The University of Sydney-    Classic Texts in Australian and International Taxation Law

III. Payment of Tax

22.89. At the present time the liability for payment of tax is discharged by means of three main systems: firstly, the tax instalment deduction system (pay-as-you-earn), which requires tax to be deducted by the employer from salary and wages; secondly, the system of provisional tax payments by individuals in respect of income that is not salary or wages, applying principally to business income and income from investments and property; and thirdly, the system of payment of tax by companies. The system applying to companies is in course of change from one basically of payment in a single lump sum in the financial year following the year of income to one of payment by four instalments spread over the later year.

22.90. There is also the system of withholding tax on interest and dividends flowing from Australia to non-residents.

Tax Instalment Deduction System

Excess Instalment Deductions

22.91. The present system of tax instalment deductions from salary or wages is well established. Deductions from salary or wages comprise over half the total collections of income tax. The system is accepted by both employees and employers and generally works satisfactorily. But there are several aspects of the system requiring examination.

22.92. The instalment deductions from salary or wages are based upon schedules in the Regulations to the Act. The main schedule provides for instalment deductions in relation to concessional allowances for dependants and for home loan interest to which a taxpayer may be entitled. An employee may formally notify his employer of any of these concessional allowances and the employer is then required to take account of this information in making instalment deductions. The main scale of instalment deductions has built into it some recognition of average concessional allowances for items other than dependants, such as superannuation contributions and medical expenses; but generally the aim is to ensure that total instalment deductions exceed the amount of final tax payable, so that for a very high percentage of salary or wage earnings without other income there are end-of-year refunds. In some cases taxpayers deliberately refrain from informing their employers of entitlements to dependant allowances and in this way voluntarily increase the amount of their refunds. Moreover, in recent years there have been indications that the application of the main schedule of instalment deductions is resulting in greater numbers of salary and wage earners with further tax payable at the end of the year: the taxpayers chiefly involved are those without dependants and with few other concessional allowances. In September 1972 an optional schedule was issued with the object of reducing the number of cases where a further tax payment has to be made after the end of the year.

22.93. It is apparent from submissions that some taxpayers favour instalment deductions being aligned more closely with their final tax liability. It has also been put to the Committee that the rapid growth of end-of-year refunds, mainly in the months of July, August and September, is leading to more pronounced seasonal movements in the economy's liquidity—movements involving costs for the whole community. The


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end-of-year refunds have grown from $507 million in 1970-71 to $772 million in 1973-74 and an estimated $930 million in 1974-75.

22.94. Under the present legislation an employee can reduce his tax instalment deductions to a figure closer to his final liability by special application to the Commissioner for a variation of the instalment deductions. In the Committee's view this procedure should be more readily available to employees and more widely applied. The present system of declaration forms supplied by employees to employers should be extended to include a number of concessional allowances in addition to those for dependants and for mortgage interest. Within the limits of a maximum yearly allowance, the extension ought at least to encompass employee superannuation and medical and hospital benefit fund contributions collected through employers, and deductible life insurance premiums where supported on the declaration form by details of policy number, name of payee, etc. as now required on return forms.

22.95. The reduction of tax instalment deductions in this fashion should be entirely optional in the manner of the present reduction for dependants: it would be solely up to the employee whether he wishes to take advantage of it. Where an employee claims reduction of instalment deductions other than for dependants, the employer would be obliged to apply an instalment scale that takes no account of concessional allowances. The implementation of a scheme of this kind will inevitably involve the Taxation Office in an expanded role in advising upon and policing the pay-as-you-earn system. But the work load on employers would not be significantly increased; and as is the case at present, employers would not be required to accept responsibility for the accuracy of the items claimed by employees.

Limited Effectiveness

22.96. The key to the effectiveness of the tax instalment deduction system is the definition of ‘salary or wages’ in the legislation. While the definition is drafted to include payments made ‘under a contract which is wholly or substantially for the labour of the person to whom the payments are made’, its interpretation has severely limited the application of tax instalment deductions. Generally the system cannot apply unless payments are made in circumstances where a relationship of employer and employee clearly exists, and difficulties arise where payments based on work performed are made to one of a group of workers operating in a loose partnership arrangement: payments of the latter type cannot be said to be substantially for the labour of the one person to whom the payment is made.

