House of Representatives

Explanatory Memorandum

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

Chapter 2 - The shortfall interest charge

Outline of chapter

2.1 Schedule 1 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) to apply a special interest regime - the shortfall interest charge - to understatements of income tax liability.

2.2 The shortfall interest charge will replace the existing general interest charge with a charge at a lower rate for the period between when the shortfall amount would originally have been due and when the shortfall is corrected.

2.3 These provisions also allow for the remission of the shortfall interest charge in appropriate circumstances, with review rights where the shortfall interest charge is significant relative to the size of the shortfall.

Context of amendments

2.4 These provisions have been developed as part of the Government's response to the recommendations made in the Report on Aspects of Income Tax Self Assessment (the Report). Background to the Report, and the recommendations made, is in Chapter 1 of this explanatory memorandum.

2.5 A shortfall is different from a late payment of tax, which occurs where a stated liability (whether correct or not) is not fully paid by the due date.

2.6 Currently, a shortfall is treated the same way as a late payment, with the general interest charge being applied from the due date of the original assessment to the time the amount is paid. This occurs because the due date for payment of a shortfall amount is the same as for the original (understated) assessment, automatically triggering the application of the general interest charge from that date. Thus, when the shortfall is corrected, the general interest charge will be imposed for the 'shortfall period' (the period between due date for the original assessment and the correction of the shortfall).

2.7 The general interest charge is set at a high rate (compared with indicator rates for commercial borrowing) to encourage prompt payment of tax liabilities.

2.8 The Report recommended that a lower interest charge should apply for the period prior to a taxpayer being notified of their shortfall, as they would not generally be in a position to respond to the incentive premium that is built into the general interest charge (see Chapter 5 of the Report).

2.9 These amendments implement these recommendations.

Summary of new law

2.10 Where a taxpayer's income tax assessment is amended so as to increase their liability, the taxpayer is liable to pay the shortfall interest charge on the increase - that is, on the shortfall amount. The shortfall interest charge replaces the current liability to pay the general interest charge during the shortfall period.

2.11 The shortfall interest charge rate is calculated in the same way as the general interest charge rate, but will be four percentage points less per annum. The shortfall interest charge has a three percentage point uplift over the base rate (which is an average of bank bill yields), in contrast with the seven percentage point uplift used by the general interest charge.

2.12 The shortfall interest charge applies on a daily compounding basis from the due date for payment of the earlier, understated assessment to the end of the day before the assessment is amended.

2.13 The due date for payment of the tax shortfall and the related shortfall interest charge is 21 days after the date on which the Commissioner of Taxation (Commissioner) gives the notice increasing liability. Once this due date for the amended assessment has passed, the general interest charge will apply automatically to any unpaid tax and shortfall interest charge.

2.14 The shortfall interest charge is tax deductible.

2.15 The Commissioner has the power to remit the shortfall interest charge where the Commissioner considers it fair and reasonable to do so. The Commissioner will give written reasons for rejecting remission requests.

2.16 Taxpayers whose unremitted shortfall interest charge exceeds 20 per cent of the shortfall have objection rights and appeal rights under Part IVC of the TAA 1953 (the generic objection and appeal provisions) available to them.

2.17 The shortfall interest charge applies to shortfalls in assessments for the 2004-05 and later income years. The general interest charge (and, where relevant, the older under-payment interest charge under section 170AA of the Income Tax Assessment Act 1936 (ITAA 1936)) will continue to apply to shortfalls in assessments relating to the 2003-04 and preceding income years - regardless of when those amendments are ultimately made.

Comparison of key features of new law and current law

Detailed explanation of new law

Creation and imposition of the shortfall interest charge

The role of the shortfall interest charge

2.18 The rationale for imposing an interest charge during the shortfall period is to ensure that taxpayers who understate their liability in self assessing do not receive an advantage - in the form of a 'free loan' - over those who meet their tax liabilities in full by the due date.

2.19 This goal suggests a charge aimed at neutralising the 'loan benefits' that taxpayers could otherwise receive from the temporary use of the shortfall amount.

