Penalties and offences relating to tax returns

Contributed by AnnetteMorgan and current to 27 July 2018

If you have not complied with your tax obligations, you may become liable to penalty tax . Some of the penalties for these offences can be extremely severe, particularly for deliberate evasion of tax. It should also be remembered that the penalties apply in addition to ordinary tax payable, rather than in substitution for tax. Hence it is again emphasised that people must be aware of their taxation obligations and observe them. Two of the more common actions may be penalized as follows:
  • Failing to lodge returns and other documents by the due date or in the approved form
    For small entities (including most individuals), there is a base penalty of 1 penalty unit ($210) for each 28-day period or part of a 28-day period during which the documents are not lodged. Medium entities (for example, entities with income between $1 million and $20 million) are penalised double the base penalty amount and large entities (for example, entities with income of more than $20 million) are liable to five times the base penalty amount;
  • Late payment of tax
    A General Interest Charge (GIC) is a uniform, tax-deductible charge. It is calculated daily on a compounding basis and is currently around 8-9%.
Though the above penalties may be imposed, the ATO has the right to reduce or remit the penalties applied to you, depending on your individual circumstances.

Tax shortfall provisions

Expressed simply, you will have a tax shortfall where, due to your own actions, you paid less tax than the ATO argues you ought to have paid. This may be due to a number of factors, including deliberate understatement of your income, carelessness, or where you contend that the Acts could be interpreted in a particular way favourable to you but cannot "reasonably argue" that your interpretation is acceptable.

The penalties imposed are fairly complex and are determined by a number of factors, including the degree of seriousness of the offence, whether you co-operated with the ATO, and whether you voluntarily disclosed the offence to the ATO.

The ATO has a fair amount of scope as to the penalty to be imposed within particular limits and may also remit penalties where it deems appropriate. Some of the terms used in the above have been the subject of discussion and interpretation as follows.

Recklessness

The ATO regards this as gross carelessness not requiring a finding of dishonesty.

No reasonable care

According to the ATO, you will fail this test where you do not take the care that a reasonable, ordinary person would take in all the circumstances you have faced. Therefore, where you are regarded as having tried your best, no penalty should be imposed.

Reasonably arguable

The ATO regards a reasonably arguable position as one which is "about as likely as not" to be correct. Therefore, there must be a substantial prospect that your interpretation of the relevant provision would be upheld by a court. No penalty will be imposed for this offence unless the tax shortfall is greater than the higher of $10,000 or 1 per cent of the tax payable on the basis of the return you lodged. Therefore, for the average taxpayer this provision will have limited scope.

Penalty provisions also exist if you utilize specific tax avoidance schemes in breach of the Acts.

Offences

In addition to the penalties listed above, a range of criminal offences is outlined in the Taxation Administration Act . These may be imposed instead of the penalties referred to in the previous sections. Maximum penalties range from a fine of $4,200 to $25,200 and/or two years' imprisonment for individuals. Fines may be up to five times higher in the case of companies and company officers may be personally liable for the tax offences of the company. Further, the court has the power to order a penalty of up to three times the amount of tax that was sought to be avoided.

Also, mention has been made previously of the increasing reliance upon audits to verify taxpayers' circumstances.

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