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Taxation Laws Amendment Bill (No. 5) 1998

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1998

 

 

 

The Parliament of the Commonwealth of Australia

 

 

 

house of representatives

 

 

 

taxation laws amendment bill ( No . 5) 1998

GENERAL INTEREST CHARGE (IMPOSITION) BILL 1998

 

 

 

 

 

Explanatory Memorandum

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)



T able of contents

General outline and financial impact ....................................................................................... 1

Chapter

1.         Remittance dates, charges and penalties and running balance accounts........................................ 7

2.         Measures to deal with abuse of foreign tax credits.............................................................................. 49

3.         Technical corrections................................................................................................................................ 55

 



G eneral outline and financial impact

Remittance dates, charges and penalties and running balance accounts

The amendments in Schedule 1 to the Bill will provide for the following three measures:

·         alignment of remittance dates;

·         charges and penalties for failing to meet obligations; and

·         running balance accounts.

Alignment of Remittance Dates

Amends the Income Tax Assessment Act 1936 to align the remittance dates for medium and small PAYE, PPS and RPS payers from the 7 th to the 21 st day of the month.

The alignment to the 21 st of the month is in anticipation of a large number of businesses being required to make one payment each quarter to cover most tax debts.

Date of effect :   The amendments will apply from 1 July 1999.

Proposal announced :  The Government’s Tax Reform paper Tax Reform: not a new tax, a new tax system: The Howard Government’s Plan for a New Tax System in August 1998.

Financial impact:  There will be a cost to the revenue of approximately $60 million per year in lost public debt interest as a result of the alignment measure.

Compliance cost impact:  The amendments are not expected to impose any significant compliance costs on taxpayers.

Charges and penalties for failing to meet obligations

Reintroduces amendments to various Acts for which the Commissioner of Taxation (the Commissioner) has general administration to:

·         replace the existing late payment penalty provisions with a tax deductible general interest charge on outstanding tax debts;

·         introduce a penalty for failing to notify the Commissioner of an obligation to remit a source deduction (eg. PAYE, PPS, etc.) or sales tax;

·         introduce a penalty for failing to give the Commissioner an annual reconciliation statement of source deductions made; and

·         make other consequential amendments to support the above measures.

These amendments were previously introduced into the House of  Representatives on 2 July 1998 in Taxation Laws Amendment Bill (No.5) 1998 and lapsed with the calling of the October 1998 election.

Date of effect:   The new general interest charge together with the failure to notify and reconciliation statement penalties will generally apply from 1 July 1999.

The interest charge for unpaid sales tax and source deductions will apply to amounts payable before that date. However, this will not disadvantage taxpayers as the interest charge being proposed is lower than the current rate which would otherwise apply.

Proposal announced:   The 1998-99 Budget, 12 May 1998.

Financial impact:   The revenue impact of the changes cannot be quantified.  With greater automation of the penalty systems the incidence of imposition of late payment penalties is expected to increase. However, penalties generally will be levied at a lower rate.

Compliance cost impact:   The amendments are not expected to impose any additional compliance costs on taxpayers.

Summary of Regulation Impact Statement

Impact :     Positive

Policy objective:

The policy objective of this measure is to replace the existing late payment penalty provisions in various Acts for which the Commissioner of Taxation has the general administration with a single tax deductible general interest charge (GIC) on outstanding amounts. The new regime will be transparent, consistent, commercially based and easy to administer. A further objective is to encourage withholders who cannot remit deductions by the due dates to notify the Commissioner of the existence of liabilities and to make sure withholders send in their annual reconciliation statements of deductions.

The proposals overcome problems with the current penalty regimes identified by the Small Business Deregulation Task Force. The GIC will enable:

·         a common single rate of interest for all tax types where a correct payment is not received by the due date;

·         abolition of complex and punitive culpability elements that apply for the late payment of some taxes; and

·         simpler tax accounting and collection arrangements that will position the Australian Taxation Office to better assist taxpayers to minimise any escalation of amounts outstanding.

The failure to notify penalty will encourage withholders who cannot remit deductions by the due dates to notify the Commissioner of the existence of these liabilities. The changes will eliminate the current high level penalties that are imposed on businesses that are unable to remit withheld amounts when they are due.

Assessment of impacts of the proposals:

The groups impacted by the new penalty regimes are as follows:

taxpayers - by having consistent and more easily understood late payment penalties and more equitable and commercially acceptable failure to notify penalties. Taxpayers, in particular small business taxpayers, will not face heavy penalties where temporary cash flow problems prevent them from remitting withheld amounts on time;

tax agents and accountants - who will find it easier to advise clients on penalty regimes;

the ATO - which will find the new penalty regimes easier to administer; and

the Commonwealth Government - which, over time, should benefit from reduced levels of outstanding debt.

Running Balance Accounts (RBAs)

Amends various Acts for which the Commissioner has general administration to introduce a system of running balance style accounts to account for and administer debts under the sales tax, PAYE, PPS and RPS arrangements for the year commencing 1 July 1999.

The RBA amendments, which rely on a consistent GIC applying on any outstanding tax debt, will:

·         enable four separate RBAs to be established for a taxpayer’s sales tax, PAYE, PPS and RPS debts;

·         allow those debts to be aggregated into one outstanding balance for each of those tax types;

·         allow the GIC to be calculated on the RBA deficit;

·         enable the Commissioner to recover the RBA deficit as a tax debt; and

·         provide the Commissioner with a discretion on the application of tax debts to an RBA and the application of payments and credits against tax debts.

These amendments are the first phase in a program to establish an RBA to account for and monitor the majority of a taxpayer’s outstanding debts after 1 July 2000.  The single RBA is to be the accounting platform for the Government’s Tax Reform program.

Date of effect:  1 July 1999.

Proposal announced:   Not announced.

Financial impact:  The revenue impact of this measure cannot be quantified.

Compliance cost impact:  The amendments are not expected to impose any additional compliance costs on taxpayers. They are aimed at assisting taxpayers to better manage their outstanding tax debts.

Summary of Regulation Impact Statement

Impact:     Positive

Policy objective:

The objective of the RBA measure is to provide the legislative framework for a taxpayer accounting system to monitor a taxpayer’s different tax liabilities on an RBA and apply a daily interest charge to any RBA deficit.

The introduction of an RBA will enable:

·         simpler tax accounting and collection arrangements that will position the ATO to better assist taxpayers to minimise any escalation of amounts of outstanding tax debts;

·         the ATO to provide a comprehensive statement of a taxpayer’s outstanding tax debts at a particular point in time; and

·         an automatic calculation of the GIC on the RBA deficit.  This represents a considerably more efficient process than individually calculating the GIC for each component debt which contributed to the RBA balance.

As the first step towards a single RBA for all tax debts, these amendments will introduce four separate running balance accounts in relation to sales tax, PAYE, PPS and RPS debts for the year ending 30 June 2000.

Assessment of impacts of the proposals

Taxpayers will benefit from receiving regular periodic statements detailing their outstanding tax debts. This compares with the current arrangements where statements are generated on an ad hoc basis or following requests from taxpayers for an explanation of their outstanding debts.  The provision of regular and comprehensive account statements should enable taxpayers to better manage their outstanding debts at a reduced cost.  These new arrangements will particularly benefit small businesses.

The Government will benefit as taxpayers are more likely to reduce outstanding debts at a faster rate as a result of taxpayer RBAs being issued and being used in the recovery process.  Improvements are likely to be made in the timing of resultant collections but increases in total revenue are expected to be minimal.

Measures to deal with abuse of foreign tax credits

Schedule 2 to the Bill amends the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (the ITAA36) to enable those provisions to apply to schemes designed to acquire or generate foreign tax credits. There will also be amendments made to the penalty provisions contained in Part VII of the ITAA36 to ensure that penalties which currently apply to Part IVA schemes will also apply to foreign tax credit schemes.

Date of effect:   Schemes entered into after 4.00 pm, by legal time in the Australian Capital Territory, on 13 August 1998.

Proposal announced:   Treasurer’s Press Release No. 78 of 13 August 1998.

Financial impact:   The measures are designed to protect the revenue base against potential international tax avoidance schemes involving foreign tax credits. In the absence of the measure, to the extent that the revenue base would not be protected, there would be a significant revenue loss.

Compliance cost impact:   There are unlikely to be any significant compliance costs associated with the proposed measures. The general anti-avoidance provisions will only affect taxpayers who are contemplating entering into such schemes.

Consultation:   This measure is designed to combat potential tax avoidance arrangements and as such it was not possible to engage in public consultation prior to the measure being announced.

Technical corrections

Schedule 3 to the Bill amends various Acts to correct earlier drafting errors. The amendments do not involve changes of policy significance.

Date of effect:   Royal Assent and earlier dates as explained in Chapter 3 of this Explanatory Memorandum.

Proposal announced:   Not previously announced.

Financial impact:   None.

Compliance cost impact:   None.

 



C hapter 1

Remittance dates, charges and penalties and running balance accounts

Overview

1.1            Schedule 1 to the Bill will amend various Acts for which the Commissioner of Taxation has general administration. The measures covered by the amendments include:

·         aligning the remittance dates for medium and small PAYE, PPS and RPS payers from the 7 th to the 21 st of the month;

·         replacing the current late payment penalty arrangements with a consistent and commercially realistic general interest charge on outstanding amounts of tax. These new penalty arrangements incorporate new failure to notify and late reconciliation statement penalties; and

·         introducing a system of four running balance accounts to account for sales tax, PAYE, PPS and RPS debts for the year ending 30 June 2000.

1.2            The new general interest charge for all outstanding tax debts is an essential feature in the establishment of running balance accounts.

1.3                       Other consequential amendments are also necessary to support the above measures. For example, the new general interest charge will become tax deductible. Further, debts which currently arise as a result of administrative overpayments by the Commissioner of Taxation will become tax debts and will be subject to the new general interest charge. This amendment is necessary to ensure the new running balance accounts will register debts payable to the Commissioner of Taxation. All debts on the running balance account will be subject to the general interest charge when they become overdue.

1.4                       The measures are explained in the following sections:

Section 1        Remittance dates

Section 2        Charges and penalties

Section 3        Running balance accounts

Section 4        Regulation impact statement for charges and penalties and running balance accounts.

1.5                        The measures dealing with charges and penalties were introduced into the Parliament in Taxation Laws Amendment Bill (No. 5) 1998 on 2 July 1998 and lapsed with the calling of the October 1998 election.

1.6                        The following abbreviations are used throughout this Chapter.

Australian Taxation Office

ATO

Commissioner of Taxation

Commissioner

Failure to notify penalty

FTN penalty

Fringe Benefits Tax Assessment Act 1986

FBTAA86

General interest charge

GIC

Income Tax Assessment Act 1936

ITAA36

Income Tax Assessment Act 1997

ITAA97

Late reconciliation statement penalty

LRS penalty

Pay as you earn

PAYE

Pay as you go

PAYG

Prescribed payments system

PPS

Reportable payments system

RPS

Running balance account

RBA

Taxation Administration Act 1953

TAA53

 



 

Section 1      Remittance dates

Summary of the amendments

Purpose of the amendments

1.7                        Amendments in Parts 1 and 2 of Schedule 1 to the Bill will move the remittance date for medium and small PAYE, PPS and RPS payers from the 7 th to the 21 st day of the month.