2.20 The existing approach of applying the general interest charge to shortfalls has had significant administrative advantages. However, before the Commissioner notifies a taxpayer of a shortfall, the taxpayer would not generally be in a position to respond to the premium that is built into the general interest charge as an incentive for prompt payment.

2.21 Accordingly, the Government has decided to create a new, lower interest charge specifically for the shortfall period.

2.22 The loan benefits that can arise from a shortfall will vary according to the circumstances of the individual taxpayer, reflecting factors such as the taxpayer's usual borrowing rate, the rate of return earned from investing the shortfall amount or - where the shortfall amount was spent on consumption - whether the taxpayer would knowingly have borrowed for that purpose.

2.23 However, administrative practicality and transparency demand that a single rate of the shortfall interest charge be imposed for all affected taxpayers. The shortfall interest charge will not be fine tuned to offset the actual loan benefit (if any) received by a particular taxpayer from a particular shortfall. Rather, the shortfall interest charge rate will reflect benchmark business borrowing rates.

2.24 Accordingly, the objects clause is stated in terms of neutralising the general potential for taxpayers to receive loan benefits from shortfalls. [Schedule 1, item 1, section 280-50]

Liability for the shortfall interest charge

2.25 A taxpayer is liable to pay the shortfall interest charge on an additional amount of income tax they are liable to pay because the Commissioner amends their assessment for an income year. A shortfall does not exist unless the taxpayer's overall liability is increased - even though the Commissioner might have increased a particular element of the earlier assessment. [Schedule 1, item 1, subsection 280-100(1)]

Example 2.1: Amended assessment with no shortfall

John is an office worker in the 30 per cent tax bracket (plus a 1.5 per cent Medicare levy).

When preparing his tax return, John incorrectly claims a $380 deduction for his telephone line rental, but also neglects to claim a valid $603 deduction for work related car expenses.

A later audit of John's work related expense claims leads to the Australian Taxation Office (ATO) querying the deduction for telephone line rental. In reviewing the TaxPack, John acknowledges that he was not entitled to that deduction, but does become aware of his entitlement to the car deduction.

The amended assessment reduces John's overall liability by $70 (ie 31.5% * (380 - 603)). John does not have a shortfall and is not liable for the shortfall interest charge on the invalid $380 telephone line rental deduction.

Liability to the shortfall interest charge is unrelated to penalties

2.26 The shortfall interest charge applies regardless of whether or not the taxpayer is liable to any penalty. Liability to the shortfall interest charge does not depend upon - nor imply - culpability on the part of the taxpayer. [Schedule 1, item 1, subsection 280-100(4)]

Government bodies - liability to pay the shortfall interest charge

2.27 Neither the Commonwealth nor an authority of the Commonwealth is liable to pay the shortfall interest charge. [Schedule 1, item 1, subsection 280-100(5)]

2.28 State and territory bodies subject to income tax are liable to pay the shortfall interest charge on shortfall amounts of income tax.

Imposition of the shortfall interest charge

2.29 The Shortfall Interest Charge (Imposition) Bill 2005 accompanies this Bill, imposing the shortfall interest charge as a tax, but only to the extent to which it cannot otherwise be validly imposed.

The shortfall interest charge period

2.30 The liability exists for each day in the period during which the taxpayer's liability was understated. In most cases, the period will run from the due date of the original (understated) assessment to the day before the Commissioner gives notice that the assessment has been amended upwards on account of the shortfall (a 'debit amendment'). [Schedule 1, item 1, subsection 280-100(2)]

Example 2.2: Simple shortfall case

John is an office worker in the 30 per cent tax bracket (plus a 1.5 per cent Medicare levy).

John incorrectly claims in his 2004-05 tax return a $600 deduction for an ordinary business suit. The due date for payment of the assessment based on that return is 21 November 2005.

A later audit of John's work related expense claims results in his liability being increased by $189 (ie 31.5% * 600), with the amendment being notified to him on 30 January 2007.

