner with a BAII of $18 million.

On 1 April 2015, TBlack has a MPR test day to determine whether it is a monthly payer for the 2015-16 income year. As TBlack's BAII is under $100 million, it is not required to be a monthly payer from the commencement of the 2015-16 income year.

TBlack has an additional MPR test day on 1 October 2015. As TBlack's BAII is under $20 million it is not a monthly payer from 1 January 2016.

On 25 January 2016, TBlack is provided by the Commissioner with a BAII of $21 million.

On 1 April 2016, TBlack has a MPR test day to determine whether it is a monthly payer for the next income year (2016-2017). As TBlack's BAII is over $20 million and it is the head company of a consolidated group, it is not eligible for the exemption relating to GST reporting. Therefore, TBlack is required to be a monthly payer from the commencement of the 2016-17 income year.

TBlack's starting instalment month is July 2016. TBlack will be liable for its first monthly PAYG instalment (for the month of July 2016) on 21 August 2016 or if it is a deferred BAS payer, the 28 August 2016.

Example 1.14 : Standard 30 June balancer (TOFA entity)

Peter Potts is a high wealth sole trader who pays PAYG instalments and pays GST quarterly. Peter is a TOFA entity whose income year ends on 30 June. On 1 January 2015 Peter is provided by the Commissioner with a BAII of $18 million, based on his 2013-14 income year.

On 1 October 2015, Peter has an additional MPR test day. Peter's BAII has remained $18 million. As Peter is a TOFA entity he must determine his 'adjusted' BAII. As Peter has a substantial amount of financial arrangements subject to Division 230 of the ITAA 1997, his 'adjusted' BAII is determined by him to be $70 million for the base year of 2013-14. As both Peter's BAII as provided by the Commissioner and his 'adjusted' BAII (because he is a TOFA entity) as determined by him are under $1 billion, he is not a monthly payer from 1 January 2016.

On 15 February 2016, the Commissioner provides Peter with a new BAII of $17 million, based on his 2014-15 income year.

On 1 April 2016, Peter has a MPR test day to determine whether he is a monthly payer for the 2016-17 income year. Although Peter's has a BAII under $1 billion, he must still determine whether his 'adjusted' BAII amount exceeds $20 million. Peter determines that his 'adjusted' BAII amount is $60 million. As both his BAII as provided by the Commissioner and 'adjusted' BAII amounts are under $1 billion, he is not required to be a monthly payer from the commencement of his 2016-17 income year.

On 1 October 2016, Peter has an additional MPR test day. Peter's BAII is still $17 million and his 'adjusted' BAII amount remains $60 million. Although Peter's 'adjusted' BAII amount exceeds $20 million, Peter is a quarterly GST reporter and payer and he is not required to be a monthly payer from 1 January 2017.

If Peter was a monthly GST reporter and payer on 1 October 2016, he would be required to become a monthly payer from 1 January 2017. He would also be required, as a TOFA entity, before 1 January 2017, to provide the Commissioner with notification that that he is required to be a monthly payer. This is because his 'adjusted' BAII amount exceeds the threshold test of $20 million (and his BAII from the Commissioner was under $20 million).

Example 1.15 : Substituted accounting period balancer

Adam Co. is a corporate tax entity, pays PAYG instalments quarterly, is not part of a consolidated group, is not a TOFA entity and reports and pays GST monthly. Adam Co. is on a substituted accounting period and its income year ends on 30 April. At 1 January 2013 Adam Co.'s BAII as provided by the Commissioner is $25 million.

Adam Co. has an additional MPR test day on 1 October 2013. As Adam Co.'s BAII is under $1 billion it is not a monthly payer from 1 January 2014.

On 20 November 2013, Adam Co. is provided by the Commissioner with a BAII of $21 million.

On 1 February 2014, being Adam Co.'s third month before the end of its current income year, Adam Co. has a MPR test day to determine whether it is a monthly payer for the 2014-15 next income year (2014-2015). As Adam Co.'s BAII is under $1 billion, it is not required to be a monthly payer from the commencement of the 2014-15 income year.

