Technical guide to instalment rates, notional tax and variations for superannuation funds
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This Technical guide to instalment rates, notional tax and variations for superannuation funds provides detailed information on:
- how the Australian Taxation Office (ATO) calculates your Pay As You Go (PAYG) instalment rate and notional tax, and
- how you can vary your instalments.
The guide should be read in conjunction with the Guide to PAYG for business, which provides an overall explanation of PAYG instalments. There are also fact sheets dealing with specific issues.
Use this guide if your fund is:
- a complying or non-complying superannuation fund
- a complying or non-complying approved deposit fund, or
- a pooled superannuation fund trust.
Separate PAYG technical guides are available for:
- companies
- individuals
- life assurance companies and registered organisations
- trusts
These taxpayers should not rely on the information in this guide for superannuation funds.
Please get help from the ATO or a professional tax practitioner if you feel this guide does not fully cover your circumstances. The ATO regularly revises its publications to take account of changes to the law and you should make sure that this edition is the latest.
As part of the ATO's commitment to producing accurate publications, a taxpayer will not be subject to penalties if it is demonstrated that a tax claim is based on wrong information contained in this guide. However, interest could be payable depending on the circumstances of the case.
The information in this guide is current at 1 June 2000.
The Guide to PAYG for business lists ATO publications about PAYG and other elements of The New Tax System.
To obtain ATO publications or to talk to an ATO expert about PAYG:
- phone the business Tax Reform Infoline on 13 24 78
- download information from the web site at www.taxreform.ato.gov.au
- obtain A Fax From Tax on 13 28 60
- write to PO Box 9935 in your capital city.
- Taxpayers who do not speak English and need help from the ATO can call the Translating and Interpreting Service (TIS) on 13 14 50.
- People with a hearing or speech impairment can phone the Telephone Typewriter Service (TTY) on 1300 130 478.
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The object of PAYG instalments is to ensure the efficient collection of income tax, Medicare levy and some other tax liabilities calculated by reference to taxable income by requiring taxpayers to pay instalments during the income year to meet those liabilities.
Generally, the instalments will be payable quarterly and will be worked out from the instalment income you earn in each quarter.
Consequently, the amount you have to pay to discharge those tax liabilities after your assessment is made will be as low as possible.
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Instalment income is central to the PAYG instalments regime. It is used in:
- calculating the instalment rate
- calculating the instalment amount
- you multiply the amount of your instalment income for an instalment period by the instalment rate to determine the amount of an instalment.
Your instalment income for a period includes both your ordinary income and statutory income for that period. Your ordinary income need only be included to the extent that it is assessable income of the income year that includes that period. Your statutory income, such as a capital gain, is included in your instalment income to the extent that it is reasonably attributable to the period for which the instalment is payable.
Examples of instalment income include:
- net capital gains
- gross interest
- gross dividends
- gross taxable employer contributions
- gross taxable employee or depositor contributions
- gross distributions from trusts
- gross distributions from partnerships, and
- gross foreign income.
While ordinary income is generally a gross amount as indicated above, the courts have held that certain profits can be ordinary income, for example the profit from an isolated transaction undertaken with a profit-making purpose.
Instalment income does not include income from which amounts have been (or should have been) withheld under the PAYG withholding regime, because tax on that income is collected via the PAYG withholding regime and not the PAYG instalments regime. However, income from which tax has been withheld because you did not provide your tax file number (TFN) or your Australian Business Number (ABN) is included in your instalment income.
Goods and services tax included in the price of goods and services supplied by your business is also excluded from instalment income.
The Guide to PAYG for business has further information on instalment income.
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Most superannuation funds will pay PAYG instalments quarterly. The ATO will notify you if you may be eligible to pay annually. For funds, there are two methods of working out the instalment amount.
Most funds will pay PAYG instalments based on their instalment income after it has been earned. Quarterly payers pay a percentage of their instalment income for the quarter, 21 days after the quarter ends. Similarly, annual payers pay a percentage of their instalment income for the year (there are transitional arrangements for the due dates for annual payers - see the Guide to PAYG for business for more information). This percentage is known as your instalment rate.