The shortfall interest charge would apply on the $189 for the 435 days from 21 November 2005 to 29 January 2007 (inclusive).

2.31 Under the current law, a 'nil assessment' (such as where the taxpayer has a tax loss for the income year) does not constitute an assessment. The Government will introduce amendments later this year, as part of its proposed improvements to self assessment for amendment periods, that will have the effect that the shortfall interest charge applies to cases where a taxpayer's liability is adjusted from nil to a positive amount. In such cases, the shortfall interest charge period will commence on the day that tax would have been due had a positive amount been assessed. [Schedule 1, item 1, paragraph 280-100(2)(a)]

2.32 In some cases the shortfall does not arise from an error in the original assessment, but from the taxpayer later requesting an amendment that incorrectly reduces their liability (an erroneous 'credit amendment'). Although a shortfall would arise, the taxpayer would not have received a benefit until they received the erroneous credit. Accordingly, in such cases the shortfall interest charge period will commence from the due date of the amended assessment that incorrectly reduced the previously assessed liability. (Due dates for amended assessments are explained in paragraph 2.43.) [Schedule 1, item 1, subsection 280-100(3)]

Example 2.3: An erroneous credit amendment

John is an office worker in the 30 per cent tax bracket (plus a 1.5 per cent Medicare levy).

John files his tax return for the income year 2004-05. The due date for payment of the assessment based on that return is 21 November 2005.

Later, a colleague remarks that he had claimed a workplace deduction for a suit, prompting John, who had purchased a $600 business suit in May 2005, to request an amendment to his assessment reducing his liability by $189 (ie 31.5% * 600). John is notified of this amendment, and receives a cheque for $189. The amended assessment has a due date of 20 December 2005.

A later audit of John's work related expense claims results in his liability being increased by $189, with the amendment being notified to him on 30 January 2007.

The shortfall interest charge would apply on the $189 for the 406 days from 20 December 2005 to 29 January 2007 (inclusive).

Cases of multiple amendment.

2.33 The cases outlined above demonstrate the principle that the shortfall interest charge, rather than the general interest charge, applies to income tax shortfalls during the period in which a taxpayer has not been notified of a shortfall.

2.34 Where complex overlays of debit and credit amendments arise, it is intended that the shortfall interest charge apply to the various shortfall amounts during their respective shortfall periods. The shortfall interest charge periods pertaining to multiple amendments may run concurrently.

Example 2.4: Multiple amendments

John is an office worker in the 30 per cent tax bracket (plus a 1.5 per cent Medicare levy).

When preparing his tax return, John omits to declare $800 in dividend income and incorrectly claims a $380 deduction for his telephone line rental. The due date for payment of the assessment based on that return is 21 November 2005.

Later, a colleague remarks that he had claimed a workplace deduction for a suit, prompting John, who had purchased a $600 business suit in May 2005, to request an amendment to his assessment reducing his liability by $189 (ie 31.5% * 600). John is notified of this amendment, and receives a cheque for $189. The amended assessment has a due date of 20 December 2005.

Computerised income matching identifies the omitted dividend income, resulting in an amended assessment increasing his liability by $252 (ie 31.5% * 800), being notified to him on 2 March 2006.

A later audit of the John's work related expense claims denies the deductions for telephone line rental and the business suit, resulting in an amended assessment increasing his liability by $308 (ie 31.5% * (380 + 600)), being notified to him on 30 January 2007.

The shortfall interest charge would apply as follows:

•

For the dividends: on $252 (ie 31.5% * 800) for the 101 days from 21 November 2005 to 1 March 2006 (inclusive).

•

For the phone: on $119 (ie 31.5% * 380) for the 435 days from 21 November 2005 to 29 January 2007 (inclusive).

•

For the suit: on $189 (ie 31.5% * 600) for the 406 days from 20 December 2005 to 29 January 2007 (inclusive).