22.97. Where the relationship of employee and employer is absent, the Committee recommends that payments substantially for the labour of one person or a small group of persons be included in the system of tax deductions at source. Like salary and wages, the income would be brought to account as income in a return after the end of the income year and, on assessment, credit would be given for the tax deductions. In similar fashion the system of tax deductions at source could be extended to certain payments for goods where the payment is substantially for the labour of the seller: for example, payments to individuals for supplying animal skins or opals. The systems of tax instalment deductions employed in the United Kingdom and New Zealand contain provisions similar to what is being proposed here.

22.98. The tax deductions would have to be made at a flat rate. However, a taxpayer would need to be given an opportunity of applying to the Taxation Office for a reduced flat rate where the nature of his operations and expected net income warranted a lower rate. Similarly, where the extent and nature of a taxpayer's operations,


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the maintenance of adequate records and the lodgment of past returns give grounds for reasonable expectation of the lodgment of complete and accurate returns and the payment of tax, exemption from flat-rate deductions at source might be sought from the Commissioner.

22.99. The areas of activity to be covered by extended tax deductions at source might include the building and construction industry; primary production, including forest operations and fishing; the entertaiment industry, including professional sport; and free-lance writing. The experience of the Taxation Office in these and other fields of activity where difficulties have been experienced in collecting tax should be drawn upon in delineating the areas to be covered.

22.100. Secondary or casual employment is another area in which the system of tax instalment deductions fails to operate effectively. At present secondary or casual employment yielding $20 or less per week is not subject to instalment deductions; and a casual employee who lodges with his employer a declaration claiming reductions for dependants is freed from instalments in respect of considerably higher casual earnings. While, to an extent, earnings not subject to tax instalment deductions must be shown in Statements of Earnings supplied to employees, with a copy to the Taxation Office, the coverage is far from complete. There is thus substantial scope for tax avoidance in the case of earnings from secondary or casual employment, and the opportunity of using false names increases the scope yet further.

22.101. Where a relationship of employer and employee arises, the Committee recommends that, for tax instalment deduction purposes, a distinction be drawn between main regular employment on the one hand and all other employment— secondary or casual—on the other. The former should be subject to tax instalment deductions on the present basis, main regular employment being interpreted as employment expected to continue for more than one week and to involve working on at least four days for a minimum of 30 to 35 hours a week. Other employment ought to be subject to tax instalment deductions at a flat rate high enough to discourage working under a false name and giving strong encouragement to include the income, and the credit for tax instalment deductions, on a return of income. It would be necessary to determine an amount per week, less than the present $20, below which no tax deductions would have to be made. There would also need to be provision for an alternative to the basic flat-rate deductions: employee taxpayers taking secondary or casual employment should be able to apply to the Taxation Office for a certificate authorising, in relation to a particular employment, flat-rate instalment deductions at a lower rate or in some cases no deductions. The employee would have the option of accepting the basic flat-rate deduction with the prospect of a refund on assessment of his return of income after the end of the year or of applying to the Taxation Office for a reduced flat-rate deduction: in both instances the income and credit for instalment deductions would still have to be included in the return of income.

22.102. A third area in which the tax instalment deduction system lacks effectiveness is in relation to benefits in kind—‘fringe benefits’—given by an employer to an employee. In Chapter 9 the Committee has made recommendations on the tax treatment of non-cash benefits from employment. Briefly, the Committee recommends that the tax instalment deduction system be extended, where possible, to ensure adequate instalment deductions in respect of the assessable value of employment benefits that are to be brought to account as assessable income. The present legislation on tax instalment deductions covers meals, sustenance or the use of premises or


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quarters, in addition to salary or wages, but the statutory figures of value obviously need to be lifted.

22.103. The Committee recognises that these recommendations will, to some extent, involve employers and certain other users of labour in additional work. But if, as a result, the effectiveness of the tax system is increased, the price is worth paying.

Other Aspects

22.104. On several other aspects of the system of tax instalment deductions the Committee does not propose to make firm recommendations. One of these concerns the difficulties in establishing the true identity of employee taxpayers at the employment point. An employee, with or without the connivance of his employer, may work under a false name. The recommended system of flat-rate tax instalment deductions for secondary or casual employment is likely to reduce tax evasion in this area. But if each adult person were to be given an identifying number to be used in all employment documents and in tax instalment deduction documents and tax returns, scope for tax evasion would virtually disappear. The Committee is aware of objections to any general system of allotting numbers to members of the population for purposes of identification, though it should be pointed out that such a system is in operation in the United States.

