House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 2 - Relief from certain administrative penalties for taxpayers who engage a registered tax agent or BAS agent

Outline of chapter

2.1 Items 23 and 24 of Schedule 1 to this Bill amend the Taxation Administration Act 1953 (TAA 1953) to provide for 'safe harbours' for taxpayers who engage a tax agent or a Business Activity Statement (BAS) agent. The safe harbours ensure that, in certain circumstances, taxpayers who engage a tax agent or a BAS agent are not liable to administrative penalties that ordinarily apply for making a false or misleading statement resulting in a shortfall amount, or for late lodgment.

2.2 Item 26 of Schedule 1 to this Bill sets out when the safe harbour provisions apply.

Context of amendments

Operation of current provisions

Penalty for false or misleading statement

2.3 Subsection 284-75(1) of Schedule 1 to the TAA 1953 provides that a taxpayer is liable to an administrative penalty if they, or their agent, make a statement to the Commissioner of Taxation (Commissioner) that is false or misleading in a material particular, and this results in a shortfall amount.

2.4 A shortfall amount is the difference between the amount of tax, credit or payment entitlement calculated based on a taxpayer's statement and the amount calculated in accordance with the law. A shortfall amount arises where the tax liability is less, or the credit or payment entitlement is more, than it would have been if the statement had not been false or misleading.

2.5 The amount of the administrative penalty is calculated by determining the base penalty amount (see section 284-90) adjusted upwards for aggravating factors (see section 284-220) or downwards (see section 284-225) for mitigating factors.

2.6 The base penalty amount for providing a false or misleading statement is calculated as a percentage of the shortfall amount, with the percentage being determined with reference to the culpability of the taxpayer or their agent. Therefore, the base penalty will depend on whether the shortfall resulted from:

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intentional disregard of a taxation law (this gives a penalty of 75 per cent of the shortfall amount);

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recklessness as to the operation of a taxation law (this gives a penalty of 50 per cent of the base penalty amount); or

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a failure to take reasonable care to comply with a taxation law (this gives a penalty of 25 per cent of the base penalty amount).

2.7 This last point highlights the fact that, at present, a taxpayer will be subject to a penalty if the making of the false or misleading statement resulted from not only their own carelessness (that is, their failure to take reasonable care) but also the carelessness of their agent.

Penalty for failure to lodge on time

2.8 Subsection 286-75(1) of Schedule 1 to the TAA 1953 provides that a taxpayer is liable to an administrative penalty if they fail to give the Commissioner a return, notice, statement or other document on time and in an approved form.

2.9 The amount of the penalty is determined by reference to a base penalty amount and adjusted on the basis of the size of the taxpayer (see section 286-80). The 'base penalty' is calculated as one penalty unit for each period of 28 days, or part thereof, starting on the day the document is due and ending when the document is given to the Commissioner.

2.10 The base penalty amount is multiplied by two or five depending on the size of the entity (measured by the entity's withholding status, the entity's assessable income or the entity's annual turnover) at the time lodgment is required.

2.11 The culpability of the taxpayer or their agent is not taken into account in determining the taxpayer's liability to the penalty, nor the amount of the penalty. As a consequence, a taxpayer will be liable to a penalty where the failure to lodge a document in the approved form on time resulted from their tax agent's carelessness (or indeed, even where reasonable care was taken).

Rationale for changes

Why should there be an exemption from certain administrative penalties?

2.12 With the introduction of self assessment, the burden of applying the taxation laws to individual circumstances was shifted in some respects from the Commissioner to taxpayers. While it remains appropriate, even in a self-assessing environment, for taxpayers to be responsible for deliberate or reckless acts (whether their own or their agent's), this Bill recognises that in the absence of recklessness or intentional disregard for requirements in the taxation law a taxpayer should not be subject to an administrative penalty as a result of the actions (or omissions) of their agent.

2.13 This approach is possible now that the new regulatory framework allows effective action to be taken to improve the performance of tax agents or BAS agents where necessary.

Where an exemption for certain administrative penalties will not apply

2.14 Taxpayers are not relieved from administrative penalties for their own or their registered tax agent's or BAS agent's recklessness or intentional disregard of the taxation law (for example, where the failure to lodge a document or the provision of a false or misleading statement occurs in the context of a scheme - Subdivision 284-C of Schedule 1 to the TAA 1953 provides for penalties relating to schemes).