Adam Co. has an additional MPR test day on 1 October 2014. As Adam Co.'s BAII is under $100 million it is not a monthly payer from 1 January 2015.

On 19 November 2014, Adam Co. is provided by the Commissioner with a BAII of $28 million.

On 1 February 2015, Adam Co. has a MPR test day to test whether it is a monthly payer for the 2015-2016. As Adam Co.'s BAII is under $100 million, it is not required to be a monthly payer from the commencement of the 2015-16 income year.

Adam Co. has an additional MPR test day on 1 October 2015. As Adam Co.'s is a monthly GST reporter and payer, it is not eligible for exemption from being a monthly payer. Therefore, because Adam Co.'s BAII is over $20 million it will, at first instance, be treated as a monthly payer from 1 January 2016.

However, Adam Co.'s starting instalment month is February 2016. This is because Adam Co. has an instalment quarter that includes 1 January 2016 but does not start on that day (the quarter runs from 1 November to 31 January).

Adam Co. will be liable for its first monthly instalment payment (for the month of February 2016) on 21 March 2016, or if it is a deferred BAS payer, the 28 March 2016.

Example 1.16 : Annual payer

Assume Adam Co. in Example 1.15 is an annual instalment payer with its income year ending on 30 April.

Adam Co. has an additional MPR test day on 1 October 2015. As Adam Co.'s BAII as provided by the Commissioner is over $20 million and it is a monthly GST reporter and payer, it is not eligible for the exemption from being a monthly payer. Adam Co. will be, at first instance, a monthly payer for from 1 January 2016.

However, because Adam Co. is an annual instalment payer, its starting instalment month is May 2016 (which is the commencement of its next income year).

Adam Co. will be liable for its first monthly instalment payment (for the month of May 2016) on 21 June 2016 or if it is a deferred BAS payer, on 28 June 2016.

How and when you stop being a monthly PAYG instalment payer - additional MPR

1.55 Entities will not be able to give the Commissioner a MP stop notice as a result of the operation of any one of the additional MPR test days. Entities that are monthly payers will only be able to give the Commissioner a MP stop notice because they did not satisfy the monthly payer requirement on the relevant MPR test day under the general monthly instalment rules. [Schedule 1, subitem 47(5)]

1.56 The higher transitional period thresholds are not relevant to the giving of a MP stop notice at any time. Entities can only give the Commissioner a MP stop notice where their threshold amount falls below $20 million at the specified test time, or alternatively, they qualify for the additional exemption. The additional exemption applies if an entity, at the relevant test time, is a quarterly (or annual) GST reporter and payer with a threshold amount that is under $100 million. [Schedule 1, subitem 47(4)]

Example 1.17

Kemp Consulting is a corporate tax entity, a PAYG quarterly payer, not a TOFA entity and also pays GST monthly. Kemp Consulting has an income year commencing on 1 July. On 1 October 2014 (the additional MPR test day), Kemp Consulting has been given a BAII of $105 million. Therefore, Kemp Consulting is required to be a monthly payer from 1 January 2015 (because it is a 30 June balancer, its last quarterly tax period ends on 31 December 2014).

On 25 January 2015, Kemp Consulting is provided by the Commissioner with a BAII of $98 million.

On 1 April 2015 (the MPR test day being the first day of the third month before the end of the income year), Kemp Consulting has a BAII that is over $20 million. As Kemp Consulting is a monthly GST reporter and payer it will remain a monthly payer for the next income year.

If Kemp Consulting, at 1 April 2015, was a quarterly GST reporter and payer, then it could give the Commissioner an MP stop notice (prior to the commencement of the next income year on 1 July 2015). The effect of the notice is that it is no longer a monthly payer from the commencement of the next income year.

Example 1.18

Assume Kemp Consulting was a TOFA entity and a quarterly GST payer. On 1 April 2015, it is required to also calculate its 'adjusted' BAII amount. The 'adjusted' BAII is determined by reference to the TOFA income relevant to its last tax return that corresponds to the BAII provided by the Commissioner. This amount is determined to be $200 million. As Kemp Consulting has an 'adjusted' BAII that exceeds $100 million, it is required to remain a monthly payer for the 2015-16 income year.

