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
"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.