Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 7 - Regulation impact statement

Policy objective

7.1 The objective of the proposed change to the law is to introduce a new uniform, simple and equitable penalty regime to apply to all laws for which the Commissioner has administrative responsibility. This new penalty regime will support compliance under the new tax system.

7.2 The introduction of uniform rules is an essential adjunct to the introduction of the BAS, the means by which a range of existing and new taxes will be reported on a single statement. Uniform penalties are necessary in order that the penalty regime be consistent with the self reporting nature of the new taxes. The new regime will also rectify a number of deficiencies that are evident in the current penalty system.

7.3 The objective of the proposed change to allow people other than registered tax agents to prepare and lodge the BAS is to overcome the reported incapacity of tax agents to supply BAS services to all their business clients.

Background

7.4 Currently there are rules for the imposition of various penalties in a number of Acts administered by the Commissioner. These Acts include:

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A New Tax System (Australian Business Number) Act 1999 ;

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A New Tax System (Goods and Services Tax) Act 1999 ;

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Diesel and Alternative Fuels Grants Scheme Act 1999 ;

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Fringe Benefits Tax Assessment Act 1986 ;

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Income Tax Assessment Act 1936 ;

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Income Tax Assessment Act 1997 ;

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Petroleum Resource Rent Tax Act 1987 ;

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Superannuation Contributions Tax (Assessment and Collection) Act 1997 ;

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Superannuation Guarantee (Administration) Act 1992 ;

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Taxation Administration Act 1953 ;

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Taxation (Interest on Overpayments and Early Payments) Act 1983 ;

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Tobacco Charges Assessment Act 1955 ; and

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Wool Tax Administration Act 1964 .

7.5 The current systems of penalties in these Acts may be generally described as falling within one of the following categories:

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penalties relating to false or misleading statements which may lead to a shortfall in tax paid;

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penalties for failing to comply with a particular requirement such as failing to do something as required by a taxation law; and

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penalties for failing to pay the correct amount of tax when it became due and payable.

False and misleading statement penalties

7.6 A false or misleading statement can result in a tax shortfall which can form the basis upon which a penalty is imposed. Currently this penalty can range from 8% for failure to notify the Commissioner of a withholding liability to 200% for failure to notify the Commissioner of the correct amount of GST, FBT and superannuation guarantee.

Failure to comply penalties

7.7 In the laws currently administered by the Commissioner there are many penalties for failure to do particular things. These are administrative penalties where there can be no doubt as to whether an entity has complied with a requirement of the taxation law such as failure to lodge a tax return, failure to pay electronically and failure to keep records. The penalties for failure to lodge range from $10 per week (to a maximum of $200) for income tax returns of self assessed taxpayers to 200% of tax payable for FBT returns.

Failure to pay tax on time

7.8 The GIC is an interest rate that is used to calculate the interest that is charged on outstanding tax debts including penalties that are not paid by the due date. It effectively compensates the Commonwealth for the time value of the revenue due but not paid.

7.9 The GIC rate is based on the 13 week Treasury Note rate (the Government's borrowing rate) plus an uplift factor of 8%.

7.10 In addition to the inconsistent penalty rates in the current laws, a number of other problems have been identified with the existing penalty regimes. These include:

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inadequate penalties for late lodgment of reconciliation statements and income tax returns by self assessed taxpayers;

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problems with the structure of penalties for late lodgment of income tax returns by individuals;

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no administrative penalties for taxpayers who overclaim credits in their income tax returns;

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no administrative penalties for taxpayers who refuse to lodge income tax returns, thereby forcing the Commissioner to raise default assessments; and

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difficulties with the administration of GIC penalties which don't relate to late payment, such as understatement and underestimation penalties.

BAS service providers

7.11 Currently, the law generally restricts the provision of any service relating to an income tax or a FBT matter to registered tax agents. These arrangements would preclude any other person from preparing and lodging a BAS.

Implementation options

Penalties

7.12 Only one approach has been identified as being appropriate for modifying the penalty regime to meet the requirements of the new tax system and the goals of uniformity, simplicity and equity. This approach involves the rationalisation of the penalty systems by standardising rules in the existing penalty regimes across the various taxes and charges.

7.13 The existing penalty regimes will be standardised into 4 categories:

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false or misleading statements;

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failure to lodge documents;

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late payment; and

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other administrative penalties.

7.14 The penalties for false or misleading statements will adopt the model that currently applies to tax shortfalls under the income tax law. The Commissioner will be required to make an assessment of the amount. The assessment decision will be reviewable under Part IVC of the TAA 1953.

7.15 The penalties for failing to lodge documents on time will be replaced with a single administrative penalty ranging from one to 5 penalty units per 28 days, or part thereof, depending on the size of the taxpayer. This more effective penalty will allow the ATO to develop remission policies that reflect required compliance outcomes by tailoring the penalty to the lodgment history, the circumstances of the taxpayer and perceived future compliance behaviour.

7.16 The penalty for failing to pay tax on time has recently been amended with the introduction of the GIC. This type of penalty is not to be changed. Consequential amendments will be made as a result of changes to the other penalties.

7.17 The other category of penalties being amended is administrative penalties. This category of penalties and offence provisions apply where taxpayers fail to meet a statutory requirement to do something. This change will give the Commissioner greater flexibility in applying these compliance rules as administrative penalties will be introduced to situations where the current penalty requires a prosecution in response to an offence.

