Taxation Ruling

SST 3

Sales Tax: guidelines for penalty remission

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FOI status:

may be releasedFOI number: I 1019574

Chapter 1: What this ruling is about

1.1 Sales taxpayers have a number of obligations under the sales tax law. Failure to meet these obligations may result in prosecution (in some cases) or the imposition of a penalty. This Ruling explains the circumstances under which a person may become liable for penalties and sets out guidelines for the remission (or reduction) of the amount of penalty imposed.

1.2 In this Ruling, references to sections and subsections relate to the Sales Tax Assessment Act 1992 (the Assessment Act ) unless otherwise specified. The principles in this Ruling apply to all taxpayers, whether lodging quarterly or monthly.

1.3 Penalties are imposed under various sections of the Assessment Act at rates set out in the relevant sections for reasons such as:

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paying tax late;

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lodging late returns or failing to provide information at the required time; and

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making false statements.

Penalties also apply if the Commissioner uses the general anti-avoidance provisions to cancel a tax benefit.

1.4 The provisions dealing with penalties recognise that there will be circumstances where it is fair for the penalty to be reduced from the amount specified in the provision imposing it. As a result, the Commissioner is given the power to reduce (or remit ) the penalty imposed.

1.5 This Ruling deals with the exercise of the power to remit penalty by officers who are able to do so on the Commissioner's behalf and provides guidance on the factors that ought to be taken into account. The responsible officers must apply the law with the assistance of these guidelines, considering the facts and circumstances of each case.

1.6 A given set of circumstances may result in a penalty becoming payable under more than one section. For example, if a person makes a false statement and later, when that statement is discovered to be false, further tax is recovered, a penalty may be imposed under both subsection 68(1) (for late payment) and section 97 (in respect of the false statement). However, for the purposes of this Ruling, exposure to penalties and factors affecting remission are considered in distinct categories and commented upon in separate Chapters.

1.7 In this Ruling, the words taxpayer and person refer to and include individuals, companies, partnerships, bodies politic and trusts. Circumstances warranting remission for an individual will apply to companies, partnerships, bodies politic and trusts if it can be said that those circumstances apply to the respective directors and officials, partners, office holders or trustees.

1.8 Penalty calculations will generally be based upon net tax payable after deducting credit entitlements (such as discounts allowed, bad debts, and returns inwards) which relate to the period in question. Where credits are identified later, these may reduce the penalties previously imposed.

Changes to previous guidelines under Taxation Ruling ST (NS) 5

1.9 As well as aligning the legislative references with the provisions of the new sales tax law (which became effective on 1 January 1993), this ruling brings about a number of changes to the guidelines that formerly operated. The main changes to the Chapter on penalty for false statements are:

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the ruling increases the rate of remission (that is, effectively lowers the penalty) for voluntary disclosures of false statements;

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the scale of typical penalties for false statements is altered so that there is a decrease in penalty for honest mistakes and an increase in penalty for careless, reckless or deliberate behaviour;

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the categories of false statement now include a specific reference to taxpayers acting on professional advice; and

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the ranges of typical penalties that previously applied have been replaced by individual figures and the extent to which the typical penalty may be varied for mitigating or aggravating factors is clarified.

1.10 In addition, the approach to remission of late payment penalty (Chapter 3) has been altered to reflect that the statutory rate of penalty may be thought of as including both an interest and a culpability component and the examples have been expanded to reflect this. Remission for failure to provide information (Chapter 4) now includes a new category of full remission and the further remission for mitigating factors has been increased.

Chapter 2: Date of effect

2.1 This Ruling applies to any exercise of the discretion to remit penalty imposed under either the new sales tax law or the former law, provided that exercise of discretion takes place on or after 11 July 1994 .

Chapter 3: Late-payment Penalty

Effect of subsection 68(1)

3.1 Subsection 68(1) imposes late payment penalty at the rate of 16% per annum on tax that is payable, but remains unpaid, after the due date. In this context the tax payable includes:

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the tax shown as payable on a sales tax return;

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any further tax that should have been shown on a return;

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penalties imposed under sections 96, 97 and 98 (note that the due date in the case of these penalties will be the date shown on the notice of assessment); and

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any credit claim for which there was no entitlement.

3.2 Late payment penalty applies where tax is underpaid (for example, because the tax payable shown on a return is lower than that actually payable) or delayed (for example, by liabilities being accounted for in a month later than they occurred). Penalties for false statements (see Chapter 5) may also apply in these cases.

