House of Representatives

Explanatory Memorandum

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

General outline and financial impact

The shortfall interest charge

Schedule 1 to this Bill amends the Taxation Administration Act 1953 to provide for a special interest regime - the shortfall interest charge - that will apply to under-assessments of income tax (known as 'shortfalls'). For income tax shortfalls, the shortfall interest charge will replace the existing general interest charge with a charge that is four percentage points lower than the general interest charge rate.

The Shortfall Interest Charge (Imposition) Bill 2005 is also being introduced to ensure the constitutional validity of the charge.

Date of effect: These amendments will apply to amendments of assessments for the 2004-05 income year and later income years.

Proposal announced: These amendments were announced in the Treasurer's Press Release No. 106 of 16 December 2004 as part of the Government's response to the Report on Aspects of Income Tax Self Assessment.

Financial impact: The financial impact of the amendments is expected to be:

Compliance cost impact: Nil.

Penalties

Schedule 2 to this Bill amends the administrative penalty regime in the Taxation Administration Act 1953 to repeal the penalty for failing to follow a private ruling, to require the Commissioner of Taxation to supply reasons why an entity is liable to a penalty and why the penalty has not been remitted in full, and to make a technical clarification of when a statement by an entity about a large income tax item is reasonably arguable.

Date of effect: The clarification of when a large income tax item is reasonably arguable applies from Royal Assent. The other amendments will broadly apply from the 2004-05 income year for income tax and from corresponding years for other taxes.

Proposal announced: These amendments were announced in the Treasurer's Press Release No. 106 of 16 December 2004 as part of the Government's response to the Report on Aspects of Income Tax Self Assessment.

Financial impact: Nil.

Compliance cost impact: Nil.

Summary of regulation impact statement

Regulation impact on business

Impact: All taxpayers whose assessments are amended to increase a liability will benefit from the reduced interest charges proposed by the changes to the interest regime.

The proposed penalties changes impact on entities who receive an administrative penalty for a shortfall amount. Entities will benefit from a shift in the balance of responsibility for accuracy in self assessing income tax liabilities in their favour in three ways.

Main points:

•

Income tax shortfall currently incurs the general interest charge. The general interest charge is generally higher than commercial borrowing alternatives, to discourage using the Australian Taxation Office as a source of finance. However, in pre-amendment 'shortfall' cases, taxpayers are usually unaware of their debts, and so are unable to respond to this incentive premium. The measure introduces a new, lower shortfall interest charge in lieu of the general interest charge for the period before assessments are amended. This measure also allows for the Commissioner of Taxation (Commissioner) to remit the shortfall interest charge where the Commissioner considers it fair and reasonable to do so.

•

The Commissioner is currently required to notify a taxpayer that a tax shortfall penalty applies, but is not required to tell the taxpayer the reasons that the penalty applies. Similarly, if the Commissioner decides not to remit a penalty in full, the Commissioner is not required to give reasons for that decision. This measure amends the law to provide that when an administrative penalty applies and the Commissioner decides the penalty should not be remitted in full, the Commissioner will provide the taxpayer with an explanation of why the penalty applies and why it has not been remitted in full.