Bills Digest No. 15  1999-2000 A New Tax System (Taxation Laws Amendment) Bill (No.1) 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

A New Tax System (Taxation Laws Amendment) Bill (No.1) 1999

Date Introduced: 30 June 1999

House: House of Representatives

Portfolio: Treasury

Commencement: For the most part, the day on which the Bill receives the Royal Assent.

Purpose

The A New Tax System (Taxation Laws Amendment) Bill (No.1) 1999 (the Bill) introduces a Pay As You Go (PAYG) system. The stated objectives of PAYG are to reduce business tax compliance costs, abolish provisional tax and to give business certainty about which payments to workers are subject to withholding.

The new PAYG system comprises 2 parts:

  • a PAYG withholding system which will replace the existing pay as you earn (PAYE), prescribed payments (PPS) and reportable payments (RPS) systems, as well as six other withholding arrangements such as non-resident and TFN withholding, and
  • a PAYG instalments system which will replace the current provisional tax and company tax instalment systems.

It also includes an extension of the running balance account (RBA) arrangements so that taxpayers can receive a single statement which tallies their net tax paying or tax refund position in respect of their entire taxation liabilities.

Eleven existing payments and reporting systems will be abolished and replaced by the new PAYG.

The Bill does not include recovery, procedural and evidentiary provisions for PAYG.

Background - Tax Reform Package

On 13 August 1998 the Federal Government released proposals for reform of the Australian tax system(1) (ANTS) of which, a goods and services tax (GST) was the centrepiece.

The tax reform plan proposed to:

  • Introduce a GST which eliminates sales tax and a range of nine other indirect taxes
  • Change Commonwealth-State financial relations by providing States and Territories with an independent revenue base
  • Implement significant changes to individual marginal tax rates
  • Implement a major rationalisation of family assistance
  • Replace the various existing taxation payment and reporting systems of company tax, provisional tax, PAYE,(2) PPS(3) and RPS(4) by one quarterly tax payment system, PAYG(5)
  • Introduce a new universal business number system
  • Move toward an entity taxation system which is directed toward the elimination of tax advantages between different business structures, and
  • Simplify the imputation system and introduce refunds for excess franking credits.

On 25 November 1998, the Senate referred issues relating to the GST and the new tax system to a Select Committee and three of its Reference Committees.(6) In February 1999 the Senate Select Committee produced its First Report.(7) The three Reference Committees produced their reports in March 1999.(8) In April 1999 the Senate Select Committee released its second report(9) and shortly thereafter, its report on Commonwealth-State financial arrangements, luxury car tax and wine equalisation tax.(10)

The Government did not, however, possess sufficient numbers in the Senate to pass its tax reform plan without the support of either the Independents or the Australian Democrats. On 14 May 1999 independent Senator Brian Harradine announced that he would not support the GST. The Government elected to negotiate with the Australian Democrats to secure its passage through the Senate.

On 28 May 1999 the Prime Minister announced that an agreement had been concluded between the Government and the Australian Democrats on the GST and ANTS. The agreement retained the GST rate at 10 per cent to apply from 1 July 2000, but included changes to the GST, the State taxation and funding arrangements, compensation, the planned income tax cuts and introduced new environmental measures.

The ANTS legislation as amended, some 39 Bills, was passed by both Houses on or before 30 June 1999 and received Royal Assent on 8 July 1999 except for the Bills relating to the Commonwealth-State financial arrangements, which will continue to be debated in August 1999.

Background - Existing Taxation Reporting and Payment Systems

1. &nbspPay As You Earn (PAYE) taxation

Employees are required to pay tax on their salary or wage income progressively as they earn it. It is paid through tax instalment deductions withheld by employers at prescribed rates under the PAYE system.

The PAYE payments are not a final tax liability. The PAYE payments are an estimation of tax on current income, which is applied against the tax actually payable after the end of the financial year. If PAYE payments exceed the actual tax payable the taxpayer generally receives a refund and if the payments are less the taxpayer will have to pay the balance.

There is continuous debate dealing with the meaning of 'employee' for the purposes of the PAYE system and the position of contractors can be particularly unclear. The PAYG system proposes to remedy this problem by shifting the focus from characterising the relationship between the payer and payee, to the nature of the payment to be made.

Employers are required to remit deductions either within:

  • an average of seven days after making a deduction (large remitters: annual deductions(11) exceed $1 million)
  • 21 days after the end of the month in which the payments were deducted (medium remitters: annual deductions exceed $25,000), or
  • 21 days after the end of the quarter in which the deductions are made (small remitters: annual deductions less than $25,000).

This remittance schedule does not appear to have changed under the proposed PAYG withholding system.

2. &nbspPrescribed Payments System (PPS)

The PPS applies for collecting tax at source from certain 'prescribed payments' for work or services in specified industries, where the payments are not covered by PAYE.

The industries are building and construction, road transport, motor vehicle repairs, joinery and cabinet-making, architectural, engineering, surveying and other professional building and construction services and cleaning.

A payer must deduct tax from prescribed payments at the ordinary percentage rate of 20 per cent of the gross payment unless another rate is specified on a deduction variation certificate provided to the payer by the payee or, where no payee declaration is furnished, at the non-declaration percentage rate of 48.5 per cent.

Tax deducted at source from a prescribed payment does not represent a payee's final tax liability. The tax liability is calculated in the usual manner at the close of the financial year at which time tax deducted is allowed as credits against the tax assessed.

The remittance obligations of withholders under PPS were combined with those for RPS and PAYE under one set of arrangements from 1 July 1998. Remitters are classified as 'large', 'medium' or 'small' and the timing of making payments to the Commissioner of Taxation (Commissioner) is based on such classification. Refer to paragraph 1 above for further detail.

Householders are also required to notify the Commissioner on completion of a private construction project costing more than $10,000. Householders are not required to deduct tax from the prescribed payments that they make except where they are classed as owner-builders.

3. &nbspReportable Payments System (RPS)

The RPS requires payers to report all payments relating to transactions that are in the fishing, clothing, smash repair and fruit and vegetable industries to the Commissioner in an annual report.

There is no obligation on the payer to deduct tax from reportable payments unless the payee fails to provide the payer with its tax file number. In such cases the payer is required to deduct tax at the specified rate of 48.5 per cent and remit this amount to the Commissioner.

Tax deducted at source from a reportable payment does not represent a payee's final tax liability. The tax liability is calculated in the usual manner at the close of the financial year at which time tax deducted is allowed as credits against the tax assessed.

The annual reporting obligations apply to payers who make one or more reportable payments during a financial year. Payers must provide an annual report to the Commissioner within two months after the end of the financial year which must list each payee's name and address; the total amount of reportable payments made during the year; the total amount of tax deducted (if any) and each payee's tax file number (if quoted).

4. &nbspNon-resident and Tax File Number (TFN) withholding

4.1 TFN withholding

Subject to certain exemptions, the failure by an investor to quote a TFN in connection with an investment means that the investment body is required to withhold an amount on account of tax at the rate of 48.5 per cent.

Tax withheld does not represent a payee's final tax liability. The tax liability is calculated in the usual manner at the close of the financial year at which time tax deducted is allowed as credits against the tax assessed.

The amount is generally withheld at the time of payment and must be paid to the Commissioner within 21 days after the end of the month in which the payment was made.

The TFN withholding rules apply to various investments including interest-bearing accounts and interest-bearing deposits with a financial institution, loans to government bodies or companies (eg treasury bonds), units in a unit trust and shares in a public company.

Investment bodies must provide an array of reports to the Commissioner including annual investment income reports in relation to all investments in the investment body.

4.2 Non-resident withholding

Generally the rules governing the taxation of non-residents are that non-residents are liable to tax on all items of ordinary or statutory income which have their source in Australia and are exempt from tax on foreign source income.

Subject to exceptions, dividends, interest and royalties paid to non-residents are subject to a final withholding tax.

Therefore an amount representing tax payable is withheld from the payment and remitted to the Commissioner by the payer. Because it represents the final tax liability, amounts subject to dividend, interest or royalty withholding are excluded from the assessable income of non-residents.

The payer must remit the amount of the deduction to the Commissioner within 21 days after the end of the month in which it was made. If the payer does not withhold the correct amount, the payer is liable to pay the tax that should have been paid together the general interest charge.

5. &nbspCompany instalments

The classification of a company ( ie small, medium or large) and, therefore, the applicable payment arrangements, depend on the level of the company's likely tax liability for the year.

The following table illustrates the operation of the payment system for companies with a balance date of 30 June 1999.

Tax level of company

Payments required

Due date after end of relevant income year

'Small', ie less than $8,000 and actual tax payable for current year exceeds $300,000

100% of tax liability

1 December 1999

'Small', ie less than $8,000 and actual tax payable for the current year is less than $300,000

100% of likely tax
Balance of tax liability

15 December 1999
15 March 2000

'Medium', ie likely tax $8,000 to $300,000

25% of likely tax
25% of likely tax
25% of likely tax
Balance of tax liability

1 June 1999
1 September 1999
1 December 1999
1 March 2000

'Large', ie likely tax of more than $300,000

25% of likely tax
25% of likely tax
25% of likely tax
Balance of tax liability

1 June 1999
1 September 1999
1 December 1999
1 March 2000

Source: 1999 Australian Master Tax Guide, Table of Company Tax Payments, p 1221 with modifications to include a description of what constitutes a medium and large company in the first column of the Table.

6. &nbspProvisional tax

Basically all individuals and trustees, but not companies, are liable to pay provisional tax if they derive assessable income, not being salary or wages.

Provisional tax for a given year is the uplifted provisional tax amount of the taxpayer for the year of income. Generally this is calculated by applying current year rates plus Medicare levy to the previous year's assessable income increased by a specific percentage referred to as the provisional tax uplift factor.

The provisional tax uplift factor is set on an annual basis by reference to gross domestic product. It is 5 per cent for the 1998-99 year.

Provisional tax is not imposed for the current year if the taxpayer's income for the previous year consisted solely of salary or wages, or has a non-salary and wages component of under $1,000. However, anti-avoidance provisions levy provisional tax in instances where there is a significant shortfall in the amount of tax instalment deductions made from salary and wages.

Provisional tax is payable in a single lump sum, no later than 31 March where the previous year's provisional tax did not exceed $8,000.

Where provisional tax is not payable in a lump sum it is payable by instalments with the earliest due dates being 1 September, 1 December, 1 March and 1 June. Any balance of tax payable following the assessment is payable separately no earlier than the following 1 February.

As provisional tax is an anticipatory tax based on the assumption that a taxpayer's income will not be less than the previous year (as increased by the provisional tax uplift factor) provision is made for taxpayers to apply for a variation and recalculation of their provisional tax. This may be necessary where the taxpayer anticipates their taxable income will be more or less than the previous year. Additional tax does apply, however, for substantially underestimating taxable income by more than 15 per cent.

Main Provisions

1. &nbspSummary - PAYG

Schedule 1 introduces the pay as you go (PAYG) system of collecting income tax and other liabilities by inserting new Schedule 1 to the Taxation Administration Act 1953.

The PAYG system has two components:

  • PAYG withholding, where amounts are collected in respect of particular kinds of payments or transactions and then paid to the Commissioner, and
  • PAYG instalments which are paid directly to the Commissioner usually on a quarterly basis.

Credits are created for the amounts of income collected under PAYG and applied against tax debts. Any excess is refunded.

2. &nbspPAYG withholding

The provisions relating to PAYG withholding are contained in new Part 2-5.

The payments and transactions covered by PAYG withholding are called withholding payments.

2.1 Types of withholding payments

The types of withholding payments are summarised in a table in new section 10-5 and include:

  • a payment of salary etc to an employee
  • a payment of remuneration to a director of a company
  • a return to work payment to an individual
  • a payment under a labour hire arrangement
  • a payment of pension or annuity
  • a social security or similar payment (e.g. old age pension)
  • a compensation, sickness or accident payment
  • a payment arising from an investment where the recipient does not quote a tax file number, or in some cases, its ABN, and
  • a mining payment.

2.2 Three new events subject to arrangements

The table contains some 24 categories of withholding payments. Most of these are familiar from existing arrangements, however, there are three new categories:

  • a payment under a labour hire arrangement, or specified by regulations
  • a payment that is covered by a voluntary agreement, and
  • a payment for a supply where the recipient of the payment does not quote its ABN.

These categories have been included to avoid confusion over whether payments must be withheld from contractors and to overcome the perceived problem of taxpayers opting out of the PAYE system by becoming contractors.

In addition it seeks to impact on the cash economy by requiring withholding where an ABN is not quoted and a payment for a supply (as defined in the GST Act) is made.

2.3 Non-cash benefits treated as if payments of money had been made

If a non-cash benefit is provided instead of a payment, the provider must pay to the Commissioner the amount that would have been withheld from the payment if payments of money had been made instead of non-cash benefits (new section 14-5).

Generally this applies to the types of non-cash benefits that would be caught if they were payments of money under new Division 12, being broadly the payments referred to in paragraph 2.1 above.

It does not apply to a fringe benefit, an exempt benefit or a benefit under an employee share scheme (new subsection 14-5(3)).

2.4 Payer obligations

2.4.1 Obligation to withhold

New Division 16 contains the obligations and rights of a payer.

The primary obligation on a payer is to withhold an amount from withholding payments.

Generally, it is an offence not to withhold an amount from a payment when making the payment. (New sections 16-5 and 16-25)

Similarly a payment must be made to the Commissioner before providing a non-cash benefit. (New section 14-5)

The amount to be withheld will be contained in regulations (except for the natural resource payment). The regulations have not yet been released, however, no change is anticipated to the rate of withholding that currently applies. (New section 16-10)

2.4.2 Obligation to pay withheld amounts and payments relating to non-cash benefits to the Commissioner

The next obligation is to pay withheld amounts and amounts in respect of non-cash benefits to the Commissioner. (New section 16-70)

When payments must be made depends upon whether the payer is a large, medium or small withholder. (New sections 16-75 and 16-85)

Generally:

  • A large withholder must pay the withheld amount to the Commissioner within seven or eight days of making the payment. The amount must be paid electronically.
  • A medium withholder must pay the withheld amount for each month by the end of the 21st day of the next month. The amount may be paid electronically or by any other means approved by the Commissioner.
  • A small withholder must pay the withheld amount for each quarter by the end of the 21st day of the month after the end of that quarter. The amount may be paid electronically or by any other means approved by the Commissioner.

Special rules apply for the year 2000-01. (New section 16-120)

There are also certain information requirements that a payer must comply with, including notifying the Commissioner of amounts required to be withheld or paid. (New Subdivision 16-C)

2.5 Recipient entitlements

2.5.1 Credits

A person is entitled to a credit equal to the total of the amounts withheld from withholding payments (other than dividend, interest, royalty or mining payments) made to the person during the income year if an income tax assessment has been made or the Commissioner is satisfied that no tax is payable. (New section 18-15)

For partnerships each partner is entitled to a credit, based on the individual's interest in the net income or partnership loss that is attributable to the withholding payments. (New section 18-20)

For trusts, either the beneficiary or trustee is entitled to a credit depending upon whether an amount has been included in the assessable income of the beneficiary or trustee in respect of a share of the net income of the trust. (New section 18-25)

A person is also entitled to a credit if the person's ordinary income or statutory income(12) includes a dividend, interest or royalty and the person has borne all or part of an amount withheld. The credit is equal to that amount or part. (New section 18-30)

2.5.2 Refunds

A payer must refund to the recipient any amounts withheld in error where, within 21 days after the end of the financial year, either the payer becomes aware of the error or the recipient applies for a refund. (New section 18-65)

The amount that must be refunded becomes a debt recoverable by the recipient from the payer.

The payer can recover the amount from the Commissioner or have it offset against another amount payable.

Refunds also apply to amounts erroneously paid to the Commissioner in respect of non-cash benefits.

If the 21 day period has expired the recipient can claim a credit for the amount withheld against liability for tax, or the recipient can apply for a refund from the Commissioner if an amount was withheld or paid to the Commissioner in error. However, the refund is only given if the Commissioner is satisfied it is fair and reasonable to do so. (New section 18-70)

3. &nbspPAYG instalments

The provisions relating to PAYG instalments are contained in new Part 2-10.

3.1 When instalments are due

Under the PAYG instalment system, an entity will generally be liable to pay a PAYG instalment quarterly unless it is eligible to pay annually. (New sections 45-15 and 45-140)

Payments do not have to be made unless the Commissioner has provided an instalment rate. (New section 45-15)

Instalment rates will not be given to persons whose assessable income has always consisted wholly of withholding payments (that is, employees or contractors will not generally receive an instalment rate and therefore will not have to make any instalment payments).

Entities that are registered (or required to be registered) for GST purposes will pay income tax in four quarterly payments, usually 21 days after each quarter, at the same time as their GST. (New sections 45-55, 45-140 and 45-60)

Non-GST registered payers will also make quarterly PAYG instalments unless they have a tax liability of less than $8,000, in which case they can choose to pay annually on 21 October after the end of the income year. (New section 45-140)

The following table appears in the document Tax Reform: not a new tax, a new tax system released on 13 August 1998, at page 137 and provides a good summary of the proposed timing changes to the payment process.

Table 4.1: Simpler payment arrangements under PAYG

Ref

Business type

Size
(tax payable)

Old payment schedule

New payment
schedule

A

Individual
(small tax)

<$8,000
and in GST

Annual Payment
from 1 April

 

 

 

Quarterly
Payments

21 October

21 January

21 April

21 July

B

Individual
(small tax)

<$8,000 and
not in GST

Annual payment
from 1 April

C

Individual
(other)

>$8,000

Quarterly payments

1 September
1 December
1 March
1 June

D

Company
(small tax)

<$8,000
and in GST

Annual payment
15 December

E

Company
(small tax)

<$8,000 and
not in GST

Annual payment
15 December

F

Company
(medium tax)

$8,000-
$300,000

Quarterly payments

1 September
1 December
1 March
1 June

G

Company
(large)

>$300,000

Quarterly payments

1 September
1 December
1 March
1 June

B and E: these individuals and company taxpayers have the choice of whether to pay quarterly or remain annual payers. From 2003, their annual payment date will be aligned to 21 October.

3.2 Instalment amounts

3.2.1 Quarterly instalment amount

The quarterly instalment amount is calculated by multiplying the instalment income(13) for the quarter by the instalment rate determined by the Commissioner, or by a rate chosen by the payer and notified to the Commissioner. (New sections 45-110 and 45-205)

Penalties (being the liability to pay the general interest charge (GIC)) apply for choosing a rate that is too low. Once a rate is nominated for a particular quarter and notified to the Commissioner it cannot be revoked (but a new rate may be chosen for a later quarter). In the following income year the instalment rate will default to the latest instalment rate notified for that year by the Commissioner, unless the payer again nominates a different rate. (New sections 45-230, 45-205 and 45-210)