Calculation of late payment penalty

3.3 Late payment penalty is calculated from the date the sales tax was originally due for payment to the date when the tax is paid. In the usual case, tax will be due 21 days after the close of the period (either a month or quarter as the case may be) in which the transaction giving rise to the liability occurred. The penalty calculation is based on the actual tax unpaid and therefore, if a taxpayer pays part of the tax by the due date, the penalty is calculated on the balance.

3.4 Where sales tax has been unpaid in more than one period, the late payment penalty is calculated from the due date for each period. Where tax is unpaid over several periods it may not always be possible to determine the precise dates the tax was due and therefore the tax unpaid is apportioned over the relevant periods. For example, if $60,000 in sales tax has been unpaid over a 6 month period, the penalty will be calculated on the basis that $10,000 was unpaid each month, subject to any evidence to the contrary.

Remission of late payment penalty

3.5 Subsection 68(4) provides that the Commissioner may remit some or all of the penalty imposed under subsection 68(1), where he is satisfied that:

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the person did not contribute to the delay and has taken reasonable steps to minimise the delay;

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the person contributed to the delay, but has taken reasonable steps to minimise the delay and, having regard to the nature of the things that caused the delay, it would be fair and reasonable to remit some or all of the penalty; or

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there are special circumstances that make it reasonable to remit some or all of the penalty.

3.6 The statutory rate at which late payment penalty is imposed, being higher than commercial interest rates, may be thought of as being made up of two components, being a penalty for the act of paying late (a culpability component ) of 8% per annum, plus an equivalent notional interest component. Although it would be uncommon for the penalty to be remitted in full, the following paragraphs provide some examples of full and partial remission.

3.7 An example of grounds for remission under the first of the categories mentioned in paragraph 3.5 might be that:

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the taxpayer has lost records due to a natural disaster or becomes suddenly ill and makes arrangements with the Taxation Office to pay late.

In this case, a full remission of penalty would be appropriate as the taxpayer did not contribute to the delay through culpable conduct and has taken reasonable steps to minimise the delay.

3.8 An example of the second category might be that:

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the taxpayer loses records through carelessness, or is genuinely unable to pay the full amount when due, but makes arrangements with the Taxation Office for late payment of the outstanding portion of the tax prior to the due date .

In this case, a reduction in the culpability component of the penalty (say, leaving a total penalty of 12% per annum) might be granted, provided the terms of the payment arrangement are adhered to. Although the taxpayer's own conduct contributed to the late payment, he or she has taken steps to minimise the effect.

3.9 An example of special circumstances might be where a taxpayer, although careful, has made an underpayment through an honest mistake that he or she later discovers and voluntarily discloses. In this case, a reduction in the penalty to 8% may be granted, representing a full remission of a culpability component included in the standard penalty. Note, however, that the voluntary disclosure of an understatement made deliberately, recklessly or carelessly will not constitute grounds for remission on the basis of special circumstances .

3.10 In any case where a person believes that they have grounds for remission of late payment penalty, they should write to the local Branch of the Taxation Office setting out the reasons why the penalty should be reduced.

Chapter 4: Penalty for failure to provide returns or information

Effect of section 96

4.1 Section 96 imposes penalty equal to double the tax payable on any assessable dealing with goods where a person fails to provide a return or other information as required. Where there is both late lodgment of a return and late payment of the tax, penalty under section 96 will apply in addition to penalty under subsection 68(1).

4.2 The sales tax law provides the same maximum penalty for a simple failure to lodge a return on time as for repeated failures to provide information as required. In practice, the degree of fault in the act giving rise to the penalty imposition is reflected in the amount of penalty remission. The following paragraphs set out the typical remission that may be expected in the usual cases and explain factors warranting a departure from that standard (further decreasing or increasing the penalty).

Remission of penalty in typical cases

4.3 Section 100 contains the power to remit any or all of the penalty imposed under section 96. A taxpayer who fails to lodge a return or provide information after being directed to do so by the Commissioner will be subject to a greater penalty than a person who simply fails to meet the requirements set out in the law.

Isolated failures to provide information

4.4 Persons who have simply failed to provide a return or information when required under the law on an isolated occasion will ordinarily have the penalty reduced to an amount equal to 2% of the tax payable, unless there are factors that warrant a decrease in that figure (as set out in paragraph 4.6 - 4.10).

Repeated failures to provide information

4.5 Persons who have repeatedly failed to provide returns or who fail to comply with a direction to provide returns or information, will ordinarily have the penalty reduced to an amount equal to 10% of the tax payable, unless there are factors that warrant an increase in that figure, such as:

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co-operation has not been reasonable and, as a result, there have been undue or excessive delays in the completion of official enquiries; or

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deliberate steps have been taken to conceal the need to lodge returns (for example, the falsification of records).

