Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

CHAPTER 11 - Late lodgment penalty

Overview

11.1 The amendments in Schedule 8 of the Bill introduce a new regime of penalties for late lodgment of income tax returns. A flat rate penalty is to apply to all relevant entities and instalment taxpayers that fail to furnish returns by the final day for lodgment. All other taxpayers who are late in lodging a return will be liable for both additional tax and interest penalties, if an amount of tax is payable following the assessment.

Summary of amendments

Purpose of the amendments

11.2 The amendments will enable a penalty to be imposed on all relevant entities and instalment taxpayers (such as companies and superannuation funds) where they are late in lodging an income tax return. This will include cases where the taxpayer does not derive any taxable income.

11.3 For taxpayers other than relevant entities and instalment taxpayers, the amendments will enable the imposition of penalty which recognises that late lodgment of an income tax return delays the payment of tax. This is achieved by making taxpayers who are late in furnishing a return liable for additional tax and interest in the same manner as late payment penalties.

Date of effect

11.4 The amendments will apply to income tax returns for the 1994-95 and later years of income where the final date for lodgment occurs more than 60 days after the date of Royal Assent. [Items 4 and 7]

Background to the legislation

11.5 In August 1991 the Government released an information paper titled 'Improvements to Self Assessment - Priority Tasks' which outlined a number of proposals designed to improve the self assessment system of taxation. Most of these proposals were enacted by the Taxation Laws Amendment (Self Assessment) Act 1992 (the Self Assessment Act). The amendments in Schedule 8 of this Bill which introduce the new late lodgment regime were also foreshadowed in the information paper. They have been developed after extensive consultation with professional bodies and taxpayer representatives.

11.6 The collection of the revenue is contingent on both the timely lodgment of returns and the timely payment of tax. Therefore, where the delay in the payment of tax is due to the late lodgment of a return, the penalty for late lodgment of a return should have a component that reflects the time value of money as well as a culpability component that reflects the failure to comply with the legal requirement to lodge a return. This would make the penalties for late lodgment of returns complementary to the penalties for late payment of tax.

11.7 The Self Assessment Act inserted new late payment penalties into the Income Tax Assessment Act 1936 (the Act). Section 207A makes a person liable to pay interest where any tax remained unpaid after the time it became due and payable. This interest is designed to compensate the revenue for not having use of the funds during the period in which the tax remained unpaid. The interest is in addition to section 207 additional tax which is a penalty designed to sanction taxpayers for their culpable behaviour of not paying tax on time.

11.8 These late payment penalty provisions have different rules for taxpayers on full self assessment, that is relevant entities or instalment taxpayers, and other taxpayers. Relevant entities and instalment taxpayers are defined in Divisions 1B and 1C of Part VI of the Act to include a company, a superannuation fund, an approved deposit fund, a pooled superannuation fund, a trustee of a corporate unit trust and a trustee of a public trading trust.

11.9 The income tax of taxpayers other than relevant entities and instalment taxpayers (hereafter referred to as ordinary taxpayers) is due and payable on the date specified in the notice of assessment or, if no date is specified, 30 days after service of the notice. Ordinary taxpayers who do not pay their tax when it is due and payable are liable under section 207 for additional tax on the unpaid amount at the rate of 8% per annum. In addition they are also liable under section 207A to penalty interest on the unpaid amount at the rate provided for by section 214A. The proposed new penalty for late lodgment of returns by ordinary taxpayers will complement these rates.

11.10 With relevant entities and instalment taxpayers, income tax generally becomes due and payable on the later of the following days:

•

the day on which a relevant entity is required to make a final payment of tax under section 221AZD or an instalment taxpayer is required to pay its final instalment under section 221AZK; or

•

the day on which the return is furnished.

The final payment of tax and the final instalment are amounts that are due under the relevant entity and instalment taxpayer collection system provisions. They are not amounts of income tax but are advance payments of tax collected during the year and credited by the Commissioner on assessment against income tax payable.

11.11 Income tax is not due and payable unless there has been an assessment. Under full self assessment the Commissioner is deemed to have made an assessment on the day a relevant entity or instalment taxpayer lodges a return. Where a return is lodged after the day that the person is required to make a final payment of tax or pay the final instalment, the late lodgment will delay the income tax that is payable under the assessment.

