Knowledge Bank: CPA POLICY EXPERTS CLARIFY TAX OFFICE INTEREST CHARGES AND REVISIONS TO AASB 119

Intheblack, Mar 2005 by Roshan, Sepi, Addison, Gerry

Q: I have a client who has a defined benefit plan. They have already undertaken their IFRS analysis based on the requirements in AASB 119 Employee Benefits, as issued in July 2004. Does the client now have to apply the requirements of the revised AASB 119?

A: The revised AASB 119 was issued by the Australian Accounting Standards Board in December 2004 and introduces two additional options for the treatment of actuarial gains and losses for defined benefit plans. As a result of this revision, entities can recognise actuarial gains and losses:

(a) in full through the profit and loss statement,

(b) in full direct to retained earnings; or

(c) partially in the profit and loss statement, using the corridor approach.

The AASB 119 issued in July last year, only allowed the first option.

The revised MSB 119 is applicable to annual reporting periods beginning on or after 1 January 2006. Early adoption is permitted, to allow entities to apply the revised AASB 119 on their transition to Australian equivalents to IFRS. However, if entities do not elect to early adopt the revised AASB 119 on their transition to Australian equivalents to IFRS, they cannot use the additional options to account for actuarial gains and losses of defined benefit plans in their first IFRS financial reports.

Answered by Sepi Roshan, technical adviser in financial reporting and governance at CPA Australia

Q: In what circumstances can the tax office charge interest on late payment of tax?

A: The tax office is able to impose a general interest charge (QIC) where there is a late payment of a tax debt. The GIC rate is linked to market interest rates as it is seven per cent on top of the 90-day bank bill rate. It has varied in recent years but generally averaged around 12.5 per cent. This is designed to encourage the payment of tax liabilities on time and to discourage the use of the ATO as a source of business or private finance. A particularly contentious feature of the GIC is that it may arise without the taxpayer being initially notified. For example, it may stem from a taxpayer's mistake in their return which only comes to their attention when they receive an amended assessment from the ATO at a later date such as in the event of an audit. While the ATO is empowered to remit GIC in appropriate circumstances, it appears to be generally reluctant to do so. As a result of a recent review, however, the government has announced that the GIC rate will be substantially reduced (to around 6.5 per cent) in tax shortfall situations and the ATO's discretion to remit GIC in other such cases will be clarified. The changes will apply from the 2004-05 income year.

Answered by Garry Addison FCPA, senior tax counsel at CPA Australia