Your instalment amount is calculated by multiplying your instalment rate by your instalment income. You can use the instalment rate given to you by the ATO or you can choose to vary that rate. In summary:
The ATO calculates your instalment rate. You use this rate if you choose not to vary it.
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see section 4 for how the ATO calculates your instalment rate
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OR
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You vary the instalment rate given to you by the ATO (quarterly payers only - annual payers who wish to vary must use Method 2)
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see section 5.2 for information about varying your instalment rate
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Then
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The ATO checks your varied rate against the benchmark instalment rate it calculates when you lodge your annual income tax return.
You may be liable for the General Interest Charge if your varied rate is less than 85 per cent of the ATO's benchmark instalment rate.
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See section 5.2.2 for more about the benchmark instalment rate
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If you prefer and are eligible, the amount you pay as your annual instalment can be the notional tax amount notified by the ATO, unless you choose to vary that amount. In summary:
The ATO calculates your notional tax and advises you of it. You use this figure if you choose not to vary it.
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See section 4.3
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OR
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You vary your annual instalment by estimating your benchmark tax.
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See section 5.3
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Then
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The ATO checks your varied amount by calculating your benchmark tax.
You may be liable for the General Interest Charge if your varied amount is less than 85 per cent of your benchmark tax as calculated by the ATO.
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See section 5.3
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3.2 The instalment rate x instalment income formula for quarterly or annual payers (Method 1)
instalment rate
%
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x
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instalment income
$
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=
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instalment amount
$
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Your instalment rate is the rate worked out and notified by the ATO, which uses the formula notional tax ÷ base assessment instalment income x 100, or your chosen rate.
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Your total ordinary income for the period for which you are paying the instalment. You work out this amount. For more information, see the Guide to PAYG for Business
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The amount you pay with your activity statement.
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If you pay quarterly, you can vary your instalment rate if the instalments worked out using the rate notified by the ATO (or a varied rate you used in the previous quarter) will result in you paying more (or less) than your expected tax liability for the year.
Section 5 gives more details on varying your instalment rate.
The ATO works out your notional tax amount based on the most recent assessment for your most recent income year for which an assessment has been issued and pre-prints it on your activity statement. To use this method, you fill in the instalment box on your activity statement with the pre-printed notional tax amount.
Section 4.3.3 shows how the ATO works out your notional tax.
You can vary the amount of your instalment if you believe that the notional tax amount notified by the ATO will result in you paying more (or less) than your expected tax liability.
Section 5.3 gives more details on varying your annual instalment.
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4 How the ATO calculates your instalment rate
The instalment rate is central to the PAYG instalments regime. It is a percentage worked out by the Commissioner of Taxation. When your instalment income is multiplied by this percentage, the resulting instalment amount should be an appropriate proportion of your end-of-year tax liabilities. The instalment rate is not a tax rate.
Typically, the instalment rate calculated by the ATO for most funds will be less than the tax rate. However, your instalment rate will be determined by your individual circumstances in the base year (the most recent income year that is the subject of an assessment).
- The instalment rate will be low where your notional tax for the base year represents a small proportion of your instalment income for the same year.
- The instalment rate will be high where your notional tax for the base year represents a large proportion of your instalment income for the same year. This might happen, for example, if your deductions are a very low proportion of your assessable income.
The ATO calculates your instalment rate based on the information in the most recent assessment (the base assessment) for your base year.
The calculation is made by dividing your notional tax by your base assessment instalment income, then multiplying the result by 100.
The instalment rate is calculated as a percentage to two decimal places. Where the third decimal place is 5 or greater, the instalment rate is rounded up. For example, if the rate is calculated as 12.3451, it is rounded up to 12.35. If the third decimal place is less than 5, it is rounded down.
An instalment rate will be 0.00, that is nil, if the notional tax or the base assessment instalment income is equal to or less than $0. A nil instalment rate is valid.
