Senate

Revised Explanatory Memorandum

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

Chapter 1 - Administrative penalties

Outline of Chapter

1.1 Schedules 1 and 2 to this Bill will introduce a uniform administrative penalty regime into Schedule 1 to the TAA 1953. The new administrative penalty regime is comprised of 3 distinct components:

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penalties relating to statements and schemes;

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penalties for late lodgment of returns and other documents; and

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penalties for failing to meet other taxation obligations.

1.2 The new administrative penalty regime will apply to all taxation laws for which the Commissioner has administration.

Context of Reform

1.3 The purpose of the amendments is to streamline the existing penalties framework and to support compliance under the new tax system. The new administrative penalty regime will impose uniform administrative penalties on taxpayers for failing to satisfy obligations under the taxation laws. It will:

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consolidate and standardise the provisions of the existing penalties framework throughout the different taxation laws;

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rectify current anomalies; and

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support the range of new taxes being reported on the BAS.

1.4 The new administrative penalty regime has been designed to be easily understood by taxpayers and easily administered by the Commissioner. It is equitable in that a common penalty will apply where a taxpayer fails to satisfy the same type of obligation under different tax laws. The regime is consistent with the ATO Compliance Model and the Taxpayers' Charter.

1.5 These measures are the second phase of the uniform penalties regime. The GIC was introduced in 1999 in Taxation Laws Amendment Act (No. 3) 1999 to apply a uniform interest rate to all late payments of tax. A third phase of penalty amendments is proposed to be introduced in a Bill in the 2000-2001 year. It will deal with penalties relating to recommendations contained in A Tax System Redesigned .

Date of effect

1.6 The amendments contained in this Bill will generally apply from 1 July 2000. However, where the amendments relate to income tax return matters they will apply to the 2000-2001 income year. Amendments relating to FBT return matters will apply from 1 April 2001.

Background to the legislation

1.7 The existing penalties framework is composed of disparate penalty provisions in the various taxation laws. For example, late lodgment of an FBT return attracts a penalty under section 114 of the FBTAA 1986 of double the amount of tax payable for the year, whereas late lodgment of an income tax return by the same person attracts a penalty of $10 for each week that the return is outstanding, up to a maximum of $200.

1.8 Another example of differing sanctions are penalties for understating tax payable. Where a taxpayer understates GST, the penalty is double the amount of the shortfall amount. This is high compared to the penalty for understated income tax of 25% of the understated tax where the taxpayer failed to exercise reasonable care. If the person did exercise reasonable care there is no penalty imposed on the shortfall amount.

1.9 A further problem with the current penalties framework is the duplication of penalty provisions in the different taxation laws. For example, the ITAA 1936 and the FBTAA 1986 each contain their own penalty provisions. As new tax obligations have been introduced, more penalty provisions have been added to existing legislation or included in new legislation. While many of the penalties serve a similar purpose, the progressive introduction of separate penalty provisions has led to a substantial amount of unnecessary duplication.

1.10 As well, the existing penalties framework does not impose penalties for breaches of some tax obligations. For example, the current penalties provisions in the income tax law do not impose a penalty where a taxpayer overclaims a credit (other than a credit under Division 19 of Part III or an offset under Division 1 of Part IIIAA of the ITAA 1936).

1.11 The implementation of the new tax system has introduced a number of new tax obligations. Taxpayers will be required to provide information about different types of taxes in the one approved form (a BAS). There needs to be a common penalty applying to understatements of these different taxes and overclaiming credits, as well as a common penalty for failing to notify the Commissioner of these debts by lodging a BAS. These obligations are self-reporting and, for some taxpayers, are required to be carried out electronically. The existing penalties framework was not designed to operate in this environment.

1.12 The new administrative penalty regime will overcome the problems within the existing penalties framework and the application of penalties to the new tax system by:

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grouping together existing penalty provisions which have a substantially similar operative effect;

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imposing the same administrative penalty for breaches of similar tax obligations; and

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applying the new administrative penalty regime uniformly to all taxation laws, including those recently introduced as part of the new tax system.

Detailed explanation of new law

1.13 The amendments contained in Schedules 1 and 2 to this Bill to introduce the new administrative penalty regime are explained in Table 1.1.

1.14 Where not specifically stated, legislative references throughout this Chapter (e.g. new Divisions, sections, subsections and paragraphs) about the new administrative penalty regime are references to provisions in Divisions 284 and 286 of Schedule 1 to the TAA 1953.

SECTION 1: GENERAL SHORTFALL AMOUNT PROVISIONS AND KEY CONCEPTS

1.15 Items 1 and 2 of Schedule 1 to this Bill introduce Division 284, which imposes administrative penalties for:

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making a statement that is false or misleading;

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taking a position that is not reasonably arguable; and

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participating in schemes.

1.16 The provisions of Division 284 are based on the existing penalty provisions in Part VII of the ITAA 1936. This structure of penalties is being adopted for understatements of all taxes. Table 1.2 summarises the existing penalty provisions in Part VII which have equivalent provisions in the new administrative penalty regime.

1.17 Where a provision in the new administrative penalty regime has no equivalent in the existing penalties framework, it will be fully explained in this Chapter.

Key Concepts

1.18 Subdivision 284-A contains a number of concepts which apply throughout the Division. These concepts are explained in paragraphs 1.20 to 1.35.

1.19 The explanation of reasonably arguable is taken from the explanatory memorandum to Taxation Laws Amendment (Self Assessment) Act 1992 and updated where necessary.

Reasonably arguable

1.20 'Reasonably arguable' is a standard about the position taken by a person on a question of interpretation, including a conclusion of fact. It requires the treatment of a tax law to be about as likely to be correct as it is incorrect. Although the wording has been refined, the concept has the same meaning as in section 222C of the ITAA 1936. The new provision makes it clear that a taxpayer will always have a reasonably arguable position if it is more likely to be correct than incorrect. [Schedule 1, item 2, section 284-15]

1.21 A person can be liable for a penalty on a shortfall amount if he or she makes a statement about the treatment of an income tax law that is not reasonably arguable [Schedule 1, item 2, subsection 284-75(2)] . The reasonably arguable standard applies only to an income tax law, and does not apply to other tax laws, for example, FBT and GST matters. The standard applies only to taxpayers with large transactions that exceed the reasonably arguable position thresholds (see paragraphs 1.82 to 1.86) [Schedule 1, item 2, items 4 to 6 of subsection 284-90(1)] . The reasonably arguable position standard is also relevant in determining the amount of penalty that is payable as a result of a person participating in a scheme [Schedule 1, item 2, section 284-160] .

1.22 A position taken by a taxpayer will be reasonably arguable if, on an objective analysis of the law and the application of the law to the relevant facts, it would be concluded that the taxpayer's position was about as likely or more likely to be correct as incorrect. In other words, the position must be a contentious area of the law, where the relevant law is unsettled or where, although the principles of the law are settled, there is a serious question about the application of those principles to the circumstances of the particular case. [Schedule 1, item 2, subsection 284-15(1)]

1.23 The test does not require the taxpayer's position to be the 'better view'; the standard threshold is 'as likely correct as incorrect'. However, the reasonably arguable position standard would not be satisfied if a taxpayer takes a position which is not defensible, or that is fairly unlikely to prevail in court. On the contrary, the strength of the taxpayer's argument should be sufficient to support a reasonable expectation that the taxpayer could win in court. The taxpayer's argument should be cogent, well-grounded and considerable in its persuasiveness.

1.24 For the purposes of determining whether a taxpayer has a reasonably arguable position about a tax-related matter, relevant authorities include the following:

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an income tax law, for example, a provision of the ITAA 1936 or ITAA 1997;

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material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901, such as explanatory memoranda and second reading speeches;

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a decision of a court or the AAT; and

•

a public ruling within the meaning of Part IVAA of the TAA 1953.

[Schedule 1, item 2, subsection 284-15(3)]

1.25 The list is not intended to be exhaustive, and a wider range of authorities may be taken into account in weighing up the merits of the competing arguments. For example, authorities relating to other areas of law (e.g. contract law) may provide support for a particular treatment of an item.

1.26 A taxpayer may have a reasonably arguable position about a tax-related matter despite the absence of authorities other than the law itself. What is required in such cases is that the taxpayer has a well-reasoned construction of the applicable statutory provision which it could be concluded was about as likely as not the correct interpretation.

1.27 An opinion expressed by an accountant, lawyer or other adviser is not an authority. However, the authorities used to support or reach the view expressed by the adviser, including a well-reasoned construction of the relevant statutory provisions, may support the position taken by a taxpayer.

1.28 The relevance of any authority is a matter to be weighed against other authorities, including the applicable statutory provisions and the facts of the case. An authority that has some facts in common with the tax treatment at issue is not particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. An authority that merely states the condition is ordinarily less persuasive than one that reaches its conclusion by cogently relating the applicable law to the pertinent facts. The source of an authority must be relevant. For example, a High Court decision on all fours with the tax treatment in question will be accorded more weight than a Federal Court decision, which in turn would be accorded more weight than a decision of the AAT.