22.105. In the Committee's view the advantages of a system of identity numbers far outweigh the disadvantages, a matter mentioned earlier in paragraph 13.14. The obvious advantage in reducing tax evasion, and thereby conveying benefits by way of potentially lower imposts upon honest taxpayers, is in itself a major factor in favour of such a system. At 30 June 1974 the total amount of unapplied credit on Group Certificates was some millions of dollars. This figure represents tax instalment deductions made by group employers and included on Group Certificates issued to employees which the Taxation Office has not been able to match with returns lodged. Clearly this figure must include a substantial sum in respect of employees working under false names where there is not a corresponding return lodged: the tax correctly payable would generally exceed the amount deducted at source.

22.106. The Committee is also aware of the likelihood, under the present system, of false claims for dependent children in dependant declaration forms furnished by employees to employers, whether the employee is working under his true name or not. By this means an employee can substantially reduce tax instalment deductions or eliminate them completely. The proposal of the Committee in Chapter 12 that concessional tax allowances for children be replaced by benefits given solely through the child endowment system will eliminate claims for children in dependant declaration forms. This is a further point in favour of handling child maintenance benefits through the expenditure side of the Budget.

22.107. Finally, the question has been raised in submissions of the Australian Government paying interest on end-of-year excess tax instalment deductions due for refund. The Taxation Office endeavours to issue these refunds to a maximum number of taxpayers as soon after the end of the income year as possible, and by the end of October well over 80 per cent of refunds of excess tax instalment deductions have normally been posted to taxpayers.

22.108. The Committee has made recommendations that would enable any taxpayer concerned at the size of his expected refund to have the amount reduced. To calculate interest entitlements in relation to end-of-year excess tax instalments would


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be extremely expensive and might result in delays in making refunds to employee taxpayers. The Committee therefore does not favour the payment of interest.

Provisional Tax System

22.109. It is by means of the provisional tax system that individual taxpayers with income from sources other than salary or wages have since 1944 been called upon to pay tax on a basis broadly similar to the pay-as-you-earn basis applicable to salary or wage earners. In a year of income in which income other than salary or wages is derived, a taxpayer pays, not earlier than 31 March in that year, an amount of provisional tax normally based on the taxable income from this source in the preceding year of income. The amount and due date for payment of provisional tax are notified with the assessment for the preceding year of income. Where prior to this due date for payment of the provisional tax, or an extended due date, a taxpayer confidently anticipates that his taxable income in the current year will be less than in the preceding year, he may by a process of self-assessment have the amount of provisional tax reduced. Penalties by way of additional tax are provided for undue underestimation of income. A taxpayer may also have the amount of provisional tax increased above the notified figure by the same self-assessment process.

22.110. Submissions to the Committee on this subject can be conveniently divided into two categories, the first advocating that the provisional tax system be abolished and the second claiming that provisional tax should be paid by instalment. At the basis of the latter claim is the view that payment by instalment is a more convenient means of satisfying a substantial liability and that payment of all provisional tax in the last quarter of the year is a major contributing factor to the pronounced seasonal movements in the liquidity of the whole economy.

22.111. In the Committee's opinion, the pay-as-you-earn character of provisional tax should not be abolished. Receipt by the Government of substantial amounts of revenue from this source in the year of derivation of the taxed income is well established and abandonment of pay-as-you-earn would severely affect revenue in the year of change. So long as pay-as-you-earn applies to salary and wage earners by instalment deduction as income is received, there seems little justification for other individual taxpayers paying tax on any substantially more advantageous basis.

22.112. In considering the payment of provisional tax by instalment, the Committee has had in mind two other relevant matters upon which submissions have been received. These are criticisms of the present requirements that apply to taxpayers carrying on business activity who find it more convenient and desirable, for a variety of reasons, to prepare accounts on a year ending on a date other than 30 June; and representations on the problems facing tax agents in meeting the program set by the Commissioner for lodgment of clients’ returns. On both these matters companies as well as provisional taxpayers are involved: the company aspects will be taken up later when the system of paying company tax is considered.

