Variation of withholding for personal services income (15/03/2013)

Explanatory Statement

General Outline of Instrument

1. This instrument enables a variation to the amount of withholding required by a payer under the pay as you go withholding system for personal services income payments received by an entity for a certain class of cases. The withholding is required under Division 13 of Schedule 1 to the Taxation Administration Act 1953 (TAA).
2. This instrument is made by the Commissioner of Taxation (the Commissioner) pursuant to section 15-15 of Schedule 1 to the TAA.
3. This is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Date of effect

4.         The instrument commences on the day after it is registered on the Federal Register of Legislative Instruments.

What is this instrument about?

5.         The object of Division 13 of Schedule 1 to the TAA is to ensure the efficient collection of income tax (and other liabilities) on any personal services income included in an individual's assessable income under the Alienation of Personal Services Income Measures (Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997)).

6.         Under section 13-5 of Schedule 1 to the TAA, a personal services entity must pay an amount of tax to the Commissioner if it receives an alienated personal services payment that relates to an individual's personal services income; and if it receives the payment during a PAYG payment period for which it is a personal services payment remitter.

7.         In working out the amount to pay to the Commissioner under Division 13 of Schedule 1 to the TAA, the personal services entity follows a method statement in subsection 13-5(2) of Schedule 1 to the TAA.

8.         Step 2(a) of the method statement in subsection 13-5(2) of Schedule 1 to the TAA requires the personal services entity to identify amounts that are included in the individual's assessable income under section 86-15 of the ITAA 1997 and that relate to alienated personal services payments the entity received during the PAYG payment period.

9.         The amounts that are included in the individual's assessable income under section 86-15 of the ITAA 1997 are reduced by certain deductions calculated under section 86-20 of the ITAA 1997. These amounts are worked out after the end of an income year.

10.     The personal services entity therefore cannot quantify the amount to be included at Step 2(a) of the method statement in subsection 13-5(2) of Schedule 1 to the TAA during the income year as these amounts are not determined until after the end of the income year. As a result, the personal services entity will not be able to accurately determine the correct amount to pay to the Commissioner under Division 13 of Schedule 1 to the TAA.

11.     This instrument provides an alternative, practical method for estimating the net amounts that will be included in the individual’s assessable income under section 86‑15 of the ITAA 1997, after taking into account those allowable deductions calculated under section 86-20 of the ITAA 1997. 

12.     This instrument then varies to nil the amount of withholding required by a payer under the pay as you go withholding system for personal services income payments for the class of cases which satisfies the test relating to payments made to the individual.

13.     The absence of this variation would remove the legal power for payers to vary the amount to withhold from these personal services income payments. That would then cause withholding to take place when it would not be required to meet a future tax liability.

What is the effect of this instrument?

14.     The instrument is a pay as you go withholding class variation that reduces the required amount of withholding to nil for the relevant entities receiving a personal services income payment.

15.     An assessment of the compliance cost impact indicates that the impact will be minor for both implementation and on-going compliance costs. The new instrument is of a minor or machinery nature.

Background:

16.      This instrument supports the administrative policy outlined in ATO Law Administration Practice Statement PS LA 2003/6 ‘Administrative arrangements for the calculation of Alienated Personal Services Payments withholding amounts’ which sets out the circumstances in which the Commissioner of Taxation will allow a taxpayer to use administrative options for calculating withholding amounts under Division 13 in Schedule 1 to the TAA.

17.     Under the administrative arrangements, a personal services entity can satisfy their Division 13 of Schedule 1 to the TAA obligations by withholding or paying amounts under Part 2-5 of Schedule 1 to the TAA (either withholding under Division 12 of Schedule 1 to the TAA or paying under Division 13 of Schedule 1 to the TAA) that are calculated by applying the applicable withholding rate to a minimum personal services income payout measure.

Consultation:

18.     This instrument is required to support the current withholding practice set out in ATO Law Administration Practice Statement PS LA 2003/6 ‘Administrative arrangements for the calculation of Alienated Personal Services Payments withholding amounts’ for personal services income payments being made to this class of cases.

19.     No further consultation has been conducted as the affect of the instrument is to support current practices.

Erin Holland

Deputy Commissioner of Taxation

Legislative references:

Taxation Administration Act 1953

Legislative Instruments Act 2003

Human Rights (Parliamentary Scrutiny) Act 2011

Statement of Compatibility with Human Rights

This Statement is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Taxation Administration Act 1953

Variation of withholding for personal services income

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

This Legislative Instrument varies to nil the amount to withhold for the following personal services income payments:

        70% of the gross personal services income (exclusive of GST) received by the personal services entity during the current PAYG payment period

        a net personal services income percentage applied to the gross personal services income (exclusive of GST) received by the personal services entity during the current PAYG payment period.

Human rights implications

This legislative instrument does not engage any of the applicable rights or freedoms because the new instrument is of a minor or machinery nature.

Conclusion

This legislative instrument is compatible with human rights as it does not raise any human rights issues.

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Erin Holland

Deputy Commissioner of Taxation