House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Provisional Tax

Summary of proposed amendments

Purpose of amendment: This Bill proposes to amend various provisions of the Principal Act, to implement certain changes to the provisional tax system. The proposed changes are threefold:

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to vary the provisional tax uplift factor down from 10% to 8% for the 1992-93 income year and 10% for later income years;

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to give credit for tax deducted from investment income when ascertaining the amount of provisional tax payable; and

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to increase the margin for error allowed, when varying down provisional tax, in underestimating taxable income or overestimating PAYE tax instalment deductions without incurring additional tax from 10% to 15%.

Date of Effect: These amendments will apply in ascertaining provisional tax (including instalments) payable for the 1992-93 year of income and for all later years of income.

Background to the legislation

provisional tax uplift factor

In calculating provisional tax for the current year of income, tax rates and the medicare levy for the current year are applied to the preceding years taxable income increased by the provisional tax uplift factor. The resulting figure is then reduced to take into account various rebate and credit entitlements of the taxpayer in relation to the preceding years notice of assessment. The rebate and credit entitlements are adjusted to reflect amounts that are expected to appear in the current years notice of assessment.

The " provisional tax uplift factor" is a percentage that is used to allow for the effects of inflation and other factors in ascertaining provisional tax payable for the current year. Currently the uplift factor is set at 10% (subsection 221YA(1)).

In Press Release 110 of 1992, the Treasurer announced that as part of the provisional tax concession package there would be a reduction in the provisional tax uplift factor from 10% to 8% in ascertaining provisional tax payable for the 1992-93 income year.

This Bill proposes to amend subsection 221YA(1) of the Act to ensure that in ascertaining provisional tax payable the provisional tax uplift factor is 8% for the 1992-93 year of income and 10% for later years of income.

Tax File Number Credits

From the 1 July 1991, the failure by an investor to quote a tax file number (TFN) in connection with an investment meant that the investment body would withhold an amount of tax ( TFN tax) on behalf of the taxpayer. This amount of tax is calculated at the highest marginal tax rate plus the Medicare levy. For the 1991-92 year of income TFN tax was deducted at the rate of 48.25%.

A taxpayer is entitled to a credit for TFN tax deducted once the annual tax return is lodged (section 221YHZK). However, in ascertaining the amount of provisional tax payable the Act does not provide for TFN tax credits to be taken into account.

This Bill proposes to amend subsection 221YCAA(2) of the Act to allow TFN tax credits to be taken into account in ascertaining provisional tax payable.

Margin for Error

Provisional tax is an anticipatory tax based on the assumption that taxable income of the current year will not be less than that of the preceding year (as increased by the provisional tax uplift factor). However, taxpayers who estimate that their taxable income for the current year will be more or less than the preceding year's income as uplifted in the provisional tax calculation may apply for a variation and recalculation of their provisional tax. This variation and recalculation can only occur after the taxpayer has received a notice of assessment in relation to the preceding year of income or has received an instalment notice in respect of an instalment of provisional tax for the current year of income (paragraphs 221YDA(1)(a) and (b)).

Additional tax is imposed under section 221YDB of the Act if taxable income is underestimated or PAYE tax instalment deductions are overestimated by more than 10% in an application for variation of provisional tax payable.

This Bill proposes to amend section 221YDB of the Act to ensure that the margin for error allowed in estimating taxable income and PAYE tax instalment deductions before additional tax is imposed is increased from 10% to 15%.

Explanation of proposed amendments

provisional tax uplift factor

The amendment to subsection 221YA(1) will ensure that the provisional tax uplift factor is 8% for the 1992-93 year of income and 10% for later years of income [Clause 10].

Tax File Number Credits

The amendments to paragraphs 221YCAA(2)(m) and (q) will ensure that TFN tax credits are included in the provisional tax calculation. These credits will be treated in the same way as foreign tax credits under section 160AF (paragraph 221YCAA(2)(q)). That is, TFN tax credits will be uplifted by the provisional tax uplift factor and taken into account in calculating provisional tax payable [Clause 11].

Margin for Error

Section 221YDA provides that taxpayers may lodge an application to have their provisional tax or an instalment of provisional tax recalculated on the basis of their own estimate of their taxable income and rebates and credits for the current year of income.

In an application for this purpose the taxpayer is required to estimate the taxable income and the amount of PAYE tax instalment deductions which will be made in accordance with sections 221C and 221D of the Act from the taxpayer's salary or wages during the year.

Section 221YDB provides that taxpayers are liable to additional tax, by way of penalty, if they underestimate their taxable income or overestimate their PAYE tax instalment deductions by more than 10% in their application for a variation of provisional tax.

The amendments to section 221YDB ensure that the margin for error allowed in estimating taxable income and PAYE tax instalment deductions before additional tax is imposed is increased from 10% to 15% [Clause 12, paragraphs (a) and (b)].