Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 10 - Company tax instalments
Overview
10.1 Schedule 11 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system.
Summary of amendments
10.2 The purpose of the amendments is prevent the inappropriate application of the grouping provisions contained in the company tax instalment system to superannuation funds, approved deposit funds, and pooled superannuation trusts.
10.3 The amendments will apply from the 1995-96 income year.
[Item 2 of Schedule 11]
Background to the legislation
10.4 The timing of an entity's company tax instalment depends on whether the entity is classified as large, medium, or small. Broadly speaking, entities classified as small pay instalments later than medium entities and medium entities pay later than large entities.
10.5 There are grouping provisions within the company tax instalment system that can reclassify a medium entity as large if it is part of a group of entities that, when consolidated, would be a large entity.
10.6 The grouping provisions are an anti-avoidance measure designed to prevent large entities arranging themselves into several medium entities to gain a more concessional payment schedule.
10.7 However, the current grouping provisions can inappropriately group employer companies and their superannuation funds when a large company could not arrange itself into, say, a medium company and a medium superannuation fund. Similarly they could also inadvertently operate to group approved deposit funds and pooled superannuation trusts with the company that established them.
Explanation of amendments
10.8 Item 1 of Schedule 11 of the Bill amends paragraph 221AZMC(b) of the Act by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system. [Item 1 of Schedule 11; amends paragraph 221AZMC(b)]
10.9 Therefore, a medium-sized company and the medium-sized employer superannuation fund that it established will not be grouped together to form a large entity for the purposes of the company tax instalment system.
10.10 However, where a superannuation fund, approved deposit fund, or pooled superannuation trust is individually classified as large, the entity will continue to pay instalments of tax under the instalment schedule applying to large entities.
Regulation Impact Statement
Specification of policy objective
10.11 Implement the Governments announcement to exclude superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.
Identification of implementation options
10.12 Under the company tax instalment system a companys classification (ie. small, medium or large) and the instalment amount that it is required to pay is based on its likely tax. Likely tax is a companys estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year.
10.13 For companies classified as small (ie. likely tax of less than $8,000) and who balance on 30 June, the law currently provides that a single instalment of tax equal to the tax assessed for the income year is due on 1 December following the end of that income year. For companies classified as medium (ie. likely tax between $8,000 and $300,000) or large (ie. likely tax greater than $300,000), quarterly instalments of tax are generally required to be paid earlier than the payment schedule that applies to companies classified as small.
10.14 There are grouping provisions in the law that treat a medium entity as large if it is part of a group of entities that, when consolidated, would be a large entity.
10.15 The grouping provisions apply, broadly speaking, where one entity controls another entity or entities. Where the grouping provisions apply, the likely tax for each group member is added together. If the total is greater than $300,000, each member of the group is classified as a large unless an entity within the group is individually classified as small.
10.16 The grouping provisions are designed to prevent large entities arranging themselves into a group of smaller entities so as to obtain a more concessional payment and lodgment schedule. However, the law, as it currently stands, can inappropriately apply in circumstances where entities have not set out to obtain such an advantage. For example, a company and its employer sponsored superannuation fund may both be inappropriately classified as large notwithstanding that each entity is individually classified as medium.
10.17 To remove this inappropriate outcome there is one implementation option, namely, to amend section 221AZMA of the Income Tax Assessment Act 1936 by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system. The amendments will apply from the 1995-96 income year.
Assessment of impacts (costs and benefits) of the implementation option
10.18 The proposed amendment may benefit companies, superannuation funds, approved deposit funds and pooled superannuation trusts who pay tax under the company tax instalment system.
10.19 The proposed amendment may also benefit tax agents and accountants who advise the above taxpayers of their tax obligations (eg. tax agents would have an extra three months to prepare the tax return of affected taxpayers).
Analysis of the costs and benefits associated with the implementation option
10.20 The advantage of the implementation option is that it will prevent superannuation funds, approved deposit funds and pooled superannuation trusts coming within the operation of the grouping provisions contained in the company tax instalment system. Furthermore, companies will not have to consider whether the grouping provisions apply to superannuation funds, approved deposit funds or pooled superannuation trusts that they control. For this reason the implementation option will reduce compliance costs.
10.21 However, where a superannuation funds (or approved deposit fund or pooled superannuation trust) likely tax exceeds $300,000 at the time of classification, the fund will continue to be classified as a large instalment taxpayer.
10.22 For those superannuation funds, approved deposit funds, and pooled superannuation trusts who did not previously apply the grouping provisions contained in the company tax instalment system there will be no revenue impact. For those entities, if any, that did apply the grouping provisions there would be a permanent deferral of revenue equal to the amount of one instalment. The impact of this deferral cannot be quantified but is expected to be insignificant.
10.23 The Australian Tax Office consulted with representatives of the tax profession in various forums. No concerns were raised during consultations about the implementation measure.
10.24 The implementation option has the objective of excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.
10.25 The proposed amendment is the only way of implementing the Governments policy objective. It is expected to result in lower compliance costs for certain companies and superannuation funds, approved deposit funds, and pooled superannuation trusts.
10.26 The ATO and the Treasury will monitor this taxation measure, as part of the whole taxation system, on a continuing basis. In particular, the ATO will closely monitor developments to detect any significant revenue loss/deferral or unreasonable compliance costs arising from this proposal. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and other taxpayer bodies.
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