1.29 There will be situations where a taxpayer, in applying the law to the facts, will need to make an assumption about the way in which the Commissioner would apply a discretion that is relevant to determination of taxable income. In these cases the taxpayer will have a reasonably arguable position to the extent that the assumption is in the range of positions which, if decided by the Commissioner in the circumstances of the case, a court would be about as likely or not to conclude that the exercise of the discretion were in accordance with law. This approach effectively puts the taxpayer in the shoes of the Commissioner, and looks to whether the taxpayer, in making the assumption, has taken into account all relevant considerations, and not taken into account any irrelevant considerations, that bear materially on the decision reached. [Schedule 1, item 2, subsection 284-15(2)]

Taxpayers who use tax agents

1.30 Division 284 maintains the current position that a taxpayer is vicariously liable to any penalties arising from the conduct of an agent acting on behalf of the taxpayer. Where a taxpayer has a shortfall amount that is caused by an agent either failing to take reasonable care, behaving recklessly, intentionally disregarding the law or not having a reasonably arguable position, the taxpayer will be liable to pay a penalty at the appropriate rate. [Schedule 1, item 2, subsection 284-90(1)]

1.31 Where the statement is made by the agent, the taxpayer is taken to have made the statement. [Schedule 1, item 2, section 284-25]

Application of Division to trusts

1.32 There are special rules that apply in determining the penalty on shortfall amounts relating to trusts. The trustee of a trust is liable to pay any penalty arising from statements made about the trust's net income or obligations, or any penalty arising from the trust's participation in a scheme. Any shortfall amount or scheme shortfall amount of a beneficiary that relates to the trust's net income or obligations is taken to be the shortfall amount of the trustee. [Schedule 1, item 2, section 284-30]

Application of Division to partnerships

1.33 The existing penalties in Part VII of the ITAA 1936 impose the penalty on the 'defaulting partner'. That is, the partner who makes the statement or enters into the scheme which causes the shortfall amount or the scheme shortfall amount pays the penalty for each partner in the partnership.

1.34 The new administrative penalty regime has not retained an equivalent 'defaulting partner' provision. Instead, for matters relating to the net income of the partnership or the partnership loss, each partner is liable for a penalty on the shortfall amount or scheme shortfall amount reflected in the partner's income tax return. That is, an incorrect position taken in the partnership return will be a shortfall amount in each partner's return. The penalty amount will be in proportion to the partner's share of the net income or loss of the partnership. [Schedule 1, item 2, section 284-35]

Example 1.1

A partnership has a $25,000 shortfall amount because it omitted a capital gain on the disposal of a property from its net income. There are 2 partners who are entitled to an equal share of the profits of the partnership. Each partner will be liable for a penalty on a shortfall amount of $12,500. As it was determined that their agent had acted recklessly in not returning the capital gain, each partner is liable for a penalty of $6,250. This amount is calculated as follows:

50% (the base penalty amount) * $12,500 = $6,250


1.35 However, for all other shortfall amounts of tax-related liabilities of the partnership, for example, a PAYG withholding amount, section 444-5 of Schedule 1 to the TAA 1953 will apply. That provision makes each partner jointly and severally liable for the penalty imposed on the partnership shortfall amount or scheme shortfall amount. If one partner is not at fault for the partnership having a shortfall amount, then that partner may take action against the partner that caused the shortfall amount - but this does not affect that partner's liability to pay the penalty amount.

SECTION 2: PENALTIES RELATING TO STATEMENTS

When is an administrative penalty imposed?

1.36 Subdivision 284-B, which deals with penalties relating to statements, provides that an administrative penalty relating to statements may be imposed if:

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the taxpayer or agent makes a statement to the Commissioner about a taxation law;

•

the taxpayer has a shortfall amount as a result of the statement; and

•

the statement is either:

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false or misleading in a material particular [Schedule 1, item 2, subsection 284-75(1)] ;

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in the statement, the taxpayer treated an income tax law applying to a matter in a way that was not reasonably arguable [Schedule 1, item 2, subsection 284-75(2)] ;

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the taxpayer fails to make a statement [Schedule 1, item 2, subsection 284-75(3)] ; or

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the statement disregards a private ruling [Schedule 1, item 2, subsection 284-75(4)] .

Diagram 1.1: Penalty where there is a tax shortfall amount

Statements

1.38 A statement is anything disclosed to the Commissioner or to another entity about a tax-related matter. Statements made to the Commissioner include statements made to an employee of the ATO in the course of his or her duties. Statements made to an entity include statements made to a person other than a taxation officer about a tax-related matter, for example a tax agent preparing an income tax return.

1.39 The statement may be made in an application, approved form, BAS, instalment activity statement, certificate, declaration, notice, notification, return, statement or any other document made, prepared or given under a taxation law, or in answer to a question asked, or in any information given, under a taxation law. The current income tax penalty provisions exclude statements made in certain documents obtained under the Commissioner's information gathering powers. That exclusion no longer applies under the new administrative penalty regime.

1.40 The statement may be made, lodged with or given to the Commissioner verbally, in writing, in an approved form or in any other way, including electronically. [Schedule 1, item 2, section 284-20]

1.41 A taxation law is defined in subsection 995-1(1) of ITAA 1997 to mean an Act of which the Commissioner has general administration, or regulations under such an Act.

False or misleading statements

1.42 A statement is false or misleading in a material particular when something in the statement is false or misleading, or something is omitted from the statement. If something is included in, or left out of, a statement relating to a tax matter which, if known, would cause a taxation officer to determine a claim in another way, it will be a material particular. In short, if a matter is important enough to affect a decision relevant to determining a taxpayer's tax liability, the matter is to be regarded as material and must be disclosed correctly. [Schedule 1, item 2, paragraph 284-75(1)(b)]

Example 1.2

A taxpayer claims a deduction in an income tax return to which he or she is not entitled. The return contains a false or misleading statement.

A taxpayer does not include an amount of taxable income in his or her return, such as interest. The tax return contains a false or misleading statement because of this omission.

A taxpayer who states the wrong industry code in an income tax return will not be regarded as making a false or misleading statement in a material particular, as an incorrect code will generally not affect the taxpayer's tax liability. Similarly, small or insignificant income omissions will be regarded as immaterial if there is little or no effect on the tax liability and the omission was caused by an honest oversight.

1.43 It is irrelevant whether the taxpayer knows that the statement is false or misleading or not. However, there are exclusions from the penalty where the taxpayer and the agent (if any) exercised reasonable care or followed the advice of the Commissioner (see paragraphs 1.108 to 1.112). The Commissioner may also remit the penalty under section 298-20 in Schedule 1 to the TAA 1953.

Reasonably arguable statements

1.44 The concept of whether a taxpayer or agent treated an income tax law applying in a way that was not reasonably arguable is discussed at paragraphs 1.20 to 1.29. [Schedule 1, item 2, paragraph 284-75(2)(b)]

1.45 Where a shortfall amount is caused by the taxpayer treating the law as applying in a particular way in respect of a number of different matters, the taxpayer will only need to have a reasonably arguable position in respect of the treatment of those matters that cause a part of the shortfall to exceed the threshold. However, if any of the matters are identical, for example, 2 separate lease payments for the same item of plant, the parts of a shortfall caused by the treatment of the 2 payments will be amalgamated for the purposes of testing that part of the shortfall against the threshold. [Schedule 1, item 2, paragraph 284-75(2)(b)]

1.46 This rule is designed primarily to prevent taxpayers seeking to split up single matters so as to come under the threshold. It is not intended, for example, that many small repairs to many substantially similar but discrete items of plant would be treated as single matters. This is one of the reasons why the penalty does not apply to other taxes such as GST.

Failure to make a statement

1.47 A taxpayer is liable to an administrative penalty under this section if he or she fails to give the Commissioner the required return, notice or other document from which a liability can be established. In these cases there is no false or misleading statement, or a statement which is not reasonably arguable, because a statement has not been made. [Schedule 1, item 2, subsection 284-75(3)]

1.48 For example, this penalty would apply if a taxpayer failed to lodge an income tax return, and the Commissioner issued a default assessment under section 167 of the ITAA 1936. In this situation, the taxpayer would also be liable for a penalty for failing to lodge a return under Subdivision 286-C.

1.49 An equivalent penalty for failing to make a statement is not included in the current penalties framework. It is being introduced into the new administrative penalty regime to provide a measure of fairness. Otherwise, a taxpayer who makes a statement that is false or misleading, or is not reasonably arguable, is subject to a penalty, but a taxpayer who does not make a statement at all would not be subject to a penalty.

Failure to follow a private ruling

1.50 A taxpayer who applies for and receives a private ruling on the way in which the law will apply to an arrangement is required to follow the ruling when determining the tax position in the relevant return. If the taxpayer does not follow the ruling and makes a statement treating the tax law as applying in a different way, the taxpayer will be liable to a penalty on any resulting shortfall amount. This penalty applies to both income tax and FBT rulings. [Schedule 1, item 2, subsection 284-75(4)]

1.51 The penalty does not apply if there has been a decision of the AAT or of a court that applies to the ruling. In such a case, the taxpayer would be expected to follow the decision when determining taxable income or the taxable value of fringe benefits, even if the taxpayer has appealed against the decision. Failure to follow a decision of the AAT or court would ordinarily amount to a lack of reasonable care. A shortfall amount will not exist to the extent that the AAT or court supports the taxpayer's treatment of the law as applying to the arrangement. [Schedule 1, item 2, subsection 284-215(3)]

What is the shortfall amount?