22.113. The two matters mentioned in the preceding paragraph need spelling out. Under section 18 of the Act, a person desiring to lodge returns on an accounting period ending other than on 30 June requires the approval of the Commissioner. The Commissioner takes the view that where such approval is granted the person should not receive a tax advantage, such as a deferment or delay in payment of tax, compared with a taxpayer lodging on the basis of 30 June. Special conditions are not normally attached to approval to lodge returns on an accounting period ending on say 30 September, being after 30 June, except that there must be no period of income not


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covered by returns. In such a case the person involved accepts some tax disadvantage compared with a 30 June basis because he pays tax on income derived in the last three months—July, August and September—at an earlier date.

22.114. On the other hand, where a taxpayer seeks leave to lodge returns on an accounting period ending on, say, 31 March, being before 30 June, the granting of leave without a conditional adjustment would result in the taxpayer gaining an advantage from the deferment or delayed payment of tax on income derived in the three months of April, May and June following the balance date of 31 March. The usual condition attached to the approval is agreement to pay, in conjunction with the tax due on the first period ending 31 March, a further amount equal to tax attributable to taxable income derived or estimated to be derived in the following three months of April, May and June. Subsequent returns cover a twelve-month period ending 31 March and the further amount is held by the Revenue until the person ceases to be a taxpayer or changes the balance date, when an appropriate tax adjustment is made. Few individuals, partnerships and trust estates lodge returns on an accounting period ending other than on 30 June, though quite a number of companies do. The requirement to pay the further amount has been the main subject of complaint by companies in submissions to the Committee, and the matter is taken up later. Not all companies and individuals now lodging returns on an accounting period ending before 30 June have actually paid the further amount referred to, or an amount that is realistic in the light of their current income. There are a variety of reasons for this: for example, the present accounting period may have been adopted many years ago when annual income was considerably lower than it now is.

22.115. The second matter relates to the lodgment of clients’ returns by tax agents after the general due date of 31 August in conformity with a pattern set by the Commissioner. Briefly, the pattern requires that each tax agent lodge a certain percentage of returns, differentiated by category, by various dates between 31 August and 31 March. For many years now this has been a source of contention between tax agents and the Commissioner, the contending issues being the continually growing work load falling on tax agents and the need of the Commissioner to have returns lodged in sufficient time for assessment and collection of tax within the financial year. Some relaxation in the lodgment program has been advocated in submissions.

22.116. For taxpayers deriving income other than salary or wages—provisional taxpayers is a convenient term for them—the Committee recommends that tax payments be made by instalments on a pay-as-you-earn basis involving an adaptation of the present provisional tax system. The adapted system would not apply to income other than salary or wages below a set figure where both salary or wages and other income are received by a taxpayer.

22.117. Several other countries have adopted a system of pay-as-you-earn taxation for provisional taxpayers involving payment by instalments. In the United States and Canada, provisional taxpayers pay self-calculated tax on estimated income in the year of derivation by quarterly instalments; in New Zealand and South Africa payment is by two instalments. It is usual for arrangements to differ somewhat in the case of farmers and certain other taxpayers. In some instances heavy reliance is placed on estimates of income and self-assessment of tax by the taxpayer progressively throughout the year, with penalties by way of ‘interest charges’ for undue underestimation of income or underpayment of instalments.

22.118. Australia's present provisional tax system has a number of unsatisfactory features. For one thing, it involves a degree of unfairness vis-á-vis the system of tax


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instalment deductions applying to non-provisional taxpayers. Under the instalment deduction system a salary or wage earner is forced to meet his tax liability progressively as he receives his remuneration over the year of income, whether it be paid weekly, fortnightly or monthly. In fact, under the present system a very high percentage of salary and wage earners without other income are required to pay more tax than they strictly should during the year of income and to wait for an end-of-year refund of the excess: the Committee has earlier made recommendations that will mitigate the extent of the excess payment.

22.119. On the other hand, in the income year in which he derives his income a provisional taxpayer pays an estimated amount of tax applicable to that income; but in no case is he called upon to make payment until at least nine months of that year have passed and, in the majority of cases, until nine months’ income has been derived. Published figures reveal that more than half the 1.4 million assessments issued to provisional taxpayers in 1973-74, based on 1972-73 income, were due for payment after the end of the first week in April 1974 and more than a third were due for payment in May-June 1974 and later. Thus for a substantial proportion of provisional taxpayers provisional tax relating to income derived in 1973-74 did not become payable until the second quarter of 1974. The time of issue and due date of provisional tax assessments are of course largely dictated by the date of lodgment of returns by taxpayers and by tax agents on behalf of clients in line with the program referred to in paragraph 22.115.

