Penalties and interest can be used as a ‘stick’ by regulators. Taxpayers who fail to comply with their tax obligations may be subject to penalties and interest charges, which can often be greater than the original tax burden. Penalties typically apply in addition to ordinary tax payable, rather than as substitution for the tax that would otherwise have been paid.
There are many circumstances in which penalties can be imposed. Penalties the ATO can impose include penalties for:
The majority of penalty provisions for Federal taxes are contained in Schedule 1, Part 4-25 of the Taxation Administration Act 1953 (Cth), but there are also a number of specific penalty provisions for more confined issues or particular taxes outside of that division that can apply – including both administrative and criminal penalties.
There are similar penalty provisions that apply for State taxes.
Criminal penalties are usually calculated by reference to penalty units. Administrative penalties are a combination of amounts determined by reference to penalty units, fixed rate amounts and shortfall amount.
A shortfall arises if a taxpayer has:
The shortfall amount accounts for the impact of taxpayer’s conduct, and is the difference between the ATO’s assessment and what has actually been paid. Where there is a shortfall amount, the penalty amount is calculated by multiplying the shortfall amount with the penalty rate:
Base penalty amount = shortfall amount x penalty rate
The penalty rate depends on the perceived level of culpability:
Various factors would be considered in assessing the penalty rate to be applied, with there being loadings that can apply to the above rates. Factors considered include:
Note that the Commissioner considers intentional disregard to be a situation where the taxpayer is fully aware of the conduct being in breach of the tax laws and chooses to act with the intention of bringing about favourable results.
Non-compliant conduct by taxpayers where there is no shortfall, or for various actions in breach of tax obligations, can attract a penalty, calculated in penalty units, the value of which is as follows:
Failure to lodge an approved form by the due date can lead to the application of an administrative penalty. The rate of the penalty is one penalty unit for each 28 day period or part therefore that it is late (capped at five penalty units).
The penalty is multiplied by two for taxpayers who are medium PAYG withholders or have an annual turnover of between $1m and $20m. Medium PAYG withholders have an annual PAYG withholding exceeding $20,000 but less than $1m.
The penalty is multiplied by five for taxpayers who are large PAYG withholders or have an annual turnover of $20m. Large PAYG withholders have an annual withholding exceeding $1m.
Where a misleading statement is made (for example in an objection, private ruling request or in an audit) that does not result in a shortfall amount, the base penalty is determined by classification of the conduct:
Other conduct which may attract a penalty includes the following:
Where the Commissioner finds that the taxpayer has engaged in particularly egregious conduct, a 20 per cent increase can be applied to penalties. This includes situations in which:
The ATO has the power to apply interest to tax shortfall amounts and to penalties in the form of either the General Interest Charge (GIC) and/or the Shortfall Interest Charge (SIC).
GIC is applied to tax debts which are unpaid or paid late, or if there is an excessive shortfall in an incorrectly varied or estimated tax instalment to which the SIC does not apply. The rate for the GIC is determined by the ATO on a quarterly basis, and compounds daily at the ATO published daily rate.
The SIC applies instead of the GIC to income tax shortfalls where there has been an amendment and consequent increase in the taxpayer’s tax liability. The Commissioner applies interest to the shortfall amount for the period when it would have been due and the date the assessment is corrected. The SIC is charged at a lower rate than the GIC because taxpayers are generally unaware of a shortfall amount until they receive an amended assessment. As with the GIC, the SIC is calculated daily on a compounding basis at the ATO published daily rate.
The due date for the payment of additional tax and SIC is 21 days after the date of the amended assessment. Once the due date has expired, the GIC will apply to unpaid tax and SIC.
The ATO has significant discretion as to how penalties will be imposed and have the power to remit penalties if they consider this appropriate.
Taxpayers can significantly reduce their liability for penalties by up to 80 per cent through early voluntary disclosure of shortfall amounts. A voluntary disclosure must be made by the taxpayer in the approved form and provide information required to understand any errors or determine the correct position.
Reductions in penalties of up to 80 per cent may apply where a voluntary disclosure occurs before the Commissioner informs the taxpayer of any review or audit into their affairs. Where a voluntary disclosure is made in respect of a shortfall of less than $1,000, the ATO will waive the penalty.
If a voluntary disclosure of a shortfall amount is made after the taxpayer is advised by the Commissioner of an examination of their affairs, the penalty may be reduced by 20 per cent.
Taxpayers can dispute penalties through the objection process or otherwise request the ATO to remit penalties in part or in full outside of this process.
Whilst the tax legislation is silent as to which circumstances the Commissioner should consider in determining whether penalties should be remitted, the ATO states that it considers:
Individuals and small businesses may be eligible for penalty relief where penalties would otherwise arise from inadvertent errors on tax returns or activity statements. Penalty relief automatically applies, and will be provided to eligible taxpayers if an audit occurs.
To be eligible for penalty relief, the taxpayer must:
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