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.