11.12 The Self Assessment Act made amendments to the late payment penalty provisions to deal with this problem. Relevant entities and instalment taxpayers are liable to additional tax under section 207 and interest under section 207A on any tax that remains unpaid after the day on which they are required to make a final payment of tax or final instalment. As explained below this day is also the day the Commissioner requires a relevant entity or instalment taxpayer to lodge an income tax return. The rates of additional tax and interest are the same as those that apply to ordinary taxpayers (paragraph 11.9).

11.13 Subsection 161(1) of the Act requires all taxpayers to furnish a return within the period specified in a notice, which the Commissioner must cause to be published in the Gazette, or within such further period as the Commissioner allows. The day by which a return must be lodged is a discretionary decision of the Commissioner. The Commissioner's policy in respect of lodgment of returns is as follows:

•

relevant entities are generally required to lodge a return by the day on which the final payment of tax is due under section 221AZD;

•

instalment taxpayers are generally required to lodge a return by the day on which the final instalment is due under section 221AZK; and

•

ordinary taxpayers are generally required to lodge their returns by 31 October unless the Commissioner has granted an extension of time for lodgment, eg extensions under the tax agent lodgment program.

11.14 An income tax return may also be required by the Commissioner to be furnished within a time and in the manner required by him or her in accordance with sections 162 and 163.

Penalty under subsection 222(1) for failure to furnish a return

11.15 Where a taxpayer does not lodge a return within the period specified in the notice under section 161, or by the time under sections 162 and 163, subsection 222(1) operates to make a taxpayer liable to pay, by way of penalty, additional tax equal to double the amount of tax payable for the year of income. The Commissioner has a discretion under subsection 227(3) to remit the whole or any part of the additional tax payable. The Commissioner's general policy on late lodgment penalties is to remit the penalty to 20% of the lesser of the amount of tax payable or the balance of the amount payable after taking into account any credits or other payments.

11.16 Lodgment of the return does not occur unless the following criteria are satisfied:

•

it is in the form provided by the Commissioner;

•

it is furnished in the prescribed manner;

•

it is signed by the person; and

•

it contains information relating to the income and profits or gains of a capital nature derived by the person and any deductions or losses, being losses of a capital nature claimed by the person.

11.17 Subsection 222(1) has a much wider application than imposing a penalty for late lodgment of an income tax return. It applies to any situation where a taxpayer refuses or fails to furnish a return, or any other information relating to the affairs of the taxpayer, when and as required by the Commissioner. However, a liability under subsection 222(1) can only arise where there is an amount of tax payable by the taxpayer in respect of the year of income. Where there is no assessment, ie where the taxpayer derived a loss or had income for the year that did not exceed the minimum taxable amount, the person is not liable to pay late lodgment penalty.

11.18 As explained in paragraphs 11.12 and 11.13 above, with relevant entities and instalment taxpayers, late payment penalties accrue from the due date of the final payment which is also the due day for lodging a return. This is similar to the late lodgment penalties for ordinary taxpayers proposed by these amendments. However, as the penalties do not apply where a taxpayer incurs a loss for the year, there is no sanction that can be applied in these cases when a return is not lodged on time. As lodgment of returns by relevant entities and instalment taxpayers is particularly necessary for data collection and compliance purposes, the amendments propose a flat rate penalty that will apply to all relevant entities and instalment taxpayers.

Explanation of the amendments

Late lodgment penalty for relevant entities and instalment taxpayers

11.19 The new flat rate penalty for late lodgment of income tax returns by relevant entities and instalment taxpayers is inserted by the new section 163A . A relevant entity and an instalment taxpayer have the same meanings as in Divisions 1B and 1C of Part VI of the Act [new subsection 163A(9)] . The late lodgment penalty is to be in addition to any late payment penalties which a taxpayer may be liable for under sections 207 and 207A.

11.20 The late lodgment penalty will only apply where a person is required by the Commissioner to furnish a return [new paragraph 163A(1)(a)] . The penalty will be imposed whenever a return is lodged after the final day for furnishing a return. In most cases, this will be where the return is not furnished within the period specified in the notice under section 161 or any further period allowed by the Commissioner. It may also be where the return is not furnished by the time required by the Commissioner under sections 162 and 163 [new paragraph 163A(1)(b)] .