The shortfall interest charge rate

2.35 The shortfall interest charge rate is a daily rate arrived at by dividing an annualised rate by the number of days in the calendar year - as occurs with the general interest charge. [Schedule 1, item 1, subsection 280-105(2)]

2.36 In annualised terms, the shortfall interest charge rate is four percentage points lower than the general interest charge, employing a three percentage point uplift factor over the same base rate that the general interest charge uses. [Schedule 1, item 1, subsection 280-105(2)]

2.37 The shortfall interest charge uses the same base rate as the general interest charge. The base rate is adjusted quarterly, as the mean yield on 90-day bank accepted bills for the middle month of the preceding quarter. [Schedule 1, item 1, subsection 280-105(2) and, item 22, subsection 995-1(1)]

Example 2.5: Calculation of the shortfall interest charge rate

Assume the mean yield on 90-day bank accepted bills for November 2005 is 5.5 per cent per annum. The base rate applying in the first quarter of 2006 would therefore be 5.5 per cent per annum.

The annualised shortfall interest charge rate applying during that quarter would therefore be 8.5 per cent (ie 5.5% + 3%) per annum, resulting in a (daily) shortfall interest charge rate of 0.02328767 per cent.

In contrast, the applicable general interest charge rate during the quarter would be 12.5 per cent per annum, corresponding to a daily general interest rate of 0.03424657 per cent.

Calculation of the shortfall interest charge

2.38 The shortfall interest charge rate is applied on a daily compounding basis to the shortfall amount, for the duration of the shortfall interest charge period. That is, for any day in the period, the shortfall amount and any shortfall interest charge accumulated to date is multiplied by the (daily) shortfall interest charge rate. [Schedule 1, item 1, subsection 280-105(1)]

Example 2.6: Calculation of the shortfall interest charge

A taxpayer has a $1,000 shortfall for (exactly) the whole of the first quarter of 2006, during which the base rate was 5.5 per cent.

•

On 1 January 2006 the shortfall interest charge would be $0.23 ($1,000 * 0.0002328767).

•

On 2 January 2006 the shortfall interest charge would be $0.23 ($1,000.23 * 0.0002328767).

Over the whole 90 days of the quarter, the total shortfall interest charge will amount to $21.18, compared with the general interest charge of $31.30 that would have been imposed on the shortfall under the current legislation.

Notification by the Commissioner

2.39 The Commissioner must give the taxpayer a notice stating the amount of the shortfall interest charge liability. This amount can be included in another notice that the Commissioner gives to the taxpayer - such as the notice of the amended assessment. The notice will serve as prima facie evidence of the shortfall interest charge liability. [Schedule 1, item 1, section 280-110]

2.40 Section 29 of the Acts Interpretation Act 1901 describes what is meant by 'give' in these provisions. In most cases the ATO will be considered to have given notice by addressing and posting a notice as a letter, and the notice is deemed to have been given to the taxpayer at the time the letter would be delivered in the ordinary course of the post.

Due date for payment of amended assessments

2.41 Under the current law, an amended assessment is due and payable at the same time as the original assessment. Also, the general interest charge that accrued each day during the shortfall period would have been due at the end of each day.

2.42 The new arrangements provide a prospective due date, allowing a 21 day payment period for notified amounts of shortfall and related shortfall interest charge. [Schedule 1, item 7, subsections 204(2) and (2A) of the ITAA 1936]

2.43 The amount of tax that a taxpayer is liable to pay because of an amended assessment will be due 21 days from when the taxpayer is given notice of the amendment. [Schedule 1, item 7, subsection 204(2) of the ITAA 1936]

2.44 Any shortfall interest charge that a taxpayer is liable to pay will be due 21 days from when the taxpayer is given notice of the charge. [Schedule 1, item 7, subsection 204(2A) of the ITAA 1936]

Credit amendments

2.45 The prospective due date will apply to all amended assessments - including amendments decreasing a taxpayer's liability (ie credit amendments).