1.57 Only allowing an MP stop notice where the $20 million threshold is not met ensures that entities that become monthly payers in the transition period do not change back to quarterly instalments because they no longer meet the transitional threshold, only to be required once again to become a monthly payer when the $20 million threshold applies.

Application and transitional provisions

1.58 The amendments apply to corporate tax entities from 1 January 2014. [Schedule 1, subitem 46 ]

1.59 The amendments apply to all other entities from 1 January 2016. [Schedule 1, subitem 46 ]

Consequential amendments

1.60 Consequential amendments are made to:

•

update the relevant guide provisions in Division 45;

•

update the definitions in the ITAA 1997;

•

update liability for payment of tax provisions in Division 721 of the ITAA 1997;

•

modify the current provisions to ensure monthly PAYG payers cannot also be quarterly or annual PAYG payers; and

•

update the PAYG instalment provisions to give the same effect as they would a quarterly payer in relation to a quarter, for a monthly payer in relation to a month for:

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variation of instalment rates (Subdivision 45-F);

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the application of the general interest charge to instalment shortfalls (Subdivision 45-G);

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the anti-avoidance rules (Subdivision 45-P);

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the general and special consolidations rules (Subdivisions 45-Q and 45-R); and

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the MEC group rules (Subdivision 45-S).

[Schedule 1, items 1 to 2, 11 to 17 and 18 to 44, sections 45-1, 45-125, 45-130, 45-200, 45-205, 45-225, 45-597, 45-703, 45-715 and 45-870, subsections 45-132(4 ), 45-200(2 ), 45-705(4) and 45-915 of Schedule 1 to the TAA 1953, and sections 721-10 and 995-1 of the ITAA 1997 ]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Monthly Pay as You Go instalments

1.61 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.62 Schedule 1 to this Bill amends Division 45 of Schedule 1 to the Taxation Administration Act 1953 to require certain large entities to pay Pay As You Go instalments monthly.

1.63 The PAYG instalment system requires entities with business or investment income to pay instalments towards their income tax liability. It is designed to ensure the efficient collection of income tax, including the Medicare levy, Higher Education Loans Program (HELP) debts, and debts under the Student Financial Supplement Scheme and the Aboriginal Study Assistance Scheme (ABSTUDY). This change does not increase the overall tax liability of an entity. Rather it makes PAYG instalments more responsive to the economic position of an entity and better aligns the timing of PAYG instalments with Government payments. This reduces the risk of an entity accumulating large tax debts.

1.64 Schedule 1 to this Bill requires large entities to pay PAYG instalments monthly rather than quarterly or annually. Entities will be transitioned into the monthly PAYG instalment system over a four year period:

•

from 1 January 2014, corporate tax entities (being companies, corporate limited partnerships, corporate unit trusts or public trading trusts) that meet or exceed the $1 billion threshold will be required to pay PAYG instalments monthly;

•

from 1 January 2015, corporate tax entities that meet or exceed the $100 million threshold will be required to pay PAYG instalments monthly;

•

from 1 January 2016:

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all entities, including superannuation funds, trusts and individuals, that meet or exceed the $1 billion threshold will be required to pay PAYG instalments monthly;

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corporate tax entities that meet or exceed the $20 million threshold may be required to pay PAYG instalments monthly; and

•

from 1 January 2017, all entities, including corporate tax entities, superannuation funds, trusts and individuals that meet or exceed the $20 million threshold may be required to pay PAYG instalments monthly.

1.65 Entities that are not currently required to report and pay GST monthly will not be required to move to monthly PAYG instalments if they do not meet the $100 million threshold and are not a head company of a consolidated group or a provisional head company of a multiple entry consolidated group (MEC group). This exemption better aligns the reporting of GST and PAYG instalments for those entities.

Human rights implications

1.66 The Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.67 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury