Chapter 2 - Provisional tax uplift factor
2.1 The provisional tax uplift factor (PTUF) is
the amount by which the previous year's taxable income of an unincorporated
business is increased for the purposes of calculating provisional tax in that
business's rent year of income.
2.2 It is necessary to bear in mind that the
provisional tax uplift factor (PTUF) is essentially a method of bringing
forward anticipated tax receipts. It is therefore a timing device and not an
impost. The amount of for which provisional tax payers are liable at the end
of the day will not affected in dollar terms by the PTUF, regardless of its
quantum or form. What will be affected is when that money will
be paid.
2.3 The PTUF was introduced in 1980-81 at 7.5
per cent, rose to 12 cent, before being installed in section 221YA(1) of the
ITAA at a default rate of 10 percent, subject to Parliamentary discretion.
Parliament set the PTUF at 8 per cent for the two previous financial years.
The Government is proposing that for 1995196, it will again be 8 per cent.
2.4 Should a provisional taxpayer consider that
his/her taxable income not increase by the amount predicated in the
PTUF, or that his/her taxable income will decline during the remainder
of the forthcoming year, taxpayer has the option of lodging an application to
vary provisional If that variation understates actual income by more
than 15 per cent, then the onus is on the taxpayer to make a case for a
claim as to why that underestimation occurred, otherwise they are subject to
penalties.
Rationale
2.5 The rationale for the PTUF is based on the
expected average annual growth in income subject to provisional tax over the following
!rat years. The joint submission by the Australian Tax Office and the Treasury
states in relation to the PTUF that:
The
level of aggregate income that should be subject to provisional tax is
difficult to predict with accuracy. For this reason, it is preferable not to
place undue emphasis on a specific forecast or estimate in setting the
provisional tax uplift factor. Rather the [PTUFI should, on average, over time
and across taxpayers, represent a reasonable reflection of the growth in income
of provisional taxpayers. The 8 per cent uplift factor for 1994-95 has regard
to the expected average annual rate of growth in income subject to provisional
tax over the next several years...
2.6 The
Treasury advised the Committee of the factors that were taken into account
in formulating the PTUF for 1995-96, as follows:
It is done on the estimates of income growth for the major items
fitting into that category. Affecting that are a range of issues. Inflation
is an important one but it is by no means the sole influence. If 1 can look at
the three major categories that we have already spoken of [property income
(including interest), other business, primary production] 1 can give you some
general indications of the factors influencing those.
As it currently stands, income from
property and from other business are the two major elements, with primary
production accounting for about 10 per cent; so the first two categories
account for about 45 per cent [each] of total provisional income at the
moment.
Within property income, the major element there would be interest
and non-dwelling rent income, followed by dividends and rental income. If you
think of the components which are influencing that, interest rates and growth
in the stock of assets would be the prime determinants of interest receipts
there.
For the normal situation, you would have growth in assets which
would be more in line with nominal growth in the economy than simply
inflation. Interest receipts represent an element of real return relative to
inflation so normally interest levels are significantly in excess of inflation
as well. If you look at current experience, interest receipts are growing at
something like 17 per cent in the year to December - the latest information we
have - well in excess of inflation rates.
If we think in terms of the other major
category, other business income - this is primarily the receipts that
businesses obtain - in general one would think of that again as growing in line
with nominal GDP growth adjusted for any movements in real earnings relative to
productivity growth. In the year to December, which again is the latest
information we have, that sector grew at around a little under eight per cent.
When you think
in terms of projected real rates of growth in the economy of around 33/4 per
cent and an inflation rate of four per cent, and with real earnings projected
to move in line with productivity - so there is no significant shift in wage or
profit shares - then the earnings of the other business sector would be
expected to approximate nominal income growth significantly in excess of the
inflation rate.
In the area you have already mentioned as being a particularly
volatile one, the primary production sector, we have had very marked declines
in income in the year just coming to an end as a result of the drought. With
projections of the drought easing successively over the next couple of years,
volume growth should be exceptionally strong. With prices projected to rise
somewhat in excess of the general inflation rate, the projected income growth
there is particularly large,
So taking these three sectors together, certainly the growth in each of
them should be in excess of inflation and the aggregate growth is in line with
the uplift factor as suggested.'
Efficacy of the
PTUF
2.7 By Treasury's own admission,
outcomes have not matched predictions:
If you looked at
the actual data, you would find that in a lot of cases their provisional tax
uplift factor, compared to what actually happened, varied quite a lot. On that
basis, the record is not good.