2.46 In the case of credit amendments, no additional amount of tax will become due and payable at that date. However, the due date for the amended assessment will be the starting point for any shortfall interest charge period that might arise from erroneous credits in that amended assessment. [Schedule 1, item 1, subsection 280-100(3)]

Ongoing relevance of previous due dates

2.47 Although an amended assessment has a new, prospective due date, the due date of the original assessment - and any intervening amended assessments - will continue to be relevant for determining any shortfall interest charge or general interest charge arising from those assessments.

2.48 The due date of an original assessment will continue to be the starting date for the shortfall interest charge on any further shortfalls arising from the original assessment and for the general interest charge on unpaid amounts from the original assessment.

Example 2.7: Relevant due dates and amended assessments

John is an office worker in the 30 per cent tax bracket (plus a 1.5 per cent Medicare levy).

When preparing his tax return for the income year 2004-05, John omits to declare $800 in dividend income and incorrectly claims a $380 deduction for his telephone line rental.

John files his tax return well before the 31 October 2005 lodgement deadline and, based on that return, receives a tax assessment for $10,000, due and payable on 21 November 2005. After allowing for $9,000 of tax that had been withheld from his salary over the course of the year, John has an outstanding tax liability of $1,000. John makes no payments against that $1,000, and the general interest charge commences to accrue from 21 November 2005.

Computerised income matching identifies the omitted dividend income. On 2 March 2006, John is notified of an amended assessment increasing his liability by $252 (ie 31.5% * 800) and of the shortfall interest charge on that amount for the 101 days from 21 November 2005 to 1 March 2006 (inclusive). John pays the increased liability and the shortfall interest charge before the due date of 23 March 2006.

The general interest charge, which has been accruing on a compound basis since 21 November 2005, will continue to accrue on the unpaid $1,000 from the original assessment and the unpaid general interest charge.

A later audit of John's work related expense claims denies the deduction for telephone line rental, resulting in a further amended assessment. On 30 January 2007 John is notified that his liability for 2004-05 has been increased by $119 (ie 31.5% * 380) and that the shortfall interest charge applies on this amount for the 435 days from 21 November 2005 to 29 January 2007 (inclusive). The due date for payment of these amounts is 20 February 2007.

As John has still made no payments against the unpaid $1,000 from the original assessment or the resulting general interest charge, the general interest charge on those overdue amounts continues to accrue daily.

2.49 Similarly, the due date of an amended assessment remains relevant even where that amended assessment is itself later amended:

•

The shortfall interest charge period for a shortfall that arises from an erroneous credit amendment always commences at the due date for that credit amendment (see Example 2.3) [Schedule 1, item 1, subsection 280-100(3)].

•

The general interest charge on any amounts remaining unpaid from an earlier amended assessment always accrues from the due date of that earlier amended assessment (see paragraph 2.53).

Interest charge implications of the prospective due date

2.50 Having a prospective due date for amended assessments has implications for interest charges.

The payment period

2.51 Consistent with the treatment of the original assessment, neither the shortfall interest charge nor the general interest charge will apply during the 21 day payment period. This ensures that the taxpayer can settle the matter by paying the notified amount by the due date, without further (un-notified) interest having accrued.

2.52 Similarly, to encourage immediate payment of notified amounts, taxpayers will be eligible for early payment interest under the terms of the Taxation (Interest on Overpayments and Early Payments) Act 1983. The prospective due date will automatically give rise to this entitlement for early payment of the increase in assessed liability. The amendments extend the entitlement to early payment of the shortfall interest charge. [Schedule 1, item 29, paragraph 8A(1)(a) of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

The general interest charge

2.53 The general interest charge applies automatically from the due date of any unpaid tax liabilities, and so will commence to accrue daily at the end of the 21 day payment period on any unpaid shortfall amount. The amendments extend this treatment to unpaid shortfall interest charge. [Schedule 1, item 7, subsections 204(2), (2A) and (3) of the ITAA 1936 and item 24, subsection 8AAB(4)]

2.54 The higher general interest charge is applied in such cases because, once the amounts owing have been notified and a payment period allowed, the shortfall taxpayer would generally be in a position to respond to the incentive premium that is built into the general interest charge.

