House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 5: Varying the GDP uplift factor for tax instalments

Outline of chapter

5.1 Schedule 5 to the main Bill amends the TAA 1953 to reduce the GDP adjustment factor for the 2022-23 income year to 2 per cent. The GDP adjustment factor is applied by the Commissioner to work out the amount of PAYG and GST instalments payable by a taxpayer in certain circumstances.

Context of amendments

5.2 Most small businesses and some individuals are required to pay instalments toward their expected annual income tax under the PAYG instalment system. The difference between instalment payments and the taxpayer's final tax liability is reconciled in a wash-up payment or refund at the time an income tax assessment is made (generally at the end of the income year).

5.3 Small business entities that are liable to pay GST may also elect to pay by instalments. The amount of the GST instalments payable by a small business entity is worked out by the Commissioner taking into account the GDP adjustment factor.

5.4 There are a number of methods to determine tax instalments based on previous tax outcomes. These include:

•

the Instalment Rate method - under this method the amount of the instalment is worked out based on income as a proxy for profit within instalment periods; and

•

the Quarterly Instalment Amount method - under this method the amount of the instalment is worked out based on previous tax outcomes that are uplifted based on the nominal increase in GDP over the previous two calendar years.

5.5 Taxpayers can vary their instalments if they consider their income is expected to be lower or higher than the amount determined by the Commissioner.

5.6 The Commissioner has advised that, without this amendment, the GDP adjustment factor that will apply to work out instalments for the 2022-23 income year under the Quarterly Instalment Amount method will be 10 per cent.

5.7 The GDP adjustment factor can be unrepresentative of expected profit growth in income years where economic and business conditions change quickly and the expected income of taxpayers changes accordingly. This can cause taxpayers to be required to pay instalments that are too high compared with their actual income, with the overpaid tax being credited to them after the end of the income year when their final tax liability is assessed.

5.8 Therefore, having regard to the economic and business conditions caused by the Coronavirus, the GDP adjustment factor that applies to work out the amount of instalments payable is reduced to 2 per cent for the 2022-23 income year.

Comparison of key features of new law and current law

Table 5.1 Comparison of new law and current law

Detailed explanation of new law

5.9 Schedule 5 to the main Bill amends section 45-405 in Schedule 1 to the TAA 1953 to reduce the GDP adjustment factor for the 2022-23 income year to 2 per cent.

5.10 Taxpayers who make PAYG and GST instalments on the basis of the Quarterly Instalment Amount method are required to pay a percentage of their GDP adjusted notional tax each quarter as worked out under either section 45-400 or section 45-402 in Schedule 1 to the TAA 1953.

5.11 GDP adjusted notional tax is calculated by the Commissioner under section 45-405 in Schedule 1 to the TAA 1953. Broadly, a taxpayer's GDP adjusted notional tax is calculated by increasing the taxpayer's adjusted taxable income from their most recent income tax return by the GDP adjustment factor to give the adjusted taxable income for the purposes of calculating their notional tax for the current income year.

5.12 The GDP adjustment factor is generally calculated using the formula in subsection 45-405(3) in Schedule 1 to the TAA 1953. However, for the 2022-23 income year, the GDP adjustment factor is set at 2 per cent. [Schedule 5, item 1, subsection 45-405(9) in Schedule 1 to the TAA 1953]

5.13 The Commissioner will apply the reduced GDP adjustment factor to work out the amount of GST instalments payable by small business entities in the 2022-23 income year.

5.14 Taxpayers may still vary their quarterly instalments if they consider their income is expected to be lower or higher than the amount determined by the Commissioner using the 2 per cent GDP adjustment factor.

5.15 The reduction of the GDP adjustment factor does not alter the relevant taxpayer's overall tax liability. Instead, the reduction minimises adverse impacts on cashflow for the 2022-23 income year as instalments fall due.

Commencement, application, and transitional provisions

5.16 The amendments commence on the first day of the first quarter following Royal Assent of the main Bill. [Clause 2]

5.17 These amendments will apply for the purposes of working out the amount of PAYG and GST instalments for instalment quarters of the 2022-23 income year. [Schedule 5, item 2]

5.18 This will ensure that the measure will apply for the purposes of working out the amount of a taxpayer's instalments in relation to the 2022-23 income year (including the PAYG instalments payable by a taxpayer that has a substituted accounting period). For relevant taxpayers with substituted accounting periods that are early balancers for the 2022-23 income year, the reduction of the GDP adjustment factor to 2 per cent does not cause a disadvantage as there is a reduction in the applicable instalments.

5.19 To avoid inoperative provisions remaining in the tax laws, the provisions that give effect to this measure will be automatically repealed on 1 July 2027. [Schedule 5, item 3]