Tax Penalties

Tax penalties play a vital role in the Australian taxation system as authorities impose them when taxpayers fail to fulfill their tax obligations.

You, as a taxpayer, are actively encouraged to comply with your tax obligations through the imposition of penalties. They motivate you to exercise reasonable care, accurately report income, claim deductions correctly, and meet lodgment obligations within specified timeframes.

Moreover, these laws establish clear standards and requirements that you must adhere to, ensuring compliance and holding you accountable for your actions.

In fact, penalties act as reminders for you to take reasonable care, avoid errors, omissions, or false/misleading statements that could lead to non-compliance.

Penalty Unit Amount

The penalty unit system is a method used to determine the monetary value of penalties imposed for various infringements. It establishes a standardized unit that corresponds to a specific dollar amount.

The penalty unit system ensures consistency and clarity in penalty calculations across different types of offenses or breaches.

The penalty unit amounts vary depending on the timeframe in which the infringement occurred. Generally, penalty unit amounts increase over time to account for factors such as inflation and changing regulatory considerations.

The table below outlines the penalty unit amounts for different periods:

Infringement PeriodPenalty Unit Amount
On or after 1 July 2023313
1 January 2023 to 30 June 2023275
1 July 2020 to 31 December 2022222
1 July 2017 to 30 June 2020210
31 July 2015 to 30 June 2017180
28 December 2012 to 30 July 2015170
Up to 27 December 2012110

The calculation of the penalty amount can be determined through either a statutory formula based on your behavior and the amount of tax avoided or by using multiples of a penalty unit as a basis for calculation. The specific method used will depend on the circumstances of the infringement.

When you are liable for a penalty, the tax authority will notify you in writing. The notice will include the reason for the penalty, the specific amount of the penalty, and the due date for payment, which is typically at least 14 days after the notice is given. It’s important to note that penalties imposed by the tax authority cannot be claimed as deductions.

Types of Tax Penalties

A. False or Misleading Statements

Penalties for statements resulting in a shortfall amount:

If you provide false or misleading information in your tax return, activity statement, or amendment request, leading to a shortfall amount, you will be subject to penalties.

This penalty also applies if your tax agent makes false or misleading statements on your behalf. The shortfall amount represents the difference between the correct tax liability or credit entitlement and the amount calculated based on the information provided by you or your tax agent.

Under the safe harbor provisions, penalties may be waived if your tax agent made an incorrect statement despite receiving accurate information from you.

In cases where errors occur in your income tax return or activity statement, penalty relief may be granted, resulting in no penalty being imposed.

The base penalty for this offense is calculated as a percentage of the shortfall amount and varies depending on the behavior that led to the shortfall. The base penalty percentages are:

  • 25% for situations where reasonable care has not been exercised
  • 50% for cases of recklessness
  • 75% for instances of intentional disregard of the law

These percentages are doubled if you are classified as a Significant Global Entity (SGE).

 

Penalty for Statements Without Shortfall Amount

If you or your tax agent make a false or misleading statement during an objection, private ruling request, or audit, even if it does not lead to a shortfall amount, you may face a penalty.

The base penalty for this offense is determined by multiplying a penalty unit by a specific multiple, depending on the behavior that led to the false or misleading statement. If you have a tax agent, their behavior also influences the penalty calculation.

The base penalty unit amounts are as follows:

  • 20 penalty units for failure to take reasonable care
  • 40 penalty units for recklessness
  • 60 penalty units for intentional deliberate act of ignoring or disregarding laws

For significant global entities (SGEs), the base penalty is doubled through a penalty multiplier.

 

When Penalties Are Not Incurred?

In both of the above situations, you will not incur penalties if either of the following conditions is met:

  1. You or your tax agent exercised reasonable care when making the statement. It is important to note that the use of a tax agent alone does not guarantee reasonable care.
  2. Your statement, or your tax agent’s statement, aligns with the advice, published statements, or general administrative practices provided by the tax authority regarding the relevant tax law.

B. Penalty for Non-Reasonably Arguable Positions on Income Tax or PRRT

If you or your tax agent take a position on the application of income tax or petroleum resource rent tax (PRRT) laws that is not reasonably arguable, and the resulting shortfall amount exceeds a certain threshold, you will be subject to a base penalty of 25% of the shortfall amount.

The threshold for determining the penalty depends on the taxpayer type:

  • For partnerships and trusts, the threshold is the greater of $20,000 or 2% of the entity’s net income, as calculated in its return.
  • For other taxpayers, the threshold is the greater of $10,000 or 1% of their income tax or PRRT liability, based on their income tax or PRRT return.

If you are classified as a significant global entity (SGE), a penalty multiplier will be applied to double the base penalty.

Also, you must keep in mind that for false/misleading statement penalties and for PRRT, the base penalty amount may be adjusted based on aggravating or mitigating circumstances or remitted if it is deemed fair and reasonable to do so.If you or your tax agent take a position on the application of income tax or petroleum resource rent tax (PRRT) laws that is not reasonably arguable, and the resulting shortfall amount exceeds a certain threshold, you will be subject to a base penalty of 25% of the shortfall amount.

The threshold for determining the penalty depends on the taxpayer type:

  • For partnerships and trusts, the threshold is the greater of $20,000 or 2% of the entity’s net income, as calculated in its return.
  • For other taxpayers, the threshold is the greater of $10,000 or 1% of their income tax or PRRT liability, based on their income tax or PRRT return.

