Taxation Ruling

IT 2206

Income tax: remission of additional tax imposed by section 223 and the former sub-section 226(2) of the Income Tax Assessment Act 1936

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FOI status:

May be releasedFOI number: I 1199654

PREAMBLE

This ruling is divided into two parts, viz,

(i)

Part A provides guidelines for the exercise of the Commissioner's discretion under sub-section 227(3) to remit the statutory penalty imposed by section 223 following the enactment of the Taxation Laws Amendment Act 1984.

(ii)

Part B amends Taxation Ruling No. IT 2012 which provides guidelines for the remission under former sub-section 226(3) of additional tax imposed by sub-section 226(2). The amendments to IT 2012 reflect the modified approach adopted in Part A of this ruling to the circumstances in which remission of additional tax may be warranted.

RULING

Discretion of Deputy Commissioners

2. In providing these guidelines, there is no intention of laying down any conditions to restrict Deputy Commissioners and authorising officers in the exercise of the discretion to remit additional tax. It is essential that Deputy Commissioners and authorising officers retain the flexibility necessary to deal with each particular case on its merits. What is being attempted in this ruling is to set out for the information of officers a guide as to the manner in which the discretion might generally be exercised.

3. It is emphasised that the guidelines do not represent a general exercise of the power of remission - they cannot. The legislation requires that the power to remit must be exercised in the light of the facts of each particular case. The guidelines are provided to assist officers in the exercise of the discretion and to help ensure that taxpayers do not receive inconsistent treatment from different Branch Offices. At all times, these remission guidelines should be administered in a commonsense manner.

PART A

4. In effect, section 223 replaces the former sub-section 226(2). A detailed discussion of the application of section 223 is contained in Taxation Ruling No. IT 2141. These remission guidelines, which should be read in conjunction with IT 2141, do not address the question of whether section 223 is applicable to a particular situation - that is, whether additional tax is imposed by the section. They are concerned only with the remission of section 223 additional tax.

5. Although covered more fully in IT 2141, the following points in relation to section 223 should be noted -

.

The new provisions apply to statements made on or after 14 December 1984 including statements made on or after that date in relation to taxation matters of earlier years.

.

The section imposes additional tax where a taxpayer makes a statement (including an oral statement) to a taxation officer, or to another person for a purpose in connection with the operation of the Act or regulations, that is false or misleading in a material particular or omits something from such a statement that renders it misleading in a material particular and, in the result, there is avoidance of tax. The omission of assessable income from a return is within the scope of the section.

.

As with the legislation it replaces, it is section 223 which imposes the penalty. The provision automatically comes into effect where the conditions for its operation exist.

.

The statutory penalty imposed under section 223 is double the amount of tax sought to be avoided.

.

The section contains special provisions relating to a false or misleading statement by a partner or trustee.

.

Statutory additional tax is imposed in situations where it has been argued that the former sub-section 226(2) did not apply.

6. Under the new legislation the Commissioner continues to have the power to remit some or all of the penalty. The introductory and substantive words of the new remission sub-section 227(3) provide -

"The Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part ...".

7. Under the repealed sub-section, the Commissioner could, in any case, for reasons which he thought sufficient, remit the statutory additional tax. New sub-section 227(3) re-enacts for practical purposes the repealed remission provision. Consequently, what an authorising officer is doing under the new legislation in determining a rate is remitting a penalty, in whole or in part, that has already been imposed by statute. The extent of any remission of additional tax will continue to depend upon the sufficiency of reasons, i.e. mitigating circumstances, in each case.

8. In the new section 223 deceit is not an element; as indicated in IT 2141, the provision is attracted when a statement is misleading notwithstanding that it is honestly made. However, as indicated in that ruling, matters such as intent, knowledge, honesty, etc., may be taken into account in considering any remission of penalties. The policy relating to the remission of additional tax has been framed accordingly.

9. It should be remembered that, although section 223 is clearly intended to penalise heavily taxpayers who seek to evade their correct liability to tax, it is equally obvious that this legislation is not to be administered so as to be seen as oppressive by those taxpayers who, although caught by section 223, have made an honest attempt to fulfil their obligations under the income tax law.