Notional tax
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x
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100
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=
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Instalment rate
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Base assessment instalment income
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For example, if your notional tax is $9000 and your base assessment instalment income is $36 000, the instalment rate expressed as a percentage to two decimal places will be:
See section 4.3.3 for how the ATO works out your notional tax.
See section 4.4.3 for how the ATO works out your base assessment instalment income.
See section 4.5 for worked examples of calculating the instalment rate.
4.3 Notional tax
Your notional tax will be the same as your assessed tax for the base assessment (that is, the latest assessment for your most recent income year that is the subject of an assessment) if you have not deducted any amount for carry forward losses.
If you deducted carry forward losses, your taxable income is adjusted by adding back those deductions, and instead subtracting any carry forward losses you still have available for deduction in future years. A new tax figure is then calculated from that adjusted taxable income.
It is used in calculating your instalment rate. If you are an annual payer, you can use your notional tax as your instalment amount.
4.3.3 How does the ATO calculate it?
The ATO calculates notional tax using information from your income tax return for your base year.
Basic steps
There are three steps involved in working out notional tax.
The first step is to work out your adjusted taxable income. It is worked out in much the same way as taxable income is worked out under section 4-15 of the Income Tax Assessment Act 1997. However, one adjustment is made:
- Your deduction for carry forward losses is added back to your taxable income. Then your tax losses still available for deduction in subsequent income years are subtracted from the result. This adjustment ensures that an instalment rate is calculated for loss entities in the income year in which they are likely to become taxable.
The second step is to work out the adjusted tax payable on adjusted taxable income before tax offsets. To calculate adjusted tax payable, the ATO uses an average rate of tax.
The third step is to work out notional tax. Notional tax is the result of step two reduced by any rebates/tax offsets and foreign tax credits available to you.
Final adjustment
There are two circumstances when the ATO may make a final adjustment in working out notional tax:
- The ATO will apply the tax law that applies to the income year to which the instalment rate relates. This means that the ATO can take account of changes to the law that may reasonably be expected to apply for the income year to which the instalment rate applies.
- The ATO may take into account provisions of an Act or regulations that it believes are likely to be enacted. It can only do this if it will result in a lower instalment rate.
The table below shows how the information from your tax return is used in each of the steps outlined above.
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Item
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2000
tax return label
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1998 & 1999
tax return label
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Step 1
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Taxable income or losses (+ for income, - for losses)
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Information Statement
8T
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Information Statement
T
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+
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Losses deducted/recouped
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8F
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F
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-
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Losses carried forward
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8V
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V
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=
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Adjusted taxable income
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|
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Step 2
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x
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Average tax rate* for the base year which is equal to:
Gross tax ÷ taxable income
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Calculation Statement
7B ÷ 7A
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Calculation Statement
B ÷ A
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=
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Adjusted tax payable on adjusted taxable income before tax offsets
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|
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Step 3
|
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Calculation Statement
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Calculation Statement
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-
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Rebates (includes franking rebate, landcare rebates [1999 only], Commonwealth loan interest rebate, etc.)
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7C
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C
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-
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Foreign tax credits
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7D
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D
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=
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Notional tax
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|
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* The average tax rate is expressed as a percentage to two decimal places. Where the third decimal place is 5 or greater, the average tax rate is rounded up. Where the third decimal place is less than 5, the rate is rounded down.
See section 4.5 for worked examples.
4.4 Base assessment instalment income
Your base assessment instalment income is so much of your assessable income from the latest assessment of your most recent income year that is the subject of an assessment (the base year) as the Commissioner determines is instalment income.
The ATO works out your base assessment instalment income using information from your tax return for the base year.
In most cases your base assessment instalment income will equal your total assessable income. However, due to the constraints of the income tax return, a single figure for total assessable income is not available.
To overcome this difficulty and minimise the compliance burden for taxpayers, the ATO works out your base assessment instalment income using the information that is available on your tax return for the base year. How the ATO does this is explained in section 4.4.3.
Base assessment instalment income is the denominator in the instalment rate formula.
4.4.3 How does the ATO calculate it?
The ATO works out your base assessment instalment income using the following method.
