Income Tax: Liability to pay a PAYG instalment

When does a corporate tax entity have a liability to pay a PAYG instalment for the purposes of paragraph 205-20(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

A corporate tax entity will have a liability to pay a PAYG instalment for the purposes of paragraph 205-20(1)(a) of the ITAA 1997 at the end of an instalment quarter.

A corporate tax entity has been notified by the Commissioner of an instalment rate. On 20 June 2003 it makes a franked distribution to its shareholders forcing its franking account into a deficit. The PAYG instalment is due on or before 21 July 2003. The corporate tax entity makes a payment for the PAYG instalment on 2 July 2003.

Item 1 of section 205-15 of the ITAA 1997 operates so that an entity generates a credit in its franking account when the entity pays a PAYG instalment. Section 205-20 of the ITAA 1997 provides that an entity pays a PAYG instalment if the entity has a liability to pay the instalment and either a payment to satisfy the liability has been made or a credit, or a Running Balance Account surplus, is applied to discharge or reduce the liability. In order to determine when a franking credit arises, the time at which the liability for each instalment arises must be established.

Section 45-15 of Schedule 1 of the Tax Administration Act 1953 (TAA 1953) establishes a general liability to pay instalments if the Commissioner issues an instalment rate to a taxpayer. This liability however should not be construed as establishing a specific liability for the purpose of section 205-20 of the ITAA 1997. Subsection 45-50(1) of Schedule 1 to the TAA 1953 establishes a specific liability to pay an instalment for an instalment quarter in an income year if at the end of that instalment quarter the taxpayer is either a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax or a quarterly payer who pays on the basis of instalment income. However, this is subject to subsection 45-50(4) of Schedule 1 to the TAA 1953, which states that such a liability only arises in respect of an instalment quarter if the Commissioner has issued the taxpayer with an instalment rate that has not subsequently been withdrawn before the end of the relevant quarter.

The meaning of an instalment quarter is found in section 45-60 to Schedule 1 of the TAA 1953 which sets out four instalment quarters for the income year consisting of three months. The end of each quarter for an entity with an income year ending 30 June is 30 September, 31 December, 31 March and 30 June respectively. The corporate tax entity is a quarterly payer who is not a deferred BAS payer, and so under subsection 45-61(1) of Schedule 1 to the TAA 1953, the instalment is due on or before the 21st day after the end of 30 June.

Therefore, a corporate tax entity will have a liability to pay a PAYG instalment for the purposes of paragraph 205-20(1)(a) of the ITAA 1997 at the end of an instalment quarter, provided the Commissioner has not withdrawn the previously issued instalment rate.

Therefore, in this case, the payment made by the corporate tax entity on 2 July 2003 will be characterised as a PAYG instalment payment made pursuant to a liability. This will generate a credit in the franking account of an amount equal to the payment at the time of that payment. As the payment is made on 2 July 2003, a credit will arise in the franking account of the entity on this date.