1.52 A shortfall amount will arise where there is a difference between the amount of tax, credit or payment entitlement, calculated on the basis of the entity's statement in the document, and the tax properly payable according to law. The items in the table at section 284-80 describe these differences. A shortfall amount arises where:

•

a tax-related liability is less than what it would be otherwise if the statement:

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had not been false or misleading (This applies to tax-related liabilities for an accounting period and also to liabilities for GST arising on the importation of goods). [Schedule 1, item 2, item 1 in section 284-80] ;

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had not treated the income tax law in a way that is not reasonably arguable [Schedule 1, item 2, item 3 in section 284-80] ; or

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had not been inconsistent with a private ruling [Schedule 1, item 2, item 5 in section 284-80] ; and

•

a payment or credit is greater than what it would be otherwise, if the statement:

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had not been false or misleading [Schedule 1, item 2, item 2 in section 284-80] ;

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had not treated the income tax law in a manner that is not reasonably arguable [Schedule 1, item 2, item 4 in section 284-80] ; or

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had been consistent with a private ruling [Schedule 1, item 2, item 6 in section 284-80] .

1.53 The shortfall amount is the amount by which:

•

the relevant liability is less than it would otherwise have been; or

•

the payment or credit is greater than it would otherwise have been.

1.54 The current penalties framework does not impose a penalty where a taxpayer overclaims a credit (other than a credit under Division 19 of Part III or an offset under Division 1 of Part IIIAA of the ITAA 1936). New penalties have been introduced into the new administrative penalty regime to rectify this problem. An amount that the Commissioner must pay or credit to a taxpayer includes an amount credited under Part IIB of the TAA 1953 [Schedule 1, item 2, items 2, 4 and 6 in section 284-80] or an amount under a tourist refund scheme in Division 168 of the GST Act and Division 25 of the WET Act. [Schedule 1, item 2, item 2 in section 284-80]

1.55 The penalty is calculated on the shortfall amount. The shortfall amount may be reduced or eliminated under section 284-215. If the taxpayer does not have a shortfall amount, there is no penalty.

Accounting period

1.56 The accounting period is the period for which the tax-related liability or credit is calculated. The period is not necessarily a financial year and may differ according to the type of tax involved. Table 1.3 provides some examples of accounting periods for a number of tax obligations.

What is the base penalty amount?

1.57 Where there is a shortfall amount, the Commissioner identifies the cause of the shortfall amount, and applies the appropriate percentage to arrive at the base penalty amount. [Schedule 1, item 2, section 284-90]

1.58 Table 1.4 summarises the causes of the shortfall amount, and the percentage applied in each situation. The base penalty amount is the relevant percentage of the shortfall amount. [Schedule 1, item 2, section 284-90]

If more than one shortfall section applies

1.59 It is possible that more than one shortfall section may apply in respect of a shortfall amount. For example, a taxpayer may be reckless in making a claim for a deduction, and so be liable for penalty under item 2 of subsection 284-90(1), and also be liable for penalty under item 4 of subsection 284-90 (1) for not having a reasonably arguable position in respect of the claim. In such a case the taxpayer is liable to pay only one of the penalties. If one penalty is higher than the other (e.g. if items 2 and 4 of subsection 284-90 (1) both apply), the taxpayer is liable to pay the higher base penalty amount. [Schedule 1, item 2, subsection 284-90(2)]

1.60 If the taxpayer is subject to 2 base penalty amounts of the same percentage on 2 different shortfall amounts, for example, items 3 and 4 of subsection 284-90(1) both apply, then that percentage will be applied to the total shortfall amount.

Intentional disregard of a taxation law

1.61 A taxpayer will be liable to pay a base penalty amount of 75% of a shortfall amount caused by the taxpayer or agent intentionally disregarding a taxation law. [Schedule 1, item 2, item 1 in subsection 284-90(1)]

1.62 For example, the base penalty amount of 75% would apply to the shortfall amount where a taxpayer or agent deliberately excludes from the taxpayer's assessable income an amount knowing it to be assessable, or deliberately claims a deduction, rebate, credit or offset knowing that it is not allowable.

Recklessness

1.63 A taxpayer will be liable to pay a base penalty amount of 50% of a shortfall amount caused by the taxpayer or agent behaving recklessly with regard to the operation of a taxation law. [Schedule 1, item 2, item 2 in subsection 284-90(1)]

1.64 A taxpayer would be behaving recklessly if the taxpayer's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. A finding of dishonesty is not necessary for a taxpayer to be subject to this penalty.

1.65 For example, a taxpayer who purchases shares in a company, but makes no attempt to find out the tax consequences of receiving dividends, and who destroys letters from the company (after banking the dividend cheque) without reading them would be penalised 50% of any shortfall amount which results from the taxpayer failing to return the dividends as income. The concept of recklessness for the purposes of this penalty covers behaviour that could be described as gross negligence.

Lack of reasonable care

1.66 A taxpayer will be liable to pay a base penalty amount of 25% of a shortfall amount caused by a failure by the taxpayer or the agent to take reasonable care to comply with a taxation law. [Schedule 1, item 2, item 3 in subsection 284-90(1)]

1.67 The reasonable care test requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer's tax obligations. Taxpayers must take reasonable care not only in the preparation of their tax returns, but throughout the year on matters that may impact on their tax obligations, for example, record keeping. A shortfall amount may be caused not only by the taxpayer being careless in making (or not making) taxation statements, but also by careless acts or omissions of the taxpayer which lie behind the statements that are (or are not) made. Whether a taxpayer has behaved reasonably will depend on all the facts of each case.

1.68 The test looks to whether a person, in all the circumstances of the taxpayer, would have foreseen as a reasonable probability or likelihood the prospect that the act or failure to act would result in a shortfall amount. It is not a question of whether the taxpayer actually foresaw the probable impact of the act or failure to act, but whether a person in the same circumstances of the taxpayer would have foreseen it. The test does not depend on the actual intentions of the taxpayer.

1.69 Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill.

1.70 The reasonable care test is not intended to be overly onerous for taxpayers. For most taxpayers, an earnest effort to follow TaxPack instructions would usually be sufficient to pass the test. For example, if a taxpayer made a claim for a deduction without being able to substantiate the deduction in accordance with the substantiation provisions, then this would tend to indicate that the taxpayer had not taken reasonable care about the claim, since TaxPack emphasises the requirement to be able to substantiate work-related expenses.

1.71 On the other hand, if the taxpayer who could not meet the substantiation requirements was able to show that he or she did not know and could not reasonably be expected to have known of the substantiation requirements, and had in fact incurred the relevant expenditure which would be deductible but for the substantiation requirement, the taxpayer would not be liable for penalty. Whether penalty is attracted will depend on the circumstances of the case.

1.72 For business taxpayers, reasonable care would require the putting into place of an appropriate record-keeping system and other procedures to ensure that the income and expenditure of the business is properly recorded and classified for tax purposes. The fact that an employee of the business makes a careless error would not necessarily mean that the business taxpayer is subject to penalty. For example, a penalty would not apply where the taxpayer can show that its procedures are designed to prevent such errors from occurring. What is reasonable will depend, among other things, on the nature and size of the business, but could include, for example, internal audits, sample checks of claims made, adequate training of accounting staff and instruction manuals for staff.

What is reasonable care?

1.73 On questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to in the circumstances of the taxpayer. If the taxpayer is uncertain about the correct treatment of a tax-related matter, reasonable care requires that taxpayer to make reasonable enquiries to resolve the issue. Reasonable enquiry would include the taxpayer consulting someone or some text like an ATO publication or other reference in an effort to satisfy the taxpayer about the proper tax treatment of the matter. The taxpayer would need to have reasonable grounds for believing the source consulted reflected the true tax position in respect of the matter. A mere reading of a provision of the relevant tax law which the taxpayer believed to be relevant might not constitute reasonable enquiry unless the taxpayer had reasonable grounds for believing that he or she had understood the requirements of the law. For example, a wrong interpretation of a statutory provision that is clear and unambiguous would tend to suggest that the taxpayer did not exercise reasonable care. The ultimate consideration would be the honest efforts of the taxpayer, as displayed by the actions of the taxpayer in the context of the taxpayer's circumstances, to ascertain the proper tax position.

1.74 The taking of a position with respect to a tax matter that is frivolous, or which lacks a reasonable basis, would be a strong indication of a lack of reasonable care.

1.75 A taxpayer who prepares his or her own return or BAS would usually be taken to have exercised reasonable care if in doing so the taxpayer relies upon the advice of a registered tax agent, accountant or lawyer or other person whom the taxpayer could reasonably expect to provide competent advice on the relevant matter. On the other hand, where such advice is not followed this would usually mean that the taxpayer did not exercise reasonable care.

1.76 If a taxpayer seeks to rely upon the wrong advice, and the taxpayer's skill and education was such that the taxpayer could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. A taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the adviser and this had materially affected the advice on which the taxpayer sought to rely.

1.77 Where a taxpayer uses a registered tax agent or other person to help prepare and lodge a BAS or tax return, the taxpayer will be vicariously liable for any penalties caused by the agent providing information that results in a shortfall amount. This includes the tax agent not taking reasonable care. The standard expected of a tax agent will be much higher than the standard expected of the client.

1.78 A taxpayer who relies upon the advice from a third party of a fact that is material to the preparation of the taxpayer's return (e.g. a bank providing a statement of the amount of interest earned by the taxpayer) will not usually be liable for penalty if the advice is wrong, as taxpayers are ordinarily entitled to rely on such advice. However, if the taxpayer knew, or could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. For example, a group company may not have exercised reasonable care in claiming a deduction for a group loss transferred to it, if the company could reasonably be expected to have known or suspected (e.g. because of common management and control of the transferor and transferee companies) that the deduction giving rise to the loss was not properly allowable to the transferor company.

1.79 Arithmetic errors may indicate a failure to take reasonable care but are not conclusive. For business taxpayers, as indicated above, it would depend on the procedures in place to detect such errors. In other cases it may depend on the size, nature and frequency of error, or the circumstances of the taxpayer making the error, for example, if the taxpayer was under extreme stress at the time of preparing the return.

Reasonably arguable

1.80 A taxpayer may be liable to pay a base penalty amount of 25% of a shortfall amount where the taxpayer or agent treats an income tax law as applying in a particular way that is not reasonably arguable. The reasonably arguable standard is fully explained above in paragraphs 1.20 to 1.29. [Schedule 1, item 2, item 4 in subsection 284-90(1)]

1.81 A taxpayer will be taken to have treated an income tax law as applying in a particular way even where the taxpayer treats a provision as not applying to a matter. For example, where the taxpayer treats a provision as not applying to include an amount in assessable income.

Reasonably arguable threshold

1.82 A taxpayer will only be liable for penalty for not having a reasonably arguable position where the shortfall amount caused by that position is more than the greater of $10,000 or 1% of the income tax payable calculated on the basis of the taxpayer's return. [Schedule 1, item 2, item 4 in subsection 284-90(1)]

1.83 Under section 226K of the ITAA 1936, foreign tax credits and franking deficit tax offsets were deducted from tax payable in determining the 1% of income tax payable threshold. This rule will not apply under the new penalty regime.

1.84 Where the reasonably arguable position relates to a matter about the application of an income tax law to a partnership or a trust, the threshold is doubled to the greater of $20,000 or 2% of net income of the partnership or the trust calculated on the basis of the return. [Schedule 1, item 2, items 5 and 6 in subsection 284-90(1)]

1.85 The use of these thresholds significantly reduces the number of taxpayers to which the requirement to have a reasonably arguable position applies.

Example 1.3

Where a shortfall amount is less than the threshold.

On the basis of a taxpayer's return, the taxpayer is liable to pay $40,000 tax in respect of a year of income.

The taxpayer has claimed a non-allowable deduction, resulting in a shortfall amount of $6,000.

In this case, the greater of $10,000 and 1% of the tax payable (i.e. $400) is $10,000.

As the shortfall amount ($6,000) is less than $10,000, the shortfall amount is not subject to penalty under item 4 of section 284-90(1). (Note: the taxpayer may be subject to penalty under another shortfall section).

Example 1.4

Where a shortfall amount is more than the threshold.

On the basis of a taxpayer's return, the taxpayer is liable to pay $10 million in respect of a year of income.

The taxpayer has omitted income from the sale of property, resulting in a shortfall amount of $500,000.

In this case, the greater of $10,000 and 1% of the tax payable - (i.e. $100,000) is $100,000.

As the shortfall amount ($500,000) is more than $100,000, the taxpayer must have a reasonably arguable position to support the omission of the income from the sale of the property to avoid being penalised under subsection 284-90(1). (Note: even if the taxpayer has a reasonably arguable position, the taxpayer may be subject to penalty under another shortfall section).

1.86 Where a position taken by a taxpayer results in a shortfall amount in 2 or more years of income, each shortfall amount is tested against the income tax payable for the year to which it relates, to determine whether the reasonably arguable position test is satisfied in respect of that shortfall amount.

Example 1.5

In year one a taxpayer has incorrectly claimed a deduction of $1 million, which has resulted in a loss for that year of $1 million;

•

the 'loss' is recouped over the next 3 years in the amounts of $200,000, $750,000 and $50,000 respectively; the tax payable in years 2 and 3 is nil, and in year 4 is $6 million;

•

for years 2 and 3 the taxpayer must have a reasonably arguable position supporting the claiming of the loss to prevent being penalised under subsection 284-75(2), since the shortfall amounts (assuming a flat rate of tax of 30%) of $60,000 and $225,000 respectively exceed the greater of $10,000 and 1% of tax payable (i.e. nil); and

•

for year 4 the shortfall amount, $15,000 (30% of $50,000) is less than the greater of $10,000 and 1% of tax payable ($60,000), so the taxpayer would not be subject to penalty under subsection 284-75(2).

Failure to make a statement

1.87 A taxpayer may be liable to pay a base penalty amount of 75% of a shortfall amount where the taxpayer fails to make a statement [Schedule 1, item 2, item 7 in subsection 284-90(1)] . This penalty is explained in paragraphs 1.47 to 1.49.

Failure to follow a private ruling

1.88 A taxpayer will be liable to pay a base penalty amount of 25% of a shortfall amount where a statement is made in a return about the treatment of a taxation law that disregards a private ruling [Schedule 1, item 2, item 8 in subsection 284-90(1)] . This penalty is explained in paragraphs 1.50 to 1.51.

How to calculate the penalty

1.89 The following steps and example shows how the amount of penalty is calculated.

Step1:

work out the shortfall amount under section 284-80.

Step2:

the shortfall amount may be reduced by section 284-215. The reduced amount, if any, is the shortfall amount on which the base penalty amount is calculated under step 3.

Step 3:

work out the base penalty amount under section 284-90. If there is no increase or reduction in the base penalty amount, this is the amount of the penalty that the taxpayer is liable to pay.

If there is an increase under section 284-220 or reduction under section 284-225 in the base penalty amount, the formula in subsection 284-85(2) applies to determine the amount of penalty the taxpayer is liable to pay. The formula is:

base penalty amount + [base penalty amount x (increase % less reduction %)]


Example 1.6

Narda's Consulting Services Pty Ltd received notice from the Commissioner that an audit was to be conducted into the company's taxation affairs. This was part of a compliance program in the industry. After receiving the notice and prior to the visit from the ATO, the company disclosed a shortfall amount of understated PAYG withholding amounts from earlier periods of $5,000.

As a result of the audit, the company was found to have understated its net GST debts resulting in another shortfall amount of $2,500. It was concluded that the company had inadequate accounting systems giving rise to careless errors in calculating its tax liabilities. It was decided that there was a lack of reasonable care so the base penalty amount for the GST shortfall amount was 25% [Schedule 1, item 2, item 3 in subsection 284-90(1)] . However, for the understated PAYG withholding amounts, the base penalty amount of 25% was reduced by 80%, because the Commissioner treated the company as having made the voluntary disclosure before the audit [Schedule 1, item 2, subsection 284-225(2)] . This decision was taken because of the Commissioner's policy of encouraging voluntary disclosures.

To calculate the amount of the penalty:

(a) Determine the base penalty amounts

Base penalty amount on PAYG shortfall = 25% x $5,000 = $1,250


Base penalty amount on GST shortfall = 25% x $2,500 = $625


(b) Calculate adjustment on PAYG base penalty amount

base penalty amount + [base penalty amount x (increase % less reduction %)]

= $1,250 + [$1,250 x (0% - 80%)]


= $1,250 - $1,000


= $250


Therefore the total penalties from both shortfall amounts is $875.

SECTION 3: PENALTIES RELATING TO SCHEMES

1.90 The current penalties framework contains provisions which impose penalties on benefits obtained from specified avoidance and transfer pricing schemes. For example, the current penalty provisions of the income tax law impose common penalties on tax shortfalls arising from Part IVA, Division 13 of Part III and other specified anti-avoidance provisions of the ITAA 1936. The new administrative penalty regime takes a more generic approach. In broad terms, uniform penalties will be imposed on any benefits obtained from any scheme under a taxation law. They will apply to the anti-avoidance measures currently contained in the taxation law and to transfer pricing adjustments in Division 13 of Part III of the ITAA 1936.

When is an administrative penalty imposed?

1.91 An administrative penalty will be imposed where a provision in a tax law (called the adjustment provision, including anti-avoidance scheme provisions such as Part IVA of the ITAA 1936 or Division 165 of the GST Act) operates to eliminate a scheme benefit.

1.92 Under current tax law, 3 requirements need to be satisfied before the anti-avoidance scheme provisions are triggered. These are:

•

an entity participates in a scheme;

•

an entity obtains a benefit from a scheme; and

•

an outcome of the scheme was to obtain that tax benefit.

1.93 The first 2 requirements are common to all schemes to which the administrative penalty provisions of Subdivision 284-C apply. It is the third requirement, or purpose test, where there are differences among the schemes.

1.94 Most scheme penalties require that it is reasonable to conclude that the sole or dominant purpose of participating in the scheme was for the entity or another entity to get a benefit. It is not necessary for the entity that participates in the scheme to get the scheme benefit. The dominant purpose of a scheme is the prevailing or most influential purpose. [Schedule 1, item 2, subparagraph 284-145(1)(b)(i)]

1.95 There are 2 schemes with unique features. The first is a scheme under Division 165 of the GST Act. In addition to the dominant purpose test applying to some schemes to avoid GST, Division 165 can also be triggered where the scheme satisfies the principle effect test. That is, the principle effect of the scheme or part of the scheme is that the entity got a benefit. The principle effect test only applies to the entity and does not look at the effect on other entities. For this test, 'principal effect' means an important effect, as opposed to merely an incidental effect. This is in contrast to the dominant purpose referred to in paragraph 1.94 which is concerned about the prevailing or most influential purpose of the scheme. [Schedule 1, item 2, subparagraph 284-145(1)(b)(ii)]

1.96 The second scheme with unique features is one where arrangements are caught by sections 136AD and 136AE in Division 13 of Part III of the ITAA 1936. These sections allow the Commissioner to make determinations that arm's length consideration should apply to certain international transactions. These arrangements are not expressed as tax avoidance schemes and for the provisions of Subdivision 284-C, they are identified separately as schemes to which the transfer pricing provisions apply. [Schedule 1, item 2, paragraph 284-145(2)(a)]

1.97 Penalties for these schemes are currently imposed under section 225 of the ITAA 1936. That provision has a dual penalty structure where the amount of penalty imposed is dependent on whether there was a sole or dominant purpose of obtaining a tax benefit. In schemes where that purpose test is not satisfied a lower penalty is imposed. The same structure is maintained under the new penalty provisions. It is necessary to identify whether the purpose test is satisfied and the base penalty amount will vary accordingly. [Schedule 1, item 2, paragraph 284-145(2)(b)]

Scheme

1.98 A scheme is defined in subsection 995-1(1) of the ITAA 1997 to mean:

•

any arrangement; or

•

any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

1.99 The fact that a scheme or any part of a scheme is entered into or carried out outside of Australia does not affect the application of Subdivision 284-C. [Schedule 1, item 2, subsection 284-145(3)]

Scheme benefit

1.100 An entity will get a scheme benefit from a scheme if its tax-related liability is less than it would otherwise be, or a credit is larger than it would otherwise be, as a result of participating in the scheme [Schedule 1, item 2, subsection 284-150(1)] . The amount of scheme benefit that the taxpayer got from the scheme, apart from the application of either an adjustment provision or a transfer pricing provision, is called the scheme shortfall amount.

What is the scheme shortfall amount?

1.101 A scheme shortfall amount will arise if one of the following situations applies:

•

a tax-related liability is less than what it would be, as a result of participating in a scheme; and

•

a payment or credit is greater than what it would be, as a result of participating in a scheme (credit includes amounts under Part IIB of the TAA 1953).

[Schedule 1, item 2, subsection 284-150(2)]

1.102 The penalty is calculated on the scheme shortfall amount. If the entity does not have a scheme shortfall amount, there is no penalty.

What is the base penalty amount?

1.103 Where there is a scheme shortfall amount , the base penalty amount is:

•

50% of the scheme shortfall amount; or

•

25% of the scheme shortfall amount, if it is reasonably arguable that an adjustment provision does not apply.

[Schedule 1, item 2, paragraph 284-160(a)]

1.104 However, where the scheme benefit relates to a transfer pricing adjustment and the scheme was not entered into with the sole or dominant purpose to obtain a tax benefit, the base penalty amount is:

•

25% of the scheme shortfall amount; or

•

10% of the scheme shortfall amount, if it is reasonably arguable that the transfer pricing provision does not apply.

[Schedule 1, item 2, paragraph 284-160(b)]

1.105 See paragraphs 1.20 to 1.29 for an explanation of the reasonably arguable standard. The thresholds that apply to penalties relating to statements for taxpayers that have a reasonably arguable position (see items 4-6 in subsection 284-90(1)) do not apply to penalties relating to schemes.

How to calculate the penalty

1.106 The following steps show how the amount of penalty is calculated.

Step 1:

work out the scheme shortfall amount under subsection 284-150(2).

Step 2:

the scheme shortfall amount may be reduced by section 284-215. The remaining balance is the scheme shortfall amount on which the base penalty amount is calculated under step 3. If the remaining balance is nil, there is no penalty.

Step 3:

work out the base penalty amount under section 284-160. If there is no increase or reduction in the base penalty amount, this is the amount of the penalty that the taxpayer is liable to pay.

If there is an increase in the base penalty amount under section 284-220 or a reduction under section 284-225, the formula in subsection 284-155(2) applies to determine the amount of penalty the taxpayer is liable to pay. The formula is:

base penalty amount + [base penalty amount (increase % less reduction %)]

SECTION 4: COMMON PROVISIONS RELATING TO SHORTFALL AMOUNTS

1.107 Subdivision 284-D contains provisions which may apply to the calculation of penalties relating to statements and schemes. Under these provisions:

•

shortfall amounts or scheme shortfall amounts may be reduced;

•

base penalty amounts may be increased; or

•

base penalty amounts may be reduced.

Reduction in shortfall or scheme shortfall amounts

Exclusion where a taxpayer relies on the Commissioner's advice

1.108 A shortfall amount or scheme shortfall amount will be reduced where the taxpayer has relied on advice from the Commissioner. [Schedule 1, item 2, subsection 284-215(1)]

1.109 Advice from the Commissioner includes the following:

•

advice given to the taxpayer in writing, electronically or orally, such as:

-

correspondence from the Commissioner about a matter or matters relating to a taxation law;

-

a private ruling given under Part IVAA of the TAA 1953; or

-

an oral ruling given under Part 5-5 of Schedule 1 to the TAA 1953;

•

statements in public rulings issued under Part IVAAA of the TAA 1953; and

•

statements in approved publications, for example TaxPack , or in published information about specific aspects of a taxation law that are available to taxpayers.

Exclusion where the taxpayer takes reasonable care

1.110 A taxpayer will be treated as not having a shortfall amount relating to a statement that was false or misleading where the taxpayer, or the agent if the agent made the statement, took reasonable care in making the statement. The shortfall amount is reduced only for the purposes of calculating the administrative penalty. The reduction in the shortfall amount does not reduce the amount of the underlying tax liability. This exclusion does not apply to shortfall amounts where the taxpayer failed to have a reasonably arguable position or to scheme shortfall amounts. A detailed explanation of what constitutes reasonable care is at paragraphs 1.66 to 1.79. [Schedule 1, item 2, subsection 284-215(2)]

1.111 Under the current law, section 226U of the ITAA 1936 excludes from penalty a shortfall amount relating to a statement treating an income tax law applying in a particular way where the taxpayer has sought a ruling about that arrangement prior to lodging the return. This exclusion will not be part of the new regime. Instead, any penalty imposed under subsection 284-75(1) would be subject to the reasonable care exclusion provision where the Commissioner is satisfied that the taxpayer made a genuine attempt to flag the transaction by seeking a ruling prior to lodging the return. Where a ruling is sought after the return is lodged, or the ruling is about the treatment of an income tax law to which a reasonably arguable threshold applies, this would amount to a voluntary disclosure (see paragraphs 1.124 to 1.138) and the shortfall amount will be reduced.

1.112 Similarly, section 226A excludes from penalty a shortfall amount relating to a scheme where the taxpayer has sought a ruling about that scheme prior to lodging the return. This exclusion will not be part of the new regime. If a taxpayer seeks a ruling on the scheme prior to lodging the return, this will be accepted as a voluntary disclosure (see paragraphs 1.124 to 1.138) and the scheme shortfall penalty under Subdivision 284-C will be remitted by 80%.

Increase in base penalty amounts for shortfall amounts

1.113 The base penalty amount imposed on a shortfall amount or a scheme shortfall amount may be increased by 20%. [Schedule 1, item 2, section 284-220]

1.114 There are 5 situations where the penalty imposed on a shortfall amount for an accounting period may be increased.

1.115 Situation 1 : A taxpayer takes steps to prevent or hinder the Commissioner from finding out about the shortfall amount or scheme shortfall amount. [Schedule 1, item 2, paragraphs 284-220(1)(a) and (2)(a)]

1.116 This would include, for example, unreasonable delay by the taxpayer in responding to enquiries by taxation officers, or the taxpayer failing to attend an interview at a time previously agreed without a reasonable excuse. It would also include instances where the taxpayer destroyed relevant records, or colluded with other persons (after the relevant statement had been made) to conceal part or all of the shortfall amount.

1.117 Situation 2 : A taxpayer becomes aware of a shortfall amount after the statement has been made, and does not tell the Commissioner about it within a reasonable time. [Schedule 1, item 2, paragraph 284-220(1)(b)]

1.118This covers situations such as where a taxpayer relies upon factual information from a third party in preparing an approved form to be given to the Commissioner, and subsequently finds that the information supplied was inaccurate (e.g. the separate net income of a taxpayer's spouse). This rule does not require a taxpayer to monitor developments in the law, but rather looks solely at errors of a factual nature.