10. Sub-section 227(3) gives the Commissioner power to remit the whole or any part of the additional tax payable under section 223. It recognises that, in the context of section 223, there are degrees of culpability. Some situations will require substantial penalty, others less substantial. Some may not warrant any penalty at all.

11. It is important, also, to keep in mind that the legislation has to be administered in the context of the realities and practicalities of taxpayers fulfilling their income tax obligations. As IT 2141 points out, "a proper balance needs to be struck between the supply by taxpayers of sufficient information to enable a correct assessment to be made and the supply of excessive detail which may, in the longer term, result in inefficiencies developing in the administration of the taxation laws". It is not always practicable for taxpayers to include full and complete details of every element which finds a place in their returns of income. Judgments have to be made about how much information should or needs to be provided in justification of claims made. The assessability or deductibility of most items is generally beyond doubt. However, in the case of marginal or contentious items, if a full and accurate disclosure has not been made, and a view contrary to that of the taxpayer is taken, the taxpayer runs the risk of having penalty imposed.

12. Because of the requirement in the law to exercise the power of remission separately in each case, officers are required to comment specifically and separately in their reports or additional tax submissions on any aggravating or mitigating factors to be taken into account in determining the extent of any remission to be made. In deciding the extent to which the statutory additional tax is remitted, officers exercising the discretion should clearly state the reasons for their decision. In the event that the extent of the remission in any case is challenged in any way the reasons for the decision will be apparent.

13. In cases where the extent of the remission is challenged, the person reviewing the extent of the remission will be required to carefully consider whether there is any case for varying the level of penalty. In doing so that person should also take account of these guidelines.

Guidelines for Remission of Section 223 Additional Tax

14. The general remission guidelines set out in these paragraphs should be applied to all adjustments penalisable under section 223 except, of course, adjustments in respect of which prosecution action has been instituted against the taxpayer and not withdrawn (see section 8ZE of the Taxation Administration Act 1953). The guidelines are intended to apply to all taxpayers. However, a separate ruling will issue dealing with the special position in relation to penalties imposed on a defaulting partner under sub-section 223(2) and on a trustee under sub-section 223(4).

15. Situations calling for the exercise of the power of remission in sub-section 227(3) fall into two broad categories, i.e. voluntary admissions of a false or misleading statement and non-voluntary cases.

Voluntary Admission of False or Misleading Statements

16. The additional tax imposed by section 223 may be remitted to an extent necessary to reduce the additional tax to an amount equal to 10% per annum of the tax avoided subject to a maximum of 50% of the tax avoided in any year. Where a voluntary admission is made after a return has been lodged but before an assessment has been made, section 223 additional tax should be fully remitted.

17. For what constitutes a voluntary admission reference should be made to the description of voluntary disclosure in paragraphs 9-12 of IT2012.

Non-Voluntary Detection of False or Misleading Statements

18. This category covers the situations most commonly encountered, i.e. where, as a result of action taken by this office, assessable income is found to have been omitted from returns or deductions or rebates have been overclaimed.

19. In these cases, in the absence of aggravating or mitigating factors (see later), the discretion under sub-section 227(3) should be exercised to reduce the additional tax imposed by section 223 to an amount equal to -

20% per annum of the tax avoided (the per annum component)

plus

40% of the tax avoided (the culpability component).

20. Depending on the degree of seriousness of the offence, the culpability component may be increased by a further 10% - 50% of the tax avoided for each of the following circumstances -

(a)

Deliberate steps have been taken, either before or after commencement of official enquiries, to conceal the evasion of tax.

(b)

The above steps have involved corruption of employees or collusion.

(c)

There has been previous tax evasion by or on behalf of the taxpayer.

(d)

There has been a lack of co-operation such as to cause undue/excessive delay in the completion of the official enquiries, and/or there has been obstruction or hindrance.

(e)

There are other factors not covered by (a) to (d) which might add to the taxpayer's degree of culpability, e.g.,

.

the taxpayer is a tax agent or tax adviser;

.

the taxpayer has advised or encouraged others in the practice of tax evasion.