2.8 Looking at the actual data supplied by the
Treasury, it reveals little if any correlation between the PTUF and the actual
annual changes in taxable income for all provisional income earners. 3 Table
2.1 displays estimates by the Treasury, based on National Accounts data, about
the annual change in income subject to provisional tax compared to the PTUF
used for each year. Table 2.2 SHOWS the picture when ATO figures, based
on taxpayer return data for taxable individuals, are used. When these figures
were tested to see how the outcomes (all income subject to provisional tax)
fitted the predictions (the PTUFS), it was found that the predictive value of
the model used to calculate the PTUFs was poor and was worse than if
a constant PTUF had been used for every year.
Table 2.1: Treasury estimates based on National
Accounts data.
Types
of Income Subject to Provisional Tax (percent annual change)
|
Year
|
PTUF
|
All Income
|
Property
(including
interest)
|
Other
Business
|
Primary
Production
|
|
1988-89
|
12%
|
15.9%
|
21.8%
|
12.9%
|
2.0%
|
|
1989-90
|
10% (a)
|
10.2%
|
18.2%
|
1.4%
|
2.1%
|
|
1990-91
|
10%
|
-4.3%
|
1.6%
|
-1.25
|
-45.1%
|
|
1991-92
|
10%
|
-2.9%
|
-14.5%
|
12.4%
|
23.5%
|
|
1992-93
|
8%
|
0.9%
|
-10.8%
|
14.3%
|
11.0%
|
|
1993-94
|
8%
|
5.5%
|
-0.3%
|
7.8%
|
25.5%
|
Table 2.2: ATO data based on taxpayer return data
for taxable individuals.
Types of Income Subject to Provisional Tax (percent annual charge)
|
Year
|
PTUF
|
All Income
|
Property
(including
interest)
|
Other
Business
|
Primary
Production
|
|
1988-89
|
12%
|
25.2%
|
32.2%
|
17.7%
|
16.5%
|
|
1989-90
|
10% (a)
|
-1.1%
|
-2.2%
|
1.1%
|
-3.7%
|
|
1990-91
|
10%
|
-11.0%
|
-6.3%
|
-6.0%
|
-59.2%
|
|
1991-92
|
10%
|
-7.8%
|
-18.1%
|
6.8%
|
-0.1%
|
|
1992-93
|
8%
|
1.5%
|
-8.5%
|
8.6%
|
44.7%
|
(a) Uplift factor not used in 1989-90 because the
amending legislation lapsed.
2.9 Whichever figures are used, it
is apparent that the annual fluctuations in the income of the provisional
income tax paying population of over 1.5 million taxpayers are substantial,
even when averaged across the entire sector. When the figures are broadly
broken down into the income types, these fluctuations are even more
pronounced. They would also be reflected at the level of individual small
businesses.
2.10 The Committee acknowledges the
thoroughness employed by Treasury in attempting to take into account the widest
range of relevant considerations when formulating a PTUF, but points out the subjectiveness
of the process as evidenced by the need to utilise indicators such as long
range weather forecasting:
With projections of the drought easing successively over the next
couple of years, volume growth in the primary production sector should be
exceptionally strong.
2.11 The figures in Tables 2.1 and 2.2
demonstrate the underlying premise of continued annual growth in provisional
incomes to be simplistic, even on the broadest average. Clearly, even during
the limited lumber of years represented in the Tables, there have been one or
more bears of growth and one or more years of contraction, both on an aggregate
and sectoral basis. Furthermore, the volatility manifest across and
within the provisional income sector casts considerable doubt upon the
appropriateness of the averaging process implicit in the PTUF, as currently
applied.
2.12 These doubts are reinforced
by the Treasury's exposition of the factors which are taken into account in
calculating the PTUF (paragraph 2.6). The provisional taxpaying sector
is by no means a uniform group of taxpayers. The only commonality within the
sector is that they are unincorporated recipients of business income.
2.13 Treasury pointed out that an 8 per
cent PTUF was below the growth in income of a number of provisional taxpayers
who:
are not required
to vary upwards when their incomes are rising significant
2.14 The
recommended remedy for provisional taxpayers whose growth
c+
in income was expected to be less than 8 per
cent was to lodge a request to vary their provisional tax instalments. The
Committee received a considerable amount of evidence concerning the usefulness
of this facility and has found it to be deficient in its current form.
2.15 Firstly, many provisional
taxpayers had fluctuating incomes which were very difficult to predict more
than a few weeks ahead, let alone most of a year, if a taxpayer wishes to lodge
a variation early in their accounting period. Consequently, as pointed out in
a number of submissions and in evidence, many provisional taxpayers would not
be in a position to lodge a request to vary until the final quarter of their
accounting period because the 15 per cent margin of understatement allowed
under the legislation was far too narrow for these taxpayers. As demonstrated
in the case study of provisional tax (Chapter 1), this would very likely create
considerable hardship for taxpayers who suffer reductions in income, as their
provisional tax assessment may be based on what may well be much higher levels
of income from a previous year.