1.119 Situation 3 : A taxpayer has, in a previous accounting period, been penalised for a shortfall amount caused by intentional disregard of a taxation law, recklessness or lack of reasonable care in a previous accounting period, or been penalised for a scheme shortfall amount in a previous accounting period. [Schedule 1, item 2, paragraphs 284-220(1)(c) and 284-220(2)(b)]

1.120 Situation 4 : A taxpayer has, in a previous accounting period, been penalised for a shortfall amount resulting from the taxpayer or agent treating an income tax law as applying to a matter in a particular way that was not reasonably arguable, or for disregarding a private ruling, in a previous accounting period. [Schedule 1, item 2, paragraph 284-220(1)(d)]

1.121 Situation 5 : A taxpayer has, in a previous accounting period, been penalised because the taxpayer refused to give a return, statement or other document in which a statement can be made about a tax-related matter. These cases of deliberate non-compliance require the Commissioner to make a default assessment, or to determine the amount of non-assessed tax liabilities. [Schedule 1, item 2, paragraph 284-220(1)(e)]

1.122 A transitional provision allows the rules in situations 3 and 4 to operate where a penalty was previously imposed under Part VII of the ITAA 1936. [Schedule 1, item 3]

Reduction in base penalty amounts for shortfall amounts

1.123 The base penalty amount imposed on a shortfall amount or a scheme shortfall amount will be reduced where the entity makes a voluntary disclosure of the shortfall amount or scheme shortfall amount. [Schedule 1, item 2, section 284-225]

Voluntary disclosure after a tax audit has commenced

1.124 The penalty on a shortfall amount or a scheme shortfall amount may be reduced by 20% where a taxpayer voluntarily tells the Commissioner about a shortfall amount or scheme shortfall amount after the Commissioner has told the taxpayer that a tax audit of his or her financial affairs for a particular accounting period is to be conducted. [Schedule 1, item 2, paragraphs 284-225(1)(a) and (b)]

1.125 The voluntary disclosure must be expected to save the Commissioner a significant amount of time or resources in the audit in order for the base penalty amount to be reduced. [Schedule 1, item 2, paragraph 284-225(1)(c)]

1.126 For example, where the shortfall amount was due to a failure to take reasonable care, and the taxpayer tells the auditor about the shortfall amount before the auditor finds it, the base penalty amount of 25% of the shortfall amount is reduced by 20%. The taxpayer's disclosure must bring all the relevant facts and other information to the attention of the auditor that will allow the auditor to readily identify the amount and nature of the shortfall amount or scheme shortfall amount. The disclosure should be such that it could reasonably be estimated to have saved the auditor a significant amount of time or resources in looking into the matter disclosed.

1.127 A taxpayer need not admit liability in respect of the shortfall amount or scheme shortfall amount disclosed. A taxpayer is eligible for the reduced penalty whether or not the taxpayer maintains an opinion contrary to that of the auditor, or disputes the adjustment made to the taxpayer's assessment.

1.128 Tax audit is defined in subsection 995-1(1) of the ITAA 1997 to mean an examination of an entity's financial affairs by the Commissioner for a purpose of a taxation law. [Schedule 5, item 14]

Voluntary disclosure before a tax audit commences or in response to a request made by the Commissioner

1.129 The penalty on a shortfall amount or a scheme shortfall amount will be reduced where a taxpayer voluntarily tells the Commissioner about a shortfall amount or scheme shortfall amount before the Commissioner tells the taxpayer that a tax audit of his or her financial affairs for a particular accounting period is to be conducted. Telling the Commissioner about the shortfall will require a taxpayer to disclose the relevant facts and other information to enable the Commissioner to adjust the tax-related liability. [Schedule 1, item 2, paragraph 284-225(2)(a)]

1.130 The penalty will also be reduced where the taxpayer responds to a request made by the Commissioner in a public statement for taxpayers to make voluntary disclosures about participation in tax avoidance schemes or other arrangements relating to their financial affairs. Where a taxpayer comes forward and makes a disclosure on or by the day specified in the public statement, the penalty will be reduced (see paragraphs 1.132 to 1.134). Any disclosure made after that day will not qualify for this reduction. Instead, the disclosure will be treated as having been made after the audit had commenced. [Schedule 1, item 2, paragraph 284-225(2)(b)]

1.131 Although the new administrative penalties regime will apply to income tax matters in returns for the 2000-2001 year of income and later years, this new voluntary disclosure rule will apply to any announcements made by the Commissioner after 1 July 2000. [Schedule 2, item 30, paragraph 226Z(b)]

1.132 In the case of a shortfall amount, the penalty is:

•

reduced by 80% where the shortfall amount is $1,000 or more [Schedule 1, item 2, paragraph 284-225(3)(a)] ; or

•

reduced to nil where the shortfall amount is less than $1,000 [Schedule 1, item 2, paragraph 284-225(3)(b)] .

1.133 For example, where a shortfall amount greater than $1,000 is due to a failure to exercise reasonable care, and a voluntary disclosure is made before the taxpayer is advised of a tax audit, the base penalty amount of 25% of the shortfall amount is reduced by 80% to 5% of the shortfall amount. If the shortfall amount had been less than $1,000, the shortfall amount would be reduced to nil and there would be no penalty.

1.134 In the case of a scheme shortfall amount, the penalty is reduced by 80%. The threshold of $1,000 does not apply in scheme cases. [Schedule 1, item 2, subsection 284-225(4)]

1.135 Voluntary disclosures must be given to the Commissioner in an approved form. Under the rules in Part VII of the ITAA 1936, they had to be given in writing. This is no longer the case. Disclosing in an approved form is a new requirement specifying the procedure for giving information to the Commissioner about tax obligations under the new tax system. Most tax liabilities are required to be notified in an approved form and the Commissioner can determine the manner for giving that information, for example, on paper, by electronic transmission or by telephone. The rules about the approved form are explained in Section 6.

Commissioner's discretion regarding when the disclosure is made

1.136 In some instances it may be appropriate to reduce the taxpayer's base penalty amount by 80%, even though the taxpayer made the voluntary disclosure after being advised of the tax audit. This may be the case, for example, where an audit of a group of companies has commenced and a company which is a part of the group, but not the focus of the audit, voluntarily discloses a matter which was unlikely to have been detected by the audit.

1.137 To enable the Commissioner to grant this concession in the appropriate circumstances, the Commissioner has a discretion to deem a disclosure to have been made before the taxpayer was advised of a tax audit. [Schedule 1, item 2, subsection 284-225(5)]

Disclosure in scheme cases by applying for a private ruling

1.138 Section 226A currently excludes from penalty any scheme shortfall that arises where the taxpayer applies for a private ruling before lodging a return. This provision is being repealed [Schedule 2, item 29)] and the lodgment of a private ruling will be given the same status of a voluntary disclosure under section 284-225. That is, a penalty on a scheme shortfall amount resulting from participation in a scheme will be reduced by 80% where a taxpayer applies for a ruling prior to an audit commencing or prior to the date in the Commissioner's public statement about the scheme.

Remissions of shortfall amount penalties

1.139 All penalties imposed under Part 4-25 of Schedule 1 to the TAA 1953 will be subject to uniform machinery provisions. These provisions which are in Division 298 require the Commissioner to give a notice of penalty to the taxpayer: the penalty is due and payable 14 days after the notice is given to the taxpayer. The GIC is payable on any penalty unpaid after the due date. Section 298-20 allows the Commissioner to remit a penalty in whole or in part. A decision of the Commissioner not to remit the penalty, or to remit it only in part, is a reviewable decision under Part IVC of the TAA 1953.

1.140 There are a number of factors which the Commissioner takes into account when deciding to remit a penalty. These include:

•

treating taxpayers in like circumstances consistently;

•

considering a taxpayer's particular circumstances and compliance history; and

•

tailoring the penalty to secure improvements in compliance behaviour.

1.141 Remission guidelines for statement and scheme penalties will be published by the ATO. The guidelines will be based on the ATO Compliance Model and will be consistent with the principles contained in the Taxpayers' Charter. While recognising that all taxpayers are required to comply with the requirements of the taxation law, the guidelines will reflect the above factors and the reality that taxpayers have to adapt to a new tax system.

1.142 The guidelines will look to remit penalties where taxpayers and their agents make a genuine attempt to meet their obligations, but will maintain an appropriate level of penalty where taxpayers don't make an effort to do the right thing. For taxpayers that deliberately flout the law or participate in fraudulent activity, the maximum penalties will be imposed with prosecution action being taken in appropriate cases.

Assessment of penalties

1.143The Commissioner will be required to make an assessment of all penalties imposed under Division 284. A taxpayer will have a right to object to the assessment of penalty and the Commissioner's decision on the objection will be reviewable under Part IVC of the TAA 1953. This assessment and review process is necessary because, unlike other administrative penalties, the Commissioner is making a determination about the behaviour of the taxpayer. Issues about the wrongfulness of acts in making the statement or participating in the scheme, and any factors that could result in an increase in the penalty under subsection 284-220, need to be subject to judicial review. [Schedule 2, item 117, section 298-30 in Schedule 1 of the TAA 1953]

1.144 The notice of assessment of the penalty is conclusive evidence of the liability. This means that, in recovery proceedings, the taxpayer cannot contest the correctness of the assessment. This can only be done through the review process under Part IVC of the TAA 1953. [Schedule 2, item 117, subsection 298-30(3) in Schedule 1 of the TAA 1953]

SECTION 5: PENALTIES FOR FAILING TO LODGE RETURNS AND OTHER DOCUMENTS

1.145 Division 286 will impose a uniform administrative penalty for failing to give returns, statements, notices or other documents to the Commissioner on time and in the approved form. This Division consolidates the late lodgment and failure to lodge penalty provisions in a number of different taxation laws. For the purposes of this Explanatory Memorandum, returns, statements, notices and other documents will be referred to collectively as 'taxation documents'. Similarly, 'BAS' is used to refer to both the BAS and to notifications of other obligations under the new tax system, such as the instalment activity statement.

When is an administrative penalty imposed?

