Penalties, Interest Charges and Offences Relating to Tax Returns
If you have not complied with your tax obligations, you may become liable to penalties and interest charges. Some of the penalties for these offences can be extremely severe, particularly for deliberate evasion of tax. Penalties apply in addition to ordinary tax payable, rather than in substitution for tax. Therefore, you must be aware of your tax obligations and observe them.
The ATO may reduce or remit penalties and interest, depending on individual circumstances.
Two of the more common actions may be penalised 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 an ATO base penalty of 1 penalty unit (currently $110) for each 28-day period or part of a 28-day period (up to a maximum of five periods) during which the documents are not lodged; and
- late payment of tax: the Shortfall Interest Charge (SIC) and the General Interest Charge (GIC) are uniform, tax-deductible charges. The SIC is payable where your tax assessment is amended to increase the amount of tax payable. It is 7.37%-8.00% per year for the 2011/12 financial year. The GIC is payable where you do not pay an amount of tax by the time it is due or where your assessment for a year prior to the 2004/05 income year is amended to increase the amount of tax payable. It is 11.37%–12.00% per year for the 2011/12 financial year. The GIC and SIC are each calculated daily on a compounding basis.
Tax shortfall provisions
Expressed simply, you will have a tax shortfall where, due to your own actions, you paid less tax than the ATO considers you should 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.
The Commissioner considers recklessness arises where there is a high degree of carelessness, including disregard of, or indifference to, risks that are foreseeable by a reasonable person.
Lack of Reasonable Care
The reasonable care test requires a taxpayer to take the same degree of care in fulfilling their tax obligations as could be expected of a reasonable ordinary person in their circumstances. Where you are regarded as having tried your best, no penalty should be imposed.
A matter will be “reasonably arguable” if what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. 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% of the tax payable on the basis of the return you lodged.
Specific penalty provisions also exist if you are involved in a tax avoidance scheme.
Promotion of tax avoidance and tax evasion schemes is also prohibited. This activity can be penalised with civil penalties of up to $550,000 for an individual or $2.75 million for a body corporate, or more depending on the benefits received by the promoter and their associates.
In addition to the penalties listed above, a range of criminal offences may be imposed instead of the penalties referred to in the previous sections. Maximum penalties range from a fine of $2,200 to $11,000 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.