2.16 About 12 per cent
of provisional taxpayers lodge variations although doing so may necessitate
additional accountancy fees. This places an extra burden on a taxpayer
who is already likely to be in tighter financial circumstances.
2.17 The ATO, in evidence, stated that
a provisional taxpayer who was expecting a growth in income greater than 8 per
cent was not required to lodge a variation, although they were technically
eligible to do so. It was extremely rare' for a variation to be lodged in
these circumstances. There is no obvious logic behind this apparent laissez
fare attitude, as a provisional taxpayer who did not lodge a request for a
variation when they anticipated an upturn in their income, was implicitly
understating their income. These taxpayers therefore gained a twofold
advantage - firstly, by not incurring accounting costs associated with lodging
a variation, and secondly, by deferring tax on the extra income until much
later. In contrast, the provisional taxpayer who had lodged a variation
because of an expectation of reduced income, may well be placed at a twofold
disadvantage: accounting costs associated with lodging a variation, and a
penalty if their actual income is understated by more than 15 per cent.
2.18 This is clearly unfair to businesses
experiencing declining incomes. However, the Committee does not believe that
this should be addressed by requiring variations to be lodged by provisional
taxpayers expecting higher than PTUF-average increases in their taxable income.
This would simply compound the unfairness as it would extend the narrow
requirements involved in lodging variations to all provisional taxpayers.
Consequences of a High PTUF
2.19
As noted by the ATO:
Provisional tax is generally paid either in a single instalment in
the last quarter of the income year, or in quarterly instalments. This compares
with PAYE taxpayers who are subject to deductions from their income as it is
earned through the year. If the (PTUF) is set too low, this will provide a
timing advantage to recipients of income subject to provisional tax compared to PAYE
taxpayers and other recipients of income which has tax deducted at the time of receipt. Of course, an uplift factor in any given year will be too high for
the individual circumstances of some taxpayers....This is accommodated through
the arrangements that allow taxpayers to approach the (ATO) to vary the
provisional tax for the year.
2.20 Thus the implications of setting the PTUF
too low and consequent loss of revenue is of major concern to the ATO just as
the problems associated with it being too high are of major concern to
provisional taxpayers.
2.21 However, as
the ATO acknowledges:
The reality is that, at an individual
taxpayer level, there will probably be a great number who will be below that
average and far fewer who will be in excess of it, as the table points out
2.22 In other
words, the rates at which the PTUF have been set since 1991 have
resulted in the ATO never having lost any net provisional tax revenue,
and in fact considerably exceeding what was required to be remitted in advance
by provisional taxpayers in some years (Tables 2.3 and 2.4). Thus the ATO has
had a considerable benefit from the PTUF being, on average, too high.
Table 2.3 Cases with provisional credit only that exceeds
primary tax.
|
YEAR
|
NUMBER OF
TAXPAYERS
|
PRIMARY TAX
ASSESSED ($m)
|
PROVISIONAL
TAX ($m)
|
EXCESS PROVISIONAL CREDIT ($m)
|
|
1991
|
238
|
1,806
|
1,165
|
641
|
|
1992
|
206
|
1,432
|
905
|
530
|
|
1993
|
236
|
1,670
|
1061
|
609
|
Table 2.4 Cases with provisional credit only that is less than
primary tax.
|
YEAR
|
NUMBER OF
TAXPAYERS
|
PRIMARY TAX
ASSESSED ($m)
|
PROVISIONAL
TAX ($m)
|
EXCESS PROVISIONAL
CRED ($m)
|
|
1991
|
238
|
1,806
|
1,165
|
641
|
|
1992
|
206
|
1,432
|
902
|
530
|
|
1993
|
236
|
1,670
|
1061
|
609
|
Alternatives to the Current PTUF
2.23 While the Committee accepts the premise that
provisional income will vary from year to year, -generally (that is:
over multiple, not single years) in the direction of growth, the main problem
in adopting this as the standard for calculating the PTUF is in the averaging
process. Whatever figure is chosen as an uplift factor, there will always be a
large number of businesses with higher income growth, and a large number of
businesses with lower income, simply because it is an average. In other
words, the aggregated nature of the PTUF coupled with the volatility in the
rate of means that only very few provisional taxpayers will ever record a
growth in taxable income at the level of the PTUF within the year of income in
question. Those recording a growth higher in taxable income than the PTUF
forecast will enjoy the advantages conferred on them by a low PTUF, while those
taxpayers with a lower than PTUF-anticipated growth in taxable income will
incur the disadvantages described above.
2.24 The imposition of a factor which attempts to
express an average rise in projected income upon this numerically very large,
disparate and volatile section of the business is clearly inappropriate.