11.21 If a relevant entity or an instalment taxpayer fails to furnish a return by the final day for lodgment they will be liable for a penalty at a rate of $25 per week, or part of a week, for the period that a return is late. Where a return is lodged between one and seven days late, the penalty will be $25. In cases where a relevant entity or instalment taxpayer is required to furnish a return but the return is never lodged, the person is still liable for the penalty. [New subsection 163A(1)]

11.22 The maximum penalty that a relevant entity or instalment taxpayer may be liable for is $500. This means that where the return remains outstanding for more than 20 weeks the taxpayer will only be liable for a penalty of $500. [New subsection 163A(2)]

11.23 The Commissioner must serve a notice of the penalty on the relevant entity or instalment taxpayer. The notice must specify the following details:

•

that the penalty is for late lodgment of a return under section 163A;

•

the person who is liable for the penalty;

•

the amount of the penalty; and

•

the day on which the penalty is due and payable (which must be at least 30 days after the day on which the notice is served on the taxpayer). [New subsection 163A(3)]

The notice of late lodgment penalty under section 163A can be incorporated in any other notice of assessment that is issued to the relevant entity or instalment taxpayer [new subsection 163A(4)] . However, this does not include a return which is deemed under paragraph 166A(1)(b) to be a notice of deemed assessment.

11.24 The Commissioner has the discretion to remit the late lodgment penalty, in whole or in part [new subsection 163A(5)] . Where the Commissioner decides to not remit the penalty, or only part of the penalty, the Commissioner is obliged to serve a notice of that remission decision on the person. Where the Commissioner considers the matter prior to issuing a notice of late lodgment penalty the remission decision may be incorporated in the notice of penalty. Where the Commissioner considers the matter after having issued a notice of late lodgment penalty he must serve a notice of the remission decision on the taxpayer [new subsection 163A(6)] . A request by the taxpayer for the Commissioner to remit the penalty does not defer the due date for payment specified in the notice of penalty.

11.25 A person who is dissatisfied with a notice of penalty under subsection 163A(3) or a decision of the Commissioner not to remit the penalty under subsection 163A(5) may object against the notice or the decision in accordance with Part IVC of the Taxation Administration Act 1953 . This includes a decision by the Commissioner to not remit any of the late lodgment penalty [new subsection 163A(7)] . Where the person is dissatisfied with the Commissioner's objection decision they may, under section 14ZZ of that Act, either apply to the Administrative Appeals Tribunal for a review of the decision or appeal to the Federal Court against the decision.

Late lodgment penalties for ordinary taxpayers

11.26 Where an ordinary taxpayer, that is a person other than a relevant entity or instalment taxpayer, lodges a return after the final day for furnishing a return the taxpayer will be liable to pay additional tax under the new section 163B and interest under the new section 163C .

11.27 As with relevant entities and instalment taxpayers, these new provisions will only apply where a person is required by the Commissioner to furnish a return. [New paragraph 163B(1)(a)]

11.28 The additional tax and the interest will be imposed on ordinary taxpayers whenever a return is lodged after the final day for furnishing a return. In most cases, this will be where the return is not furnished within the period specified in the notice under section 161 or any further period allowed by the Commissioner. It may also be where the return is not furnished by the time required by the Commissioner under sections 162 and 163. [New paragraph 163B(1)(b)]

11.29 Where the taxpayer is late in furnishing a return the penalties can only apply if the Commissioner has made an assessment of the taxable income, or net income, and tax payable thereon. [New paragraph 163B(1)(c)]

11.30 Under the new subsection 163B(1) the taxpayer will be liable for additional tax at the rate of 8% per annum. Where a taxpayer becomes liable to the additional tax they are also liable for interest [new subsection 163C(1)] . The liability to the interest penalty arises irrespective of whether the Commissioner has remitted the additional tax. The interest is calculated at the rate provided for under section 214A of the Act.

11.31 Additional tax and interest are calculated on the lesser of:

•

the income tax payable on assessment; or

•

a person's net tax payable.