Date of effect

1.8            The amendments will apply to amounts deducted on or after 1 July 1999. [Item 403]

Background to the legislation

1.9                        Currently sections 220AAM and 220AAR of the ITAA36 require medium and small remitters to pay deductions on a monthly and quarterly basis respectively. The deductions made during a month or quarter are required to be paid not later than the 7 th day after the end of that month or quarter.

1.10          The new Tax Reform arrangements will align most remittances with the new quarterly GST and PAYG payment dates of 21 October,

21 January, 21 April and 21 July.

1.11          The alignment to the 21 st of the month for monthly and quarterly PAYE, PPS and RPS remitters is in anticipation of the new Tax Reform arrangements which will apply from 1 July 2000. Under those arrangements most businesses will complete a single compliance statement once a quarter and make one quarterly payment.

Explanation of the amendments

1.12          Sections 220AAM and 220AAR of the ITAA36 will be amended to allow an additional 14 days (from the 7 th day of a month) so that deductions made during a month or quarter will be required to be paid by the end of the 21 st day after the end of the month or quarter in which deductions were made. [Items 105 and 109]

1.13          The amendments also include legislative notes to clarify that subsection 36(2) of the Acts Interpretation Act 1901 does not apply for the purposes of subsection 220AAM(1) or subsection 220AAR(1) of the ITAA36. [Items 106 and 110]

1.14          Subsection 36(2) provides that where the last day of any period allowed to do something (an action) falls on a Saturday, Sunday, public holiday or bank holiday, the action may be done on the first working day after that Saturday, Sunday, public holiday or bank holiday.

1.15          Under the amendments proposed, the due date for payment is the 21 st day of the relevant month. Where the 21 st falls on a weekend or holiday, payment may be necessary a day or two before that time in order to avoid the new general interest charge.  Electronic funds transfers can enable payments to be made on the 21 st day of the month even though it may not be a normal business day.



Section 2      Charges and penalties

Summary of the amendments

Purpose of the amendments

1.16          The amendments will replace the various existing late payment penalties in the tax and related law with a new GIC which will be applied to outstanding tax debts. A separate imposition Bill is also being introduced to complement the amendments dealing with the new GIC.  The General Interest Charge (Imposition) Bill 1998 will impose the GIC as a tax, but only to the extent to which it cannot validly be imposed as a penalty.

1.17          The new charge will be described as the GIC and will be worked out daily on a compounding basis.  The charge will apply where there is:

·         an amount of tax, charge, levy or penalty that remains unpaid;

·         an underpayment of tax following an amendment of an assessment;

·         an underestimate of an instalment of tax;

·         late lodgment of income tax returns;

·         failure by a government body to withhold tax from certain source deduction payments; and

·         failure to remit certain amounts by electronic funds transfer.

1.18          The amendments will also introduce penalties for failing to:

·         notify the Commissioner by a certain time of an amount a person is liable to pay - to be known as the FTN penalty; and

·         give the Commissioner by a certain time a reconciliation statement of source deductions made - to be known as the LRS penalty.

1.19          The introduction of the two new penalties is balanced by the removal of:

·         the offence provisions that apply when a withholder fails to remit deductions by the due date; and

·         the culpability penalty provisions that apply when a withholder fails to pay source deductions by the due date or a sales tax payer fails to furnish a return by the due date.

Date of effect

1.20          The new GIC and notification penalties are to apply generally from 1 July 1999. [Part 2 of Schedule 1: items 398 to 402]

1.21          An exception to this is the general interest charge for unpaid sales tax and certain source deductions.  The charge will apply to amounts payable before that date.  However, this will not disadvantage taxpayers as the interest charge proposed is a lower rate than the penalty rate which currently applies. [Subitem 398(4)]

Background to the legislation

1.22          In November 1996, the Small Business Deregulation Task Force made recommendations designed to alleviate the paper work and compliance burden imposed on small business.  The report specifically highlighted concerns taxpayers have about the imposition and calculation of penalties under the various taxation laws.

1.23          In March 1997, the Prime Minister responded to the recommendations in his statement More Time for Business .  The Government accepted that the complexity of the current penalty arrangements is a major factor contributing to confusion and misunderstanding among taxpayers.  The Commissioner was asked to review all penalty arrangements with a view to rationalising and simplifying the system.

1.24          The ATO in consultation with professional bodies and taxpayer organisations, reviewed the penalty arrangements, in particular penalties under the various source deduction collection systems.  The review found that the current arrangements suffer from a number of drawbacks, including:

·         penalty calculations are not easily understood by taxpayers;

·         inconsistent penalty rates and calculations exist across the different taxes and between classes of taxpayers;

·         the difficulties in having the ATO’s systems automate the calculation of penalties and issue account statements;

·         the rate of penalty does not reflect market interest rates; and

·         the lack of commercial reality in the penalty rules which prevents the ATO from assisting taxpayers to minimise any escalation of outstanding debt.

1.25          The amendments proposed will rationalise, simplify and align late payment penalties with market interest rates and should assist taxpayers to better manage their liabilities to the Commissioner under various laws.

Explanation of the amendments

1.26          The amendments to introduce the GIC, the FTN and LRS penalties and the RBA are set out in Part 1 of Schedule 1 to the Bill.

1.27          The various features of the GIC, FTN and LRS penalties are contained in new Part IIA of the TAA53 in the following Divisions:

Division 1   The general interest charge

Division 2   The failure to notify penalty

Division 3   The late reconciliation statement penalty

Division 4   Recovery of charges and penalties.

The features of the GIC, FTN and LRS penalties are summarised in Tables 1 to 3 .

Table 1:  The General Interest Charge (GIC)

Concepts

Features

Legislative references

GIC

GIC on amounts payable to the Commissioner

 

 

·          The GIC will apply in a range of situations arising under the Acts administered by the Commissioner.  New Part IIA of the TAA53 identifies the situations in which the GIC will apply to tax debts in respect of unpaid and other amounts due to the Commissioner.

Item 350; new section 8AAB

 

GIC

Calculation

 

 

·          The charge is calculated daily on a compounding basis.

Item 350; new sections 8AAC and 8AAD

GIC

Remission and Recovery

 

 

·          The Commissioner may remit all or a part of the GIC payable by a person.

·          The Commissioner may recover outstanding amounts of GIC.

Item 350; new sections 8AAE to 8AAH

Item 350; new sections 8AAV to 8AAW

 



 

Table 2:  The failure to notify penalty (FTN)



Concepts

Features

Legislative references

FTN

penalty

When the FTN penalty applies

 

 

The FTN penalty will apply in various situations where a taxpayer fails to notify the Commissioner of a liability by a particular date.

Item 350; new section 8AAJ

 

FTN penalty

Calculation

 

 

FTN penalty will be calculated at a rate of 8% per annum for the period during which the Commissioner is not aware of the liability.

Item 350; new section 8AAK

 

FTN penalty

Remission and Recovery

 

 

·          The Commissioner may remit all or a part of the FTN penalty payable by the person.

·          The Commissioner may recover unpaid amounts of FTN penalty.

Item 350; new section 8AAM



Item 350; new section 8AAV

 

 

Table 3:  The late reconciliation statement penalty (LRS)



Concepts

Features

Legislative references

LRS penalty

When the LRS penalty applies

 

 

LRS penalty will apply in various situations where a taxpayer fails to provide information in relation to amounts which have been deducted and are payable to the Commissioner.

Item 350 ; new section 8AAP

 

LRS penalty

Calculation

 

 

The penalty is $10 per week (subject to a maximum of $200) for the period the statement is not given to the Commissioner.

Item 350; new section 8AAQ

 

LRS penalty

Remission and Recovery

 

 

·          The Commissioner may remit all or a part of the LRS penalty payable by the person.

·          The Commissioner may recover unpaid amounts of LRS penalty.

Item 350; new section 8AAS



Item 350; new section 8AAV

 

 

1.28                      A more detailed explanation of the amendments associated with the introduction and application of the GIC, FTN and LRS penalties, including examples of both how the law is being amended and how the law will be applied, are provided below.

The general interest charge (GIC)

Summary of amendments

1.29          To give effect to the introduction of the GIC, the Bill:

·         amends or removes the existing late payment and other penalty provisions (see paragraph 1.17). As mentioned above, these provisions could relate to the late payment of income or other taxes and the late or non payment of source deductions or the failure to deduct those amounts (eg. PAYE, PPS, RPS);

·         replaces those penalties with a liability to pay the GIC from the time the payment was due to be paid to the Commissioner;

·         provides a trigger for the operation of the GIC in new Part IIA of the TAA53 by imposing the GIC for the period in respect of which amounts remain unpaid;

·         makes consequential changes which are necessary to support the above amendments; and

·         if applicable, removes the offence provisions for failing to pay amounts to the Commissioner by the due date.

An example of how the amendments apply

1.30          A large remitter is currently required to make PAYE source deductions under section 221EAA of the ITAA36 and remit those deductions to the Commissioner as required under section 220AAE.

1.31          The new GIC has potential application in the following situations:

·         where the source deductions are not made (situation 1) ; and

·         where the source deductions are made but not remitted to the Commissioner as required under section 220AAE (situation 2) .

1.32          For situation 1 , the Bill:

·         amends the existing late payment penalty provisions - the amendments include the repeal and replacement of section 221EAA of the ITAA36 with new section 221EAA; item 140 .  With the exception of Government bodies, the current section has a flat administrative penalty equal to the undeducted amount and a penalty running at 16% per annum. New subsection 221EAA(1) retains the obligation to make the deduction and, where the employer fails to do so, imposes a penalty equal to the undeducted amount.  This is the same as the existing ‘failure to make deductions’ penalty;

·         establishes a due date for payment of the penalty [new subsection 221EAA(2)] ;

·         imposes the GIC on the undeducted amount from the time it is due to be paid.  [New subsection 221EAA(3)]  This is calculated through the application of Division 1 in new Part IIA of the TAA53 [new sections 8AAA to 8AAH] ; and

·         makes consequential amendments - these will generally impact on the existing remission provision (section 221N) and the provision enabling the late payment penalty to be reduced on account of judgment interest being awarded to the Commissioner (section 221NA).  An amendment is necessary to section 221N so that the remission will now only apply to the penalty in respect of the undeducted amount.  This is because the 16% per annum penalty is being replaced by the new GIC in the TAA53.  A further amendment is required to remove the judgment interest provision from the PAYE provisions as its function is now achieved through new section 8AAH of the TAA53. [Items 148, 149 and 350]

1.33          There are no offence provisions to be removed for situation 1 . Further, the consequential amendments to the remission and judgment interest provisions discussed for situation 1 are also relevant for situation 2 .  For situation 2 , the Bill also:

·         removes offence provisions for failing to pay amounts to the Commissioner by the due date - this is currently in subsection 220AAE(3) and is removed by item 101.   New subsection 220AAE(3) imposes the GIC charge for the period during which the amounts are not paid to the Commissioner; and

·         replaces the existing late payment penalty provisions in section 220AAV with the GIC under new subsection 220AAE(3) [Items 101 and 113]

1.34          By way of example, Table 4 summarises the linkages between the various amendments required to replace two current late payment penalties associated with the penalty provisions currently in the ITAA36 and referred to in the tables in new section 8AAB of the TAA53.  Tables 9 and 10 at the end of this Chapter contain a more detailed summary of the other amendments involved for other areas of the laws where the new GIC will apply.  Many of the other amendments repeal various remission and judgment interest provisions scattered throughout the taxation laws. These are no longer required as the GIC regime in the TAA53 has a remission and judgment interest provision.