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Item
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2000 tax return label
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1999 tax return label
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1998 tax return label
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Information Statement
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Information Statement
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Information Statement
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Total income
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8S
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S
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S
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+
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Gross foreign income
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8I
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I
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N/A
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-
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Net foreign income
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8E
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E
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N/A
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-
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Total current year capital losses applied
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8I
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I
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I
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-
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Prior year net capital losses applied
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8S
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S
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S
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=
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Base assessment instalment income
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|
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See section 4.5 for worked examples.
4.5 Examples of instalment rate calculations
Pines is a regulated superannuation fund with a 1998-99 taxable income of $56 000. The fund's adjusted taxable income for the 1998-99 year is also $56 000. The adjusted tax payable on this before credits is $8400.
The fund invests in shares and has a franking rebate of $1050 and foreign tax credits of $500. It does not carry on a business of primary production or business using rural land and therefore is not entitled to the Landcare and Water Facility Rebate.
The notional tax calculated for Pines superannuation fund is $6 850, as shown in the following calculation.
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Item
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1999
tax return
($)
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Step 1
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Taxable income
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$56 000
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+
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Losses deducted/recouped
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$0
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-
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Losses carried forward
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$0
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=
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Adjusted taxable income
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$56 000
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Step 2
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x
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Average tax rate for the base year which is equal to:
Gross tax ÷ taxable income
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15%
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=
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Adjusted tax payable on adjusted taxable income before tax offsets
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$8 400.00
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Step 3
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-
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Rebates (includes franking rebate, landcare rebates [1999 only], Commonwealth loan interest rebate, etc.)
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$1 050.00
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-
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Foreign tax credits
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$500.00
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=
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Notional tax
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$6 850.00
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Pines recorded a total income, including gross capital gains, for the 1998-99 income year of $102 000. During the income year, the fund's gross foreign income was $5000, it received a net foreign income of $4500 and recorded capital losses of $3284 and prior year net capital losses applied of $1238. The base assessment instalment income for the 1998-99 income year is $97 978.
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Item
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1999
tax return
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Total income
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$102 000
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+
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Gross foreign income
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$5 000
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-
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Net foreign income
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$4 500
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-
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Total current year capital losses applied
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$3 284
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-
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Prior year net capital losses applied
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$1 238
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=
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Base assessment instalment income
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$97 978
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Pines' instalment rate is 6.99 per cent, as determined by:
$6 850.00
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x
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100
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=
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6.99%
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$97 978.00
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5 How you can vary your instalments
You can vary whether you use the instalment rate x instalment income formula method or the notional tax method of working out your instalment amount.
A key objective of the PAYG instalments regime is to ensure that the instalments will, as far as is practical, cover a taxpayer's income tax liabilities so that any additional amount payable on assessment will be as low as possible.
Where you believe that instalments worked out using the instalment rate or notional tax notified by the ATO will result in you paying more (or less) than your expected tax liability, you may choose to vary.
It should not be necessary to vary because of income fluctuations - the 'rate x income' formula accommodates such fluctuations.
Typical reasons for varying might include:
- mergers, acquisitions and takeovers
- significant (abnormal) transactions affecting income or expenses
- cessation of business activity
- internal or external restructuring of business activity
- expected utilisation of losses of a revenue or capital nature
- domestic or foreign financial market changes
- change in entity structure
- change in trading conditions affecting income or expenses
- change in product mix, or
- business expansion or contraction.
5.2 Varying your instalment rate
If you pay quarterly, you can vary your instalment rate if the instalments worked out using the rate notified by the ATO (or a varied rate you used in the previous quarter of your current income year) will result in you paying more (or less) than your expected tax liability for the year.
Varying the instalment rate is optional. You will not be penalised if your instalments are less than your tax liabilities for an income year and you have used the instalment rate calculated by the ATO.
You may be liable to pay the General Interest Charge if your varied instalment rate is less than 85 per cent of the benchmark instalment rate worked out by the ATO. The ATO will calculate your benchmark instalment rate when you lodge your income tax return for the income year and compare it with your estimate.
