Deduction of tax: annual payments and yearly interest: overview: the new rules
Part 15 Income Tax Act 2007
Part 15 of ITA07 contains the rewritten legislation on the deduction of tax from annuities, annual payments and patent royalties (formerly in ICTA88/S348 (1) and S349 (1)), and on ‘yearly interest’ (formerly referred to as ‘annual interest’ in ICTA88/S349 (2)). The general scheme replaces the concept of ‘charges’ with an ordinary deduction from income for annual payments, and makes deduction of tax mandatory in all cases, with collection being made directly rather than being charged on the income ‘out of’ which the payment is made.
The requirement to deduct tax from payments of ‘yearly interest’ is now in Chapter 3 of Part 15. SAIM9070 to SAIM9110 explains the rules for deducting tax.
The requirement to deduct tax on annual payments is in Chapter 6 of Part 15, which brings together the rules formerly in sections 348(1) and 349(1). SAIM9120 onwards explain the rules for deducting tax.
The relief for annual payments from which tax must be deducted is now in Chapter 4 of Part 8 of ITA07 (‘Other Reliefs’). ITA07/S448 gives tax relief to an individual who pays an annual payment from which tax must be deducted as required by ITA07/S900 or ITA07/S903. ITA07/S900 requires deduction of tax where the individual makes an annual payment for commercial purposes, and ITA07/S903 requires it where the individual pays a patent royalty. ITA07/S449 gives relief to persons other than individuals for annual payments.
Under the computational rules on calculating business profits, as they stood before the advent of the Income Tax (Trading and Other Income Act) 2005, an annual payment payable ‘out of the profits’ of the trade was not an allowable deduction.
It remains the case that a payment out of the profits, as distinct from one made in arriving at the profits, will be disallowable. But an annual payment or patent royalty paid wholly and exclusively for the purposes of a trade (or property business) will be deductible. Relief under ITA07/S448 is only due where the payment is not otherwise deductible.
Relief for patent royalty payments was withdrawn for payments made on or after 5 December 2012.
Certain payments made by non-individuals are ineligible for relief (payments made out of capital, exempt income, or subsidies).
Where the tax relief for annual payments is given as a deduction from total income, it is on the gross amount of the payment, before deduction of income tax (ITA07/S452).
The new legislation preserves the effect of the former ‘charges’ legislation in the requirement that relief is not given for more than a person’s ‘modified total income for the tax year’. This is defined in ITA07/S1025 and S1026. In essence this is unrelieved total income (as set out in ITA07/S23), excluding non-qualifying income (certain types of dividend income, release of close company loans, life insurance gains, estate income), trading losses, annual payments and patent royalties, averaging profits of farmers’ and creative artists, post-cessation receipts carried back.
In this way, relief for annual payments is made ‘out of’ income brought into charge to income tax, as was the case under the former legislation on ‘charges’.