 

Table 4:  Examples of amendments (s - section; ss - subsection)

Item in table in new subsection 8AAB(4)

Topic

Amendments to create GIC liability

Consequential amendments - offence (O) , remission (R) , judgment  (J)

10

Penalty (large remitters) for failing to remit RPS, PAYE and PPS deductions made to the Commissioner

Item 101; new ss220AAE(3)

Item 113; repeals s220AAV

(O) Item 101; repeals ss220AAE(3)

(R) Item 115; repeals s220AAX

(J) Item 115; repeals s220AAY

14

Penalty for failing to make RPS deductions

Item 118; new s220AS

(R) Item 120 modifies s220AU

(J) Item 113 repeals s220AAV

 

How is the GIC calculated?

1.35          New sections 8AAC and 8AAD of the TAA53 provide that the GIC will be worked out daily on a compounding basis.  The nominal annual interest rate from which the daily effective rate will be calculated is set at the weighted average yield for the 13 Week Treasury Note yield rate plus 8 percentage points.  The daily effective rate will be adjusted each quarter to reflect quarterly movements in the 13 Week Treasury Note yield.

1.36          The GIC for a day as defined in new section 8AAD of the TAA53 will be worked out by dividing the nominal annual interest rate by the number of days in the calendar year.

Example of how the GIC will be calculated

1.37          A taxpayer who has made PAYE deductions of $10,000 is required to remit those deductions to the Commissioner by 21 October 1999 and fails to do so. Assuming the 13 week Treasury Note yield is 5%, the daily effective rate of interest is 13% divided by 365 or .0356%.  The 13% is obtained by adding 8% to 5% as provided for in new subsection 8AAD(1) of the TAA53.

1.38          New subsection 220AAE(3) of the ITAA36 provides that the GIC is payable on the unpaid amount in the period that:

·         starts at the beginning of the day the amount is due to be paid (21 October 1999); and

·         finishes on the last day on which, at the end of the day, any of the following amounts remain unpaid:

(i)    the amount ;

(ii)   GIC on any of that amount .

1.39          The amount of the GIC as at 21 October 1999 (as the amount remained unpaid) will be $3.56 ($10,000 x .0356%). As the GIC is worked out daily on a compounding basis, the GIC for subsequent days will be calculated on the $10,000 plus the GIC from previous days.  The outstanding debt at the end of 20 November 1999, which if repaid on 21 November 1999, will be $10,111 [$10,000 x (1.000356) 31 ].  The superscripted number used in the expression means ‘raised to the power of’ in the same way as 2 5 equals 32.  Using compound interest terminology, an amount A, if invested at an effective rate of i% per period for N periods will accumulate to A x (1 + i%) N .

1.40          New section 8AAF of the TAA53 provides that the Commissioner may notify in writing - in a specific notice or as part of any other notice issued in respect of the taxpayer - the amount of the GIC for a particular day or days.

Remission of the GIC

1.41          The amendments which require that the GIC be calculated daily on a compounding basis also enable the Commissioner to remit the whole or any part of the GIC imposed on a taxpayer. [New section 8AAG]

Administrative issues

1.42          As of 1 July 1999, the computer systems which support the administration of sales tax, PAYE, PPS and RPS debts will be able to calculate the GIC on a compounding basis as provided for in the amendments being introduced.

1.43          However, due to the lead times involved with systems development, as of 1 July 1999 the computer systems which support the administration of other tax debts such as income and fringe benefits tax will not be able to calculate daily the GIC on a compounding basis. They will continue to perform calculations on a simple interest basis.

1.44          From 1 July 1999 the Commissioner will therefore use his discretion to partially remit the GIC on tax debts other than sales tax, PAYE, PPS and RPS debts. The discretion will be exercised by applying the nominal GIC rate of the Treasury Note yield plus 8% (currently around 12.8%) on a simple rather than compounding interest basis.

Comparison of the GIC and existing penalty rates

1.45          In almost all of the cases where GIC is imposed there will be a reduction of between 3 and 23 percentage points in the existing penalty rates. However, in a small number of cases where an amended assessment increases the amount of tax payable, there will be an increase.

1.46          The relevant provisions where there will be an increase in penalty are:

·         new sections 160ARW and 170AA of the ITAA36;

·         new section 93 of the FBTAA86;

·         new sections 21 and 22 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 ;

·         new section 18 of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 ; and

·         new section 17 of the Termination Payments Tax (Assessment and Collection) Act 1997 .

1.47          The penalty rates in the above provisions will increase by 4 percentage points with the exception of the penalty in section 93 of the FBTAA86.  In the limited situation of penalties on tax shortfalls where Part VIII of the FBTAA86 does not apply (eg. no penalty for false or misleading statements) there will be an increase of 8 percentage points.  In all other FBT cases where there is an amended assessment there will be a decrease in penalty under section 93.

The failure to notify (FTN) penalty

Summary of amendments

1.48          New Division 2 of Part IIA of the TAA53 will contain the amendments to introduce an FTN penalty which will apply to source deduction withholders and sales tax payers who fail to notify the Commissioner when an amount is due. New subsection 8AAJ(4 ) of the TAA53 lists the situations where the FTN will apply.  The amendments in the Bill will:

·         insert new provisions in the relevant areas of the tax law creating liability for the FTN penalty.  The areas involved are those which currently require taxpayers to provide certain information to the Commissioner [Items 13, 104, 108, 112, 197, 198, 199, 210, 222, 232, 233, 235, 303, 307, 308 and 347] ;

·         remove administrative penalties and offence provisions, if any, which apply when taxpayers fail to remit amounts of source deductions and sales tax; and

·         insert new provisions in the TAA53 that explain how to work out the FTN penalty. [New sections 8AAI to 8AAN]

Example of how the FTN amendments will apply

1.49          In situations where an investor does not provide a tax file number, an investment body is currently required to make deductions under section 221YHZC of the ITAA36 and remit those deductions to the Commissioner as required under section 221YHZD.

1.50          It is necessary to link the new FTN provisions in both the ITAA36 and the TAA53 to work out and apply the FTN penalty.  An example of a new FTN liability provision in the ITAA36 is new section 221YHZCA inserted by item 197 .

1.51          New section 221YHZCA requires investment bodies who have deducted amounts to notify the Commissioner, on or before the date those amounts are due to be paid, of the deductions made from interest, dividends or natural resource payments.  A failure to notify will create an FTN liability. [Item 197]

1.52          The taxation laws already provide for taxpayers to supply information to the Commissioner at the time of making a payment.  Where a payment is made by the due date in accordance with existing requirements, the notification obligation will be met.

1.53          Under subsection 221YHZD(1) of the ITAA36, the failure to meet the current deduction remittance requirements is an offence which carries a penalty of $5,000 and/or 12 months imprisonment.  Paragraph 221YHZD(1)(b) also contains a notification requirement which is no longer necessary as it will become part of the notification requirement in new section 221YHZCA .  These provisions will be removed to support the more commercially realistic FTN penalty. [Items 198 and 200]

1.54          The FTN penalty is designed to encourage taxpayers to notify the Commissioner of liabilities with which the taxpayer is having difficulty - the emphasis being on managing the growth and payment of the taxation debts in preference to taking prosecution action.

1.55          It is also necessary to provide for the new FTN penalty to be worked out and applied.  New sections 8AAI to 8AAN of the TAA53 provide for the FTN penalty and its determination once an FTN liability is created under the relevant provision in the ITAA36.  If the FTN penalty is not paid by the due date as provided in the Commissioner’s notice, new section 8AAN of the TAA53 will apply to impose the GIC on the unpaid penalty amount.

1.56          Table 5 summarises the amendments required to the ITAA36 as a result of introducing the FTN penalty.  The penalty is being established to cater for notification of sales tax and various other remittances referred to in new subsection 8AAJ(4) of the TAA53. 

Table 5:  FTN penalty - Summary of amendments

Item in table in new subsection 8AAJ(4)

Topic

Amendments to create the FTN liability in the sales tax and income tax laws

Consequential amendments (eg. offence provisions)

Text above table

Sales tax assessable dealings with goods

Item 303; new subsection 91Z(2A) and item 307; new section 95A

Item 308 ; exclude new section 95A from section 96 requirement

1

RPS, PAYE and PPS deductions (large remitters)

Item 104; new section 220AAGA

Item 113 ; repeals section 220AAV offence

2

RPS, PAYE and PPS deductions (medium remitters)

Item 108; new section 220AAOA

Item 113 ; repeals section 220AAV offence

3

RPS, PAYE and PPS deductions (small remitters)

Item 112; new section 220AATA

Item 113 ; repeals section 220AAV offence

4

Deductions from certain payments

Item 197; new section 221YHZCA

Items 198 and 200 ; repeal offence and notification requirement

5

Withholding tax

Item 210; new subsections 221YN(2), (2A) and (2B)

Item 212 ; repeals subsection 221YN(2) offence

6

Mining withholding tax

Item 222; new subsections 221ZC(2), (2A) and (2B)

Item 223 ; repeals subsection 221ZC(2) offence

7

Australian Film Industry Trust Fund accounts

Item 235; new section 221ZNA

Item 234 ; repeals subsection 221ZN(5) offence

 

How is the FTN penalty calculated?

1.57          The FTN penalty will be calculated at a rate of 8% per annum of the amount not notified to the Commissioner. [New subsection 8AAK(2) of the TAA53 ]

1.58          The Commissioner must notify in writing - in a specific notice or as part of any other notice issued in respect of the taxpayer - the amount of the FTN penalty for a particular day or days and the day on which the FTN is due and payable. The due date for payment must be at least 30 days after the notice is given to the taxpayer. [New section 8AAL of the TAA53 ]

1.59          New subsection 221YHZCA(2) and other comparable provisions in Table 5 provide that the FTN penalty continues accruing until such time as the Commissioner is notified - or becomes aware through his or her own enquiries - of the correct amount the taxpayer should have paid. [Item 197]

1.60          New section 8AAM of the TAA53 allows the Commissioner to remit the whole or any part of the FTN penalty imposed on a taxpayer in certain circumstances.

1.61          New subsection 221YHZCA(3) of the ITAA36 and other comparable provisions in Table 5 provide that, for all source deductions, notification is to be in a form approved by the Commissioner.  This will allow emerging electronic technologies to be approved by the Commissioner for notification purposes.  In accordance with current arrangements, withholders and sales tax payers will not be required to advise of a ‘nil’ liability where there have been no transactions for a period.  [Items 104, 108, 112, 197, 198, 199, 210, 222, 232, 233 and 235]

1.62          Where a taxpayer fails to notify the Commissioner of any source deduction required to be notified under the proposed amendments, the offence provisions in the TAA53 will be available to prosecute serious offenders.  Under subsection 8C(1) of the TAA53, it is an offence to refuse or fail to give information to the Commissioner in the manner in which it is required under a taxation law.  This provision is currently relied upon in prosecution proceedings dealing with taxpayers who fail to lodge sales tax returns.

