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Tax Office Prepares for New Withholding Tax Rates

Due to uncertainty about what rate of tax is to be withheld from employees' salaries from 1 July 2005, the Tax Office recently released two alternate sets of formulas to help software providers implement new withholding tax rates.

Tax Commissioner Michael Carmody said following discussions with software developers we have released two sets of formulas for withholding rates.

"The first set covers the tax rate changes announced in 2004 due to take effect from 1 July 2005. The second covers the larger tax rate changes announced in this year's Budget," Mr Carmody said.

"This gives software providers the lead time to build both alternatives into their systems for a 1 July start date. We will also be making the alternate formulas available to the 130,000 employers who code their own in-house payroll systems.

"In addition we will prepare and print two alternate sets of withholding schedules so that we are ready to mail out the final schedules to some 850,000 employers as soon as we know which rate schedules apply."

From 1 January this year withholding schedules must be tabled in both Houses of Parliament as legislative instruments.

In order to provide for the possibility that the schedules incorporating the 2005 rate changes could be disallowed the instrument is being drafted to ensure that the rate changes announced in 2004 can apply from 1 July.

If the schedules incorporating the 2005 rate changes are not disallowed employers will be able to withhold tax from employees at these rates from 1 July. This is the case irrespective of whether the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2005 is passed by 1 July or not.

If the schedules incorporating the 2005 tax rate changes are disallowed then the instrument will need to be re-tabled after 1 July to enable employers to use the changed rates in the new financial year.

There will be a gap between 1 July 2005 and whenever the new withholding schedules take effect. During this period employers can only withhold tax based on the rate changes announced in 2004. To claim tax back for this period employees can seek a variation from the Tax Office, or simply wait and receive a higher refund at the end of the year.

Copyright Commonwealth of Australia, 19 May 2005.

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