Individuals who are not registered for GST purposes (and have tax payable greater than $8,000) may choose to have the amount of the instalment worked out on the basis of the previous year's income tax liability adjusted by a factor which reflects annual movements in gross domestic product and notified to them by the Commissioner. This is referred to as quarterly instalments on the basis of GDP-adjusted notional tax. (New section 45-125)

3.2.2 Annual instalment amount

The amount of an annual instalment will be the instalment income for the year multiplied by the rate determined by the Commissioner, or an amount based on the pervious year's income tax liability and notified to the payer by the Commissioner or the payer's own estimate of the income tax liability for the income year (benchmark tax). Penalties (being the GIC) apply for estimating an amount of the instalment that is less than 85% of benchmark tax as calculated by the Commissioner. (New section 45-235)

3.2.3 Instalment rate

Under new section 45-320 the instalment rate is worked out by the Commissioner using the following formula:
Your notional tax divided by Base assessment instalment income multiplied by 100

Inevitably there are a series of complicated steps involved in working out notional tax (new sections 45-325, 45-330, 45-335 and 45-340). The aim is to ensure that notional tax is calculated only on instalment income and not on income from which tax has been withheld under the PAYG withholding system.

Base assessment instalment income is generally so much of a payer's assessable income from the latest assessment for the payer's most recent income year which the Commissioner determines is instalment income for the year. (New subsection 45-320(2))

4. &nbspRunning balance accounts

4.1 Background to RBAs

Running balance accounts (RBAs) were introduced, with effect from 1 July 1999, to account for and administer debts under PAYE, PPS, RPS and sales tax.

Schedule 2 amends the Taxation Administration Act 1953 (TAA 1953) to extend the RBA arrangements to account for the changes resulting from the new PAYG system.

The separate RBAs established under the existing provisions of Part IIB of the TAA 1953 for PAYE, PPS, RPA and sales tax will continue only for record keeping purposes on unpaid amounts arising before 1 July 2000. (Items 35 and 36)

4.2 RBAs for primary tax debts

Under the new proposal the Commissioner may establish an RBA for primary tax debts.(14) Separate RBAs may be established for different types of primary tax debts. (Items 8 and 10)

The Commissioner may allocate a primary tax debt to an RBA that has been established for that type of tax debt and if 2 or more have been established, for example, for different businesses conducted by the same entity, the Commissioner may allocate the debt to any one of those RBAs or between any 2 or more of those RBAs as he determines. (Item 11)

4.3 Treatment of payments, credits and RBA surpluses

Item 22 repeals the current Division 3 of Part IIB and replaces it with new Division 3 which deals with the treatment of payments, credits and RBA surpluses.

There is a change from the current rules determining the application of payments and credits against tax debts.

Current arrangements allow for amounts to be applied first against a non-RBA tax debt. Under the Bill, the Commissioner will have a choice of using 2 methods. The Commissioner may either allocate the amount first to an RBA or apply the amount against a non-RBA tax debt of the entity. (New sections 8AAZLA and 8AAZLB)

Applying an amount against an RBA will reduce the RBA deficit debt as well as the primary tax debt allocated to the RBA and the GIC that has accrued on the primary tax debt.(15)

Where the total amount of primary tax debts allocated to an RBA is greater than the payments and credits applied to the RBA, the account will have a deficit balance (RBA deficit debt). Where the applied payments and credits are greater than the primary tax debt allocated to the RBA there will be an RBA surplus. (Items 5 and 6 providing for new definitions in section 8AAZA)

Generally, the Commissioner must refund any RBA Surplus where there are no other tax debts to which any RBA surplus can be applied. Special provisions apply in respect of voluntary payments made in anticipation of a tax debt. An RBA Surplus generated in this way does not have to be refunded unless the entity requests it be refunded. (New section 8AAZLF)

Concluding Comments

1. &nbspA simplified system?