1.63          The amendments proposed in new sections 8AAL and 8AAN of the TAA53 will allow the GIC to be applied to an unpaid FTN penalty from a time which is at least 30 days after a notice of the FTN penalty is given.

Example

1.64          An employer makes a deduction of $3,000 from wages of employees and this amount is due to be remitted to the Commissioner on 21 August 1999.  The employer does not pay by the due date and fails to notify the Commissioner by the due date that he has an amount to pay.  On 21 September 1999, the employer notifies the Commissioner of the amount that should have been paid on 21 August 1999.

1.65          The FTN penalty in this case will be $20 (8% pa. x $3,000 x 31 days).  When the Commissioner has calculated the FTN penalty amount, he will send a notice to the employer specifying the amount of the penalty and the due date for payment of the penalty.  In addition to the FTN penalty, the employer will be liable to the GIC on the unpaid amount of $3,000 from 21 August 1999.  If the FTN penalty is not paid by the due date in the Commissioner’s notice, the GIC will also apply to that unpaid amount.

The late reconciliation statement (LRS) penalty

Summary of amendments

1.66          The Bill will amend the tax laws to introduce an LRS penalty which will apply when source deduction withholders fail to provide the Commissioner with an annual reconciliation statement in respect of amounts withheld and forwarded to the Commissioner. New subsection 8AAP(4 ) of the TAA53 lists the situations where the LRS penalty will apply.  To introduce the LRS penalty, the amendments in the Bill will:

·         create a liability for the LRS penalty where an obligation to send a reconciliation statement to the Commissioner is not met [Items 15, 117, 142, 143, 180, 193, 194, 213, 224, 246 and 349] ; and

·         insert new provisions in the TAA53 that explain how to work out the LRS penalty. [New sections 8AAO to 8AAT]

An example of how the LRS amendments will apply

1.67          As with the FTN penalty, it is necessary to link the relevant ITAA36 provisions to the TAA53 provisions which work out the LRS penalty.  An example of the new liability provisions is new subsection 221F(6) inserted by item 142 .

1.68          New subsection 221F(6) creates a new LRS liability in the ITAA36 for employers who fail to send a yearly reconciliation statement of PAYE tax instalment deductions as shown in the group certificates they have issued. Subsection 221F(5J) of the ITAA36 requires the statement, together with total remittances of those amounts, to be sent to the Commissioner by 14 August of each year. [Item 142]

1.69          It is also necessary to have provisions to work out and apply the LRS penalty.  New sections 8AAP to 8AAT of the TAA53 provide for the application, notification and collection of the LRS penalty once an LRS liability is created.

1.70          The following table summarises the  amendments required to the ITAA36 as a result of introducing the LRS penalty.  The penalty is being established to encourage taxpayers to provide the reconciliation statements listed in the table in new subsection 8AAP(4) of the TAA53 and summarised in Table 6 .



 

Table 6:  LRS penalty - Summary of amendments

Item in subsection 8AAP(4) table

Topic

Amendment to create the LRS liability in the ITAA36

Who has to provide the reconciliation statement

1

RPS payment report

Item 117; new subsection 220AJ(5)

A payer under the reportable payments system

2

PAYE deductions reconciliation statement

Item 142; amends subsection 221F(6)

An employer under the group tax system

3

PPS payment report

Item 180; new subsection 221YHDC(9A)

An eligible paying authority under the prescribed payment system

4

Statement of deductions from certain payments

Item 194; new subsection 221YHZC(1AAA)

An investment body who has made a deduction where a tax file number has not been supplied

5

Statement of withholding tax deductions

Item 213; new subsection 221YN(2C)

Person who has made a deduction from a dividend, interest or royalty payment

6

Statement of mining withholding tax deductions

Item 224; new subsection 221ZC(2C)

A person who has made a deduction from a mining payment

7

Farm management deposits report

Item 246; new subsection 221ZXD(4)

A financial institution

 

How is the LRS penalty calculated?

1.71          The LRS penalty will be calculated at a flat rate of $10 for each week, or part of a week up to a maximum of $200 for each statement. [New section 8AAQ]

1.72          The Commissioner must notify in writing - in a specific notice or as part of any other notice issued in respect of the taxpayer - the amount of the LRS penalty and the day on which it is due.  The due date must be at least 30 days after the notice is given to the taxpayer. [New section 8AAR]

1.73          As with the FTN penalty, the Commissioner will be able to remit the whole or any part of the LRS penalty imposed on a taxpayer in certain circumstances. [New section 8AAS]

1.74          The amendments proposed in new section 8AAT of the TAA53 will allow the GIC to be applied to an unpaid LRS penalty from the time the penalty is due to be paid.

Example

1.75          An employer makes PAYE deductions during the year ended 30 June 1999 and fails to provide the Commissioner with a reconciliation statement by 14 August as required under subsection 221F(5J) of the ITAA36. The reconciliation statement was lodged on 30 September 1999 in response to a letter from the Commissioner.

1.76          New subsection 221F(6) will apply so that the employer will be liable for the LRS penalty. [Item 142]

1.77          The LRS penalty for the period from 14 August 1999 to 30 September 1999 is $70, as the statement is overdue by 7 weeks.  When the Commissioner becomes aware that the statement has not been forwarded as required, he will send a notice to the employer specifying the amount of the LRS penalty and the due date for payment of the penalty.  If the LRS penalty is not paid by the date specified in the Commissioner’s notice, the GIC will also apply to that amount until the LRS penalty is paid.

Other amendments

1.78          As well as introducing specific provisions necessary to establish the GIC, FTN, LRS and RBA, other amendments are necessary to supplement their introduction as well as to provide other specific features in their application. Table 7 summarises these other amendments.

Table 7:  Summary of GIC, FTN, LRS consequential amendments

Exempt the Commonwealth and authorities of the Commonwealth from the GIC

Item 350; new subsection 8AAB(3 ) of the TAA53; Items 119, 141, 186, 196 and 305

Exempt exempt Australian government agencies from the FTN and LRS penalties.  These agencies are defined in the ITAA97.

Item 350; new subsections 8AAJ(3) and 8AAP(3 ) in the TAA53

Ensure the GIC is tax deductible.

Items 278; amends paragraph 25-5(1)(c) of the ITAA97

Apply the method of calculating the Treasury Note yield rate in the TAA53 to the interest rate set by section 214A of the ITAA36.

Items 81, 83, 86 and 87

Replace the concept of additional tax in the ITAA36 with the GIC and introducing the GIC, FTN and LRS into the ITAA36 and ITAA97.

Items 12, 13, 14, 15, 170, 171, 172, 173 , 280, 348, 373 and 396

Remove sections 207 and 207A of the ITAA36 which deal with penalties and penalty interest for unpaid tax.

Items 18, 27, 29, 40, 44, 69, 73, 82, 88, 90, 92 94, 99, 262, 265, 267, 269, 271 and 273

Introduce tax debts for administrative errors by the Commissioner.

Item 351; new section 8AAZN of the TAA53

 



 

Consistency in the application of GIC

1.79          A further consequential amendment will ensure that GIC accrues from when an outstanding tax debt is due to be paid.  Previously, under subsection 207(1) of ITAA36 the Commissioner was able to impose late payment penalty from the date on which tax was originally due and payable even though there may have been an extension of time allowed for the payment of the tax.

1.80          This is now no longer the case with the repeal of sections 207 and 207A of the ITAA36.  [Item 73]



Section 3  Running balance accounts

Summary of the amendments

Purpose of the amendments

1.81          These amendments are in response to recommendations by the Auditor General (Report No. 13 in 1996-97) and the outcomes of the Small Business Deregulation Task Force. The amendments support the ATO’s re-engineering of its business systems to reflect the account management practices of major financial institutions.

1.82          These amendments represent the first phase in the establishment of an RBA account for the majority of a taxpayer’s outstanding tax debts after 1 July 2000. The first phase involves the establishment of four separate RBAs for the year ending 30 June 2000 for tax debts in respect of sales tax, the PAYE arrangements, the PPS and the RPS. The main outcomes sought from the four RBAs are:

·         the production of regular account statements showing the total of all outstanding tax debts for indebted taxpayers. The statements will be similar to commercial credit card and cheque account statements; and

·         the application of a single daily interest rate in the form of a GIC to the outstanding account balance.

1.83          The next phase from 1 July 2000 will aim to produce the above outcomes from an RBA covering most tax debts (eg. income tax, fringe benefits and the current PAYE withholding amounts). Other tax obligations such as TFN withholding taxes and superannuation debts are expected to come onto the RBA in subsequent phases.

Date of effect

1.84          The amendments will generally apply to tax debts owing at or after, and payments received on or after, 1 July 1999. [Part 2 of Schedule 1: item 405]

Background to the legislation

1.85          At present, the taxation laws which the Commissioner administers cover up to fourteen different revenue products, each of which can give rise to separate tax debts. These revenue products are currently managed through several different computer systems. Superannuation debts are in addition to these revenue products.

1.86          Within each revenue product, the majority of tax debts are represented as specific periodic or primary debts. For example, the monthly obligation to pay sales tax and remit PAYE, PPS and RPS deductions over a year could be represented by up to 48 separate primary debts under the current arrangements. When those debts are overdue, they are currently recovered as separate debts, each with its own late payment penalty.

1.87          Under the RBA amendments in this Bill (Phase 1) which will apply for the year ending 30 June 2000, those 48 primary debts referred to above could be aggregated within the 4 RBAs and represented as 4 separate recoverable debts. Under the RBA model envisaged from 1 July 2000 (Phase 2), they would be represented as one recoverable debt.

Parallel systems

1.88          The introduction of RBAs will not affect the establishment and recovery of those primary debts. The current arrangements will continue and will be available to the Commissioner if needed. However, RBAs will introduce greater flexibility into the management of, reporting on and recovery of outstanding tax debts.

Explanation of the amendments

1.89          The amendments to introduce the legislative framework to support the RBAs are set out in Part 1 of Schedule 1 to the Bill.

1.90          The RBA framework proposed by the amendments in this Bill reflects an alternative presentation, in the form of an RBA, of the specific outstanding tax debts referred to above. In an accounting framework, those debts are represented as debits on an RBA. Any payments received by, or credits allowed to, the person are to be applied as credits on an RBA.

1.91          The RBA legislative framework will be contained in new Part IIB of the TAA53 in the following Divisions:

Division 1        Preliminary

Division 2        Running balance accounts

Division 3        Application of payments and credits against tax debts

Division 4        Miscellaneous provisions about tax debts.

Preliminary - Definitions

1.92          The definitions to support the RBA legislative framework are contained in new section 8AAZA of the TAA53. The definitions include the following concepts in relation to an RBA:

deficit                       means a balance in favour of the Commissioner as represented by tax debts which remain unpaid;

non-RBA tax debt    is a tax debt other than an RBA deficit debt;

primary tax debt      is an amount owing to the Commonwealth directly under a tax law. The 48 separate monthly debts referred to above are examples of primary tax debts, as an obligation for each would arise under a tax law. For example, the obligation to remit monthly PAYE, PPS and RPS deductions arises under section 220AAM of the ITAA36. Debts to the Commonwealth which can arise indirectly through court and insolvency proceedings are not primary debts for RBA purposes;

RBA class                refers to a class of tax debts (sales tax, PAYE, PPS and RPS) for which an RBA can be established. As explained below, an entity may have several RBAs for an RBA class of tax debts;

secondary tax          is a debt that is not a primary tax debt, such as an

debt                         amount owing under a court order;

tax debt                    includes both primary and secondary tax debts;

tax debtor               is the person or persons liable for a tax debt. In relation to an RBA, the tax debtor is the person or persons liable for the tax debts that are allocated to the RBA.

