1. Penalty Tax and Tax Offences
Chapter 12
Penalty Tax and Tax Offences
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Overview
Penalty taxes differ from tax offences in that penalties are imposed by way of additional tax, whilst tax offences are prosecuted by the Courts.
Thus, a taxpayer who fails to comply with provisions of the TAA may be faced with either:
additional penalty tax, or
court prosecution
but not both.
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3. Uniform Administrative Penalty Regime
The uniform administrative penalty regime provides for the imposition of penalties:
Relating to statements and schemes.
For the late lodgement of returns and other documents.
For failing to meet other tax obligations.
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Penalties
A penalty may be payable where: • a taxpayer fails to lodge an income tax return or other document by the due date. • a taxpayer refuses or fails to provide information. • a taxpayer fails to keep or furnish records. • a taxpayer has a “shortfall amount” (i.e. an understatement of tax payable). • the Commissioner has applied an anti-avoidance provision. • tax is paid after the due date.
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Shortfall Amounts
A shortfall amount is the difference between tax payable in accordance with the law (proper tax) and tax payable based on the taxpayer’s tax return (statement tax). Tax penalties apply where there is a shortfall amount caused by a particular behaviour of the taxpayer or tax agent.
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Shortfall Amounts
The actual amount of the tax shortfall penalty imposed upon a taxpayer is based upon consideration of the following factors: • Intentional disregard of tax law. • Recklessness. • Lack of reasonable care. • No reasonably arguable position. • Private Ruling disregarded.
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7. Administrative Penalties
Tax Shortfall Penalties
A penalty may apply where a taxpayer makes a statement (or fails to make a statement) that results in a “shortfall amount”.
i.e. an underpayment of tax.
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8. Tax Shortfall Penalties
Culpable Behaviour
Base Penalty
amount %
Adjusted Penalty
If Voluntary Disclosure
If hindrance during audit
During audit
Before audit
Shortfall amounts
• Intentional disregard.
• Recklessness.
• Reasonable care not shown.
• No reasonably arguable position.
• Failure to make statement. 75 50 25 90 60 30 40 20
N/A 15 10 5
Scheme Shortfall amounts
• Tax avoidance provision applied.
• Profit shifting (tax avoidance purpose).
• Profit shifting (no dominant tax avoidance purpose).
50(25)*
25(10)*
60(30)*
30(12)*
40(20)*
20(8)*
10(5)*
5(2)*
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9. Tax Shortfall Penalties
Increase in the Base Penalty Amount
The base penalty amount is increased by 20% in situations where the taxpayer:
prevents or hinders the ATO from determining the shortfall amount or scheme shortfall amount,
became aware of the shortfall amount but did not inform the ATO within a reasonable time, or,
was previously liable to a false or misleading statement penalty.
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10. Tax Shortfall Penalties
Reduction of the Base Penalty Amount The base penalty amount may be reduced for voluntary disclosure by the taxpayer. If the shortfall amount is $1,000 or more, the base penalty amount is reduced by 80% upon voluntary disclosure before the ATO notifies the taxpayer of a pending audit.
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11. Tax Shortfall Penalties
Penalty for taking an income tax position that is not reasonably arguable
A base penalty amount of 25% of the shortfall amount will apply if the shortfall amount exceeds a threshold amount.
The threshold for individual taxpayers and companies is any amount more than the greater of $10,000 or 1% of the income tax worked out on the basis of the taxpayer's income tax return.
For partnerships and trusts, the threshold is any amount more than the greater of $20,000 or 2% of the net income.
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12. Illustration: Shortfall amount less than the threshold
Kylie is liable to pay $40,000 income tax based on her income tax return for the current income year. She claimed a deduction in her tax return that is not allowable and for which she does not have a reasonably arguable position. The deduction has resulted in a shortfall amount of $6,000. In this case, the greater of $10,000 and 1% of the income tax payable ($400) is $10,000. Required: Is Kylie liable to any penalties? Solution: Because the $6,000 shortfall amount is less than $10,000, Kylie is not liable to a penalty for not having a reasonably arguable position. She may, however, be liable to a false or misleading statement penalty.
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13. Illustration: Shortfall amount greater than the threshold
YZX Pty Ltd is liable to pay $10 million income tax based on the income tax return for the current year. The tax return omitted taxable income from the sale of property resulting in a shortfall amount of $500,000. Required: Is YZX Pty Ltd liable to any penalties? Solution: In this case, the greater of $100,000 which is 1% of the income tax payable and $10,000 is $100,000. Because the $500,000 shortfall amount is more than $100,000 YZX Pty Ltd must have a reasonably arguable position to support the non-inclusion of the income from the sale of the property to avoid being liable to a penalty of 25% of the shortfall for not having a reasonably arguable position.
