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Compounding tax penalties could cripple business, says TIA

Publication date: 16 Dec 98 | Source: THE TAX INSTITUTE

The Government’s proposal to introduce a general daily compounding penalty for late payments of a range of taxes from July 1,1999 needs to be reconsidered because of the potentially damaging effects it could wreak upon taxpayers, particularly small and medium business taxpayers, according to Taxation Institute of Australia President Mr Ken Spence.

"The proposal introduced into Parliament last week contained in Taxation Laws Amendment Bill (No.5) 1998 is confusing and unfair," said Mr Spence.

"These penalties could easily result in quite modest tax amounts escalating into horrendous debts that could cripple a business in a very short time."

The Bill proposes a daily compounding tax penalty based on the daily 13 Week Treasury Note yield rate plus 8%. This contrasts with the present system where separate charges are made for interest and penalties for late payments. Mr Spence noted that in some instances, interest charged under the proposed system will be less.

"However, the use of an interest rate on a compounding basis will make calculations of such penalties very difficult for many taxpayers," Mr Spence said.

"Even the example (see over) of how to calculate the penalty to be called a "General Interest Charge"(GIC), used by the Government in its Explanatory Memorandum circulated with the Taxation Laws Amendment Bill (No.5) 1998 is complex and misleading as the example assumes that the daily 13 Week Treasury Note yield rate will remain constant."

"In fact the Bill specifies in some detail how to determine the correct rate in relation to each three month period," he said.

"The Taxation Institute of Australia calls upon the Government to reconsider the use of a daily compounding ‘GIC’ under the proposed streamlined system of penalties," Mr Spence said.

"Whilst the move to streamline the current system was imperative under the Government’s tax reform program, unless a simple equitable system was adopted, the gains hoped for the current system would be lost."

Extract from in Taxation Laws Amendment Bill (No.5) 1998 EM

1.37 A taxpayer who has made PAYE deductions of $10,000 is required to remit those deductions to the Commissioner by 21 October 1999 and fails to do so. Assuming the 13 week Treasury Note yield is 5%, the daily effective rate of interest is 13% divided by 365 or .365%. The 13% is obtained by adding 8% and 5% as provided in new subsection 8AAD (1) of the TAA53.

1.38 New subsection 220AAE (3) of the ITAA36 provides that the GIC is payable on the unpaid amount in the period that:

7 Starts at the beginning of the day the amount is due to be paid (21 October 1999); and

7 Finishes on the last day on which, at the end of the day, any of the following amounts remain unpaid:

(i) the amount;

(ii) GIC on any of that amount.

1.39 The amount of the GIC as at 21 October 1999 (as the amount remained unpaid) will be $3.65 ($10,000 x .0365%). As the GIC is worked out daily on a compounding basis, the GIC for subsequent days will be calculated on the $10,000 plus the GIC from the previous days. The outstanding debt at the end of 20 November 1999, which if repaid on 21 November 1999, will be $10,111 [ $10,000 x (1.000356)31 ]. The superscripted number used in the expression means 'to the power of' in the same way as 25 equals 32. Using compound interest terminology, an amount A, if invested at an effective interest rate of i% per period for N periods will accumulate to A x (1 + i%)N.