1.93          The concepts of entity and tax debtor are important in relation to the establishment of RBAs. An entity will be able to have one RBA or several RBAs established for the purposes of accounting for tax debts. There may be more than one tax debtor with an interest in an RBA. For example, where an entity is a partnership, each partner will be a tax debtor in respect of the partnership RBA deficit. Further, where an entity is a company that has several operating divisions, RBAs may be established for each division. In this case, the company’s ( tax debtor ) outstanding tax debts at a particular time would be determined by aggregating the RBA deficit balances in the company’s RBAs for each RBA class .

1.94          Where the Commissioner has established several RBAs for an entity the GIC will apply separately and be calculated independently for each RBA.

1.95          The term taxation law as already defined in section 2 of the TAA53 is used throughout the RBA amendments to mean an Act of which the Commissioner has the general administration, or regulations under such an Act. This concept is commonly used in other legislation. For example, provisions which deal with the application of credits and payments generally require the Commissioner to apply any excess payments or credits (after a specific application) against liabilities to the Commonwealth that arise under an Act of which the Commissioner has general administration. Subsection 221H(4) of the ITAA36 and section 104 and the definition of liability to the Commonwealth in subsection 136(1) of the FBTAA86 demonstrate the general approach.

1.96          A person who is a trustee in several instances is treated as a separate entity for each such instance for RBA purposes. [New section 8AAZB]

Establishment of RBAs

1.97       New section 8AAZC provides that the Commissioner may establish a system of RBAs to account for an RBA class of primary debts. For the year ending 30 June 2000, separate RBAs will be established for debts which arise under the sales tax legislation, the PAYE arrangements, the PPS and the RPS.

1.98          An RBA may be established for an entity which is defined in new section 8AAZA as including a partnership. Further, several RBAs may be established for an RBA class of primary debts (eg. PAYE tax debts) for an entity. This could occur if separate RBAs are established to account for the PAYE tax debts of several operational divisions of a large company. It may also be appropriate to establish separate RBAs for different parts of a business entity or for different periods. For example, it may be necessary to ‘rule off’ an RBA for a particular period in order to commence recovery proceedings for the RBA deficit at the end of that period. [New subsections 8AAZC(3) to (5)]

Allocation of tax debts

1.99          Where a tax debtor has only one RBA for a particular RBA class (eg. sales tax), each primary tax debt in that class must be allocated to that RBA.  Where a tax debtor has several RBAs to account for that RBA class , the primary tax debt is to be allocated between those RBAs as determined by the Commissioner. In exercising this discretion, the Commissioner may have regard to information provided by the tax debtor . The practical application of this provision will be that the RBAs established by the Commissioner to account for the divisional debts (eg. PAYE obligations) of an entity will record those divisional debts. [New subsection 8AAZD(1)]

1.100        For the purpose of allocating tax debts to an RBA, primary tax debt does not include an RBA deficit debt , GIC (or equivalent), or the penalty currently imposed on large remitters under new subsection 220AAW(2) of the ITAA36 for not paying by electronic transfer. [New subsection 8AAZD(2) and item 114]

1.101        The RBA deficit debt and GIC are excluded from this allocation provision as they are automatically reflected in (in the case of the RBA deficit debt ) or allocated to (in the case of the GIC) the RBA under new section 8AAZF . The penalty for non-electronic transfer is excluded because it does not attract GIC after the end of the 7 th day from when the payment was due to be paid electronically. [Item 114, new subsection 220AAW(2)]

Allocation of payments and credits

1.102        New section 8AAZL of the TAA53 allows the Commissioner to determine the particular tax debt or debts against which any payment in respect of a tax debt or credit under a tax law is applied. This provision will allow the application of payments and credits against all tax debts within the 4 RBA classes and all other tax debts from 1 July 1999.

1.103        Payments received for tax debts must be applied against one or more tax debts in the manner determined by the Commissioner and credits may be applied in the same way and any excess credits must be refunded. [New subsections 8AAZL(1) and (2)]

1.104        In exercising this discretion, the Commissioner is not required to take account of any instructions in respect of payments or credits being allocated. [New subsection 8AAZL(4)]

1.105        These allocation arrangements are similar to other provisions throughout the tax laws that allow the Commissioner to apply payments received against different outstanding debts. Subsection 220AAZA(8) of the ITAA36 is one such example in the recovery of PAYE, PPS and RPS debts.

1.106        The introduction of a general allocation rule for payments and credits under new section 8AAZL will obviate the need for special rules in the different recovery areas throughout the tax laws. Table 8 summarises those consequential changes.

Timing of Payments

1.107        New section 8AAZM provides that a payment in respect of a tax debt is not considered to have been made until it is received by the Commissioner or a person acting on his or her behalf. This provision will introduce clarity as to the timing of credits against an RBA. Current provisions, such as subsection 220AAM(2) of the ITAA36, which allow periods of grace in relation to the timing of payments, will be repealed. [Items 107 and 111]

1.108        Where a taxpayer becomes liable for the GIC due to extraordinary events, the Commissioner is able to exercise his discretion under new section 8AAG of the TAA53 to remit all or part of that GIC.

1.109        Where the credit is a special priority credit as defined in new subsection 8AAZA , it must be applied against the tax debtor’s HEC assessment debt or FS assessment debt (each also defined) before being applied against any of the tax debtor’s other tax debts. [New subsection 8AAZL(3)]

Allocation of payments and credits to an RBA

1.110        Under the RBA arrangements from 1 July 1999, debts in the 4 RBA classes referred to in new section 8AAZC may be allocated to their respective RBAs under new section 8AAZD .

1.111        The general allocation of payment and credit rules will apply as follows:

·         firstly, payments or credits will be applied against the tax debtor’s tax debts in a manner determined by the Commissioner; [new section 8AAZL]

·         then, for a debt which has been allocated to an RBA, the amount of the payments or credits applied against that debt will also be allocated to the relevant RBA so as to reduce the RBA deficit existing on that account.

1.112        Where a tax debt has been allocated to two or more RBAs, the payment or credit applied against that debt must be allocated between those RBAs in the same proportions in which the tax debt was allocated. [New section 8AAZE]

1.113        These application rules, in conjunction with the recovery rules relating to RBA deficits explained below, ensure that a tax debt and any related GIC, either represented as a separate debt or within an RBA deficit , is recoverable only once under the parallel debt structure proposed.

Application of the GIC on an RBA deficit

1.114        GIC is payable by the tax debtor on any RBA deficit which exists at the end of each day. Where an entity has several divisional RBAs for an RBA class of debts, GIC would be separately determined on the basis of each divisional RBA deficit. [New section 8AAZF]

1.115        As explained in the background to these amendments, GIC will also apply to the primary tax debts that are covered by an RBA, so as to maintain the existing option of recovering amounts based on the individual liabilities.

Debt recovery issues

1.116        The Commissioner’s existing recovery powers in respect of primary tax debts will continue to operate as they do now. The Commissioner will be able to continue to sue for individual primary tax debts where it is considered appropriate to do so.

1.117        However, the establishment of an RBA will enable the Commissioner, as an alternative, to recover outstanding tax debts as reflected in the RBA deficit . Hence, where the RBA is in deficit , that deficit will be a debt due and payable to the Commonwealth and may be recovered by the Commissioner. [New subsection 8AAZH(1)]

1.118        The nature of a tax debtor’s liability for an RBA tax debt is of the same nature as their liability for the primary tax debts that have been allocated to the RBA. In the case of a partnership, for example, each partner will be liable for the RBA deficit in the partnership RBA in the same way as they are liable for the individual debts allocated to that RBA. [New subsection 8AAZH(2)]

1.119        New section 8AAZG enables the Commissioner to prepare a statement for an RBA at any time, including particulars as he determines. The RBA statement , or a copy appropriately signed, will be able to be used as prima facie evidence that the RBA has been duly kept and that the amount and particulars in the statement are correct. [New section 8AAZI]

1.120        A tax debtor will continue to have all existing rights in contesting the correctness of primary tax debts . Further, in recovery proceedings the Commissioner can provide an appropriately signed certificate as prima facie evidence of any of a number of specified matters in respect of a particular RBA. These matters are that:

·         no further tax debts (other than GIC) were allocated to the RBA after the balance date shown on the RBA statement;

·         GIC, payments and credits, as specified, were allocated to the RBA;

·         the amount specified was the RBA deficit on the date of the certificate. [New section 8AAZJ]

1.121        Where the Commissioner obtains judgment in an action against a tax debtor in respect of an RBA deficit debt , the operation of common law is such that the judgment extinguishes the debt on the RBA. New section 8AAZK operates to ensure that where judgment is obtained and an amount is paid or applied (for the tax debtor ) in satisfaction of the judgment debt then any liability for a tax debt , to the extent to which that debt was allocated to the RBA, as well as the GIC attributable to that portion of the tax debt , is also extinguished.

Consequential amendments to support the RBA

1.122        Consequential amendments, in particular, in the application of payments and credits, are necessary to support the introduction of RBAs.  Table 8 summarises these consequential amendments.

Table 8:  Consequential amendments for the RBA legislation

Amendment

Legislative references

Introduction of tax debts for administrative errors by the Commissioner.

Item 351; new section 8AAZN of the TAA53

Application by the Commissioner of credits and payments against tax debts.

 

Items 4, 28, 31, 32, 33, 34, 35, 36, 52, 76, 116, 122, 124, 125, 126, 129, 144, 145, 146, 147, 150, 154, 155, 159, 160, 176, 181, 182, 183, 184, 190, 205, 207, 208, 210, 219, 220, 230, 231, 244, 253, 279, 299, 300, 302, 321, 336, 342, 343, 353, 374 and 395

 



1.123        The following diagram compares the new RBA arrangements with the current arrangements which will continue to run in parallel with the RBA.

 

Current arrangements                                                                      RBA arrangements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Notes: (1)

 

 

 



Notes:   (1)   Assumed GIC nominal rate of 13% per annum.

(2)   The daily rate for the calendar year 2000 is 0.03552% (based on 366 days).

(3)   The unpaid amount needed to give $1 of GIC for one day is $2,815.

(4)                               The liabilities shown are the outstanding debts on 30/6/2000 and 1/7/2000.

(5)                               Under current arrangements the Commissioner applies payments to the oldest tax debt first and any GIC on that debt.



 

Section 4      Regulation Impact Statement - Running balance accounts and Charges and penalties

Policy objective

1.124        The policy objectives of these measures are to:

·         replace the existing late payment penalty provisions in various Acts for which the Commissioner has the general administration with a single tax deductible GIC and to impose FTN and LRS; and

·         introduce amendments to provide 4 separate RBAs for taxation debts in relation to sales tax, PAYE, PPS and RPS for the year ending 30 June 2000. These amendments represent the first step to deliver the Tax Reform administrative arrangements and the opportunity to have one RBA for all the taxation debts of a taxpayer.