22.120. A further area in which a provisional taxpayer gains an advantage in tax payment over a salary or wage earner is in relation to the excess of actual assessed tax for a year of income over provisional tax. The pattern of payments in figures published by the Commissioner indicates that provisional taxpayers who in 1972-73 year paid provisional tax that fell short of the amount subsequently assessed on their returns for that year would have made up the short-fall in the second quarter of 1974 or later. The short-fall would have been paid nine to twelve months after the close of the income year to which it related and, where substantial amounts were involved, a significant breakdown in the pay-as-you-earn principle would have resulted.

22.121. The setting of a due date for payment of any short-fall and for payment of the next round of provisional tax will depend on when the taxpayer's return is lodged. Ideally, all returns of provisional taxpayers should be lodged in sufficient time to enable the issue of assessments with due dates for payment on 31 March. This is not feasible and some taxpayers obviously delay lodgment of returns in an endeavour to postpone payment day. In the 1973-74 year the Commissioner issued almost 308,000 final notices calling for returns and information and instituted legal proceedings in some 54,000 cases.

22.122. Other features of the provisional tax system are the almost complete dead-letter character of provisions requiring taxpayers who begin to derive income subject to provisional tax to take steps to pay in the first year, and the minimal use of the self-assessment procedures to increase provisional tax payments to realistic levels, particularly where major increases in income can reasonably have been anticipated. These two aspects have led to unwarranted criticism of the provisional tax system, including claims that the system calls, in some cases, for tax payments absorbing virtually all the taxable income of the year in which the assessment is received or all the taxable income of the previous year shown in the assessment. Not infrequently, of course, the tax payable is in reality the tax attributable to the income of two years.

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22.123. For a number of reasons, therefore, the Committee has come to the conclusion that a system of pay-as-you-earn should be applied to provisional taxpayers, involving tax instalments of, say, one-third on 30 November and two-thirds on 31 May in the year of derivation of income. Where the actual tax payable falls short of the provisional payments, the taxpayer would be required to make up the short-fall by 30 September following the end of the year of income. The base for the instalments would, in the first place, be the final estimated income for the immediately preceding year of income; and the Taxation Office would issue before 31 October of the financial year in which the instalments are payable a notice showing estimated income, the total estimated tax, the amounts of each instalment and the date on which it is due for payment. With each instalment payment the taxpayer would be required to adopt the base and estimated tax in the Commissioner's notice, or provide a fresh estimate of the income of the current year and adjust his payment as necessary. Lodgment of a return for the preceding year and receipt of an assessment on that return would require the taxpayer to review, and vary if necessary, his base income and instalment with his next payment. The one-third instalment on 30 November would be payable after the equivalent proportion of the income of the year had, in most instances, already been derived, and the 31 May instalment would be payable towards the end of the full year. The final opportunity for estimation, and any necessary further payment, three months after the close of the year, would permit actual income figures or a more accurate estimate of the likely outcome to be used in calculating any short-fall of tax due for payment on 30 September. An ‘interest charge’ at a commercial rate on underpayments as a result of underestimates of income of more than 20 per cent on 30 September would be necessary to encourage taxpayers to comply, including taxpayers commencing to be taxed under the provisions for whom special provisions will be necessary.

22.124. Special rules will also be necessary for taxpayers, mainly certain primary producers, who receive the bulk of their income in the second half of an income year. For such persons instalments of, say, one-third on 15 February and two-thirds on 31 May might be appropriate, with the same opportunity as other taxpayers for a final estimate and further payment after the end of the year. Taxpayers lodging on accounting periods other than 30 June would have instalment payment dates set at the same intervals following the first day of their accounting period as taxpayers lodging on the basis of 30 June are allowed from 1 July.

22.125. The Committee believes that many taxpayers will find the move to paying provisional tax by instalment convenient. At present provisional taxpayers are often called upon to pay very large amounts in one lump sum in April, May or June, though the majority of these adequately plan for the meeting of such payments. There are some, however, who fail to plan their financial affairs efficiently and consequently experience difficulties in meeting the once-a-year tax bill: for them the instalment payment plan will be of considerable assistance.