Each factor might warrant an increase of 50% in the penalty ordinarily imposed.

Mitigating factors

4.6 The typical rates of penalty set out in the previous paragraphs may be remitted further where mitigating factors are known to be present, or on the application by a taxpayer setting out those mitigating factors. The variation for each mitigating factor will ordinarily be 50% of the penalty otherwise imposed.

4.7 A decrease from the suggested rates of penalty would be warranted where there are factors affecting the taxpayer's ability to comply with their normal obligations or a particular direction (as the case may be), such as:

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the taxpayer has genuine comprehension difficulties; or

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at the time the return was due, or the direction required action, the taxpayer or some immediate family member was suffering from serious illness or other similar problems.

4.8 Other factors that might be considered in justifying a decrease in the penalty include:

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any action taken by the taxpayer to minimise the delay or its effects; or

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the return or information was subsequently lodged voluntarily (note that this will not be considered a mitigating factor where a person has already been directed to provide a return or information pursuant to subsections 61(3) or 108(1)).

4.9 Where the delay in lodgment is a result of neglect, inadvertence or carelessness by the taxpayer, a decrease from the typical figure will not generally be warranted.

Special basis for remission - tax paid

4.10 In recognition of the fact that sales tax returns presently require less information than has previously been the case, a new basis for full remission is now included in this ruling. Where a taxpayer has merely failed to lodge a return by the due date, but has, prior to that time, either:

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made the payment relating to that return; or

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made an alternative arrangement for payment with the ATO,

penalty under section 96 will be remitted in full.

Chapter 5: Penalty for false statements

Effect of section 97

5.1 Section 97 imposes a penalty equal to double the tax payable by a person if that person makes a false statement about his or her tax liability. A penalty is payable where a person makes a false statement:

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to a taxation officer; or

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to someone else (say, a supplier or a lessor), for a purpose in connection with a sales tax law.

5.2 A false statement means a statement (whether made orally or in writing) that:

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is false or misleading in a material particular; or

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omits any matter or thing without which the statement is false or misleading in a material particular.

5.3 Common examples of false statements include:

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the understatement of sales tax payable in a return;

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the overstatement of credit claims; or

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incorrectly quoting a registration number or exemption declaration.

5.4 A duty of care rests with taxpayers to ensure that their statements and disclosures are truthful and complete. If a taxpayer is unsure about the tax treatment of an item, taking care would involve the taxpayer making reasonable enquiries to resolve the issue. In the case of marginal or contentious issues, a taxpayer should make a full and accurate disclosure to the Taxation Office, rather than risk a penalty under section 97.

Remission of penalty

5.5 Under section 100 the Commissioner may remit any or all of the penalty imposed under section 97. An intention to deceive need not be present for penalty to apply under section 97; a statement that is false is still subject to penalty, although it may have been made honestly. However, while an intention to deceive is not a factor in the application of penalty, matters such as intent, knowledge and honesty are taken into account in considering penalty remission.

5.6 Taxpayers who have deliberately made false statements in an attempt to avoid a known liability are treated less favourably than taxpayers who have made false statements honestly. The degree of remission therefore relates to the culpability (or blameworthiness) of the taxpayer.

5.7 The factors to be considered when determining the extent of a taxpayer's culpability are listed below. The descriptions are given labels for ease of reference:

Deliberate statement

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the taxpayer's statement was deliberately made without belief in its truth or was intended to mislead in the face of a known liability or obligation.

Reckless statement

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the taxpayer's statement, although neither known to be untrue nor dishonestly made, was made recklessly or rashly without any real basis in fact or regard to the consequences.

Careless statement

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the taxpayer's statement was careless, meaning that it was made as a result of negligence or thoughtlessness, producing a result which a person with the taxpayer's knowledge and education could reasonably have been expected to recognise as incorrect or at least subject to doubt.

Honest Mistake

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the taxpayer's statement, although false, occurred through an inadvertent error or honest mistake, producing a result that the taxpayer could not reasonably have been expected to recognise as incorrect. This category would also include the circumstance where the taxpayer has made the statement as a result of being genuinely misled by actions of the Taxation Office.