Background

Charges and penalties

1.125        Following the release of the report of the Small Business Deregulation Task Force which raised concerns at recommendation 10(b) about tax penalty arrangements, the Prime Minister announced on 24 March 1997 in his statement More Time for Business that the ATO would review all late payment penalties in the taxation law.

1.126        The GIC legislative proposal implements the Government’s decision to simplify tax penalty arrangements.

1.127        T he objective of the proposal is to replace the existing disparate late payment penalties with a new regime that is transparent, consistent, commercially based and easy to administer. A further objective is to encourage sales tax payers and withholders who cannot remit deductions by the due dates to notify the ATO of the existence of liabilities and to make sure the withholders send in their annual reconciliation statements of deductions on time.

1.128        Currently, any late payment penalties on outstanding sales tax, PAYE, PPS and RPS debts are not tax deductible. However, for income tax, only the interest component of the late payment penalties is tax deductible (currently 8.8%).  Full tax deductibility on all late payment penalties in the form of the new GIC will ensure equity for all taxpayers.

Running balance accounts

1.129        In response to recommendations by the Auditor General, and in concert with the outcomes of the Small Business Deregulation review, the ATO is re-engineering its business systems to simulate the account management practices of major financial institutions. The key business imperatives include the:

·         production of regular account statements for indebted taxpayers, analogous to commercial credit card and cheque account operation; and

·         application of a daily interest rate to overdue accounts irrespective of the nature of the debts which make up the account balance.

1.130        The focal point for the re-engineering effort is a RBA.  This is an account that accrues interest on a daily basis on any balance that is outstanding and in which payments simply serve to reduce the balance of the account, not extinguish a particular liability.  Under Tax Reform, the RBA infrastructure will be the modern, innovative foundation for managing a single tax account for many obligations of business taxpayers.

1.131        Establishing 4 separate RBAs from 1 July 1999 for debts arising under the sales tax, PAYE, PPS and RPS arrangements represents the first step to achieve that objective.

Implementation option

Charges and penalties

1.132        It is proposed to replace the late payment penalties that are currently imposed under any Act of which the Commissioner has general administration with a commercially realistic GIC. The new interest charge is to apply to all taxes, levies and charges administered by the Commissioner and will be:

·         set in accordance with the weighted average yield of the 13 week Treasury Note rate plus 8 percentage points;

·         varied to reflect quarterly movements in the 13 week Treasury Note rate;

·         calculated daily on a compounding basis; and

·         tax deductible.

1.133        These arrangements vary the rate and method of calculation of the current late payment penalties. The GIC is to apply from 1 July 1999. As a transitional arrangement, the Commissioner will continue to use his administrative discretion from 1 January 1999 to reduce existing late payment penalty rates across all taxes to a simple effective rate of 13.5% (not a compound rate). Over a 12 month period this rate achieves close parity with the compounding rate of the proposed GIC.

1.134        For the year ending 30 June 2000, the GIC will apply to debts (sales tax, PAYE, PPS and RPS) for which RBAs are being established. During that time, the Commissioner will continue to exercise his discretion to partially remit the GIC on other debts. The discretion will be exercised by applying the nominal GIC rate of the Treasury Note yield plus 8% (currently around 12.8%) on a simple interest basis.

1.135        These administrative arrangements involving a simple effective rate rather than a compounding rate will continue from 1 July 1999 for tax debts not covered by RBAs from 1 July 1999. It is anticipated that these debts (eg. income tax fringe benefits tax and debts under the new PAYG system) will come onto one account platform from 1 July 2000.

1.136        There will also be a new requirement for source deduction withholders and sales tax payers to notify the ATO of liabilities that cannot be paid by the due date. Failure to notify the correct amount will result in the imposition of an 8% per annum penalty. This FTN will replace the current penalties which range across the various types of taxes from 20% to 200% of the unremitted amount.

1.137        Complementing this will be a flat rate administrative penalty of $10 per week, up to a maximum of $200 per statement, for withholders who fail to lodge annual reconciliations statements on time. Where people fail to furnish these statements they are currently liable for penalties upon prosecution. This proposal provides a penalty as an alternative to prosecution action.

Running balance accounts

1.138        It is proposed to introduce RBAs to record all outstanding tax debts, including any outstanding GIC, for a taxpayer and provide a running balance style account statement reflecting those debts for specific periods.

1.139        Accounting for tax debts using an RBA differs from the current arrangements where the majority of tax debts are represented as specific periodic or primary component debts. For example, the annual sales tax, PAYE, PPS and RPS remittances for a monthly remitter could be represented by up to 48 separate periodic debts. When those debts are overdue, they are currently recovered as separate debts each with its own late payment penalty.

1.140        Each of the four RBAs will enable those debts to be aggregated for a particular taxpayer and so provide one record of the outstanding debt for each RBA as at a particular date. A good analogy is a credit card statement or cheque account which shows a summary of debts and payments (or credits) made for a particular period. The legislative provisions establishing the RBAs will also enable the Commissioner to recover outstanding tax debts using the RBA statement. The current recovery procedures relying on specific periodic debts will not be affected by the introduction of RBAs and, if required, will continue to be available to the Commissioner.

Assessment of impacts

1.141        The groups impacted by the new penalty regimes and the introduction of RBAs are as follows:

taxpayers - by having consistent and more easily understood late payment penalties and more equitable and commercially acceptable FTN penalties, small business taxpayers in particular will not face heavy penalties where temporary cash flow problems prevent them from remitting withheld amounts on time. During the year ending 30 June 2000, separate taxpayer RBAs will be available summarising all outstanding sales tax, PAYE, PPS and RPS debts as at a particular date;

tax agents and accountants - who will find it easier to advise clients on outstanding debts, including any late payment penalties as reflected through the GIC;

the ATO - which will utilise the new RBAs to administer the collection of outstanding tax debts more efficiently; and

the Government - which, over time, should benefit from reduced levels of outstanding debt. The RBA measure will also provide the Government with a platform for the single compliance statement foreshadowed in Tax Reform: not a new tax, a new tax system: The Howard Government’s Plan for a New Tax System.

Assessment of costs

1.142        The quantifiable compliance costs relating to these proposals are those attributable to taxpayers familiarising themselves with any new obligations that relate to them.  These costs are estimated to be:

·         New GIC and RBA:

(i)         Initial costs                   $2.0m

(ii)         Recurrent costs   Nil.

·         New FTN penalty:

(i)          Initial costs                   $3.6m

(ii)         Recurrent costs   Nil

·         New LRS penalty:

(i)          Initial costs (included above)

(ii)         Recurrent costs Nil.

1.143        The following assumptions were used in determining these costs:

·         In 1996-97 approximately 365,000 taxpayers were subject to late-payment penalties. Taxpayers will take about 30 minutes to familiarise themselves with the new account statements and the changes to penalty rates and methods of calculation.

·         The ATO will notify all 950,000 withholders and sales tax payers of their new liability notification obligations and will provide details of the new administrative penalty for failing to lodge documents by the due date. Taxpayers will take 15 minutes to familiarise themselves with the new requirements.

Assessment of benefits

1.144        The GIC and introduction of RBAs will enhance the integrity of the taxation system. Unlike the existing late payment penalties, the GIC will be easily understood by the tax community. For the first time, the penalty for failing to pay debts by the due date will apply to all taxes in the same manner. The GIC will enable the ATO to:

·         provide some administrative savings through automating interest calculations thereby reducing the number of manual penalty calculations required to be done by the ATO;

·         provide accurate and timely taxpayer account statements in the form of an RBA. This arrangement is similar to most commercially administered credit accounts; and

·         reduce future costs by $9.9m per annum from 1 July 1999. From that amount, $8.1m has already been realised from the 1998-99 financial year.

1.145        The Government will benefit in that taxpayers are more likely to reduce outstanding debts at a faster rate as a result of taxpayer RBAs detailing the rate of debt escalation and being used in the recovery process. Improvements are likely to be made in the timing of resultant collections but increases in total revenue are expected to be minimal.

1.146        Taxpayers will benefit from receiving regular periodic account statements rather than statements on an ad hoc basis, or requesting further information to explain their outstanding debts, as is currently the case. This should enable taxpayers to better manage their outstanding debts at a reduced cost. These new arrangements will particularly benefit small businesses.

1.147        The FTN penalty will benefit taxpayers to the extent that penalties will be reduced where their cash flow position does not make it possible to remit withheld amounts by the due date. All they have to do is notify the ATO of the debt. This will allow the ATO to make an arrangement for the payment of the debt and any GIC that accrues on the debt. These new arrangements will particularly benefit small businesses.

1.148        The new arrangements recognise that cash flow problems can impede payment of an amount by the due date but do not preclude a taxpayer from notifying the ATO of a liability.

Compliance

1.149        Compliance with withholding and sales tax reporting obligations is expected to improve under the proposed failure to notify regime as taxpayers will no longer have the same level of administrative penalties. The imposition of FTN penalties will be the general ATO response to incidences where withholders or sales tax payers fail to notify their liabilities by the due date. This will obviate the need for the Commissioner to institute prosecution proceedings in all but the most serious cases.

Consultation

1.150        The ATO has developed the proposed GIC penalty regime in consultation with business representative bodies and tax professionals. The benefits from providing a comprehensive statement of a taxpayer’s outstanding debts in the form of an RBA were reflected in that consultation process. The proposal received support but, in the case of the GIC, an uplift factor of lower than 8 percentage points was preferred.

Conclusion

1.151        The measures will address problems with the current penalty regimes identified by the Small Business Deregulation Task Force.

1.152        The GIC will enable:

·         a common single rate of interest for all tax types where a payment is not received by the due date; and

·         abolition of complex and punitive culpability elements that apply for the late payment of some taxes.

1.153        The failure to notify penalty will encourage withholders who cannot remit deductions by the due dates to notify the ATO of the existence of these liabilities. The changes will reduce the level of administrative penalties that are imposed on businesses that are unable to remit withheld amounts when they are due.

1.154        The introduction of an RBA will enable:

·         simpler tax accounting and collection arrangements that will position the ATO to better assist taxpayers to minimise any escalation of amounts outstanding;

·         the ATO to provide a comprehensive statement of a taxpayer’s outstanding liability at a particular point in time; and

·         an automatic calculation of the GIC on the outstanding liability. This represents a considerably more efficient process than individually calculating the GIC for each primary component debt which contributed to the RBA balance.