(For further explanation of these aggravating factors, refer to paragraphs 20-24 of IT 2012). Of course, the penalty imposed under section 223 cannot exceed the statutory maximum, i.e. 200% of the tax avoided.

Circumstances Warranting Further Remission of Penalty

21. The additional tax calculated by reference to paragraphs 19 and 20 may be further reduced where mitigating factors exist. While it is not possible to specify all those situations where it is considered that further remission is warranted, there will be situations where the false or misleading statement could be considered either wholly or substantially excusable.

22. In giving the following examples of circumstances that might warrant further remission of penalty it is pointed out that the list is not intended to be exhaustive; it is merely illustrative of the kind of circumstances warranting further reduction. In the final analysis, the responsibility rests with authorising officers to apply the law to the facts and circumstances of each case, in the light of these guidelines, with commonsense and in a reasoned and consistent manner.

23. Subject to these comments, circumstances of the kind warranting further remission would include cases where the authorising officer is satisfied that -

(i)

the taxpayer did not know or could not reasonably be expected to have known that the statement was false or misleading;

(ii)

the taxpayer's statement even though false or misleading, was occasioned by an innocent error, inadvertence or honest mistake, where no carelessness was present;

(iii)

the taxpayer has genuinely misunderstood the requirements or the application of the law, e.g. the taxpayer has been misled by his or her reading of the return form or related instructions;

(iv)

the taxpayer has been misled by actions of this office;

(v)

the taxpayer's statement was occasioned by ignorance of the law in the sense that, in the particular circumstances, he or she could not reasonably be expected to have been aware of the requirements in question;

(vi)

the taxpayer's statement was occasioned by carelessness (i.e. not recklessness) of a minor nature. There may also be other mitigating factors, e.g. advanced age or serious illness, which explain or excuse that carelessness to a substantial extent;

(vii)

the office adjustment is clearly contentious. This does not mean that there should be a further remission of penalty merely because the precise quantum of the adjustment cannot be proved. A lower penalty should be considered only where the quantum or legality of the adjustment is open to genuine dispute. The nature and extent of disclosures originally made in the return would be relevant factors. The fuller the disclosure the greater the case will be for further remitting penalty in these circumstances; or

(viii)

the effect of the penalty, having regard to the taxpayer's net assets and potential earning capacity, would be such as to amount to a 'ruinous imposition', i.e. leave the taxpayer with little or no remaining assets.

24. In deciding the extent of remission in circumstances such as those indicated in the previous paragraph, it would be appropriate to have regard to mitigating factors such as -

(i)

the taxpayer has not previously been subjected to additional tax under section 223, or former section 226, and the tax avoided is relatively minor;

(ii)

the age of the taxpayer;

(iii)

whether, at the time of lodging a return of income, the taxpayer or some immediate family member is suffering from serious illness; and

(iv)

any language or comprehension problems that the taxpayer may have.

Where the taxpayer's offence is considered substantially but not wholly excusable, a reduction in the culpability component of the penalty depending on the extent of the extenuating factors would be appropriate. Where the circumstances are such that the taxpayer's offence is considered to be wholly excusable, the whole of the culpability component of the penalty may be remitted. In determining the appropriate level of penalty in a particular case, it may also be relevant if the taxpayer, after making a false or misleading statement, has had later opportunities to correct the error but has not done so (see Case S39 85 ATC 328).

25. Any remission of the per annum component of the penalty should be made in only the most exceptional cases some of which are indicated in the examples given.

26. The following are some examples of cases where it is considered that, having regard to the previous paragraphs, further remission of additional tax would be appropriate.

(i)

A taxpayer does not include in his return interest from a bank account which has been opened in his name and of which he has been unaware. In this case, all of the culpability component should be remitted.

(ii)

A taxpayer in a return of income provides details in support of his claim that a particular receipt is not assessable or that a loss or outgoing is an allowable deduction. The assessment issues on the basis of the return lodged. The taxpayer makes similar claims, without full supporting details, in subsequent returns, on the basis that his claim has been accepted. If, upon review, it is decided that the taxpayer's claim should not have been accepted in the first place and it is decided to amend assessments to correct the error, additional tax should be fully remitted unless it appears that the taxpayer misrepresented his claim in the first place.