While the Bill aims to reduce compliance costs by removing uncertainty and reducing the amount of paperwork and the number of payment dates, it takes nearly 200 pages to achieve this. Some of the definitions are complex, as are the transitional provisions. It also appears to introduce a huge compliance burden on the ATO. Under PAYG the ATO will look at last year's return and issue every company with a rate that will be applied. Instalments do not have to be made unless a rate is provided by the ATO.

The introduction of PAYG comes hot on the heels of the GST and one wonders whether the rate of change has been sufficiently paced to permit all businesses to sufficiently acquaint themselves with all the new systems with which they must comply.

2. &nbspThe new tax laws and corporate cash flow

Some commentators have suggested(16) that Corporate Australia is heading for a cash flow squeeze, as the PAYG legislation brings forward $5 billion in corporate tax collection.

It is equivalent to a 3 per cent increase in the corporate tax rate for each of the 3 years over which the Federal Government has budgeted to receive the $5 billion.

Advisers are quoted as saying(17) that the more frequent and larger tax instalments implicit in PAYG, combined with the less than generous transitional provisions and monthly GST payments would result in major cashflow problems for big business.

The timing of tax instalments is an important factor in how companies finance themselves. An alteration in the timing of instalments amounts to 36 per cent of a company's margin being paid out five months earlier.

It is also likely that business will question the Government's position that the cashflow benefits of the GST will offset the earlier payment of company tax, particularly with any advantage from the GST cut by one third because of the changes to food.

3. &nbspShould the superannuation guarantee be brought into line with quarterly PAYG?

The Institute of Chartered Accountants in Australia (ICAA) has called for the Superannuation Guarantee(18) to be brought into line with the quarterly PAYG system. The call by ICAA is in response to the ATO decision to set up new project teams to focus on employers who have not been keeping up with their superannuation payments for the 1998-99 financial year.

'If the superannuation guarantee was brought into line with this regular payment schedule, there would be less likelihood of employers falling behind in their obligations and less likelihood of employees being left without retirement benefits.'(19)

4. &nbspBiggest payment timing difference

According to the Regulation Impact Statement released with the Bill, the biggest payment timing difference under the PAYG instalment system will apply to small taxpayers, particularly small companies, that register for GST. The Government anticipates that approximately 80,000 small companies will register and these companies will change from making a single payment due five and a half months after the end of the income year to quarterly payments due 21 days after the end of the quarter.

The Government also estimates that 72,000 individuals currently paying annual provisional tax will also be in this category.

5. &nbspALP position

On 23 September 1998 the Australian Labor Party released a statement entitled 'A Better Plan for Treasury' and in that document stated that:

Labor believes employers should make quarterly Superannuation Guarantee contributions to protect employee's interests. The introduction of PAYG taxation collection arrangements provide an opportunity to introduce a quarterly superannuation contribution system.

In another document released the same day entitled 'A Better Plan for Tax Reform' Labor stated that it would introduce new Australian Business Number and PAYG arrangements to streamline and unify tax payment obligations.

It also stated that Labor would provide to eligible employers a commission equal to 5 per cent of their employee-related tax remittances up to a maximum of $1,000 in the year 1999-2000 and 2.5 per cent in following years up to a maximum of $500 for complying with their tax remittance obligations. It appears as though the offer may have been limited to small businesses employing 5 people or less.

6. &nbspPAYG withholding system and consultants

It has been suggested(20) that one of the new withholding payments referred to, as 'payments under labour hire arrangements' will create difficulties for many consultants. The category applies whenever a payment is made to an individual performing work or services for a client of the payer. The obligation to withhold tax could therefore occur where:

  • a solicitor or accountant engages a barrister on behalf of a client. An amount would then have to be withheld from the payment made by the solicitor or accountant to the barrister
  • a service trust or company pays an individual for work or services to be performed for a professional partnership eg the design of a new letterhead, or
  • one company in a corporate group enters into an arrangement with an individual consultant to carry out work for other companies in the group.