BAS service providers

7.18 The approach taken is to amend the registered tax agent provisions in the income tax and FBT laws to allow the following people to provide BAS services on behalf of taxpayers:

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any member of an RPA that represents accountants and tax practitioners;

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bookkeepers working under the direction of registered tax agents; and

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entities that provide payroll bureau services to employers.

7.19 Payroll bureaus will also be able to provide BAS services in relation to PAYG withholding obligations of employers.

7.20 A BAS service would include preparing and lodging a BAS, providing advice in relation to a BAS obligation and dealing with the Commissioner on BAS matters.

Assessment of impacts

Impact groups penalties proposal

7.21 The impact groups affected by the new penalty regime are as follows:

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taxpayers the new penalty regime will apply only to those taxpayers who do not meet their obligations under the various laws administered by the Commissioner. The new provisions represent a significant improvement and simplification of the law, and they reduce complexity. Under the existing law there are different penalty rules, with different bases for calculation of the penalty amount. Under the proposed new law one set of standardised provisions would apply to all circumstances where taxpayers have failed to meet their obligations;

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tax agents and other professional advisers the single set of standardised penalty provisions will make it simpler and easier for tax advisers to:

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work out how the law applies to any unpaid tax liabilities or unfulfilled obligations of their clients; and

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train their staff in legislation and procedures to improve compliance with the new regime;

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the ATO the standardisation of the penalty rules across all laws administered by the Commissioner will simplify administration of the law by the ATO. The introduction of standardised rules will also reduce staff training costs; and

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the Government having a more reasonable penalty regime should improve compliance. This could result in an increase in Government revenue.

Impact groups BAS preparer proposal

7.22 The impact groups affected by the BAS preparer proposals are as follows:

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taxpayers there will be a wider choice of people taxpayers can go to for provision of BAS services. This will assist to reduce the cost to business in meeting the requirement to lodge a monthly or quarterly BAS. These taxpayers will be mainly small businesses;

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tax agents and other professional advisers registered tax agents will face competition for these services. As BAS preparation is largely a bookkeeping function, it is expected that most tax agents will focus on providing services to their better organised clients. Businesses with poor record keeping procedures, the shoe box client, will probably need to seek the assistance of a BAS service provider. The measure will enable professional tax advisers, such as former sales tax consultants, to provide advice on the new taxes such as the GST;

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the ATO will benefit from having a greater number of businesses being assisted in meeting their obligations under the new tax system; and

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the Government having more businesses meeting their obligations under the new tax system will result in an increase in Government revenue.

Assessment of costs

Compliance costs for business

7.23 The compliance costs to business of the new penalty regime are unquantifiable, but are expected to be individually small. They will consist primarily of costs associated with businesses and tax practitioners familiarising themselves with the new rules. This familiarisation process is expected to be relatively straightforward, such as 30 minutes of reading, as the new rules are largely a standardisation of existing rules.

7.24 There are no compliance costs in the BAS service provider proposal.

Government revenue

7.25 There is expected to be a small positive impact on Government revenue. This will arise from an improvement in compliance and therefore collection of amounts payable, offset by a small reduction in collections from some penalties which will be reduced. The BAS service provider proposals could also have a small positive impact on Government revenue.

Administrative costs

7.26 The standardisation of the penalties across the laws administered by the Commissioner is expected to result in a general reduction in administrative costs. This standardisation should also lead to a reduction in ongoing staff training costs as staff will only need to be trained in one standard set of provisions. However, there is expected to be a small initial cost involved in training ATO staff about the new penalty system. The administrative costs of introducing BAS service providers is negligible within the general systems environment already established.

Assessment of benefits

7.27 The new penalty regime will provide a simplified and robust system of sanctions for failure to comply with various obligations under taxation and other laws administered by the Commissioner. The standardised penalty regime will compliment the standardised administrative arrangements introduced as part of the new tax system, particularly the single BAS, as well as rectifying a number of deficiencies in the existing penalty system.

7.28 Taxpayers and their representatives will benefit from the standardisation of the rules. They will only have to refer to a single set of standardised rules to determine the penalties for non-compliance. This is consistent with the more general standardisation of rules in the new tax system and will reduce in compliance costs, particularly for business taxpayers.

7.29 The additional number of BAS service providers will assist taxpayers to comply with their obligations under the new tax system and help businesses to improve their records through periodic reporting and greater computerisation of accounts. BAS service providers will open the market and provide business opportunities to people interested in providing these services. This will assist to reduce the cost to businesses in meeting the requirement to lodge a monthly or quarterly BAS.

Consultation

7.30 The ATO has consulted with tax practitioners and representatives of professional associations, and has been responsive to the suggestions of these groups. They are supportive of the change.

Conclusion

7.31 The standardisation of penalties across the Acts administered by the Commissioner is expected to provide benefits to the ATO and the Government by assisting in compliance improvement. The proposal will benefit taxpayers and tax practitioners by reducing the complexity of the law and the actual amount of penalties in some instances. There will be a small but unquantifiable initial cost to taxpayers and tax practitioners in familiarising themselves with the new rules.

7.32 Having more BAS service providers will benefit the community by assisting taxpayers to comply with their obligations under the new tax system.