Table 9

Introduction of the GIC -amendments to the ITAA36

(s - section; ss - subsection)

 

Item in ss8AAB(4) table in the TAA53

Topic

Amendments to create GIC liability

Other amendments - offence (O) , remission (R) , judgment (J) , consequential (C)

1

Payment of withholding tax

Item 20; new ss128C(3)

(R) Item 21; repeal ss128C(4), Item 54; amends ss128C(4AA)

(J) Item 25; repeal ss128C(4A)

(C) Items 19, 22, 24 and 26

2

Payment of franking deficit tax

Item 37; new ss160ARU(3)

N/A

3

Payment of deficit deferral tax

Item 38; new ss160ARUA(2)

N/A

4

Payment of franking additional tax

Item 39; new ss160ARV(2)

N/A

5

Payment of franking deficit tax - amended assessments

Item 41; new paragraph 160ARW(2)(c) and item 42; new ss160ARW(3)

(C) Item 40; amends ss160ARW(1)

6

Returns by instalment taxpayers

Item 45; new s163AA

(C) Item 43, 44; amends s163A

7

Returns persons other than instalment taxpayers

Item 46; amends ss163B(1

Item 48; new ss163B(1A)

(R) Item 50; repeals ss163B(7)

(C) Items 47, 49 to 51; amends s163B, item 53 repeals s163C

 

8

Amended assessments

Items 54 to 67; amend s170AA

(R) Item 68 repeals ss170AA(11)

(C) Item 68 repeals ss170AA(9), (10),(12) and (13); items 70 and 71 amend s172

9

Payments of tax assessed

Item 72; new ss204(3)

(R) Item 73 repeals ss207(1A) and 207A(4)

(J) Item 73; repeals ss207(1B) and 207A(5)

(C) Items 74, 75, 77 to 80

10

Payment of RPS, PAYE and PPS (large remitters)

Item 101; new ss220AAE(3)

Item 113; repeals s220AAV

(O) Item 101; repeals ss220AAE(3)

(R) Item 115; repeal s220AAX

(J) Item 115; repeal s220AAY

11

Payment of RPS, PAYE and PPS deductions (medium remitters)

Item 107; new ss220AAM(3)

Item 113; repeals s220AAV

(O) Item 107; repeals ss220AAM(3)

(R) Item 115; repeals s220AAX

(J) Item 115; repeals s220AAY

12

Payment of RPS, PAYE and PPS deductions (small remitters)

Item 111; new ss220AAR(3)

Item 113; repeals s220AAV

(O) Item 111; repeals ss220AAR(3)

(R) Item 115; repeals s220AAX

(J) Item 115; repeals s220AAY

13

Non-electronic payment of RPS, PAYE and PPS deductions (large remitters)

Item 114; new s220AAW

(R) Item 115; repeals s220AAX

(J) Item 115; repeals s220AAY

14

Deductions - Reportable Payments (RPS)

Item 118; new s220AS

(R) Item 120; new s220AU

(J) Item 121; repeals s220AV

15

Payment of instalments by companies etc.

Item 130; new s221AZMAA

(C) Items 121, 127, 128; repeals s220AV, amends ss221AZK(2) and (5)

16

Underestimation of instalments by companies etc.

Item 131 to 139; amends s221AZP

(R) Item 137; repeals ss221AZP(4)

17

Deductions from salary or wages (PAYE)

Item 140; new s221EAA

(R) Item 148; amended s221N

(J) Item 149; amended s221NA

18

Payment of provisional tax or instalments of provisional tax

Item 161; new ss221YD(3)

(C) Items 152, 153; 156, 158 and 162 to 168

19

Provisional tax - income underestimated or PAYE deductions over-estimated

Item 169; new ss221YDB(1AAA)

(R) Item 175; repeals ss221YDB(4)

(C) Items 178 and 179

20

Deductions from prescribed payments (PPS)

Item 185 new s221YHH

(R) Item 187, 188; amends s221YHL

(J) Item 189; repeals s221YHLA

21

Deductions from certain payments (eg. interest, dividends)

Item 195 new ss221YHZC(3) to (5)

(C) Items 191 and 192

22

Payments of certain payments (eg. interest, dividends)

Item 201 new ss221YHZD(2)

(O) Item 200

(R) Items 202 and 203

(J) Item 204

23

Payments of withholding tax (eg. interest, dividends)

Item 214 new ss221YN(4)

(O ) Item 212

(C) Items 215 to 217

24

Payment of mining withholding tax

Item 225 new ss221ZC(4)

(J) Item 228

(C) Item 227

25

Deductions of mining withholding tax

Item 226 new ss221ZD(1B)

(see s128C) as amended

(J) Item 228

(O) Item 223

(C) Item 221

26

Deductions - Australian Film Industry Trust Fund accounts

Item 238 new ss221ZO(3)

(J) and (R) Item 241

(C) Items 236, 237, 239 and 242

27

Payments - Australian Film Industry Trust Fund accounts

Item 240 new s221ZP

(O) Item 234

(J) and (R) Item 241

28

Payments of farm management deposits

Item 245 new ss221ZXC(2)

(R) Item 252

29

Understated farm management deposits

Item 251; new ss221ZXG(2)

(R) Item 252

(C) Items 247 to 250

30

Payments of estimates of certain amounts

Item 255 new ss222AJA(3)

(O) Item 255

(C) Item 256 to 259



TABLE 10

Replacing late payment penalties with GIC -amendments to Acts other than the ITAA36

(s - section; subsection - ss)

 

Item in ss8AAB(5) table in the TAA53

Act

Amendments to create GIC liability

Consequential amendments

1

Fringe Benefits Tax Assessment Act 1986

Item 1; new s93

Items 2, 3, 6, 7, 11; amends ss94(2), 95(2) and 136(1)

2

Fringe Benefits Tax Assessment Act 1986

Item 8; amends ss112(4)

Items 9 and 10; new ss112(4A), repeals ss112(6)

3

Petroleum Resource Rent Tax Assessment Act 1987

Item 282; new ss65(1)

Items 283 to 295; amends s65

4

Petroleum Resource Rent Tax Assessment Act 1987

Item 296; new s85

Item 281; amends s2

5

Sales Tax Assessment Act 1992

Item 301; new s68

Items 297 and 298; amends s5

6

Sales Tax Assessment Act 1992

Item 304; new s91ZB

Items 297 and 298; amends s5

7

Sales Tax Assessment Act 1992

Item 306; new s91ZC

Items 297 and 298; amends s5

8

Superannuation Contributions Tax (Assessment and Collection) Act 1997

Item 311; new ss21(1)

Items 311 and 312; repeals ss21(2), (4), (5) and (6)

9

Superannuation Contributions Tax (Assessment and Collection) Act 1997

Item 313; new s22

Items 311 and 312; repeals ss21(2), (4), (5) and (6)

10

Superannuation Contributions Tax (Assessment and Collection) Act 1997

Items 315, 317, 318; new ss25(1), (2) and (3) and new s25A

Items 309, 310, 315, 317, 319, 320, 322 to 326; amends s6, 26, 27, 37, 43, repeals ss25(3A) and (4), repeals s29

11

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997

Item 329; new ss18(1)

Items 329 and 330; repeals ss18(2), (4), (5) and (6)

12

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997

Item 332; new ss21(1), (2) and (3)

Items 327, 328, 332 to 335, 337 to 341; amends s6, 22, 23, 31 and 38, repeals ss21(4) and (6), repeals s25

13

Superannuation Guarantee (Administration) Act 1992

Item 345; new s49

Item 344; amends s6

14

Taxation Administration Act 1953

Item 350; new s8AAN

N/A

15

Taxation Administration Act 1953

Item 350; new s8AAT

N/A

16

Taxation Administration Act 1953

Item 351; new s8AAZF

N/A

17

Taxation Administration Act 1953

Item 351; new s8AAZN

N/A

18

Taxation (Unpaid Company Tax) Assessment Act 1982

Item 375; new s13

Item 373; amends s3

19

Termination Payments Tax (Assessment and Collection) Act 1997

Item 378; new s13, Item 556; new ss16(1)-(3A), Item 558A, new s16A

Items 376, 377, 380, 382, 384, 385, 387 to 392; amends s6, 17, 18, 25, 28A, 31, repeals ss16(3A), (4), repeals s20

20

Termination Payments Tax (Assessment and Collection) Act 1997

Item 380; new ss16(1), (2) and (3)

Items 376, 377, 380, 382, 384, 385, 387 to 392 ; amends s6, 17, 18, 25, 28A, 31, repeals ss16(3A), (4), repeals s20

21

Tobacco Charges Assessment Act 1955

Item 394; new s18

Item 393; amends ss4(1)

22

Wool Tax (Administration) Act 1964

Item 397; new s38

Item 396; amends ss4(1)

 



C hapter 2

Measures to deal with abuse of foreign tax credits

Overview

2.1                        Schedule 2 to the Bill will amend the Income Tax Assessment Act 1936 (the ITAA36) to enable the general anti-avoidance provisions contained in Part IVA of the ITAA36 to apply to schemes designed to acquire or generate foreign tax credits, which have been entered into after 4 pm, by legal time in the Australian Capital Territory, on 13 August 1998.  The penalty provisions in Part VII of the ITAA36 will be amended to ensure penalties which currently apply to Part IVA schemes will also apply to foreign tax credit schemes.

Summary of the amendments

Purpose of the amendments

2.2                        The overall purpose of the amendments is to deny the availability of foreign tax credits which have been acquired or generated through a scheme with the sole or dominant purpose of obtaining a tax benefit. The amendments extend the application of the general anti-avoidance provisions contained in Part IVA of the ITAA36 to include schemes in relation to foreign tax credits, and brings such arrangements within the penalty tax provisions of Part VII of the ITAA36.

Date of effect

2.3                        The amendments will apply to arrangements entered into after 4 pm, by legal time in the Australian Capital Territory, on 13 August 1998.

Background to the legislation

2.4                        Australian taxpayers are subject to Australian income tax on all Australian sourced and foreign sourced income, except where a specific exemption applies.  Generally, Australian taxpayers with assessable foreign sourced income may claim a credit for tax imposed by foreign jurisdictions against their Australian income tax liability on that foreign sourced income.

2.5                        Arrangements  which promote the purported acquisition of  foreign tax credits by Australian taxpayers have come to the attention of the Australian Taxation Office. These arrangements are structured to acquire or generate foreign tax credits to be offset against tax payable on other foreign sourced income of the Australian taxpayer.

2.6                        A foreign tax credit scheme operates on the basis that foreign income is earned which gives rise to an entitlement to foreign tax credits. A scheme is entered into whereby a foreign income stream is acquired. Where the acquisition cost of the income stream is deductible, those deductions largely cancel out the foreign income received. The major portion of the foreign tax credits which relate to that foreign income stream are then available to offset tax payable on the taxpayer’s other foreign income of the same class or to carry forward any excess to future years.

2.7                        At 4 pm on 13 August 1998, the Treasurer announced that the Government would introduce measures to amend the general anti-avoidance provisions in Part IVA to counter schemes entered into after the announcement which are designed to acquire or generate foreign tax credits that can be used to shelter low-taxed foreign sourced income from Australian tax.

Explanation of the amendments

2.8            Schedule 2 to the Bill amends Part IVA of the ITAA36 so that it can be applied to the acquisition of foreign tax credit entitlements in the year in which the entitlement to the foreign tax credit arises.

2.9                        Item 1 amends subsection 177A(1), which defines certain terms for the purposes of Part IVA, to provide that a foreign tax credit has the same meaning as in Division 19 of Part III of the ITAA36. Division 19 refers to credits allowable by virtue of:

·          Divisions 18 (credits in respect of foreign tax), 18A (credits in respect of overseas tax paid on certain film income) and 18B (credits in respect of overseas tax paid on certain shipping income); or

·          the International Tax Agreements Act 1953.