2.15 Where the taxpayer becomes liable for an administrative penalty due to the recklessness or intentional disregard of the taxation law by their registered tax agent or BAS agent (and through no fault of their own) it is open to the Commissioner to remit all or part of the penalty (see section 298-20 of Schedule 1 to the TAA 1953).

2.16 The Bill does not provide a safe harbour for subsection 284-75(3) of Schedule 1 to the TAA 1553, which relates to the raising of a debt where the taxpayer fails to lodge as required. Although superficially subsection 284-75(3) appears similar to 284-75(1) for failure to lodge on time, for which the Bill provides a safe harbour, they differ significantly. Subsection 284-75(3) requires the Commissioner to make a determination of an amount, that is, he will generally undertake an audit before the penalty can be applied. Usually lodgment is required before the audit commences, unless there is a perceived risk to the revenue such as fraud, evasion or flight. It is considered that failure to lodge after being requested to lodge and being advised of an audit, is to be reckless or intentionally disregarding the law. Therefore a safe harbour would generally never apply to administrative penalties under subsection 284-75(3).

Summary of new law

2.17 The Bill ensures that taxpayers who engage a registered tax agent or BAS agent and provide them with all relevant information:

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are no longer subject to a penalty for making a false or misleading statement that results in a shortfall amount if the shortfall amount was caused by their agent's failure to take reasonable care; and

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are no longer subject to a penalty for the failure to lodge a document (under subsection 286-75(1)) where that failure resulted from their agent's failure to take reasonable care or indeed even when that failure arose despite the agent's exercise of reasonable care.

2.18 The proposed 'safe harbours' exempt taxpayers from administrative penalties in certain circumstances. This liability is not transferred to the registered tax agent or BAS agent.

Comparison of key features of new law and current law

Detailed explanation of new law

2.19 Detailed information and specific examples on each of the safe harbours is provided below. However, one general requirement for both safe harbours is that, to access them, a taxpayer must show that they provided all relevant taxation information to their tax agent or BAS agent.

2.20 Using the services of a tax agent or a BAS agent does not of itself mean that an entity discharges their obligations. It remains the entity's responsibility to properly record matters relating to their tax affairs and to bring all of the relevant facts to the attention of the agent in order to show reasonable care. By supplying all relevant taxation information the taxpayer is taking reasonable care. To this end, the taxpayer must:

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bring to the agent's attention all accurate information which they would reasonably expect to be necessary to enable the provision of the tax agent service or BAS service correctly; and

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provide accurate and complete information in response to questions asked by their agent.

2.21 The taxpayer has the burden of proof on them to establish that they provided all relevant information as required. Further guidance and examples on how a taxpayer would discharge this onus of proof are provided below.

Safe harbour from an administrative penalty for making a false or misleading statement

2.22 Taxpayers are not liable to an administrative penalty for the making of a false or misleading statement to the Commissioner resulting in a shortfall amount where:

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the shortfall amount did not result from their tax agent's or BAS agent's recklessness as to the operation of a taxation law or their intentional disregard of a taxation law;

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they can establish that they have provided their agent with all relevant taxation information; and

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the statement was made by their agent.

[ Schedule 1, item 23, subsections 284 - 75(1A) and ( 1B) of Schedule 1 to the TAA 1953 ]

Example 2.1

George, a self-funded retiree, had interest-bearing accounts with several different financial institutions. George kept all statements received from these financial institutions and provided these to Alex, a registered tax agent, who prepared and lodged his tax return.

When preparing George's tax return, Alex had relied entirely upon the statements provided by George. However, in calculating the interest income, Alex accidentally omitted a quarterly interest payment from one of the financial institutions.

After an audit was conducted on George's income tax return, it was found that George had a shortfall amount. However, as George had provided Alex with all the relevant information he will not be liable for a shortfall penalty due to Alex's failure to take reasonable care. (Alex may, however, have breached the Code of Professional Conduct (Code) - refer to Chapter 3 of the explanatory memorandum to the Tax Agent Services Bill 2008.)