2.55 No shortfall amount will be subject to both the general interest charge and the shortfall interest charge in respect of the same day.

Interest charges and credit amendments

The shortfall interest charge

2.56 Where an assessment has been amended because of a purported shortfall and that shortfall is later overturned, the shortfall interest charge relating to that shortfall will be annulled. [Schedule 1, item 3, subsection 172(1) of the ITAA 1936; item 4, subparagraph 172(1)(a)(ii) of the ITAA 1936; item 6, subsection 172(2) of the ITAA 1936]

2.57 A taxpayer is generally eligible for overpayment interest on an overturned shortfall, under the Taxation (Interest on Overpayments and Early Payments) Act 1983. The amendments make the taxpayer also entitled to overpayment interest on the related shortfall interest charge that they had paid. [Schedule 1, item 27, subparagraph 3(1)(a)(iiia) of the Taxation (Interest on Overpayments and Early Payments) Act 1983; item 28, subparagraph 3(1)(a)(iv) of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

The general interest charge

2.58 Under the current law, the uniform due date for all assessments and amendments of assessments means that a credit amendment automatically corrects any general interest charge implications of the earlier overstatement of a taxpayer's liability.

2.59 The amendments ensure that any such general interest charge implications continue to be corrected. Where a shortfall amount (and related shortfall interest charge) is not paid by the due date, that outstanding liability will initially be reflected in the general interest charge applying to the later period. Should the shortfall later be overturned, the general interest charge will be recalculated as if the unpaid shortfall amount (and related shortfall interest charge) had never existed. [Schedule 1, item 4, paragraph 172(1)(a) of the ITAA 1936]

Example 2.8: Credit amendment and the general interest charge

Assume the base rate is a constant 5.5 per cent.

Company F completes its income tax assessment for the income year 2004-05, which has a due date of 1 December 2005. From time to time, Company F has various outstanding tax liabilities posted to its ATO running balance account, which attract the general interest charge.

An ATO compliance program results in Company F's assessment being amended to increase the liability by $30,000. Company F is notified on 2 March 2006 of the amended assessment and the related shortfall interest charge of $642 (ie on an amount of $30,000 at a rate of 8.5 per cent for the 91 days from 1 December 2005 to 1 March 2006 inclusive), with the due date for payment being 23 March 2006.

Company F makes no payments against the shortfall amount or the shortfall interest charge, and from 23 March 2006 the $30,642 debt would be reflected in the daily general interest charge accruing on Company F's ATO running balance account.

Company F later successfully objects to the debit amendment. The general interest charge for the period from 23 March 2006 is recalculated with the effects of the unpaid $30,000 shortfall and $642 of the shortfall interest charge negated by equal credits with the same effective date of 23 March 2006.

Reversal of credit amendments

2.60 Where a credit amendment is later overturned, the general interest charge and the shortfall interest charge that had been eliminated by that credit amendment will be reinstated. [Schedule 1, item 5, subsection 172(1A) of the ITAA 1936]

Tax deductibility of the shortfall interest charge

2.61 The shortfall interest charge is tax deductible. This is consistent with the tax deductibility of the general interest charge and its predecessor the under payment interest charge. [Schedule 1, item 20, paragraph 25-5(1)(c)]

Remission of the shortfall interest charge

2.62 The Commissioner can remit all or part of the shortfall interest charge where the Commissioner considers it fair and reasonable to do so. [Schedule 1, item 1, subsection 280-160(1)]

2.63 Remission can be requested by the taxpayer or initiated by the Commissioner.

2.64 In considering whether to grant remission, the Commissioner must have regard to two key principles [Schedule 1, item 1, subsection 280-160(2)] :

•

Remission should not occur just because the benefit the taxpayer received from the temporary use of the shortfall amount is less than the shortfall interest charge [Schedule 1, item 1, paragraph 280-160(2)(a)]. In particular, a taxpayer should not expect that remission would be granted for the sole reason that their rate of finance is lower than the shortfall interest charge rate.