2.10          Part IVA of the ITAA36 contains the general anti-avoidance provisions which confer on the Commissioner the power to cancel tax benefits when certain objective criteria set out in the Part are met.

Tax Benefit

2.11          A tax benefit is defined for the purposes of Part IVA in subsection 177C(1). Currently a tax benefit includes:

·         the non-inclusion in assessable income of an amount that, but for the scheme, might reasonably be expected to have been included;

·         a deduction being allowable that, but for the scheme, might reasonably be expected not to have been allowable; or

·         Schedule 1 to the Taxation Laws Amendment Act (No 2) 1998 proposes to apply Part IVA to a capital loss incurred in an income year that, but for the scheme, it might reasonably be expected that no capital loss would have been incurred.

2.12          Items 2 and 3 provide for the insertion of new paragraph 177C(1)(bb) to extend the definition of tax benefit to include a foreign tax credit allowable where it might reasonably be expected that, but for the scheme, no foreign tax credit would have been allowable. Broadly, a foreign tax credit is allowable where the taxpayer satisfies the criteria for entitlement to a foreign tax credit (see section 160AF) and the Commissioner determines that the credit so claimed is allowable (see section 160AI) or is deemed to have made such a determination (see section 160AJA). The taxpayer may make a self-determination as to their eligibility for a foreign tax credit and the amount (see section 160AIA). The Commissioner may, in his determination, accept the self-determination made by the taxpayer (see section 160AIB).

2.13          The amount of the ‘tax benefit’ in such a case is so much of the foreign tax credit as would not have been allowable if the scheme had not been entered into [new paragraph 177C(1)(f) inserted by Item 4

2.14          Subsection 177C(2) sets out specific exclusions from the definition of a tax benefit to which Part IVA applies. This provision prevents the application of Part IVA where a tax benefit is attributable to the making of a declaration, agreement, election, selection or choice, giving of a notice or exercising of an option under a provision of the ITAA36. Subsection 177C(2) only applies where the scheme was not entered into for the purpose of creating the conditions necessary for the making of the declaration, election, selection or choice, or the giving of a notice or exercising of an option.

2.15          Item 5 inserts new paragraph 177C(2)(d) which provides that the allowance of a foreign tax credit which is the result of the making of a declaration, agreement, election, selection or choice, or the giving of a notice or exercising of an option under a provision of an Act will not in itself constitute a tax benefit. New paragraph 177C(2)(d) only applies if the scheme was not entered into for the purpose of creating the conditions necessary for the declaration, election, etc. to be made. [New subparagraph 177C(2)(d)(ii)

2.16          Subsection 177C(3) deems the non-inclusion of an amount in assessable income or the allowance of a deduction to be attributed expressly to a declaration, election, selection, choice, giving of a notice or exercising of an option if, but for those actions, the amount would have been included in assessable income or the deduction not allowed. The provisions provide that the allowability of a foreign tax credit will be attributable to a declaration, election, selection or choice, giving of a notice or exercising of an option if the foreign tax credit would not have been allowable if those actions had not been taken. [Items 6 to 9

Cancellation of Tax Benefits

2.17          If a scheme has been entered into for the sole or dominant purpose of obtaining a tax benefit then the Commissioner is authorised by subsection 177F(1) to cancel the whole or part of the tax benefit. The Commissioner may also make compensating adjustments in favour of any taxpayer if it is fair and reasonable to do so (see subsection 177F(3)). The Commissioner is given the power to make a compensating adjustment in case a tax benefit is denied in accordance with Part IVA but, if the scheme had not been entered into, a different tax benefit would have arisen.

2.18          Items 10 and 11 enable the Commissioner to cancel a tax benefit which is referable, in whole or in part, to a foreign tax credit. Subsection 177F(1) empowers the Commissioner to take whatever action is necessary to give full and proper reconstructive effect to the determination. [New paragraph 177F(1)(d)

2.19          Where the Commissioner has made a determination under new paragraph 177F(1)(d) , new paragraph 177F(3)(d) authorises the making of a compensating adjustment in favour of a taxpayer, should the need arise. [Items 12 and 13  Where the Commissioner is of the opinion that the person concerned would have been allowed a foreign tax credit but for the scheme, an adjustment may be made to allow the whole or part of the foreign tax credit, where it is fair and reasonable to do so.

Objections

2.20          A taxpayer is able to object against a determination relating to assessable income or allowable deductions, as the determination will be reflected in the relevant notice of assessment or amended assessment. A determination in relation to a foreign tax credit is not reflected in a notice of assessment or amended assessment. However, by virtue of section 160AL, a person dissatisfied with a determination on the amount of foreign tax credits allowable may object against it, as set out in Part IVC of the Taxation Administration Act 1953 . This will extend to a determination on foreign tax credits made to give effect to a determination made under new paragraph 177F(1)(d) . [Item 11

2.21          Generally, determinations of claims for foreign tax credits made under sections 160AI and 160AJA may be amended by the Commissioner at any time within 4 years of the date of the original determination (see section 160AK). New subsection 177H(1) extends the time in which the Commissioner may amend a foreign tax credit determination from 4 years to 6 years after the date of the original foreign tax credit determination.  [Item 14   This is consistent with the current structure of Part IVA (see section 177G) which enables the Commissioner to amend an assessment within 6 years to give effect to subsection 177F(1).

2.22          Where the Commissioner has decided to make a compensating adjustment in favour of a taxpayer under new paragraph 177F(3)(d) , the Commissioner is permitted to amend a foreign tax credit determination at any time. [New subsection 177H(2) inserted by Item 14

Penalties

2.23          Where the Commissioner applies Part IVA and makes a determination under subsection 177F(1) to cancel a tax benefit and that determination was taken into account in calculating tax assessable to a taxpayer, additional tax by way of penalty is authorised by section 226. The additional tax is equal to 50% of the difference between the tax properly payable and the tax that would have been payable had Part IVA not been applied. This is reduced to 25% if it is reasonably arguable that Part IVA does not apply (see subsection 226(2)).

2.24          A foreign tax credit affects neither the taxable income of a taxpayer, nor the tax assessable on that taxable income, in a year of income. A foreign tax credit affects the amount of tax payable by the taxpayer. Item 17 inserts new section 226AA to extend the penalty provisions where the Commissioner has determined to cancel a foreign tax credit under subsection 177F(1). New section 226AA follows the same structure as section 226.

2.25          The definition of scheme section in subsection 222A(1) is amended to ensure that new section 226AA attracts the consequences of such a characterisation.  [Item 15]  Similarly, the definition of wrongful behaviour provisions is amended by item 16 so that it refers to the operative parts of new section 226AA . These amendments extend the application of sections 226B to 226F to a taxpayer affected by new section 226AA . Broadly, these sections permit the Commissioner to increase or reduce the amount of penalty tax payable depending upon the circumstances outlined in those sections, for example, in the event of disclosure or hindrance. Section 226A prevents additional tax, by way of a penalty, from being imposed where the taxpayer had applied for a private ruling. A private ruling cannot be given on questions of foreign credits and the amendment to paragraph 226A(a) by item 18 reflects this.

2.26          New subsection 226AA(1) provides for the imposition of  a penalty on the excess of the amount of foreign tax credit allowable to a taxpayer after entering into or carrying out the scheme, over the foreign tax credit amount allowable after the Commissioner has exercised the cancellation power under subsection 177F(1).

2.27          New subsection 226AA(2) provides for the imposition of a penalty where the Commissioner has exercised the cancellation power under subsection 177F(1) and makes a foreign tax credit determination that the credit is not allowable to give effect to that Part IVA determination. The figure upon which the penalty can be imposed will be the amount of the foreign tax credit that would have been allowable to the taxpayer had the Commissioner not made a determination under Part IVA.

2.28          The amount of additional tax is calculated by application of the ‘penalty percentage’ and is consistent with that which applies to other Part IVA schemes by virtue of section 226. The penalty percentage is 25% of the amounts identified in new subsections 226AA(1) and (2) where it is reasonably arguable that Part IVA does not apply. In the absence of a reasonably arguable position, the penalty percentage is 50%. [New subsection 226AA(4)

2.29          New subsection 226AA(3) treats an amount of additional tax imposed under new subsection 226AA(1) or (2) , as being in respect of a year of income. This provision provides a reference point for the timing of the imposition of the additional tax liability, as well as for objection and appeal rights. [Item 17

Application

2.30          These amendments apply in relation to schemes that were entered into after 4 pm, by legal time in the Australian Capital Territory, on 13 August 1998. [Item 19

Commencement

2.31          If proposed changes to Part IVA as a result of the denial of the artificially created losses measures (Part 2 of Schedule 1 to the Taxation Laws Amendment Act (No 2) 1998 ) have not commenced by the time that these measures receive Royal Assent, then commencement of these measures will be delayed until immediately after the denial of artificially created losses measures commence. 

 

 



C hapter 3

Technical corrections

Overview

3.1                        Schedule 3 to the Bill contains a number of technical amendments which correct drafting errors and do not involve changes of policy significance.

Summary of amendments

Purpose of the amendments

3.2                        The amendments will remedy a number of technical deficiencies in the following Acts:

·         the Income Tax Assessment Act 1936 (ITAA36);

·         the Taxation Laws Amendment Act (No.1) 1998 ;

·         the Taxation Laws Amendment (Private Health Insurance Incentives) Act 1997 ; and

·         the Social Security Legislation Amendment (Parenting and Other Measures) Act 1997 .

Date of effect

3.3                        Items 1 and 2 will commence from the date of Royal Assent. [Subclause 2(1)

3.4                        Items 3 and 4 are taken to have commenced immediately after the commencement of section 2 of the Taxation Laws Amendment Act (No.1) 1998 . [Subclause 2(5)

3.5                        Items 5 and 6 are taken to have commenced immediately after the commencement of item 6 of Schedule 2 to the Taxation Laws Amendment (Private Health Insurance Incentives) Act 1997 . [Subclause 2(6)

3.6                        Items 7 and 8 are taken to have commenced immediately after the commencement of item 322 of Schedule 1 to the Social Security Legislation Amendment (Parenting and Other Measures) Act 1997 . [Subclause 2(7)

Background to the legislation

3.7                        These amendments will correct a number of technical deficiencies that have been identified in a number of Acts.

Explanation of the amendments

3.8                        Item 1 amends paragraph 160AH(b) of the ITAA36 to correct an error in the citation of the International Tax Agreements Act 1953 .

3.9                        Item 2 amends paragraph 222A(1)(c) of the ITAA36 to correct an error in the citation of subparagraphs 226(1)(c)(i) and (ii).

3.10          Item 3 amends subsection 2(1) of the Taxation Laws Amendment Act (No.1) 1998 to remove an unnecessary reference to subsection 2(2) of that Act.

3.11          In the numbering of Taxation Laws Amendment Act (No.1) 1998 subsection 2(2) currently occurs twice. Item 4 will amend this Act to renumber the second subsection 2(2) as subsection 2(3).

3.12          Items 5 and 6 amend incorrect and duplicate section references in Schedule 2 to the Taxation Laws Amendment (Private Health Insurance Incentives) Act 1997 .

3.13          Items 7 and 8 amend incorrect paragraph references in Schedule 1 to the Social Security Legislation Amendment (Parenting and Other Measures) Act 1997 .