The General Interest Charge applies for the period starting on the due date for the instalment that is the subject of the variation penalty and finishing on the due date for payment of the assessed tax of the income year to which the variation relates.
You may be entitled to a credit from earlier instalments for the same income year if you have decided to use a varied instalment rate and your varied instalment rate is less than the instalment rate notified to you by the ATO (or a varied rate you used in the previous quarter).
See the Business Activity Statement Instructions or the Instalment Activity Statement Instructions for more information on claiming a credit.
There is no standard method, but you may find this formula helpful:
estimate the tax you will pay for the current year
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x
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100
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estimate your instalment income for the current year
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Your estimated tax for the current year is the tax that you estimate will be payable on your taxable income for the year less any rebates/offsets and any credits for amounts withheld from payments to you.
Express the varied instalment rate as a percentage to two decimal places. Where the third decimal place is 5 or greater, round up the varied instalment rate; where it is less than 5, round down the varied rate. For example, if your varied rate is calculated as 12.3451, round it up to 12.35.
5.2.2 What does the ATO do?
When you lodge your income tax return for the income year, the ATO will calculate your benchmark instalment rate and compare it with your varied rate.
The benchmark instalment rate is the rate that would have covered your actual liability for the income year, having regard to your instalment income for the year and your assessed tax less any rebates/offsets and any credits for amounts withheld from payments to you.
You need not work out your benchmark instalment rate, but an understanding of how the ATO calculates it may help you.
The ATO calculates the benchmark rate as follows:
Your benchmark tax
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x
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100
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Variation year instalment income
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The benchmark instalment rate is expressed as a percentage to two decimal places. For example, if your benchmark tax is $8000 and the variation year instalment income is $34 000, the benchmark instalment rate expressed as a percentage to 2 decimal places will be:
$8000 ÷ $34 000 x 100 = 23.53%
Where the third decimal place is 5 or greater, the instalment rate is rounded up. If the third decimal place is less than 5, it is rounded down.
A benchmark instalment rate will be 0.00 - that is, nil - if either component of the formula is nil.
Benchmark tax
Benchmark tax is the tax payable on your taxable income less any rebates/offsets and any credits for amounts withheld from payments to you.
It is worked out in a similar way to how notional tax is calculated, but it is based on your tax return for the variation year rather than the base year and there is no adjustment made for the losses actually deductible in that year.
Further guidance on how benchmark tax is calculated will be provided in an update to this technical guide, available by the end of June 2000.
The variation year instalment income is so much of your assessable income for the variation year as the Commissioner determines is instalment income for the year.
It is calculated in the same way as base assessment instalment income is calculated.
- You must notify the ATO of the varied instalment rate as well as your instalment income on or before the due date of the instalment. You do this on your activity statement.
- You cannot revoke the instalment rate you have chosen for a quarter after you have notified the ATO of the rate.
- If you choose your own instalment rate, you use that varied rate for each subsequent quarter in the income year unless you choose another rate for a later quarter.
- If you subsequently choose another instalment rate, you use that varied rate for each subsequent quarter in the income year unless you choose another rate for a later quarter.
- Your varied instalment rate will not carry over to the next income year.
5.3 Varying the amount of your annual instalment
If you use the notional tax method to work out your instalment amount, you can vary if you believe that the notional tax amount notified by the ATO will result in you paying more (or less) than your expected tax liability.
You do this by estimating your benchmark tax (see section 5.2.2).
If you decide to vary your annual instalment, you must notify the ATO of your estimate of your benchmark tax on or before the due date of the instalment.
Varying is optional. You will not be penalised if your instalment is less than your tax liabilities for an income year as a result of using the notional tax amount notified by the ATO.
If you choose to vary, you do not have to follow the method the ATO uses to calculate benchmark tax. You can calculate this amount using your own method.
You may be liable to pay the General Interest Charge, however, if your varied instalment amount is less than 85 per cent of the benchmark tax calculated by the ATO. The ATO will calculate your benchmark tax when you lodge your income tax return for the income year and compare it with your varied instalment amount.
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