The tax law provides for these ‘administrative’ penalties which are able to be issued directly, but there are also civil and criminal penalties that are imposed by the courts.

One comfort is that the system of penalties is fairly uniform and regulated over most tax laws. Generally this means that a penalty will be doled out under the same ‘provisions’. For example, the penalty for ‘failure to lodge’ will apply to not lodging a tax return, or not lodging an activity statement.

The penalty provisions relate to certain categories of obligations. These are:

  • positions that are not ‘reasonably arguable’
  • failing to lodge on time
  • failing to withhold
  • ‘other’ tax obligations.

There are separate penalties relating to superannuation obligations, such as the superannuation guarantee charge.

Generally, penalty amounts can be calculated with a statutory formula that allocates a percentage multiple for the ‘shortfall’ amount – that is, the difference between the amount of tax (or credit entitlement) that resulted from the information provided to the Tax Office in the first instance, and the amount that is actually the correct tax or entitlement.

As well as having to make up the shortfall, you will be required to cover this percentage – the ‘punitive’ bit. The percentage applied is pegged to certain ‘behaviours’ – failure to take reasonable care, recklessness, and intentional disregard. The size of the percentage reflects the severity of that mischief.

There are several exceptions to this method of working out penalties, such as the failure to lodge penalty. The fines imposed for late lodgement or non-lodgement of a document are not pegged to the tax outcome.

Not taking reasonable care
The first level of the sin bin, not taking reasonable care, will hit you with a penalty of 25% of the shortfall amount. Generally this occurs when the Tax Office deems that you did not do what a reasonable person would have done, considering your age, health, level of knowledge and circumstances.

The second behaviour, recklessness, cops a penalty rate of 50%. You’ll be considered reckless if you blustered ahead even though a reasonable person would have seen there was a risk of not really meeting tax obligations.

Intentional disregard
And then there is an intentional disregard of the tax law. The name speaks for itself, is still short of being criminal, but is hit with a 75% impost.

Making a false or misleading statement on, for example, a tax return or activity statement that results in a shortfall of the amount owed invites a penalty that equates to 75% of the actual tax liability. If you’ve been found to have entered into a tax scheme with the dominant purpose of avoiding tax, the penalty is 50%. If you are found to have taken a tax position that is not ‘reasonably arguable’ (which means that it is not cogent enough to be expected to win in court) you may get a penalty of 25%.

Penalty units
The amounts of the actual penalty can be based on the amount that should have been paid (either the full amount or a portion of it, and again the penalty is on top of what should have been paid) or on a ‘penalty unit’ if the unmet tax law obligation has no readily identifiable ‘value’ (such as providing access to a tax officer). A penalty unit is presently given a value of $110.

Not lodging a document on time
Not lodging a document on time (failure to lodge) gets a penalty unit ($110) for every 28 day period it remains un-lodged, up to five periods. The total fine is capped at five penalty units no matter how long the document has been outstanding. And this penalty is doubled for ‘medium’ sized businesses and multiplied by five for large businesses.

Failing to withhold
Failing to withhold, or to pay a withheld amount, relates to the PAYG withholding system for employees, directors and office holders as well as businesses that don’t provide an ABN for ‘supplies’. The penalty for not doing so is equal to the amount that should have been paid.

Other tax obligations
For failing to meet other tax obligations, there are prescribed unit-based multiples. Other obligations (together with the penalty for failing to meet those obligations) include, but are not limited to:

  • keeping or retaining records as required (20 penalty units)
  • retaining or producing declarations as required (20 penalty units)
  • providing access and reasonable facilities to authorised tax officers (20 penalty units)
  • applying for or cancelling GST registration when required (20 penalty units)
  • issuing a tax invoice or adjustment note when required (20 penalty units)
  • both principal and agent must not issue tax invoices or adjustment notes in relation to the same taxable supply or adjustment event (20 penalty units)
  • registering as a PAYG withholder when required (five penalty units)
  • lodging an activity statement electronically when required (five penalty units), and
  • paying an amount electronically when required (five penalty units).

The process
If you find yourself to be a target for a penalty, you should be notified in writing of the amount and due date, and also why you’ve been fined. And there is always the chance of being let off if you can show good cause.