1.146 An administrative penalty for failing to lodge taxation documents is imposed where:

•

the taxpayer is required under a taxation law to give a taxation document to the Commissioner by a particular day; and

•

the taxpayer does not give the taxation document to the Commissioner:

-

by the particular day; or

-

in the approved form, if required.

[Schedule 1, item 2, subsection 286-75(1)]

1.147 Taxation documents required to be given to the Commissioner under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 , the Superannuation Guarantee (Administration) Act 1992 and the Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 are excluded from the operation of this Division. That is because of the special nature of the reporting obligations in those laws. [Schedule 1, item 2, subsection 286-75(2)]

1.148 Some taxation documents, for example an objection lodged under Part IVC of the TAA 1953, are not required to be lodged in an approved form. In these cases, there is no penalty for not lodging the document in an approved form. What constitutes an approved form is explained in Section 6.

How to calculate the penalty

1.149 All entities, which include individuals, are liable for the base penalty amount where they fail to give relevant documents to the Commissioner as required. The base penalty amount is one penalty unit for each period of 28 days (or part of a period of 28 days) that the taxation document remains outstanding, either as a result of the entity not giving the Commissioner the document or not giving it in the approved form. The current value of a penalty unit under section 4AA of the Crimes Act 1914 is $110. Therefore, the longer the relevant document remains outstanding the higher the penalty will become. The maximum base penalty amount will not exceed 5 penalty units. The maximum base penalty amount of 5 penalty units will be payable if the entity has not complied with the lodgment obligation within 16 weeks and one day of the due date. [Schedule 1, item 2, subsection 286-80(2)]

1.150 The penalty will exist once the due date to lodge the relevant taxation document has passed. This means that the Commissioner can issue a notice of penalty at any time after the due date. Another notice of penalty can issue after each 28 day period. [Schedule 1, item 2, subsection 286-80(6)]

1.151 For the purposes of Division 286, the base penalty amount also increases according to the size of the entity. It is subject to a multiplier factor that reflects the size of the business for taxation purposes. A large business whose information is likely to have a greater significance for compliance purposes will pay a higher penalty than a small business. The multiplier categories are:

•

small entity liable to pay the base penalty amount;

•

medium entity liable to pay double the base penalty amount [Schedule 1, item 2, subsection 286-80(3)] ; and

•

large entity liable to pay 5 times the base penalty amount [Schedule 1, item 2, subsection 286-80(4)] .

1.152 There are 3 threshold tests to determine the size of an entity. Satisfying any one of these thresholds places the taxpayer in the relevant multiplier category. A medium entity is an entity that, at the time it is required to give the relevant document to the Commissioner:

•

is a medium withholder under the PAYG withholding system;

•

has assessable income of more than $1 million but less than $20 million; or

•

has a current annual turnover for GST purposes of more than $1 million but less than $20 million.

[Schedule 1, item 2, subsection 286-80(3)]

1.153 A large entity is an entity that, at the time it is required to give the relevant document to the Commissioner:

•

is a large withholder under the PAYG withholding system;

•

has an assessable income of $20 million or more; or

•

has a current annual turnover for GST purposes of $20 million or more.

[Schedule 1, item 2, subsection 286-80(4)]

1.154 For the purposes of Division 286, a small entity is an entity which is not a medium or a large entity. A small entity is liable to pay only the base penalty amount. This includes most individuals.

Example 1.7

A medium size taxpayer was due to give a BAS to the Commissioner by 21 May 2001. The document was given to the Commissioner on 6 July 2001. The taxpayer was therefore 46 days late in lodging the document. The base penalty amount is one penalty unit for each 28 days (or part of this period), so the base penalty amount is 2 penalty units. This base penalty amount is multiplied by a factor of 2 because the taxpayer is a medium sized entity. [Schedule 1, item 2, subsection 286-80(2) and (3)]

1.155 The BAS is a document that requires an entity to notify the Commissioner of a number of obligations under taxation laws. It is the approved form for giving the Commissioner:

•

a GST return under sections 31-10 and 31-20 of the GST Act;

•

notification of a PAYG withholding amount under section 16-150 of Schedule 1 to the TAA 1953;

•

notification of a PAYG instalment amount under section 45-20 of Schedule 1 to the TAA 1953; and

•

notification of a FBT instalment under section 104 of the FBTAA 1986.

1.156 The lodgment penalty in Division 286 applies separately to each of these lodgment or notification obligations. Lodging the BAS by the due date will satisfy all these obligations, even if the entity does not advise the Commissioner of a particular tax-related liability. Where a liability is not disclosed in a BAS, the entity will have made a false or misleading statement by omission and will be liable for a penalty on the shortfall amount.

Remission of lodgment penalties

1.157 Remission guidelines for lodgment penalties will be published by the ATO. The guidelines will be based on the ATO Compliance Model and be consistent with the principles contained in the Taxpayers' Charter.

1.158 These late lodgement penalties are the maximum amounts imposed by the law and, where appropriate, they will be remitted to take into account the circumstances of the particular taxpayer. Factors such as the amount of tax payable, compliance history and whether remission is likely to secure future improvements in lodgment behaviour will be taken into account.

1.159 The Commissioner has the authority to defer the time for lodgment of taxation documents and also to defer the time for payment of tax-related liabilities. To make it easier for small businesses to comply with the requirements of the new tax system, the Commissioner advised tax agents on 12 October 1999 of a deferral of time for lodgment of the quarterly BAS and deferral of the payment. This is the 3-2-1-0 concession which gives an extra 3 weeks for lodgment of the first BAS, 2 weeks extra for lodgment of the second BAS and one week extra for lodgment of the third BAS. The fourth BAS must be lodged on or before 21 July 2001.

1.160 Any BAS lodged after the deferred due date is subject to the lodgment penalty. With large and medium size businesses that are required to lodge monthly there is an expectation that they should be able to satisfy their lodgment obligations on time. Nevertheless, the circumstances of the taxpayer may be such that it is appropriate to remit the lodgment penalty. The emphasis in the first year of the new tax system will be to educate and assist entities to meet their obligations. This will be tempered by the need to penalise cases of apathy and deliberate non-compliance.

SECTION 6: APPROVED FORMS, DECLARATIONS AND SIGNATURES

1.161 The GST, ABN and PAYG laws currently require returns, applications and notices to be given to the Commissioner in an approved form. This requirement is being extended to other taxation documents which have to be given to the Commissioner, such as income tax and FBT returns. The approved form is the new statutory tool for the Commissioner to obtain information from an entity about its tax obligations and financial affairs. Part 2 of Schedule 2 to this Bill consolidates the approved form requirements into Division 388 of Part 5-25 in Schedule 1 to the TAA 1953. Division 388 also consolidates other requirements about declarations, signatures, electronic notification of BAS amounts and truncating amounts.

Approved forms

What is an approved form?

1.162 Approved form is a defined term that allows the Commissioner to determine:

•

the kind of form to be used by a particular entity or type of entities, for example, entities in different industries can be required to lodge different forms;

•

the information that the entity must provide in the form and any further information, additional statement or document that must be given, whether in the form, attached to it, or otherwise provided separately; and

•

the manner in which the form is to be given to the Commissioner. For example, this can be either in paper, by electronic transmission, by facsimile, or by telephone. This discretion can operate independently from other notification requirements such as section 388-80 of Schedule 1.

[Schedule 2, item 143, section 388-50]

1.163 The Commissioner may combine different taxation documents in the one approved form. For example, the BAS contains information relating to a number of taxation laws which is required to be given to the Commissioner in an approved form. The information is given in one BAS, rather than in several different forms. [Schedule 2, item 143, subsection 388-50(2)]

1.164 The current income tax and FBT return provisions contain rules about the content, manner of giving and signing of return forms. These provisions also require the regulations to prescribe certain matters. These provisions are being amended as the requirements will be covered by the definition of approved form. For example, section 162 of the ITAA 1936 is being amended to allow the Commissioner to require a further or fuller return to be given in the approved form. The amendments also reiterate the type of information that an approved form can require a taxpayer to provide to the Commissioner under paragraph 388-50(1)(c). [Schedule 2, item 138, paragraph 162(b)]

1.165 The approved form replaces the need for regulations to prescribe the form, content and manner of giving returns to the Commissioner. Amendments will be made to the Income Tax Regulations and the Fringe Benefits Tax Regulations to repeal redundant regulations.

Additional time for notifying the Commissioner of BAS amounts

1.166 The Commissioner will have a discretion to allow taxpayers further time for lodging any approved form. This deferral power is the same as the discretion to defer the time for lodgment of an income tax return, an FBT return or a GST return. The general deferral discretion will allow for an extension of the time for notifying the Commissioner of BAS amounts. Currently the discretion only exists for a GST return. [Schedule 2, items 132 and 143, subsection 388-55(1)]

1.167 It is important to note that a deferral of the due date for lodgment does not defer the due date for the payment of tax-related liabilities notified in the approved form. The deferral of payment requires the Commissioner to exercise a separate discretionary power under section 255-10 in Schedule 1 to the TAA 1953. This will allow the Commissioner, if necessary, to defer the due date for lodgment but maintain the due date for payment. For example, a PAYG large withholder is required by section 16-150 in Schedule 1 to notify the Commissioner of amounts it withholds by the due date in the table in subsection 16-75(1). The Commissioner may defer the date of notification, but the payments are still required to be made the date in the table unless the large withholder has been granted a deferral of payment under section 255-10. [Schedule 2, item 143, subsection 388-55(2)]

1.168 Conversely, the Commissioner may defer the due date for payment but require an approved form to be given by the statutory due date. For example, the Commissioner may defer the due date for payment of a PAYG instalment by annual payers, but still require notification of the election (under subsection 45-140(2) in Schedule 1 to the TAA 1953) to become an annual payer to be made by the original due date for payment.

