Legislation has recently been introduced which may require taxpayers who currently pay PAYG instalments on a quarterly basis to pay them monthly. The legislation received Royal Assent on 29 June 2013 and comes into effect on 1 January 2014 at the earliest but has staggered introduction dates depending on the turnover of the particular entity concerned.
Specifically, monthly PAYG instalments will arise:
- From 1 January 2014 for companies with a turnover of $1 billion or more;
- From 1 January 2015 for companies with a turnover of $100 million or more;
- From 1 January 2016 for companies with a turnover of $20 million or more and for all other entities, including superannuation funds, trusts and individuals with a turnover of $1 billion or more; and
- From 1 January 2017 for all other entities, including companies, superannuation funds, trusts and individuals with a turnover of $20 million or more
The rules apply on an entity by entity basis i.e. there are no grouping rules which aggregate turnover of related entities (unless they are a tax consolidated group). There are, however, anti-avoidance provisions which could potentially apply if there is a scheme to get a tax benefit in respect to PAYG instalments paid. Prima facie, these could be applied if multiple entities were set up to keep below the relevant thresholds. Where the anti-avoidance rules are invoked a general interest charge is applied to the tax benefit.
Changing from a quarterly PAYG instalment payer to a monthly PAYG instalment payer
To determine whether an entity is required to change from a quarterly PAYG instalment payer to a monthly PAYG instalment payer the entity is required to test its threshold amount at a particular time, referred to in the legislation as the “monthly payer requirement test day” (“MPR test day”). The threshold tested is the “base assessment instalment income” which is essentially the assessable income for the most recently lodged tax return on the MPR test day.
Generally, the Commissioner of Taxation will provide the threshold amount and advise the entity from when the monthly PAYG instalment requirement applies.
In the phase in period, testing for whether an entity meets the turnover test first occurs on 1 October in the year preceding the relevant introduction date. While technically all entities need to test on 1 October 2013, 1 October 2014, 1 October 2015 and 1 October 2016, practically each entity will know what income level applies to them and when they need to test in the phase in period.
After the phase in period, testing will occur on the first day of the 10th month of the preceding income year. For example, the test day for the 30 June 2018 income year is 1 April 2017, the test day for the 31 December 2018 income year (a substituted accounting period) is 1 October 2017. Therefore, if an entity did not come within the monthly PAYG instalment rules within the phase in period it will be included at a later time if a particular threshold is met at the later time. The monthly PAYG instalment will commence from the start of the tax year following the relevant MPR test day.
Where an entity has not previously paid PAYG instalments the MPR test day is the last day of the month in which the Commissioner has given the entity an instalment rate and monthly instalments will commence in the following month.
Where an entity is an entity to which the Taxation of Financial Arrangements applies (“a TOFA entity”) it may be required to adjust the threshold amount provided by the Commissioner of Taxation to include gross income from their financial arrangements rather than net amounts and notify the Commissioner accordingly.
Calculating the monthly instalment
The monthly instalment will be calculated by multiplying the income for the month by the instalment rate as advised by the Australian Taxation Office. As is currently the case, the rate can be varied if circumstances permit.
An entity will continue to be liable to monthly PAYG instalments until it no longer meets the threshold test and gives notice to the Commissioner of Taxation to this effect. Once the notice is given to the Commissioner the monthly requirement will continue until the start of the next income year.
These changes may impact your cash flow and the funding of your tax payments. Should you have any questions or require any assistance in determining when these changes will apply to you please contact your Blaze Acumen adviser.