The amount of income tax payable on assessment is the amount of tax payable on taxable income or, in the case of trustees, the amount of tax payable on net income, as defined in section 6(1). Tax payable is the amount after allowing any rebates or a deduction under subsection 100(2) allowable to the person in making the assessment. Any crediting or applying of amounts under the various tax collection systems, or advance tax payments made by a taxpayer on account of income tax, do not form part of the assessment process so are excluded from calculating the amount of income tax payable on assessment. [New paragraph 163B(2(a)]

11.32 A person's net tax payable is defined in new subsection 163B(3) . Generally, in simple terms, it is the amount shown on the bottom of a notice of assessment as the balance payable by the taxpayer. The amount is defined in the amendments by use of the formula:

(Tax liabilities) less (Crediting amounts and payments on account)

11.33 'Tax liabilities' is the sum of any assessed tax, additional tax and interest payable under section 102AAM, and any HEC assessment debt under the Higher Education Funding Act 1988 and any financial support assessment debt under the Student Assistance Act 1973 . As explained in the paragraph 11.31 above, tax payable does not include any credit available to the taxpayer under the collection systems or advance payments.

11.34 'Crediting amounts and payments on account' means the sum of any income tax crediting amount and any payment made by the taxpayer on account of an amount defined as 'tax liabilities'. Income tax crediting amounts are amounts collected under the various collection systems that can be credited or applied against tax payable of a person for a year of income, eg foreign tax credits under section 160AN and provisional tax credits under section 221YE. [New subsection 163B(10)]

11.35 Additional tax and interest is payable for the period beginning on the day after the final day for lodging a return and ends on the earlier of either the day the return is furnished or the day the assessment of tax payable is made. This means that where a taxpayer fails to furnish a return the Commissioner can make a default assessment and impose late lodgment penalty, calculated up to the date the assessment is made. [New subsection 163B(4)]

Notice of additional tax

11.36 The Commissioner must issue a notice of assessment of additional tax [new subsection 163B(5)] . The definition of assessment in sub section 6(1) is amended to incorporate an assessment of this additional tax. This will allow a taxpayer to object against the assessment under section 175A. [Item 1]

11.37 An amendment is being made to subsection 14ZS(2) of the Taxation Administration Act 1953 to exclude objection decisions in respect of assessments of additional tax under the new section 163C from the definition of ineligible income tax remission decisions. This will enable a taxpayer who is dissatisfied with the objection decision to apply to the Administrative Appeals Tribunal for a review of the decision or appeal to the Federal Court against the decision. [Items 5 and 6]

11.38 A notice of assessment of additional tax can be incorporated in any other notice of assessment. [New subsection 163B(6)]

11.39 The Commissioner may remit the additional tax in whole or in part [new subsection 163B(7)] . The minimum amount of additional tax is $20. That means that where the additional tax is less than $20 the taxpayer will be liable for a penalty of $20. [New subsection 163B(9)]

Notice of interest

11.40 The Commissioner must give a taxpayer who is liable for interest a notice in writing specifying the following:

•

that the interest is for late lodgment of a return under section 163C;

•

the person who is liable for the interest;

•

the amount of the interest; and

•

the day on which the interest is due and payable (which must be at least 30 days after the day on which the notice is served on the taxpayer). [New subsection 163C(2)]

The notice of interest may be incorporated in any other notice of assessment in respect of the person. [New subsection 163C(2)]

11.41 The are no rights of objection, review and appeal under Part IVC of the Taxation Administration Act 1953 against a notice of interest.

Amendment of existing penalty provision

11.42 Subsection 222(1) is amended to exclude any refusal or failure to lodge a return under sections 161, 162 and 163. Penalties for failing to lodge a return under those provisions are covered by the amendments in the new sections 163A, 163B and 163C. [Item 3]

Interest on early payments of late lodgment penalties

11.43 The Taxation (Interest on Overpayments and Early Payments) Act 1983 is amended to make the following payments eligible for early payment interest:

•

penalty under the new section 163A ;

•

additional tax under the new section 163B ; and

•

interest under the new section 163C .

As with other eligible payments, interest on early payments will be payable to a person where an amount is paid more than 14 days before the day it became due and payable. [Item 8]

11.44 The amendments to the Taxation (Interest on Overpayments and Early Payments) Act 1983 will apply to payments of late lodgment penalties in respect of returns for the 1994-95 year and later years of income where the final day for lodgment of the return occurs more than 60 days after the date of Royal Assent. [Item 9]