Declarations

1.169 A declaration must be completed by an entity that gives an approved form to the Commissioner. A declaration is necessary to ensure that the person who is liable for a penalty for a statement that is false or misleading was the entity responsible for the statement. Declarations can only be made by the person making the statement. That is, if an entity is giving an approved form to the Commissioner, the entity is the person that must make the declaration. On the other hand, if the approved form is being given by an agent on behalf of the entity, the agent must make the declaration.

Declarations by an entity

1.170 Where the entity gives an approved form to the Commissioner the entity must make a declaration that the information is true and correct. [Schedule 2, item 143, section 388-60]

1.171 Where the approved form is given to the Commissioner by an agent, the entity is required to make a declaration. However, this is a declaration from the entity to the agent attesting to the correctness of the information given to the agent and authorising the agent to give the approved form to the Commissioner. This declaration must be in writing. It cannot be a verbal declaration. It can be made in any form determined by the entity or the agent. For example, it can be given in paper, by facsimile, or electronic transmission. It must be made each time an agent is to give an approved form to the Commissioner. It must be signed, although the electronic signature on these forms does not need to be the signature approved by the Commissioner. [Schedule 2, item 143, subsections 388-65(1) and (2)]

1.172 The taxpayer must retain this declaration or a copy of it for 5 years after it is made, and produce it within the 5 year period if requested to do so by the Commissioner. This period is only 2 years in the case of taxpayers with a shorter period of review (SPOR). There is an administrative penalty of 20 penalty units for failing to keep and produce this declaration. These arrangements complement the existing record keeping requirements in the ITAA 1936 under section 161E (for SPOR taxpayers) and 262A (for business taxpayers). [Schedule 2, item 143, subsections 388-65(3) and (4), item 115, section 288-30]

Agent's declarations

1.173 If an agent gives a taxation document to the Commissioner on behalf of a taxpayer, the agent must declare that:

•

the document has been prepared according to the information supplied by the taxpayer;

•

the agent has received a declaration from the entity (under section 388-65) stating that the information is true and correct; and

•

the agent is authorised by the taxpayer to give the document to the Commissioner.

[Schedule 2, item 143, section 388-70]

1.174 In the case of an approved form in paper that is given by an agent on behalf of an entity, the agent does not need to make this declaration if the entity has made the declaration on the form prior to lodgment.

Signing declarations

1.175 All declarations must be signed by the person making the declaration. Where an approved form is given by electronic transfer it must contain the electronic signature of the person. This is defined in the tax dictionary in section 995-1 of the ITAA 1997 as a unique identification of the person in electronic form that is approved by the Commissioner. The Commissioner has different requirements for electronic signatures depending on the type of approved form being lodged, who is giving the form and the technology used for the electronic transmission. [Schedule 2, item 143, section 388-75; Schedule 5, item 4]

1.176 Approved forms can also be given over the telephone. For example, an entity or an agent may be able to phone the ATO and advise an adjustment to a previously notified tax-related liability. It may be possible in the future to lodge approved forms using interactive voice response. It is therefore necessary to be able to validate such information. Information can only be accepted where the entity or the agent provides a verbal declaration supported by a telephone signature . Telephone signature is also defined in section 995-1 as a unique identification of the entity that can be given over the telephone and that is approved by the Commissioner. For example, this could be something as simple as a personal identification number (PIN) or, something more detailed, like a voice recognition signature. [Schedule 2, item 143, subsection 388-75(4); Schedule 5, item 16]

SECTION 7: PENALTY FOR FAILING TO MEET OTHER TAXATION REQUIREMENTS

1.177 Amendments to Division 288 in Schedule 1 to the TAA 1953 consolidate a number of miscellaneous penalties in different taxation laws into 3 generic penalty provisions. These will apply where a person fails to:

•

keep or retain a record [Schedule 2, item 115, section 288-25] ;

•

retain or produce a declaration about an agent giving an approved form to the Commissioner on the taxpayer's behalf [Schedule 2, item 115, section 288-30] ; or

•

assist a taxation officer to carry out his or her duties [Schedule 2, item 115, section 288-35] .

1.178 The administrative penalty in each of the above cases is 20 penalty units. The generic machinery provisions in Division 298, as explained in paragraph 1.139, will apply to these penalties. Table 1.5 summarises the existing penalty provisions and their equivalent provision in the new administrative penalty regime.

1.179 As an alternative to the above administrative penalties, the Commissioner can decide to prosecute a record-keeping or an access matter as a taxation offence under the TAA 1953. Such action is only taken in the most serious cases. The various taxation laws provide different offence penalties for failing to comply with a statutory requirement relating to record-keeping and access. These offence provisions are being amended to establish a uniform maximum penalty of 30 penalty units.

FBT instalment variation threshold

1.180 Under the FBTAA 1986, an employer can vary the amount of an FBT instalment that is payable each quarter by making an estimate of the amount of FBT payable for the year of income. The variation is made when an employer completes the BAS for the quarter. If the estimate turns out to be less than 90% of the assessed FBT payable, the employer is liable to pay the GIC on the instalment shortfall. This is similar to the variation of a PAYG instalment which is also completed on the BAS. However, the threshold for imposition of the GIC on an underestimation of a PAYG instalment is 85% of the assessed income tax payable.

1.181 The thresholds for imposition of the GIC are being aligned at 85% to eliminate the inconsistent treatment between FBT and PAYG variations. This measure will be beneficial to taxpayers as it will allow for a wider variation discrepancy before the GIC is imposed. [Schedule 2, item 8A, paragraph 112(4)(b)]

SECTION 8: CONSEQUENTIAL AMENDMENTS

1.182 A number of consequential amendments need to be made as a result of the new administrative penalty regime described in Sections 1 to 7. One of these amendments is explained in paragraphs 1.181 to 1.186 and the remaining technical changes are summarised in Tables 1.6 to 1.11.

Due date for payment of income tax by individuals

1.183 Section 204 of the ITAA 1936 is being amended to introduce a statutory due date for payment for taxpayers who are not full self-assessment taxpayers, for example, individuals. [Schedule 2, items 145 to 147, section 204]

1.184 Section 161 of the ITAA 1936 provides that the due date for lodgment of income tax returns is specified by the Commissioner in the Gazette of the Commonwealth of Australia (Gazette). For individuals, this date is usually 31 October after the end of the year of income. Where a return is lodged by the due date, the due date for payment of income tax for the year of income will be the later of 21 days after the date specified in the Gazette, or 21 days after a notice of assessment is given to the taxpayer. [Schedule 2, item 145, paragraph 204(1)(a)]

1.185 For taxpayers who do not lodge on time, the due date is 21 days after the date specified in the Gazette [Schedule 2, item 145, paragraph 204(1)(b)] . This due date will also apply to tax due under amended assessments for those taxpayers. The GIC which is calculated under section 170AA of the ITAA 1936 where an assessment is amended increasing the taxpayer's liability will no longer apply. Instead, GIC will be calculated under subsection 204(3) from the statutory due date. The due date for tax payable under amended assessments where the return is lodged on time is the date explained in paragraph 1.182. [Schedule 2, item 23, section 170AA]

1.186 The current late lodgment penalty that applies to income tax returns of individual taxpayers is in section 163B of the ITAA 1936. It imposes the GIC to compensate the Revenue for not having the income tax paid when it should have been, had the taxpayer lodged the return on time. For individuals, tax is currently not due and payable until the Commissioner has made an assessment, which is contingent on the lodgment of a return. In most cases the GIC is applied to the amount of tax payable on assessment for the period commencing on the due date for lodgment and ending on the date the return is lodged. This penalty is easy to avoid by taxpayers making a payment immediately prior to lodging the late return. As this penalty is being replaced by a new penalty in Division 286 in Schedule 1 of the TAA 1953, it is necessary to have a provision that can compensate the Revenue for not having tax paid on time where returns are lodged late.

1.187 The statutory due date rules will apply in the same way to taxpayers who lodge their income tax returns under a tax agent lodgment program. As the program has staggered deferred due dates for lodgment, the tax payable will be 21 days after the notice of assessment is given to the taxpayer. However, where the return is lodged late the tax payable will have a due date of the deferred lodgment date under the program.

1.188 The lodgment program is determined by the Commissioner in consultation with tax agents. The Commissioner defers the lodgment date of a client or a group of clients of the tax agent by exercising his discretion under subsection 388-55(1) in Schedule 1 to the TAA 1953 (see paragraphs 1.166 to 1.168). The deferral does not extend the statutory due date for payment under subsection 204(1) of the ITAA 1936. The Commissioner can, in appropriate circumstances, exercise a discretion under section 255-10 in Schedule 1 to the TAA 1953 to extend the due date for payment. [Schedule 2, item 143, subsection 388-55(1)

Other amendments

1.189 The amendments in Schedule 2 to this Bill fall into several groups and are summarised in Tables 1.6 to 1.11. The consequential amendments relating to the BAS, RBA, GIC and the PAYG withholding provisions are explained in Chapters 2 and 3 of this Explanatory Memorandum.