EXPLANATORY STATEMENT
STATUTORY RULES 1989 NO. 67
ISSUED BY THE AUTHORITY OF THE TREASURER
INCOME TAX REGULATIONS (AMENDMENT)
These regulations amend the Income Tax Regulations to prescribe the rate of 25.25 per cent for the deduction of income tax instalments by employers from certain lump sum payments of arrears of income. The new rate of deduction applies for a payment received on or after 1 May 1989.
The payments to which the prescribed rate is to apply are amounts paid in a year of income which accrued, in whole or in part, in an earlier year or years of income, and which may entitle the recipients to a rebate of tax in relation to the payments in their assessment for the year of income.
Section 27 of the Taxation Laws Amendment Act (No.5) 1988 (Act No.153 of 1988 - assented to on 26 December 1988) amended the Income Tax Assessment Act 1936 (the Act) to provide for a rebate of tax in an assessment for a year of income. The rebate of tax is available where an individual taxpayer receives arrears of income in a lump sum, and the tax that would otherwise be payable in the year of income in which the income is received exceeds the tax that would have been payable if the income had been received in the years of income in which it accrued.
Division 2 of Part VI of the Act provides for income tax to be collected from employees during a year of income by the withholding of tax instalments by employers (the PAYE system). Under subsection 221C(1) of the Act, the rate at which employers are required to deduct tax instalments from payments to employees may be prescribed by regulation. Subsection 221C(1AE) of the Act authorises the prescribing of a rate of deduction in respect of lump sum payments that are the subject of the rebate referred to above different from the rates of deduction prescribed for other salary or wages.
The amending regulations insert a new regulation which prescribes the rate of 25.25 per cent as the rate at which tax instalments are to be deducted from those payments received by an employee on or after 1 May 1989 which may entitle the recipient to the “lump sum payment in arrears” rebate. The prescribed rate will, in general, be lower than the rate of tax instalment deduction that would otherwise apply to the payment.
Notes on the amending regulations are set out below:
Commencement
Regulation 1 provides that the amending regulations shall come into operation on 1 May 1989.
Principal Regulations
Regulation 2 facilitates reference to the Income Tax Regulations
which, in the amending regulations, are referred to as the “Principal Regulations”.
Rate of deductions where eligible lump sum is included
Regulation 3 inserts new regulation 54DAAC into the Principal Regulations. Regulation 54DAAC prescribes the rate of 25.25 per cent as the rate at which tax instalment deductions are required to be made by an employer from a payment to an employee that is an eligible lump sum for the purposes of Subdivision AB of Division 17 of Part III of the Act. If a payment includes an amount other than an eligible lump sum, the prescribed rate applies only in relation to the amount of the eligible lump sum.
The term “eligible lump sum” is defined by section 159ZR of the Act, as a lump sum payment of eligible income that is assessed as income of a particular year of income but which accrued, in whole or in part, in an earlier year or years of income. The term “eligible income” is also defined in section 159ZR and lists the types of income for which an individual taxpayer may become entitled to a “lump sum payment in arrears” rebate. These include:
(a) retrospective salary or wages to the extent the payment accrued during a period more than 12 months before the date of payment;
(b) salary or wages paid to an employee on reinstatement to duty following a period of suspension to the extent the payment relates to the period of suspension;
(c) payments made by way of superannuation, pension, retiring allowance or annuity, and those made for compensation or sickness or accident pay because of a person’s incapacity for work that are calculated at a weekly or other periodical rate;
(d) Commonwealth educational and training allowances; and
(e) social security benefits and repatriation pensions or allowances.
The new regulation provides for the amount of the tax instalment deduction required to be made by an employer to be rounded to the nearest 5 cents.
The regulation does not apply to an eligible lump sum paid to an employee where the payment is subject to the operation of regulation 54DAAB. This will occur where an employee who is entitled to give an employment declaration to the employer stating his or her tax file number fails to do so. These employees will be subject to a rate of deduction at 49 or 50.25 per cent (whichever is applicable) of eligible lump sums.
Further amendments
Regulation 4 has amended the Principal Regulations by inserting references to the new regulation 54DAAC, where appropriate, in certain other regulations contained in Subdivision A of Division 2 of Part VI of the Principal Regulations that deal with the rates of tax instalment deductions from the salary or wages of employees. The affected regulations are specified in the Schedule to the amending regulations. In effect, the amendments by regulation 4 ensure that the relevant regulations do not apply to a payment of an “eligible lump sum” which is subject to tax instalment deductions in accordance with new regulation 54DAAC.