When can penalties apply?
If you have not complied with your tax obligations, you may have to pay penalties and interest charges. The penalties can be severe, particularly for deliberate tax evasion. Penalties apply in addition to the ordinary tax payable, rather than in substitution for tax. The Australian Taxation Office (ATO) may reduce or remit penalties and interest, depending on individual circumstances.
Two of the more common actions are:
- failing to lodge tax returns and other documents by the due date or in the approved form; and
- late payment of tax.
The penalties for these two common actions are outlined in ‘Penalties relating to tax returns’ below.
Failing to lodge tax returns
For small entities (including most individuals), there is an ATO base penalty of one Commonwealth penalty unit (see ‘Note: Penalty units’, below) for each 28-day period or part thereof (up to five periods) during which the documents are not lodged.
Late payment of tax
The shortfall interest charge (SIC) and the general interest charge (GIC) are uniform, tax-deductible charges. The GIC and SIC are each calculated daily on a compounding basis.
Shortfall interest charge
The SIC is payable where your tax assessment is amended to increase the amount of tax payable. The SIC rates range from 3.01 to 3.07 per cent for the quarters in the 2021–2022 financial year.
General interest charge
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 2004–2005 income year) is amended to increase the amount of tax payable.
The GIC rates range from 7.01 to 7.07 per cent for the quarters in the 2021–2022 financial year.
The value of one Commonwealth penalty unit is $222.
Penalties relating to tax returns
|Nature of behaviour
|Basic Penalty Amount (BPA) (% of shortfall)
|Partially adjusted for:
|Lack of cooperation
|Voluntary disclosure by taxpayer:
|Intentional disregard for the law
|Failure to take reasonable care
|Case not reasonably arguable
|Failure to provide documents
Tax shortfall provisions
You will have a tax shortfall if, due to your own actions, you paid less tax than the ATO considers you should have paid. This may be due to several 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 complex and are determined by a number of factors, including the degree of seriousness of the offence, whether you cooperated with the ATO, and whether you voluntarily disclosed the offence to the ATO. The penalties, expressed as a percentage of the shortfall, are shown in the table in ‘Penalties for taxation shortfalls’ above.
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.
The ATO has recently established a ‘penalty relief’ framework for individuals and small businesses. Through this framework, the ATO will not impose penalties that arise from inadvertent errors in income tax returns. For more information about this framework, see the ATO’s website.
Some of the terms used in the above have been the subject of discussion and interpretation as follows.
The Tax Commissioner considers that you intentionally disregard the law if you are fully aware of the offence and you choose to make it anyway with the intention of bringing about certain results (e.g. underpaying tax or over-claiming an entitlement). This type of behaviour triggers the highest penalties among the offences.
The Tax Commissioner considers that 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 is ‘reasonably arguable’ if what is argued for is 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 $10 000 or one per cent 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.
The promotion of tax avoidance and tax evasion schemes is prohibited. This activity can be penalised with civil penalties of up to 5000 penalty units (which would currently amount to $1.11 million) for an individual, or 25 000 penalty units (which would currently amount to $5.55 million) for an owners corporation, or more depending on the benefits received by the promoter and their associates.
Offences relating to tax returns
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 between $4440 (for a first offence) and $26 640, 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.