•

Remission should occur where the circumstances justify the Commonwealth bearing part of the cost of delayed receipt of taxes [Schedule 1, item 1, paragraph 280-160(2)(b)]. Such cases would usually entail delay, contributory cause or fault on the part of the ATO or others. Where the Commissioner is aware that these circumstances arise, the Commissioner should initiate remission.

2.65 The following examples illustrate where remission should be considered in accordance with this second principle, having regard to the extent to which factors beyond the taxpayer's control were responsible for the size and duration of the shortfall:

•

The ATO took longer to complete an audit than could reasonably have been expected, having regard to all the facts and circumstances of the case.

•

Even though there was no delay by the ATO, the complexity of issues involved resulted in an abnormal time between the commencement of the audit and the amendment of the assessment.

•

The ATO has, by advice or action, contributed to the taxpayer's error giving rise to the shortfall.

•

The taxpayer relied on judicial interpretation that was later overturned.

•

The taxpayer is affected by a retrospective change in legislation.

2.66 It is also intended that remission be considered in the following cases:

•

A shortfall caused negligible or no revenue impact. An example of this would be where joint income has been incorrectly apportioned between taxpayers with equal marginal rates.

•

The amount of the shortfall interest charge remitted is minor - for example, the Commissioner might round down the amount of the shortfall interest charge payable or remit in full a minor amount of charge.

•

Practical administration favours remission - for example, where calculation of the precise shortfall interest charge is complex, the Commissioner might apply an approximation that does not disadvantage the taxpayer.

2.67 Remission may also be considered to encourage taxpayers to voluntarily self amend when they become aware that they have a shortfall. This would not generally include cases where a taxpayer is merely responding to an ATO announcement that certain arrangements were ineffective - although the ATO may offer interest incentives to settle in such cases. Similarly, specific interest rate remission policies could be adopted by the ATO as part of particular compliance programs.

2.68 The considerations set out above are not intended to be exhaustive, and the Commissioner is given a broad discretion to remit where the circumstances make it fair and reasonable to do so. [Schedule 1, item 1, section 280-160]

2.69 Conversely, the Commissioner has the discretion not to remit where a taxpayer has acted in bad faith or where other circumstances mean that it would not be fair and reasonable to remit.

Reasons for remission decision

2.70 To improve confidence in the objectivity of ATO remission decisions, the Commissioner must provide reasons for the remission decision where a taxpayer requests remission of the shortfall interest charge and the Commissioner decides not to remit all of the amount. [Schedule 1, item 1, section 280-165]

2.71 The Acts Interpretation Act 1901 (section 25D) provides for what constitutes written reasons. This states that '...the instrument giving the reasons shall also set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based.'.

2.72 In order for this provision to be administratively workable, reasons will only be required to be provided where the taxpayer has initiated the remission through making a remission request in the approved form.

2.73 Any existing right to request reasons under other administrative law mechanisms (eg the Administrative Decisions (Judicial Review) Act 1977 ) is not affected by these amendments.

Objection and appeal against certain remission decisions

2.74 The amendments introduce a new avenue of review for taxpayers with shortfalls. Under the general interest charge regime, there is no mechanism to challenge a remission decision under the tax law. No review of the merits of the decision is available.

2.75 As shown above, a range of judgements might need to be made by the Commissioner when deciding whether or not to remit some or all of the shortfall interest charge. It is appropriate therefore that merits review of remission decisions be available where the potential for the shortfall interest charge to have penalty effects is significant relative to the administrative costs of such a review process.

2.76 Accordingly, where the unremitted shortfall interest charge exceeds 20 per cent of the tax shortfall, the objection, review and appeal rights available in Part IVC of the TAA 1953 will be available to the taxpayer. The rights available include a right to object to the merits of a decision made by the Commissioner, a right to have the Administrative Appeals Tribunal review the objection decision and a right to appeal the decision to the Federal Court. [Schedule 1, item 1, section 280-170]

2.77 Without the 20 per cent threshold, the cost of objections and appeals is likely to be excessive relative to the potential penalty effect from the shortfall interest charge being above loan benefits that taxpayers receive from the temporary use of the shortfall funds.