The Explanatory Memorandum to the Bill at page 15 discusses the new withholding category but concentrates on the fact situation where a person is contracted by a labour hire firm and is not an employee of the labour hire firm or the end user. Apparently the Government elected not to specifically refer to labour hire arrangements to prevent avoidance arguments being raised.(21)

The result is a widely drafted provision that will catch activities outside the scope of labour hire arrangements. Indeed the provision itself provides for further payments for work or services to be specifically included by way of regulation.

Endnotes

  1. Treasurer, Tax Reform: not a new tax - a new tax system; Tax Reform Plan, 13 August 1998, Commonwealth of Australia.

  2. Pay As You Earn

  3. Prescribed Payments System

  4. Reportable Payments System

  5. Pay As You Go

  6. Senate Select Committee on A New Tax System; Senate Community Affairs References Committee; Senate Employment, Workplace Relations, Small Business and Education References Committee and Senate Environment, Communications, Information Technology and the Arts References Committee.

  7. Senate Select Committee on A New Tax System, First Report, February 1999.

  8. Senate Community Affairs References Committee, The Lucky Country Goes Begging, Report on the GST and a New Tax System, March 1999; Senate Employment, Workplace Relations, Small Business and Education References Committee, Report of the Inquiry into the GST and A New Tax System, March 1999 and Senate Environment, Communications, Information Technology and the Arts References Committee, Inquiry into the GST and a New Tax System, March 1999.

  9. Senate Select Committee on A New Tax System, Main Report, April 1999.

  10. Senate Select Committee on A New Tax System, Report on Commonwealth-State Financial Arrangements Bills, Luxury Car Tax Bills and Wine Equalisation Tax Bills, April 1999.

  11. For prescribed payments system (PPS), reportable payments system (RPS) and pay as you earn (PAYE)

  12. Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 state that assessable income includes income according to ordinary concepts, which is called ordinary income and amounts that are not ordinary income, but are included in assessable income by provisions about assessable income and are called statutory income.

  13. Instalment income is assessable ordinary income. In most circumstances it does not include statutory income.
  14. Primary tax debts are defined in section 8AAZA of the Taxation Administration Act 1953 to mean 'any amount due to the Commonwealth directly under a taxation law, including any such amount that is not yet payable.'

    For the purposes of allocation of tax debts to RBAs, 'primary tax debt' does not include general interest charge or an RBA deficit debt (a balance in favour of the Commissioner).
  15. Unpaid primary tax debts are subject to the imposition of the GIC. If there is an RBA deficit debt on an RBA to which the primary tax debt was allocated, then GIC will also be payable on that deficit. The balance of the RBA is increased to reflect the GIC payable daily.

  16. Buffini F, New tax laws could squeeze corporate cash flow, The Australian Financial Review, 2 July 1999, p 7, quoting Frank Drenth, executive director of the Corporate Tax Association and KPMG tax partner Michael Doolan.

  17. Refer to endnote 16.

  18. The superannuation guarantee scheme requires all employers to provide a prescribed minimum level of superannuation support in each financial year for each of their employees. Employers who fail to provide the minimum level of superannuation are liable to a superannuation guarantee charge, which is equivalent to the amount of the shortfall plus an interest component, and an administrative charge. The ATO redistributes the shortfall component to a complying superannuation fund etc for the benefit of the employees in respect of whom the charge was paid. (See 1999 Australian Master Tax Guide, CCH, Chapter 39, p 1604, for further detail)

  19. Brown, Media Release, ICAA, 7 July 1999

  20. Moschner M, Greenwoods & Freehills, PAYG withholding system creates problems for consultants, ATP Latest Tax News Daily, Issue 140, 22 July 1999

  21. Explanatory Memorandum to the Bill at page 15.

Contact Officer and Copyright Details

Lesley Lang
29 July 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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