22.126. The recommended system of instalment payments by provisional taxpayers will have the effect of aligning the tax payments of these persons, numbering about a million, more closely with the tax payments of approximately 4.7 million nonprovisional taxpayers. It will reduce the undue delays that now occur in meeting payment of substantial short-falls of provisional tax. The spacing of provisional tax payments over the year will also reduce the present seasonal drain on the liquidity of the economy stemming from the concentration of payments in the last three months of a financial year. However, the system would need to be phased in over several years.

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22.127. The taxpayers affected—mainly business people and investors—should have little difficulty adapting to the recommended system, especially as the majority of them already employ tax agents. By divorcing the amount and date of payment of provisional tax from the lodgment and assessment of the return of the preceding year, the way will be paved for the Commissioner and tax agents to settle a program of return lodgments which will answer much of the present criticism in this area.

22.128. Further, the setting of patterns of payment of the instalments at a single set of intervals from the commencement of the current income year, whether the income year be July-June or some other, will facilitate leave being granted to lodge returns on an accounting period other than one ending on 30 June: there will not be the same need as now for the Commissioner to insist on the special payment to overcome any delay or deferment in payment of tax. However, it will be necessary to have provisions to overcome any advantage or disadvantage brought about by the application of progressive tax rates to the assessment of a return for less than one or more than a full year on the occasion of the change-over from a July-June income year. Where a change in the rate of tax occurs between one income year and the next, the Commissioner at present does not attempt to split the income of an accounting period ending other than on 30 June into income subject to the previous rate and income subject to the new rate. This practice should continue.

Company Tax System

22.129. Under the system of collecting company tax by quarterly payments now being phased in, most companies will in a current year pay tax assessed on the income of the preceding year by instalments on 15 August, 15 November and 15 February, with the balance to be made up on the due date shown in a notice of assessment of the income of the preceding year. Where instalments are paid, the due date for payment will not be before 30 April.

22.130. This system is expected to result in a substantial reduction in the seasonality of company tax payments and will bring company tax somewhat closer to the pay-as-you-earn basis already applying to non-provisional taxpayers and recommended for provisional taxpayers. Although this company system is not on a pay-as-you-earn basis, it has most of the advantages of the system being proposed for provisional taxpayers. However, in the case of a company with an approved tax year ending other than on 30 June, the Committee recommends that the due date for payment of the three instalments of the company tax be set in relation to the tax year and not to 30 June, though it recognises that this change will need to be phased in.

22.131. The considerations behind this recommendation are twofold. Firstly, the Committee believes that on grounds of equity companies should pay tax as nearly as possible at the same time as one another in relation to the period in which the income is derived. Secondly, the adoption of this recommendation would meet much of the present criticism of the conditions set by the Commissioner before he allows a company to adopt an accounting period, particularly one ending before 30 June. This criticism has been referred to in paragraph 22.114.

22.132. There is, in the Committee's view, no valid reason why a company with an approved accounting period ending on, say, 31 March should not be required to lodge a return and pay tax at the same time intervals in relation to 31 March as a company balancing on 30 June is required to do in relation to 30 June. If this were done, greater tax neutrality would be achieved: no special adjusting tax payments, as a condition of


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leave to lodge returns on an accounting period, would be necessary and no tax constraint would therefore apply where a company desires for sound commercial reasons to balance at a date other than 30 June. In paragraph 22.128 the view was expressed, in the context of provisional taxpayers, that there should be no change from the Commissioner's present practice where an alteration occurs in the rate of tax from one income year to the next. That view has equal application here.

22.133. Under the system of quarterly payments now being phased in, some quarterly instalments as proposed by the Committee would be payable in a different financial year from at present. For instance, a company balancing on 31 March will, under the quarterly instalment system, make a first quarterly payment on the following 15 August, whereas under the Committee's proposal the first quarterly payment would be due on 15 May. The implications for Revenue of changes in timing involving different financial years are unlikely to be particularly significant. Moreover, the greater flexibility in the availability of balance dates other than 30 June for companies would also result in a better spread of the work involved by tax agents in preparing and lodging these returns and by the Commissioner's staff in checking and assessing. Over a year it would lessen the peak work loads and be more efficient generally.

