Shipping activities income: exclusion from instalment income

Can ordinary income derived by a taxpayer be excluded from instalment income for the purposes of section 45-120 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to the extent that it is from shipping activities that relate to a vessel in respect of which the taxpayer expects to be issued with a shipping exempt income certificate under section 8 of the Shipping Reform (Tax Incentives) Act 2012 (SRTIA 2012)?

Yes, ordinary income derived by a taxpayer can be excluded from instalment income for the purposes of section 45-120 of Schedule 1 to the TAA 1953 to the extent that it is from shipping activities that relate to a vessel in respect of which the taxpayer expects to be issued with a shipping exempt income certificate under section 8 of the SRTIA 2012.

The taxpayer is a corporation which derives ordinary income during an income year (relevant income year) from shipping activities that relate to a vessel.

The vessel meets the requirements of section 10 of the SRTIA 2012.

The taxpayer has been given an instalment rate by the Commissioner through a written notice under section 45-15 of Schedule 1 to the TAA 1953.

The taxpayer is liable to pay instalments for instalment quarters during the relevant income year under subsection 45-50(1) of Schedule 1 to the TAA 1953.

The taxpayer will apply after the end of the relevant income year for a certificate for the vessel issued under section 8 of the SRTIA 2012.

The certificate will set out each day of the relevant income year that the taxpayer met the requirement in paragraph 8(1)(a) of the SRTIA 2012 and the vessel met the requirements of paragraphs 8(1)(b) and 8(1)(c) of the SRTIA 2012.

In addition to the above, the certificate will also set out each day of the relevant income year that the taxpayer had management arrangements which satisfied paragraph 8(2)(a) of the SRTIA 2012 and training arrangements which satisfied paragraph 8(2)(b) of the SRTIA 2012.

The certificate is a shipping exempt income certificate for the purpose of subsection 9(2) of the SRTIA 2012.

Section 45-15 of Schedule 1 to the TAA 1953 establishes a general liability to pay instalments if the Commissioner issues an instalment rate to a taxpayer.

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.

Subsection 45-110(1) of Schedule 1 to the TAA 1953 provides that the amount of an instalment for an instalment quarter for a quarterly payer who pays on the basis of instalment income is worked out by multiplying the instalment rate issued by the Commissioner by the instalment income for that quarter.

Subsection 45-120(1) of Schedule 1 to the TAA 1953 provides that your instalment income for a period includes your ordinary income derived during that period, but only to the extent that it is assessable income of the income year that is or includes that period.

Subsection 51-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that an entity's ordinary income derived during an income year (the present year), or statutory income for the present year, is exempt from income tax to the extent that it is from shipping activities that: (1) relate to a vessel for which the entity has a shipping exempt income certificate for the present year; and (2) take place on a day (a certified day ) to which the certificate applies.

Section 11 of the SRTIA 2012 enables an entity to apply for a certificate issued under section 8 of the SRTIA 2012, after the end of an income year, but at least 30 days before the entity is required to lodge its income tax return for the income year.

A timing issue arises for a taxpayer that is a corporation which is liable to pay an instalment for an instalment quarter in an income year and which derives ordinary income from shipping activities that are related to a vessel for which they will apply for a shipping exempt income certificate after the end of the income year.

In calculating the amount of an instalment for an instalment quarter a taxpayer must multiply the instalment rate issued by the Commissioner by the instalment income for that period. Instalment income for a period includes ordinary income derived during that period, but only to the extent that it is assessable income of the income year that includes that quarterly period.

Ordinary income derived from shipping activities that are related to a vessel would normally be included as instalment income for a period for the purposes of calculating the amount of an instalment.

However, if a taxpayer is issued with a shipping exempt income certificate after the end of the income year for that vessel then ordinary income which is derived from shipping activities related to that vessel on each day to which the certificate applies will be exempt income for that income year under subsection 51-100(1) of the ITAA 1997.

Where a taxpayer expects to be issued with a shipping exempt income certificate for a vessel after applying for such a certificate after the end of the income year, the ordinary income which is derived from shipping activities related to that vessel on each day to which the certificate will apply will be considered to be exempt income. Therefore such income can be excluded from instalment income for the purposes of subsection 45-120(1) of Schedule 1 to the TAA 1953.