Acting on professional advice

5.8 The question often arises as to which category of penalty applies where a taxpayer understates tax although having acted on the advice of a professional taxation adviser7. There may be instances where, despite taking advice, a person nevertheless makes false statements deliberately, recklessly, carelessly or honestly. Where a person makes a false statement as a consequence of having acted upon professional advice received, it will not be an excuse to say that the advice was provided by another person. However, where:

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an adviser provides soundly based advice that a proposed course of conduct conforms with published Taxation Office views;

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the taxpayer makes a false statement by acting in accordance with the advice; and

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in the period between receiving the advice and making the false statement there has been no legislative change or any alteration to the Taxation Office's published view,

the false statement will be regarded as having been honestly made.

Typical remission according to culpability

5.9 The table below sets out typical rates of penalty for the culpability descriptions given in paragraph 5.7. These rates do not take into account the mitigating or aggravating circumstances referred to in paragraphs 5.10 to 5.12 and assume a reasonable level of co-operation (see paragraph 5.15) by the taxpayer.

Mitigating and aggravating factors

5.10 The extent to which the penalty will be remitted may also be influenced by other factors. The variation from the rates given in the table at paragraph 5.9 will ordinarily be 20% of the typical penalty for each factor. The circumstances outlined in the paragraphs below are illustrative and not exhaustive.

Circumstances warranting further remission

5.11 A decrease from the rates suggested in paragraph 5.9 may be warranted where:

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at the time of making the statement or omission the taxpayer or an immediate family member was suffering from serious illness or other similar problems;

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the taxpayer suffered from genuine comprehension difficulties;

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the taxpayer's technical knowledge and experience were poor and the matters involved were complex;

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the taxpayer and his or her representatives have positively co-operated (see the explanation in paragraphs 5.13 to 5.16) during Taxation Office enquiries; or

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the circumstances of the underpayment are such that the taxpayer has passed on a portion of the tax to arm's length customers and is unable to recover the tax from those customers.

Circumstances warranting increase

5.12 An increase from the suggested rates in paragraph 5.9 may be warranted where:

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deliberate steps have been taken to conceal the evasion of tax, for example, keeping a second set of accounts or falsifying records;

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the taxpayer has involved third parties, for example, employees, in corruption or collusion;

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there has been previous tax evasion by or on behalf of the taxpayer;

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the taxpayer originally made a false statement unknowingly, and although he or she subsequently became aware of the mistake or omission, failed to notify the Taxation Office; or

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co-operation has been less than reasonable and, as a result, there have been undue or excessive delays in the completion of official enquiries.

Level of taxpayer co-operation

5.13 The previous paragraphs refer to the level of taxpayer co-operation as a basis for decreasing or increasing the suggested penalty figure. This is intended to encourage taxpayers to assist a taxation officer establish the correct liability to sales tax, but does not restrict their rights. A taxpayer is not required to agree with the Taxation Office's views to qualify for further remission for positive co-operation . Similarly, refusal by a taxpayer (or his or her representatives) to answer questions or provide documents where a genuine claim of legal professional privilege exists will not be taken as a lack of co-operation.

5.14 Positive co-operation occurs when a taxpayer's or his or her representative's conduct has been more than reasonably co-operative. For example, a taxpayer admits to a false statement after the commencement of an audit and this results in a significant saving in time and resources in completing the audit.

5.15 Reasonable co-operation occurs when a taxpayer answers all reasonable questions honestly, to the best of his or her ability and provides books and records promptly.

5.16 Less than reasonable co-operation occurs when a taxpayer causes delays in the completion of official enquiries, or fails to answer relevant and reasonable questions honestly, to the best of his or her ability.

Voluntary disclosure of a false statement

5.17 Taxpayers who voluntarily disclose that they have breached the taxation law are treated more leniently than those who do not come forward voluntarily. Where a taxpayer voluntarily admits to a false statement, the penalty that would have applied according to the table at paragraph 5.9 if the breach had been discovered through ATO action will be reduced by 80%.

5.18 To qualify for this concessional treatment, a voluntary disclosure must:

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be in writing;

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contain all relevant material facts; and

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not be made as a result of any ATO activity relating to the taxpayer's sales tax liability.

5.19 Disclosures are sometimes claimed to be voluntary when they are prompted by Taxation Office action. In line with our long standing practice designed to encourage taxpayers to come forward, some disclosures that do not meet the description in paragraph 5.18 are nevertheless given similar treatment. For example, where a person is notified of an impending audit and is granted a deferment to conduct a prudential audit, disclosures made before the deferment expires will be treated as if they were voluntary (unless they relate to liabilities that were known or ought to have been known prior to the contact by Taxation Office).

