SENATE

REPLACEMENT Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCED

Chapter 7 Company Tax Instalment System

Summary of proposed amendments

Purpose of amendment: The Bill will amend Part VI of the Income Tax Assessment Act 1936 to improve the equity of the company tax instalment system (relative to other taxpayers, particularly unincorporated businesses) by implementing a new quarterly system of company tax instalments.

Date of Effect: The new company tax instalment system will apply from and including:

a.

the 1994-95 year of income - for instalment taxpayers with a likely tax for the 1994-95 year of income of less than $300000;

b.

the 1995-96 year of income - for all other instalment taxpayers.

Background to the legislation

The current instalment payment system for companies and trustees of certain other funds (Division 1B of Part VI of the Income Tax Assessment Act 1936) was announced in the 1989-90 Budget and applied to 1989-90 and subsequent years of income. Under this system, companies were generally required to pay their instalments under one of the following methods, depending on their level of notional (i.e. previous year's tax) or estimated tax (i.e. taxpayer's estimate of current year's tax):

These provisions were subsequently amended (for the 1990-91 and 1991-92 years of income) to defer the date of the initial payment.

Explanation of proposed amendments

Overview of new system

While the new company tax instalment system has some administrative aspects that are similar to the current arrangements (Division 1B of Part VI of the Income Tax Assessment Act 1936) it is very different in its effect on companies. In general, there are more instalments to pay, the instalments are paid earlier, and there is less involvement by the Commissioner of Taxation in checking estimates made by the instalment taxpayer.

A flowchart of the new system illustrating its basic structure is set out below.

Step 1 - Instalment Taxpayer

The instalment taxpayer in the new system is the same as the relevant entity in the existing Division 1B of Part VI of the Income Tax Assessment Act 1936 . [Subsection 221AZK(1)]

Step 2 - Classification of Instalment Taxpayers

All instalment taxpayers will, for any particular year, be classified as small, medium or large. The classification of an instalment taxpayer affects the number and timing of instalments payable by that taxpayer. The classification also determines whether the new company tax instalment system applies to an instalment taxpayer from the 1994-95 year of income or the 1995-96 year of income. Note, the new system does not apply to large instalment taxpayers until the 1995-96 year of income. [Subclause 53(2)]

The classification of an instalment taxpayer is made at the 1st day of the 9th month of the year of income. For example, the classifying date for an instalment taxpayer who balances on 30 June is 1 March.

Instalment taxpayers are classified on the basis of their likely tax for the current year at the classifying date.

Once an instalment taxpayer is classified on the 1st day of the 9th month of the year of income, the classification cannot alter in respect of that year of income . The amount of the instalment to be paid may alter on the lodgement of an estimate of likely tax but the classification and instalment schedule cannot alter until classification at the next classifying date.

If the instalment taxpayer's likely tax is:

Less than $8000 - the taxpayer is classified as small ;

$8000 up to $300000 - the taxpayer is classified as medium ;

Over $300000 - the taxpayer is classified as large .

[See Table 1 in subsection 221AZK(2)]

The likely tax is:

a.

the latest amount estimated by the taxpayer to be its income tax payable in the current year of income (there can be 2 estimates in each year of income), or if there has been no estimate made

b.

the amount of the taxpayer's income tax assessed in the previous year of income, or if there is no income tax assessed in the previous year of income

c.

the amount of the taxpayer's income tax assessed in the last year of income in which the taxpayer was assessed, or if the taxpayer has never been assessed

d.

taken to be nil. [See Table 2 in subsection 221AZN(1)]

Steps 3 and 4 - Instalments

The timing and amount of instalments payable in relation to a particular year of income are as follows:

The date the instalment is liable to be paid is the first day of the month shown in Table 1. A payment for month12 is a payment on the first day of the twelfth month of the year of income. A payment for month 18 is a payment on the first day of the eighteenth month after the start of the year of income. For example, in a year of income starting on 1 July 1996, a payment due in month 18 would be due on 1 December 1997.

Estimates

An instalment taxpayer may lodge, up until and including its 3rd instalment payment, an estimate of its income tax payable in the current year of income. Two such estimates may be made in respect of any one year of income. [section 221AZO and subsection 221AZQ(2)]

The effect of making an estimate will vary depending upon the time at which the estimate is made. If the estimate is made prior to or at the classifying date, both the classification of the instalment taxpayer and the amount of the instalments will be determined on the basis of that estimate. If an estimate is made after the classifying date then only the amount of the instalments may vary according to that estimate.

Where an estimate is lodged and the amount of instalments already paid exceeds the amount of instalments that would have been payable based on that estimate, the Commissioner will refund to the instalment taxpayer the excess amount. Where an estimate is lodged and the amount of instalments already paid is less than the amount of instalments that would have been payable based on that estimate, the instalment taxpayer must pay that difference at the time of making that estimate. [sections 221AZQ and 221AZR]

If an instalment taxpayer makes an estimate of its income tax payable in the current year and the actual amount of tax payable in that current year exceeds the estimate by 10% or more, additional tax by way of penalty at 16% per annum will be levied for the period the estimate is incorrect. That is, for the period until another estimate is lodged or the due date for the last instalment, whichever is the earlier. The Commissioner of Taxation may, in special circumstances, remit that penalty in whole or in part. [section 221AZP]

Instalments

The Commissioner of Taxation may waive or reduce an instalment amount. Such a waiver can occur before or after the instalment has been paid. If after, the Commissioner will refund any excess payment of instalment. [section 221AZL]

Anti-avoidance

These provisions contain anti-avoidance measures similar to those contained in Part IVA and related provisions of the Income Tax Assessment Act 1936. The related provisions mentioned include the anti-avoidance penalty provisions of Part VII of that Act. [section 221AZU]

The benefits referred to in this section include those benefits arising from arrangements to avoid or reduce the payment of an instalment under Division 1C.

Application Dates

The new company tax instalment system will apply from and including:

a.

the 1994-95 year of income - for those instalment taxpayers who are classed as small or medium at the first day of the ninth month of the 1994-95 year of income; or

b.

the 1995-96 year of income - for all other instalment taxpayers (see transitional provisions below for special arrangements for large instalment taxpayers in the 1995-96 year of income). [Clause 53]

Transitional provisions

The following instalment table will apply to large instalment taxpayers in the 1995-96 year of income:

In summary, as a transitional measure in their first year under the new arrangements, large instalment taxpayers will not be required to make their first instalment. [Subclause 53(2)]

As an additional transitional measure to ensure that small and medium instalment taxpayers do not defer the commencement of these new arrangements by lodging an inflated estimate in the 1994-95 year of income (in order to be classified as a large instalment taxpayer in that year), an over-estimates penalty will apply. [Clause 54]