ATO ID 2006/295: PAYG instalment rate: varying the rate upwards and the general interest charge
Date of decision: 6 October 2006
Year of income: Year ended 30 June 2006
Business line: Private Groups and High Wealth Individuals

Issue
Will the company be liable for the general interest charge (GIC) under section 45-230 of Schedule 1 to the Taxation Administration Act 1953 (TAA) if it varies its pay as you go (PAYG) instalment rate upwards and it is less than 85% of its benchmark instalment rate for the income year?

Decision
Yes. The company will be liable for the GIC under section 45-230 of Schedule 1 to the TAA if it varies its PAYG instalment rate upwards and it is less than 85% of its benchmark instalment rate for the income year. However, in the circumstances it is appropriate for the Commissioner to exercise his discretion to remit the whole of the GIC payable under section 45-240 of Schedule 1 to the TAA because it is fair and reasonable to do so.

Facts
The company was notified by the Commissioner on 28 April 2006 that its PAYG instalment rate with effect from 1 April 2006 was 0%. Previously, the company was notified by Commissioner on 28 April 2005 that its PAYG instalment rate with effect from 1 April 2005 was also 0%. On 28 April 2006, the company varied its PAYG instalment rate upwards pursuant to section 45-205 of Schedule 1 to the TAA. The company then paid PAYG instalment amounts for the March and June quarters based on the varied rate. The company's income tax return year ended 30 June 2006 is due to be lodged in February 2007. Due to a recent business decision, the company is anticipating that it will now pay a greater amount of tax when it lodges its income tax return. As a result, it is expected that its varied rate will be less than 85% of its benchmark instalment rate for the year ended 30 June 2006. The company did not vary its instalment rate downwards at any time during the year. The company is not part of a consolidated group for income tax purposes.

Reasons for decision
Summary: Under subsection 45-230(1) of Schedule 1 to the TAA, an entity is liable to pay the GIC if: The company has varied its instalment rate upwards. However its varied rate is expected to be less than 85% of its benchmark instalment rate. GIC is payable on the amount worked out using the formula in subsection 45-230(2) of Schedule 1 to the TAA: [Rate discrepancy * Your *instalment income for the variation quarter] + Credit Adjustment 'Rate discrepancy' means the difference between the varied rate and the lesser of: • the most recent instalment rate given to the entity by the Commissioner before the end of the variation quarter; and • the entity's benchmark instalment rate for that income year. 'Rate discrepancy' means the difference between the varied rate and the lesser of: The most recent instalment rate given to the company by the Commissioner before the end of the variation quarter was 0%. As the Commissioner's notified rate is 0%, this will always be less than the company's benchmark instalment rate for the income year. Therefore, the rate discrepancy will be the difference between the company's varied rate and 0%. The wording of section 45-230 of Schedule 1 to the TAA indicates that a taxpayer will be liable to GIC whenever the varied rate differs from the instalment rate worked out by the Commissioner, irrespective of whether the difference favours the taxpayer or not. As 'difference' is not defined in the TAA or the Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999, it is appropriate to consider its ordinary meaning. 'Difference' is defined as ' Mathematics the amount by which one quantity is greater or less than another' ( Macquarie Dictionary 2001 , rev. 3rd edn, The Macquarie Library Pty Ltd, NSW). Although the varied rate is greater than the Commissioner's notified rate, the 'difference' is an absolute value. The rate discrepancy is the amount by which the varied rate is greater or lesser than the Commissioner's rate of 0%. If for example the varied rate was 10%, the rate discrepancy would be 10%. Therefore, the company is liable to pay the GIC under subsection 45-230(1) of Schedule 1 to the TAA. However, the Commissioner may remit the GIC under 45-240 of Schedule 1 to the TAA. Remission of GIC The Commissioner may remit the GIC under section 45-240 of Schedule 1 to the TAA if he is satisfied that because special circumstances exist, it would be fair and reasonable to do so. A decision by the Commissioner to remit GIC because it is fair and reasonable must be considered in view of the intent of the PAYG instalment system. Not only must the exercise of the power to remit be fair to the entity concerned, it must be fair to the whole community. In other words, an entity should not be given an advantage over those taxpayers who organise their affairs to ensure they pay correct instalment liabilities. An entity will need to demonstrate that it is fair and reasonable to remit the GIC, having regard to the nature of the specific event or decision. The General Outline in the Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999 provides an overview of the intent of the PAYG instalment system. Broadly, this includes: The company was not required to vary its instalment rate but chose to do so. By varying its instalment rate upwards, the company paid greater PAYG instalments than it otherwise would have. Even though the varied rate is expected to be less than 85% of its benchmark rate, if the company had not varied its instalment rate it would not have paid any instalment amounts, as its notified rate was 0%. The company's actions were consistent with the overall intent of the PAYG instalment system. That is, it made payments that reflected its current trading and investment conditions, thereby eliminating large end-of-year tax bills and ensuring that Government had the revenue needed during the year to provide benefits and services. The company does not have an unfair advantage over other taxpayers who will pay the correct instalment liabilities. It appears that an unintended outcome of subdivision 45-G of Schedule 1 to the TAA is that an entity that only varies its rate upwards but not high enough, is liable for the GIC. It is fair and reasonable for the Commissioner to remit the GIC in these circumstances.

Legislative references: Taxation Administration Act 1953 section 3AA subsection 3AA(3) section 45-205 Subdivision 45-G subsection 45-230(1) subsection 45-230(2) section 45-240 Subdivision 45-K
Other references: Explanatory Memorandum to the A New Tax System (Pay As You Go) Bill 1999 Macquarie Dictionary 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW PS LA 2007/21
Subject references: PAYG system PAYG instalments Calculating PAYG instalments PAYG instalment rate Varying PAYG instalment rates Tax administration General interest charge Penalties Remission of penalties