Example 2.2

Stephen engages Maria, a registered BAS agent, to prepare his quarterly BAS. He provides Maria with details of income and expenditure for the quarter. Stephen confirms that he has provided all the relevant information that Maria requested and any other information that he could think of. Maria then prepares the BAS based on the information provided by Stephen. The BAS is signed by both parties and lodged with the Australian Taxation Office (ATO).

An audit reveals that cash receipts totalling $10,000 have been omitted from the BAS resulting in a shortfall amount. Stephen went through the information that he provided to Maria and discovered he had forgotten to give the cash receipts to Maria. Because Stephen has not provided all relevant information to Maria, he is therefore liable for an administrative penalty for failing to take reasonable care when making a false or misleading statement resulting in a shortfall amount.

2.23 The safe harbour from administrative penalty in relation to the making of a false or misleading statement will apply to statements that are given on or after the commencement. [ Schedule 1, subitem 26(1 )]

Safe harbour from an administrative penalty for late lodgment of documents in the approved form

2.24 Taxpayers are not liable to an administrative penalty for the late lodgment of a return, notice, statement or other document in the approved form if:

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they can establish that they provided their agent with all relevant taxation information to enable the agent to give the return, notice, statement or other document to the Commissioner by the due date for lodgment; and

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they can establish that the failure to lodge the document in the approved form in time resulted from their tax agent's or BAS agent's failure to take reasonable care (or despite their agent exercising reasonable care).

[ Schedule 1, item 24, subsections 286 - 75(1A) and ( 1B) of Schedule 1 to the TAA 1953 ]

Example 2.3

Darney engages Rumi, a registered tax agent, to prepare her income tax return. Rumi asks for Darney's records to be provided by 15 November, and Darney provides her records by that day. Rumi prepares the return and posts it to Darney for signing. Darney signs the return and posts it back to Rumi within two days. Through an oversight in Rumi's office, the return is lodged late.

Darney did all things required in time to enable Rumi to lodge her return in the approved form by the due date. Because of this, and because the reason for late lodgment was a lack of reasonable care by the agent (in this case, an administrative oversight acknowledged by Rumi), Darney is not liable to any penalty.

2.25 Supplying all relevant information to enable the agent to lodge the document on time in an approved form includes meeting deadlines specified by the agent for the provision of relevant taxation information. 'Relevant information' also includes a signed document (where applicable).

Example 2.4

Odilia engages Dylan, a registered tax agent, to prepare her income tax return. Dylan asks Odilia to provide her records by 15 November, and Odilia does so. Dylan prepares the return and posts it to Odilia to sign and return it within the following week. Odilia forgets to return her signed tax return until Dylan's office contacts her the day before the due date for lodgment. She returns the documents immediately, but the return was lodged after the due date.

Because Odilia has not provided all the information (including her signed declaration) to enable Dylan to lodge the return in time, the safe harbour would not relieve Odilia of an administrative penalty for failing to lodge her return on time.

If, however, Odilia has returned her signed tax return within the time frame specified by Dylan, and if her return was subsequently lodged late due to Dylan's lack of reasonable care, Odilia would be able to seek an exemption from the administrative penalty.

Example 2.5

Ruhan, a registered tax agent, has prepared Peter's return in time for it to be lodged by the due date. In the process Ruhan has provided an opinion about the treatment of certain assets relevant to the preparation of Peter's income tax return with which Peter does not agree. Peter seeks a second opinion before agreeing to sign the return. Although Ruhan sought an extension to the due date for lodgment on Peter's behalf, Peter's enquiries still result in the return being lodged late.

The exemption will not apply in this case as the late lodgment of Peter's return is due to his own actions.

2.26 Although the concepts of reasonable care, recklessness and intentional disregard do not exist in relation to penalties for failing to lodge required documents on time the safe harbour is available only where the late lodgment results from the registered tax agent or BAS agent failing to take reasonable care (or occurs despite their exercise of reasonable care). It is not available where the agent intentionally disregards a taxation law or is reckless as to the requirements of a taxation law.

Example 2.6

Lucas, a registered tax agent, has prepared Sofia's return in time for it to be lodged by the due date. However, the time taken to resolve a dispute between Lucas and Sofia regarding the return preparation fees has led to the return being lodged late.

