TAXATION (INTEREST ON OVERPAYMENTS) REGULATIONS (AMENDMENT) 1994 NO. 220

TAXATION (INTEREST ON OVERPAYMENTS) REGULATIONS (AMENDMENT) 1994 NO. 220

STATUTORY RULES 1994 No. 220

ISSUED BY THE AUTHORITY OF THE ASSISTANT TREASURER

Taxation (Interest on Overpayments) Act 1983

Taxation (Interest on Overpayments) Regulations (Amendment)

Section 9 of the Taxation (Interest on Overpayments) Act 1983 (the Act) entitles a taxpayer to be paid interest where there has been an overpayment of relevant tax. Relevant tax is defined in subsection 3(1) of the Act as income tax and a range of other taxes and charges administered by the Commissioner, such as sales tax, fringe benefits tax and the superannuation guarantee charge.

Section 10 of the Act provides that interest is calculated for the period during which the tax has been overpaid at the rate applicable under the Taxation (Interest on Overpayments) Regulations (the Regulations). The current rate prescribed in the Regulations is 10 percent. This rate applies to overpayments of income tax as well as to overpayments of the other taxes and charges.

In 1991 the Treasurer released an information paper entitled "Improvements to Self Assessment - Priority Tasks". One of the priority tasks to be done was to change the benchmark interest rate used in calculating interest payable on both underpayments and overpayments of income tax. The old benchmark was the weighted average yield of certain long term Treasury Bonds. However this rate was not considered to be an accurate reflection of short term market rates of interest. For that reason it was decided to move to a new benchmark, i.e., the 13 Week Treasury Note rate. It was also decided that the rate of interest payable by taxpayers for underpayments should be higher than that paid to taxpayers for overpayments. This reflects the commercial reality that a person has to pay a higher rate of interest to borrow funds than the rate they will receive for investing funds.

Last year amendments were made to section 170AA of the Income Tax Assessment Act 1936 (the Assessment Act) to change the rate of interest on underpayments of income tax. The rate of interest was formerly the same as the rate of interest that applied to overpayments of income tax. The new rate of interest on underpayments of income tax is set periodically by reference to the new benchmark rate, i.e., the weighted average yield of the 13 Week Treasury Note rate, increased by 4 percentage points. That rate is called the Treasury Note Yield and is specified in section 214A of the Assessment Act.

The purpose of amending the Regulations is to give effect to the decision to base interest on overpayments of tax on the new benchmark rate. This will complement the changes already made to the rate of interest on underpayments of income tax and allow for greater symmetry in the interest system. The new rate of interest applying to overpayments of income tax is proposed to be the rate of interest set by section 214A of the Assessment Act, reduced by 4 percentage points, i.e., the weighted average yield of the 13 Week Treasury Note rate. The one rate of interest has always applied to all overpayments of relevant tax. The reasons for changing the benchmark rate for overpayments of income tax apply equally to overpayments of all other taxes and charges. For that reason the new benchmark rate is to apply to all overpayments of relevant tax.

The amendment will apply in respect of overpayments of relevant tax for periods or parts of periods that commence on or after l July 1994. The previous rate of 10% will continue to apply up until 30 June 1994.