5.20 Note that any disclosure that does not meet the description of a voluntary disclosure in paragraph 5.18 may nevertheless be accorded concessional treatment by an auditor on the basis of positive co-operation as set out in paragraph 5.14.

5.21 Concessional treatment only applies to matters actually disclosed. If, for example, a taxpayer makes a voluntarily disclosure about a particular classification of goods and subsequent enquiries reveal other incorrect classifications, the concessional treatment will only apply to the matters disclosed.

Chapter 6: Penalty where anti-avoidance provisions apply

Effect of section 98

6.1 Section 98 imposes a penalty where the Commissioner applies section 93A to cancel a tax benefit under a scheme, the dominant purpose of which was to obtain a tax benefit. The amount of penalty imposed by section 98 is an amount equal to double the amount of that tax benefit.

Remission of penalty

6.2 In each instance the scheme will have been entered into deliberately and, therefore, the remission in a typical case will reflect the same level of culpability as in the case of deliberate false statements. In the absence of mitigating or aggravating circumstances, the penalty will be remitted to 75% of the tax benefit obtained.

Mitigating and aggravating factors

6.3 The extent to which the penalty will be remitted will be influenced by other factors that either warrant a decrease or an increase in the amount in a typical case. The variation will ordinarily be 20% of the penalty otherwise imposed for each factor.

Circumstances warranting further remission

6.4 A decrease from the suggested rate would be warranted where:

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the taxpayer and his or her representatives have positively co-operated during Taxation Office enquiries; or

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the circumstances are such that the taxpayer has passed a portion of the tax benefit on to arm's length customers and is unable to recover the tax from those customers.

Circumstances warranting increase

6.5 An increase from the suggested rate would be warranted where:

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deliberate steps have been taken to conceal the scheme or the taxpayer has involved third parties in collusion;

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tax benefits relating to schemes entered into by or on behalf of the taxpayer have previously been cancelled; or

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co-operation has been less than reasonable and, as a result, there have been delays in the completion of official enquiries.

Level of taxpayer co-operation

6.6 The comments regarding the level of taxpayer co-operation made in paragraphs 5.13 to 5.16 apply for the purposes of this Chapter.

Chapter 7: Financial hardship

7.1 These guidelines for remission have generally been concerned with examining those reasons or factors that have contributed to the taxpayer being liable for penalty. Officers may also consider the taxpayer's capacity to pay. They should assess the effect that the penalty will have on the taxpayer, having regard to his or her net assets and potential earning or borrowing capacity.

7.2 Where the level of penalty determined according to these guidelines would cause serious financial hardship for the taxpayer, further remission of penalty may be warranted. The extent of any further remission will depend on the facts in each case.

Chapter 8: Assessment of penalty and due date

8.1 Subsection 99(1) requires the Commissioner to make assessments of penalty payable under sections 96, 97 and 98 (as described in chapters 4, 5 and 6 of this Ruling). Notice of the assessment may be included in any other notice of assessment that relates to the same person. The penalty imposed will be due for payment on the day specified in the notice of assessment8.

Chapter 9: Review of decisions relating to penalty

Late-payment penalty - subsection 68(1)

9.1 There is no provision for objection against the imposition of late payment penalty. However, a taxpayer may ask for a review by lodging a request in writing setting out the circumstances that led to the late payment of the tax and the basis on which remission is sought.

9.2 A decision not to remit late payment penalty may be reviewed by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977.

Penalty under sections 96, 97 and 98

9.3 Objections may be lodged against assessments of penalty imposed under sections 96, 97 and 98. The requirements of the objection and appeal provisions are set out in Part IVC of the Taxation Administration Act 1953.

9.4 The Administrative Appeals Tribunal may only review a decision relating to the remission of penalty imposed under sections 96 (late lodgement), 97 (false statement) and 98 (cancellation of tax benefits) of the Assessment Act if:

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the amount of penalty to be reviewed is greater than $20; and

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the penalty exceeds 20% per annum of the tax properly payable.

Commissioner of Taxation
7 July 1994

References

ATO references:
NO Unknown

Related Rulings/Determinations:

SST 3W
IT 2246
ST (NS) 5

Subject References:
alteration of taxable value
basis for remission of penalty
failure or refusal to lodge returns
failure to pay tax when due
false statements

Legislative References:
Sales Tax Assessment Act 1992, sections 61,
68,
93A,
96,
97,
98,
99,
100,
107
and 108.
Taxation Administration Act 1953, Part IVC.
Administrative Decisions (Judicial Review) Act 1977