2.25 There are a number of alternatives. The
first is to abolish the PTUF. While such a measure would undoubtedly be
popular with provisional taxpayers, the deferral of over half a billion dollars
of revenue would probably rule this out as a likely possibility in the short to
medium term
2.26 Another possibility would be to
use historical data to extrapolate a growth rate. For example a five or ten
year (or even longer) historical rolling average moments in the taxable income
of provisional taxpayers is one possibility. While this has the advantage on
relying only on actual data, its shortcomings are essentially the same as the
current PTUF in that an average is being applied to groups which are characterised
by large fluctuations in annual incomes
2.27 The Committee does not support the notion of
applying a different PTUF to each part of the provisional taxpaying sector, and
endorses Treasury's view that such an approachmight subject many provisional
taxpayers to the complications involving the use of two or more PTUF's.
2.28 A constant PTUF could be used every year. As
noted above, this would have the advantage of having a better predictive
value. Its drawback is that it has all the problems of the current PTUF, and
represents no more than an in-principle projection of annual income growth
2.29 One option examined at length by the
Committee is to recognise the volatility in the provisional taxpaying sector of
the business community and to tailor the uplift fact to this feature. In other
words, each provisional taxpayer could have a personalised uplift factor
derived directly from information in that taxpayers previous returns. This
measure would be more effective in ensuring that parity is established with
wage and salary earners as fashioning individually tailored PTUFs would be more
consistent with the circumstances of each individual provisional taxpayer.
2.30 An uplift factor derived solely
from previous annual changes in taxable income represents an extrapolation
which, like the current PTUF, may not correlate with actual movements in
taxable income for provisional taxpayers for the year in question. It does,
however, have the advantage of expressing some of the circumstances of each and
every provisional taxpayer, and is based solely upon easily derived facts and
information. Coupled with a reform of the rules governing the lodgement of
applications to vary provisional tax, it may represent an alternative structure
which could more accurately, and flexibly, bring provisional taxpayers into an
equitable regime vis-a vis wage and salary earners.
2.31 This option also addresses the
situation with respect to retirees receiving incomes from fixed interest
investments and who are subject to provisional tax. As their incomes will
generally be more predictable, individually tailored PTUFs will be more likely
to reflect the eventual actual rise in their taxable incomes.
Conclusion
2.32 Almost all the submissions
and evidence received from the private sector, as well as one of the three
submissions received from the public sector, opposed the current level of the
PTUF, the most frequently stated reason being that the PTUF was far in excess
of inflation. Those that did not advocate its abolition, generally recommended
that the PTUF be fixed at either the current or projected inflation rate.
2.33 The Committee supports the
inflation-linked approach at this stage. Its main advantage compared to the
current approach is that it anticipates a growth rate in incomes subject to
provisional tax which is less likely to be higher than the actual growth in
incomes of the majority of provisional taxpayers.
|
Recommendation 2.1:
The Committee recommends that the provisional tax
uplift factor be set at a level no higher than the current or projected
annual movement in the Consumer Price Index.
|
2.34 The above recommendation is favoured
by the majority of the Committee, that is: by the Coalition and Democrat
members. In considering its position in relation to the provisional tax uplift
factor, the Committee also considered the possible framework of the alternative
discussed in paragraphs 2.29 to 2.31 above. That framework is set out
below. The majority members of the Committee believe that the Government
should examine this option.
An Alternative - The Individual Uplift Factor
- The
provisional tax uplift factor be abolished in its current form and replaced by
individual provisional tax uplift factors which are calculated by using a five
year average based on the movements in the taxable income of each provisional
taxpayer for the previous five years, or less if the taxpayer has not been
paying provisional tax for that length of time;
- such an uplift factor should be capped at a
level to be determined by Parliament;
- either:
- two
applications to vary provisional tax be allowed annually; or
- applications to vary provisional tax
should allow a margin of error greater than the current 5 per cent (perhaps 25
per cent) to reflect the volatility of annual changes in the movements in the taxable
incomes of the provisional taxpayers; and
- if, and only if,
suggestions (i), (ii), and (iii) above are accepted, that provisional taxpayers
be required to lodge variations if they 1 reasonably
expect that their taxable income will increase by an amount greater than
the margin allowed as a result of recommendation (iii) above.
2.35 The Government members of
the Committee do not support recommendation 2.1 nor the suggested option
described above. The views of Government members about the provisional tax
uplift factor are set out in the attached minority report.
Penalties
2.36 The Committee does not consider
it reasonable for a culpability factor to be added to the penalties which are
applied to most small businesses who understate their taxable income when
lodging an application to vary provisional tax. Instead, the amount of tax
owing as a result of such an understatement should be subject to maximum
commercial rates of interest.
|
Recommendation 2.2:
The Committee recommends that the only
penalty for understating taxable income when lodging an application to vary
provisional tax be a levy calculated by applying the highest commercial rate
of interest to the unpaid tax resulting from understated income.
|
Navigation: Previous Page | Contents | Next Page