Commonwealth Numbered Regulations - Explanatory Statements

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INCOME TAX AMENDMENT REGULATIONS 1998 (NO. 6) 1998 NO. 348

STATUTORY RULE NO. 348

Issued by the Authority of the Assistant Treasurer

Income Tax Assessment Act 1936

Income Tax Amendment Regulations 1998 (No. 6)

The Prescribed Payments System (PPS) is an income tax collection system that applies to certain payments for work. Subsection 221YHA(1) of the Act refers to regulations declaring that certain payments are prescribed payments for the purposes of the prescribed payments provisions (Division 3A of Part VI of the Act). Division 4 of Part 7 of the Income Tax Regulations declares certain specified payments to be prescribed payments.

In response to representations from industries currently outside the PPS, the Government announced in its 1998-99 Budget that the system would be extended to apply in cases where a payer and payee have agreed that the payment will be covered by the PPS. The PPS applies to payments made for work performed under contract and where the relationship between the payer and payee is not one of common law employment. It is generally confined to intraindustry payments and only applies in nine industries. A payer operating in one of the nine industries is required to make deductions from payments for work if the payee is not a common law employee. The payee claims a credit for the amount deducted in his or her tax return.

The Government has inserted a new regulation into Division 4 of Part 7 of the Income Tax Regulations to allow parties in non-PPS industries to enter into an agreement enabling the parties to participate in the PPS. A payment made where an agreement has been entered into will be a prescribed payment for the purpose of the PPS. Once the conditions for a prescribed payment are met, the provisions of Division 3A of Part VI of the Act will apply as for any other prescribed payment. That is, the person making the payment will be required to deduct a tax instalment from the payment and forward the instalments, together with other information, to the ATO.

Unlike the current PPS regulations. the new regulation is not restricted to payments for certain types of work carried out in specified industries. The parties to a work contract can agree to come within the system regardless of the industry in which they may operate.

A detailed explanation of the amendments is attached. The Regulations commenced on gazettal.

ATTACHMENT

DETAILED NOTES OF THE AMENDING REGULATIONS

Name of Regulations

The amending, regulations are called the Income Tax Amendment Regulations 1998 (No. 6). [Regulation 1]

Commencement

The regulations commence on gazettal. [Regulation 2]

Amendment

The regulations will extend the Prescribed Payments System (PPS) to cover payments for work where the payer and payee agree that the payments are subject to the PPS. The changes to the existing regulations are in Schedule 1 to the amending Regulations. [Regulation 3]

The substantive change to the existing law is contained in new regulation 126A which broadly declares certain payments to be prescribed payments if the parties agree that the payments should be covered by the PPS. [Item 4 of Schedule 1]

Type of payments

1

The payments that can be the subject of voluntary agreements are described in subsection 221YHA(1) of the Act. They must be under a contract that in whole or in part, involves the performance of work. Also, they must not be a payment under a common law employment contract or a payment of exempt income.

Nature of Agreement

The payer and payee must agree that payments are to be covered by the PPS. This agreement is different to the contract for work, but can be made at the same time.

There must also be satisfactory evidence of the parties' agreement that PPS apply.

Form of the Agreement

New subregulation 126A(2) sets out the conditions that the agreement must meet for payments to be prescribed payments. The central condition is that the agreement states that the payer and payee agree that the payments are to be covered by the PPS (new paragraph 126A(2)(b)). In addition, the agreement must be in writing, signed by both parties to the agreement and given to the Commissioner by the payer within 14 days of signature (new paragraphs 1.26A(2)(a), (c) and (d)).

Once the agreement has been signed by both parties, payments made after that time will be prescribed payments and the PPS obligations will apply. The Commissioner will be able to that both parties to the agreement are complying with their PPS obligations from that time, particularly the requirement to remit deductions to the Commissioner.

The Commissioner will assist those parties who wish to enter into voluntary agreements by providing a form for the required agreement. The Commissioner will produce the agreement in triplicate, retain the original and provide copies to each party to the agreement.

In practice, the parties will need to consider whether their relationship is one of common law employment and within the PAYE system. The Commissioner's form will help the parties by highlighting this issue.

Retention of the agreement

Parties to an agreement are required to each keep a copy of the agreement until 5 years after the agreement has been terminated or ceases to be in force under new paragraphs 126A(3)(a) and (b). Failure to comply with this requirement attracts a maximum penalty of 2 penalty units ($220).

Duration of the agreement

New subregulation 1.26A(6) provides that an agreement will remain in force at all times after it is signed until 1 year passes after the payer makes a prescribed payment to the payee without the payee again becoming entitled to receive a prescribed payment from the payer. This is the same period for which a PPS declaration is in force (subsection 221YHB(5) of the Act).

Termination of the agreement

New subregulation 126A(4) provides that either party may terminate the agreement by notifying the other party that they no longer wish to participate in the PPS. The payer must also notify the Commissioner that the agreement has been terminated. The notification must be in writing and be provided to the Commissioner within 14 days of the termination (new subregulation 126A(S)).

Change in name of the Regulations being amended

The name of the Regulations made under the Income Tax Assessment Act 1936 is to be changed from the Income Tax Regulations to the Income Tax Regulations 1936 (Schedule 1, Item 1). This change accords with the new naming method for Regulations.

Two types of prescribed payments

The extension of the PPS to payments under voluntary agreements means that there will be two types of prescribed payments:

* Payments for specified activities, which are set out in Regulation 126; and

* Payments under voluntary agreements, covered by new regulation 126A.

New regulation 125A, inserted by item 2 of Schedule 1, tells the reader that regulations 126 and 126A both describe prescribed payments. It also describes the relationship between the two types of payments. Parties can only have an effective voluntary agreement if they. are not covered by the rule about specified activities (new subregulation 125A(2)).

Change of name for regulation currently declaring prescribed payments

With the insertion of new regulation 126A an amendment has been made to the heading of regulation 126. Currently the heading of regulation 126 is 'payments declared to be prescribed payments'. As new regulation 126A also declares certain payments to be prescribed. the heading of regulation 126 has been amended to 'prescribed payments-specified activities'. [Item 3 of Schedule 1]