In this case, Lucas's actions in withholding lodgment pending settlement of the dispute regarding fees constitutes intentional disregard of the lodgment obligation. Since the late lodgment is not due to Lucas's failure to take reasonable care, the safe harbour from penalty is not available to Sofia. Note, however, that Sofia could apply for remission of the penalty and Lucas may have breached the Code.

Example 2.7

Courtney engages Davinford GST Specialists, a registered BAS agent, to prepare her BAS. Courtney provides all of her records two weeks before the due date for lodgment, as agreed with Davinford GST Specialists. Davinford GST Specialists has a large number of clients and experiences significant work pressures leading into key lodgment dates and is also in the process of moving its offices into larger premises. It does not post the prepared return to Courtney for signing until after the due date.

Courtney seeks safe harbour from administrative penalty for failing to lodge her return on time. Although the late lodgment was caused by Davinford GST Specialists, knowingly accepting too many clients and taking on an unmanageable workload, or adopting poor practice management practices demonstrates their recklessness as to the operation and requirements of the taxation law. The late lodgement did not result from the agent's failure to take reasonable care, nor in spite of an exercise of reasonable care.

Courtney does not gain the safe harbour from administrative penalty for failing to lodge her return on time.

2.27 If there is a dispute about whether or not the taxpayer provided all relevant information in time for the document to be lodged on time, the taxpayer will need to provide sufficient evidence to satisfy the elements of the safe harbour to the Commissioner in order to obtain the safe harbour.

Example 2.8

Henry is a small business owner. He engages a registered tax agent, Hann Pty Ltd, to handle all tax related matters of his business (including the preparation and lodgment of quarterly BASs and his annual income tax returns). Hann Pty Ltd has many clients and is therefore very busy, so it requests that Henry provides his business transaction records and any other required information on a quarterly basis within a week of each quarter's end. Henry complies with this request.

Henry receives a notice from the Commissioner imposing an administrative penalty for late lodgment of the final quarter's BAS as well as the annual income tax return for the previous year.

Henry writes to the Commissioner outlining his circumstances and seeking withdrawal of the penalty imposed. The Commissioner responds that, in order to obtain the safe harbour, Henry needs to demonstrate that the late lodgment was due to Hann Pty Ltd's failure to take reasonable care.

Henry approaches Hann Pty Ltd. Hann Pty Ltd admits that the paperwork relating to documents to be lodged for Henry at the end of the financial year was accidentally filed without being processed, and was only discovered after the due date for lodgment of the documents had passed. Hann Pty Ltd writes a statement to this effect for Henry to give to the Commissioner.

In this case, because the late lodgment was caused by Hann Pty Ltd failing to take reasonable care, and because Hann Pty Ltd admitted fault, the administrative penalty imposed on Henry for his failure to lodge documents on time may be withdrawn.

If, however, Hann Pty Ltd disputed Henry's assertion that he provided all relevant information on time and refused to admit that it had failed to take reasonable care in lodging the BAS and return, the safe harbour may not be granted. In these circumstances, Henry must provide other evidence to the Commissioner to prove that he provided all relevant taxation information in accordance with the timetable agreed with Hann Pty Ltd, for example, copies of relevant email correspondence with Hann Pty Ltd.

2.28 The safe harbour from administrative penalty for late lodgment of a document in the approved form due to the registered tax agent or BAS agent failing to take reasonable care (or in spite of them exercising reasonable care) applies in relation to a return, notice, statement or other document required to be given on or after the commencement. [ Schedule 1, subitem 26(2) ]

Administration of the 'safe harbour' provisions

2.29 The safe harbour provisions allow the ATO to consider and/or apply the exemption from administrative penalty either prior to or after the imposition of the administrative penalty. This enables the safe harbour to be administered in the most efficient way.

2.30 In situations where a shortfall amount arises due to a tax agent's or BAS agent's failure to take reasonable care, recklessness or intentional disregard for the taxation law, the agent may be referred by the Commissioner or the taxpayer to the Tax Practitioners Board (Board) for appropriate action. However, whether the exemptions from administrative penalties are applied or not, is independent of the Board's decision whether or not to take action against an agent. Similarly, it does not necessarily follow that a registered agent whose client is granted relief from an administrative penalty will necessarily have breached the Code.

2.31 The introduction of these exemptions from administrative penalties does not affect taxpayers' ability to seek remission of any penalties from the Commissioner.