The Tax Office may decide to waive a penalty (it calls this ‘remitting’ the penalty for some reason) if it considers it fair and reasonable to do so. There are cases, after all, where a shortfall arises due to a matter of timing of payment, rather than intentionally short changing the Tax Office. And a mistake made about GST amounts on an activity statement can be made up for on a subsequent statement.

Voluntarily disclosing that a mistake has been made will go a long way to reducing a penalty punishment, and is open to all taxpayers. Again, reducing penalties is a somewhat regulated largesse. The Tax Office says it will reduce a penalty by 80% if it is told about an error before it tells you you’re going to be audited or ‘publicly requests’ that you disclose certain aspects of your tax affairs. If the shortfall is less than $1,000, the penalty will be reduced to nil.

With all the above however, it pays to remember that the Tax Office maintains a significant amount of discretion about applying or reducing penalties, even though as taxpayers we are not given the same wriggle room.

Good compliance history will figure in the Tax Office’s considerations for applying penalty relief, but may not get much weight if other factors are not so rosy. In fact, should you be found to have taken steps to ‘prevent or obstruct’ the Tax Office finding out about a shortfall, or you took too long to tell it about an error, the tax law gives the Tax Office leeway to tack on 20% to a penalty.

Most businesses have up to four years to object to an assessment or an amended assessment, and others have up to two years, but penalties are dealt with on a different timeframe. After the notice of a penalty is served, a taxpayer has 60 days to object – or the penalty stands. So theoretically, a taxpayer may be forced to object to a penalty before they have objected to the assessment that sparked the penalty in the first place.

Interest charges can be imposed on outstanding amounts such as shortfalls, late payments and unpaid debts, and apply regardless of whether there is a penalty or not. There is no implication of punishment for dishonesty in having an interest charge applied. It’s just that the Tax Office is taking steps to not have the value of money owed eroded. The Tax Office’s justification is that it is making sure taxpayers who do not pay on time ‘do not get an advantage over those who do pay in full and on time’.

The general interest charge (GIC) is a uniform interest calculated daily on a compounding basis, and its rate is updated every quarter. For the January to March 2015 quarter, the annual rate is set at 9.75% (daily 0.02671233%, but click here for updates). After the due date for the extra tax (21 days after being notified), the full GIC kicks in.

The general interest charge is levied on amounts that remain unpaid, where there is an underpayment of tax or an instalment, if returns are lodged late (resulting in liabilities not paid by the due date) or certain electronic funds transfers fail.

A lower shortfall interest charge (SIC) also exists, which only applies to amounts that crop up as owing to the Tax Office due to amended assessments. The rate for January to March 2015 is 5.75% (daily 0.01575342%), but check here for updates.

The Tax Office has the discretion to partly or fully excuse an interest charge.

Avoiding penalties
There are a few things you can do to stay on the right side of the fence as far as avoiding having to pay a penalty, and of course paying the right amount of tax, on time, has to be top of the list.

But there are a few other steps you can take to make sure.

  • Keep adequate and accurate records
  • Stick to proven, genuine tax deductions
  • Use legitimate business structures
  • Make sure your business is registered for all the appropriate taxes
  • Keep your contact details up to date (so you don’t miss important information from relevant organisations or branches of government)
  • Never ‘back date’ your documents.

Another tactic is open to all taxpayers, by way of objecting to an assessment. A taxpayer may believe that claiming a certain deduction, or leaving out an item as assessable income, should (but will not) be accepted as legitimate – but they don’t want to be penalised by their interpretation of the tax law. The return can be lodged based on Tax Office accepted practice, and then an objection made to the resulting assessment.

The only proviso is that this taxpayer will need to have a ‘reasonably arguable’ position, so thorough research will be needed. It would be best to talk to your tax adviser about this course of action.

You may also lodge an objection if the Tax Office issues you with an amended assessment as a result of an audit or a review but if you believe that your original stance is the correct one under the tax law, or if totally correct, the Tax Office assessment is nevertheless excessive.

There is also the option of getting a private ruling from the Tax Office before you enter the transaction (and before you lodge the return for that year), although the process can be drawn out, is never assured, and is a case-by-case measure. Once again, this is something you will need to discuss with your tax adviser.

Source: Taxpayers Australia Limited

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