(iii)

The existing income tax law provides that a rebate for a spouse is not allowable where the net income of the spouse exceeds a certain figure, even though the spouse may not have worked for part of the year. It is accepted that, in the past, forms and accompanying guides were capable of being read as conferring a part year spouse rebate where the spouse worked for part of the year notwithstanding that the separate net income of the spouse was sufficient to preclude a rebate from being allowed. In such a case, where an officer is satisfied, having regard to all the facts, that the taxpayer has genuinely misunderstood the application of the law, due to what could reasonably be accepted as ambiguity in a return form or guide, additional tax should be fully remitted. If however, a similar adjustment had been made in the taxpayer's previous return or other facts indicated that the taxpayer could not have been ignorant that the receipt of income by the spouse affected the rebate available, then no further penalty remission would be warranted.

Income Disclosed in Another Return

27. Although departure from the guidelines is not considered to be warranted in cases where the income omitted from a taxpayer's return has either been disclosed in another year or returned by another taxpayer, calculation of penalty should be based on the actual tax which has been avoided in overall terms due to the income having been returned elsewhere. In many instances, little or no tax will have been avoided as the same rates of tax apply to the assessments in question. Where some tax has been avoided, the extent of any further remission will depend very much on the circumstances in each case after having regard to any aggravating factors or to circumstances that might warrant further remission. Where tax has only been deferred, e.g. income disclosed in a year later than when assessable, it would be appropriate to include a per annum component.

Calculation of Per Annum Component

28. The per annum calculation should be based on the period from the due date for payment of the relevant assessment (assessment date in refund and non-taxable cases) to the date when the position is reached where a correct assessment is able to be made. In some cases this will be the date of settlement with or acceptance by the taxpayer of the proposed adjustment. In others, such as straight forward voluntary admission or dividend/interest cases, it may be the date by which all relevant information necessary to raise the assessment, including the information necessary to ascertain the appropriate rate of penalty, has been made available by the taxpayer. In calculating the per annum component, the taxpayer should not be penalised for delays occasioned by the ATO. With the exception of previously assessed non-taxable cases, the per annum component will not apply in original assessments which are, however, still subject to the flat rate of penalty component.

29. As the per annum component of the basic penalty is intended to reflect the length of time a taxpayer has had the use of monies properly payable to the revenue, the fact that a taxpayer has paid all or some of the tax avoided prior to the date determined above should be taken into account in the calculation of the penalty component.

PART B

30. Sub-section 226(2) will, of course, continue to have general application to returns lodged before 14 December 1984. As a result of a number of policy changes adopted in setting the guidelines for remission of the new section 223 additional tax, IT 2012 is also amended so that a consistent approach to both the old and the new penalty provisions will be followed by authorising officers when determining the extent to which sub-section 226(2) additional tax is to be remitted.

31. The ruling contained in IT 2012 should therefore be amended to incorporate the following -

(a)

Calculation of Per Annum Component of Basic Penalty

The per annum component should now be calculated in accordance with paragraphs 28-29 of Part A of this ruling.

(b)

Extenuating Circumstances

Note 10 paragraphs 26-30 of IT 2012 is replaced with paragraphs 21-26 of Part A of this ruling.

(c)

Income Disclosed in Another Return

Paragraph 43 of IT 2012 is replaced by paragraph 27 of Part A of this ruling.

(d)

Reference of Disputed Cases to Senior Officer

To free up the process of negotiation and to take account of recent administrative re-organisations within branch offices paragraph 6 of IT 2012 is replaced by paragraph 13 of Part A of this ruling.

32. The above amendments to IT 2012 are applicable in all cases involving sub-section 226(2) additional tax including those which become subject to review as a result of a request by the taxpayer, an objection against the assessment or an appeal against a decision on an objection.

COMMISSIONER OF TAXATION
31 October 1985

References

ATO references:
NO 85/449-2

Date of effect:
IMMEDIATE

Related Rulings/Determinations:

IT 2012
2028
2043
2141

Subject References:
REMISSION OF ADDITIONAL (PENALTY) TAX

Legislative References:
223
226(2)
226(3)
227(3)

Case References:
Case S39
85 ATC 328