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14. Other Administrative Penalties
Culpable Behaviour
Penalty
• Failure to keep records required under a taxation law.
• Failure to make or keep declarations required on income tax returns authorising agent to lodge.
• Failure to give reasonable facilities to taxation officer exercising access powers under a taxation law.
20 penalty units
A penalty unit is $170 for offences occurring on or after 28 December 2012.
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15. Failure To Lodge Returns On Time (FTL)
The base penalty amount is one penalty unit for each 28 days (or part thereof) that the tax return or tax document remains outstanding.
Culpable Behaviour
Small entities
(base penalty)
Medium entities
Large entities
Failure to lodge tax documents by due date or in the approved form.
1 penalty unit for each 28 day period or part thereof not lodged.
Double the base penalty.
Five times the base penalty.
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16. Tax Shortfall Penalties
Tax shortfall penalties apply where there is a tax shortfall amount as a result of a taxpayer: • Making a false or misleading statement in a material particular. • Taking a position for income tax purposes that is not reasonably arguable. • Entering into a tax avoidance scheme. • Failing to give documents to the Commissioner.
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17. Tax Shortfall Penalties
The base penalty amount for a tax shortfall is worked out as a fixed percentage of the amount of the shortfall.
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18. Illustration: Calculation of tax shortfall penalty
Assume that a taxpayer has a $10,000 tax shortfall due to deliberate evasion (i.e. intentional disregard). Required: Calculate the tax shortfall penalty assuming that no increase or decrease to the base penalty is made by the ATO. Solution: The taxpayer is liable for the penalty tax of $7,500 (being 75% of the tax shortfall), as well as the $10,000 tax shortfall.
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19. Remission of Shortfall Penalties
The Commissioner has the discretion to remit penalty tax in whole or in part - TAA Sch 1 s Factors that are taken into account include: • The need to treat taxpayers in like circumstances consistently. • A taxpayer’s particular circumstances and compliance history. • Tailoring the penalty to secure improvements in compliance behaviour.
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20. Illustration: Remission of shortfall penalty
Andrew completed his income tax return by precisely following the instructions contained in the 2015 Individual Tax Return Instructions. However, the instructions were incorrect and misleading. By following them Andrew incurred a tax shortfall of $500. Required: Determine what penalties will be applied. Solution: Andrew will still be liable to pay the tax shortfall of $500. However, the ATO will remit any shortfall penalty, as well as plus shortfall interest charge, as he has acted reasonably and in good faith by following the 2015 Individual Tax Return Instructions.
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21. Shortfall Interest Charge (SIC)
Generally, the SIC applies from the date due for payment of the earlier, understated assessment until the day before the ATO issues the notice of amended assessment. The SIC is calculated daily on a compounding basis and is updated on a quarterly basis.
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22. Shortfall Interest Charge (SIC)
The SIC rates for the 2014/15 income year are:
Period
Interest rate (% pa)
1 July 2014 to 30 September 2014
5.69
1 October 2014 to 31 December 2014
5.63
1 January 2015 to 31 March 2015
5.75
1 April 2015 to 30 June 2015
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23. Late Payment Penalties
A General Interest Charge (GIC) applies to the late payment or underpayment of a range of taxes, the late lodgment of various returns, late payment of penalties or the failure to make deductions and other payments under the PAYG system - TAA s.8AAA to s.8AAH.
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24. Late Payment Penalties
The GIC rates for the 2014/15 income year are:
Period
Interest rate (% pa)
1 July 2014 to 30 September 2014
9.69
1 October 2014 to 31 December 2014
9.63
1 January 2015 to 31 March 2015
9.75
1 April 2015 to 30 June 2015
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25. Illustration: Calculation of GIC
Assume $10,000 income tax liability due on 22 August 2014, but not paid until 21 September 2014 (i.e. 30 days overdue). Required: Calculate the outstanding tax debt, including the General Interest Charge (GIC). Solution: The applicable daily rate is 9.69% ÷ 365 = % Therefore, the outstanding tax debt including the GIC charge is: $10,000 x ( )30 = $10,079.95
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Tax Offences
If a taxpayer is liable to pay penalty tax and a prosecution is instituted, then that taxpayer ceases to be liable to pay the penalty tax, even if that prosecution is later withdrawn. Where an offence is not punishable by a term of imprisonment, the proceedings are the same as those for the recovery of a monetary penalty. This means that the proceedings are civil, rather than criminal, in nature.
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