Changes to UOMI safe harbour threshold
(Clauses 80, 109 and 110)
Summary of proposed amendment
As part of proposed changes to the provisional tax rules, the bill increases the current “safe harbour” threshold at which use-of-money interest applies, from $50,000 to $60,000, and extends the safe harbour to non-individuals (for example, companies). Currently the safe harbour only applies to individual taxpayers.
The amendments will apply from the beginning of the 2017–18 income year.
Section 120KE of the Tax Administration Act 1994 currently allows individual taxpayers a safe harbour from the imposition of use-of-money interest when the taxpayer has residual income tax of less than $50,000. The proposed amendment increases this threshold to $60,000 and also removes the requirement that a taxpayer be a natural person (an individual) to apply the safe harbour.
The amendments also add three additional requirements to tighten application of the safe harbour rules. These amendments will:
- require a taxpayer to actually make the three instalments required under the standard method to enable them to use the safe harbour;
- prohibit a taxpayer who has a provisional tax interest avoidance arrangement from using the safe harbour; and
- prohibit a taxpayer who has paid the first two instalments under the standard method from changing to the estimation method.
The first two amendments are found in section 120KE and the third in section RC 5 of the Income Tax Act 2007.
For taxpayers who do not pay the required instalment amounts, the general standard method rules will apply.
Provisional tax is an area that businesses find difficult to get right. This is particularly so for smaller businesses. The current rules require a taxpayer to either base their provisional tax amount on a GST ratio method, an uplift from the prior year’s residual income tax (or two years prior when a tax return for the prior year has not been filed) or an estimate of income for the year. Under the latter two options use-of-money interest (UOMI) will apply if a taxpayer’s actual residual income tax differs from payments made. This result can seem unfair when a taxpayer is basing their provisional tax on an uplift from the prior year.
The current safe harbour was introduced to reduce the impact of UOMI to a subset of taxpayers. In particular, individuals other than those on very high incomes were removed from the application of UOMI to reduce the impact of those rules. The proposed amendments will bring more taxpayers into the safe harbour by increasing the threshold to those taxpayers with a residual tax liability of $60,000 or less, and extend application of the safe harbour to non-individual taxpayers.
The amendments also seek to tighten some deficiencies in the current safe harbour rules.
First, an amendment seeks to ensure that taxpayers must make required payments under the standard uplift method to use the safe harbour.
Secondly, the ability to switch from the standard to the estimation method has been limited so a taxpayer can only switch methods up to the payment of the second instalment.
Finally, a base maintenance provision will also apply to the safe harbour when a taxpayer has entered an arrangement to manipulate income to defeat the intention of the provisional tax rules.