22.134. With the changes proposed for payment of provisional tax by individuals and the recently enacted measures calling for the payment of company income tax by instalments, the date of payment of tax on profits flowing through the intermediary of companies has been brought forward. However, there will continue to be a major difference in the time of payment of tax on profits earned through a company and profits earned by an individual or partnership. Profits flowing through a company will not bear tax until the year following the year of income: on the other hand, profits derived by an individual or by him through a partnership fall to be taxed, by the operation of the provisional tax procedures, mainly in the year in which they are earned.

22.135. A provisional taxpayer with 1973–74 taxable income from a business would, under the provisional tax system proposed by the Committee, have substantially paid his tax liability by instalments on 30 November 1973 and 31 May 1974 with a final payment on 30 September 1974. The September payment would have been sufficient to bring the total payments to within 80 per cent of final liability or be subject to an interest charge. If that business had been conducted as a private company in that year it may be said that the tax on the ‘owners’ salary would be paid in the 1973–74 year on a true pay-as-you-earn basis but the tax on the balance of income taxed to the company would be paid by quarterly payments commencing 15 August 1974 with the final payment after 30 April 1975. Tax on dividends paid out of the 1973–74 profits would, under the provisional tax system, be substantially paid in the 1974–75 year. The financial advantage to a person operating through a company being able to hold and use funds which will ultimately go in payment of tax, is evident.

22.136. However, the difference in timing of payment of tax by companies should not be considered in isolation: there is the closely related fact that company profits are currently being taxed in the hands of the company and, to the extent they are subsequently distributed, also in the hands of the shareholders as explained in Chapter 16. This has the effect, for taxpayers who are on marginal rates somewhat less than the maximum, that more tax is eventually paid than would be paid if the profits had


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been derived as a sole trader or in partnership. The recommendation of the Committee in Chapter 16 for an imputation system will mitigate this greater liability depending on the extent of imputation given.

22.137. In theory, a trading profit earned through a company should fall to be taxed no later than a similar profit derived from trading by a sole trader. While the Committee favours a pay-as-you-earn system of tax payments by companies, the Committee also appreciates the difficulties of changing from the present system to a complete pay-as-you-earn basis.

22.138. Companies are at present still involved in the phasing in of the earlier payment of tax which arises from the system of payment by instalments. Proposals relating to the date of payment of tax by companies which have adopted a substituted accounting period, made in paragraph 22.130, will, if adopted, result in bringing forward the date on which tax is paid for some of them. Moreover, as yet, no imputation credit is available to shareholders. The Committee does not propose the introduction at the present time of a system to bring companies on to a basis more uniform with that recommended earlier in this chapter for provisional taxpayers. It may, however, become appropriate at a later date to give consideration to such a proposal. The method of introduction should, in any event, involve phasing in over a period of, say, ten years. This was the method of introduction of a system of pay-as-you-earn payment of tax by companies recommended by the Spooner Committee in 1951.

Withholding Tax

22.139. In Chapter 17 the Committee has considered the taxing of income flowing overseas, including interest and dividends subject to withholding tax. Here, brief consideration is given to the question of paying withholding tax on small amounts of interest and dividends. It has been put to the Committee that the costs of collecting withholding tax on trifling amounts of interest are out of all proportion to the tax collected. A survey carried out by the member banks of the Australian Bankers’ Association in 1971 showed that withholding tax of one dollar or less on bank interest accounted for 2.6 per cent of total collections of interest withholding tax by the banks and 0.1 per cent of total Commonwealth receipts from interest withholding tax. Some countries require withholding tax to be deducted only when the annual interest exceeds $10.

22.140. Freeing of small amounts from withholding tax raises the possibility of tax avoidance by the splitting of investments and by the splitting of payment of dividends and interest. The advantage to be gained from splitting of investments—several investments in distinct companies or borrowers—may not be significant. But splitting of payment—several payments of dividends or interest in the course of a year by the same company or borrower—could involve significant tax advantage, unless it was provided that payments would be free of tax only when they did not exceed in aggregate an annual total amount. This total amount, in the Committee's view, would need to be set at a modest figure, say no more than $20.

22.141. The Committee sees no objection to freeing small amounts from withholding tax if a limit of this kind on total annual payments is imposed.