Penalties, interest charges and offences relating to tax returns
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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 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 as follows.
Failing to lodge tax return
For small entities (including most individuals), there is an ATO base penalty of one Commonwealth penalty unit (pu) (see ‘A note about penalty units’ at the start of this book) 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 annual rate for the quarter October to December 2024 is 7.38 per cent. Current and historical SIC rate information is available at www.ato.gov.au/tax-rates-and-codes/shortfall-interest-charge-rates
General interest charge
The GIC is payable where you do not pay tax by the time it is due or where your assessment for a year (before the 2004–2005 income year) is amended to increase the amount of tax payable.
The GIC annual rate for the quarter October to December 2024 is 11.38 per cent. Current and historical GIC rate information is available at www.ato.gov.au/tax-rates-and-codes/general-interest-charge-rates .
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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 are expressed as a percentage of the shortfall.
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 www.ato.gov.au/general/interest-and-penalties/penalties/penalty-relief.
Some of the terms used in the above have been the subject of discussion and interpretation as follows.
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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.
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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.
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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.
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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.
Promoter penalties
The promotion of tax avoidance and tax evasion schemes is prohibited. This activity can be penalised with civil penalties of up to 5000 pu for an individual, or 25 000 pu for an owners corporation, or more depending on the benefits received by the promoter and their associates.
As part of the Federal Government’s response to the PricewaterhouseCoopers tax leaks scandal, it increased the time the ATO has to bring an application for civil penalty proceedings to the Federal Court of Australia, increased the maximum penalty applicable, and expanded the application of the promoter penalty laws. The new measures commenced on 1 July 2024.
The value of one Commonwealth pu is $313. For more information, see ‘A note about penalty units’ at the start of this book.
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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. The ATO publishes data on its tax crime prosecution results at its website: see www.ato.gov.au/about-ato/tax-avoidance/the-fight-against-tax-crime/news-and-results/tax-crime-prosecution-results.
Penalties, interest charges and offences relating to tax returns
Chapter: 5.5: Taxation
Contributor: Daniel Smedley, Principal and Accredited Tax Law Specialist, Sladen Legal
Current as of: 1 September 2024
Law Handbook Page: 351
Next Section: Objections, reviews and appeals