2.78 It is recognised that large shortfalls can result in large amounts of the shortfall interest charge without exceeding the 20 per cent threshold. However, a large shortfall interest charge does not, of itself, imply a large penalty effect. As noted in paragraphs 2.22 and 2.23, determining the loan benefit for a particular taxpayer - and hence the actual penalty effect of the shortfall interest charge rate - can be complex and any decisions based on that judgement would raise concerns over transparency.

2.79 Accordingly, formal objection and appeal rights will not be available merely because the amount of the shortfall interest charge is large in absolute dollar terms. This does not prevent the Commissioner initiating remission (or further remission) where the affected taxpayer lacks formal appeal rights.

2.80 The provision applies regardless of whether the remission decision is initiated by the taxpayer or the Commissioner. However, a remission decision must have been made before the rights will be triggered. The taxpayer is not required to request remission before objecting to a failure to remit an amount of the shortfall interest charge if the Commissioner has already made a decision not to remit.

2.81 The provision applies regardless of whether the Commissioner has remitted in full or in part, so long as the total unremitted amount is more than 20 per cent of the shortfall amount.

2.82 The current review mechanisms (and any associated right to request reasons for a decision) available under the Administrative Decisions (Judicial Review) Act 1977 or other administrative law mechanisms are not affected by these amendments.

Overpayment interest on delayed remission of shortfall interest charge

2.83 Where a taxpayer requests and receives remission of the general interest charge, but there is a delay in granting that remission, the taxpayer can receive overpayment interest for the period from the beginning of the 30th day after the request was made. The amendments extend this entitlement to delayed remission of shortfall interest charge. [Schedule 1, item 30, subparagraph 12A(1)(ia) of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

Consequential amendments

Definitions

2.84 Consequential amendments are made to include the new terms 'shortfall interest charge' and 'base interest rate' in the definition provisions in the ITAA 1936 and Income Tax Assessment Act 1997 (ITAA 1997). [Schedule 1, item 2, subsection 6(1) of the ITAA 1936; items 22 and 23, subsection 995-1(1) of the ITAA 1997]

Assessable recoupment

2.85 The shortfall interest charge will have equivalent treatment to the general interest charge as an assessable recoupment. [Schedule 1, item 18, subsection 20-25(2A); and item 19, paragraph 20-25(2A)(a) of the ITAA 1997]

2.86 An assessable recoupment occurs where the Commissioner has repaid an amount to the taxpayer. Because the taxpayer is entitled to claim a deduction for the shortfall interest charge, the taxpayer must include any recouped shortfall interest charge in their assessable income.

The shortfall interest charge as a tax liability

2.87 In order to trigger the appropriate collection and recovery provisions in the TAA 1953, the shortfall interest charge has been included as a tax related liability in the TAA 1953. [Schedule 1, item 25, subsection 250-10(2)]

2.88 Consequently, the shortfall interest charge is included in the provisions that allow for release from liability in a situation of serious hardship. [Schedule 1, item 26, subsection 340-10(2)]

Applying the shortfall interest charge where the general interest charge currently applies to shortfall cases

2.89 Consequential amendments are made to miscellaneous situations where the general interest charge can currently apply to a shortfall of income tax. These are:

•

negligence of registered tax agents

•

agents and trustees, and

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persons in receipt or control of money from non-residents.

2.90 These amendments are needed to treat the shortfall interest charge in the same manner as the general interest charge, to include references to how the shortfall interest charge is worked out and in some cases to avoid confusion between the shortfall interest charge and the general interest charge where the term 'the charge' is used. [Schedule 1, items 8 to 17 and 21]

Application and transitional provisions

2.91 These amendments apply to amendments of assessments for the 2004-05 income year and later income years. [Schedule 1, item 31]