If you are classified as a significant global entity (SGE), a penalty multiplier will be applied to double the base penalty.

Also, you must keep in mind that for false/misleading statement penalties and for PRRT, the base penalty amount may be adjusted based on aggravating or mitigating circumstances or remitted if it is deemed fair and reasonable to do so.

C. Penalty for Failure to Submit Required Statements

If you fail to submit a document that is necessary to establish your tax-related liability by the specified deadline, and as a result, the tax authority determines your liability in the absence of that document, you will be subject to a penalty equal to 75% of the tax-related liability.

For instance, if you fail to lodge your tax return within the required timeframe and the tax authority determines your income tax liability using alternative methods, this penalty will apply.

The base penalty amount can be subject to an increase in certain circumstances, or it may be remitted if deemed fair and reasonable to do so. It’s important to fulfill your obligations by submitting the necessary statements on time to avoid penalties and ensure compliance with the tax laws.

 

Failure to Lodge on Time Penalty

Individuals who fail to meet their tax lodgment obligations by the specified due date may be subject to a Failure to Lodge (FTL) on time penalty imposed by the tax authorities.

This penalty applies when there is a requirement to lodge or report certain documents, such as tax returns, PAYG instalments, GST, or PAYG withholding, but they are not submitted by the due date.

Safe harbour provisions may offer protection to individuals who engage a tax agent to handle their tax affairs.

The tax authorities acknowledge that there can be instances where individuals are unable to meet their lodgment obligations on time, despite having good intentions. In isolated cases of late lodgment, penalties are generally not imposed.

Thus, we can say that they take into account the specific circumstances of the individual when deciding on the appropriate course of action.

In cases where the FTL penalty is applied, the tax authorities will issue a written notification that includes the following information:

  • The reason for the penalty
  • The amount of the penalty
  • The due date for payment, which will be provided with at least 14 days’ notice

 

Lodgments Subject to FTL Penalties

The automated penalty system applies FTL penalties to various late-lodged returns, reports, and statements, including

  • activity statements
  • tax returns
  • FBT returns
  • PAYG withholding annual reports
  • Single Touch Payroll reports
  • annual GST returns and information reports
  • taxable payment annual reports.

In situations of escalating non-compliance, FTL penalties may be manually applied when a taxpayer fails to lodge after being requested to do so.

 

Exceptions for Refunds or Nil Results

Exceptions apply to penalties for late-lodged tax returns, FBT returns, annual GST returns, or activity statements that lead to a refund or a nil result. However, there are certain situations where penalties may still be imposed:

  • If the Failure to Lodge (FTL) penalty was already applied prior to the lodgment, it will not be remitted even if subsequent lodgment results in a refund or nil result.
  • If the unlodged item pertains to a third-party data report, such as a taxable payments annual report.
  • If the taxpayer is classified as a large entity.

Individuals are advised to ensure timely lodgment of their tax obligations to avoid incurring FTL penalties imposed by the tax authorities.

D. Failure to Withhold Penalty

If you fail to withhold or pay the required PAYG withholding amount, you become liable for a penalty. This situation arises when you are obligated to withhold from payments made to employees, directors, office holders, or other individuals in different capacities.

It also applies to payments made to enterprises that have not provided an Australian business number (ABN) for a supply.

Additionally, penalties can be imposed for not paying amounts withheld, alienated personal services payments, or non-cash benefits.

The penalty incurred is equal to the amount that should have been withheld or paid.

 

Director Penalties

Company directors hold legal responsibility for ensuring their company fulfills its PAYG withholding obligations.

If a company fails to meet a PAYG withholding obligation in full by the due date, the director automatically becomes personally liable for a penalty equivalent to the unpaid amount. It is crucial for directors to ensure compliance with PAYG withholding obligations to avoid personal liability for penalties.

E. Penalty For Failure To Meet Other Tax Obligations

Some other situations where penalties for failing to fulfill tax obligations occur are as follows:

  1. If you fail to maintain or retain the necessary records as mandated by tax regulations, you may be subject to a penalty of 20 penalty units.
  2. Failure to retain or provide the required declarations, such as income declarations, can result in a penalty of 20 penalty units.
  3. If you do not grant access or fail to provide reasonable facilities to an authorized tax officer during an audit or investigation, a penalty of 20 penalty units may be imposed.
  4. Failing to apply for or cancel the GST registration as required by the tax authority may lead to a penalty of 20 penalty units.
  5. If you fail to issue a tax invoice or adjustment note in situations where it is necessary, a penalty of 20 penalty units may be applicable.
  6. In cases where both the principal and agent issue tax invoices or adjustment notes for the same taxable supply or adjustment event, a penalty of 20 penalty units can be imposed.
  7. If you are required to register as a PAYG (Pay As You Go) withholder but fail to do so, a penalty of 5 penalty units may apply. Note that high tax withholders must be registered.
  8. If you fail to lodge an activity statement electronically when it is required, you may be subject to a penalty of 5 penalty units. Non-electronic notifications are not considered compliant.

Failure to make an electronic payment when it is required can result in a penalty of 5 penalty units. Non-electronic payments are not considered compliant.

This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.

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