When involved in a dispute with the Australian Taxation Office (ATO), dealing with the interest and penalties that may be imposed by the ATO in relation to a tax liability by seeking remission of those amounts, objecting, or having a reasonably arguable position opinion can be an important part of any dispute resolution strategy.
This is the fourth in a six-part series of articles on aspects of, and strategies that can be employed in, a tax dispute with the ATO.
The ATO has powers to impose penalties to enforce compliance with taxation laws and payment of outstanding tax liabilities. The penalties regime is complex and different penalties apply depending on the type of non-compliance.
When are penalties imposed?
Penalties are most commonly imposed by the ATO when a taxpayer makes a false or misleading statement in an income tax return. Where the false or misleading statement results in an underpayment of tax it referred to as a ‘tax shortfall’.
Where a tax shortfall arises, the Commissioner of Taxation (Commissioner) can levy an administrative penalty based on a percentage of the tax shortfall (the ‘Base Penalty’)))
A taxpayer’s behaviour informs the quantum of the Base Penalty. A failure to take reasonable care enlivens a 25% Base Penalty, recklessness, 50%, while intentional disregard of the tax laws involves a 75% Base Penalty.
The Base Penalty can be increased by a further 20%, or decreased under specific circumstances (see below), resulting in the maximum penalty imposed on a taxpayer being up to 90% of the tax shortfall.
There are also penalties for taking a position that is not reasonably arguable (see below), entering into tax avoidance schemes, and for failing to lodge documents on time.
Taxpayers may rely on a safe harbour and will not be liable to a penalty for lack of reasonable care if they engaged a registered tax agent, provided all relevant information to that agent, and there was no intentional disregard of a taxation law or recklessness as to the operation of a taxation law by the agent.
When is interest imposed?
The ATO may impose two types of interest on a taxpayer: the shortfall interest charge (SIC); and the general interest charge (GIC).
SIC is interest imposed on the tax shortfall that the taxpayer is liable to pay after the Commissioner amends a tax assessment for an income year. SIC is at an interest rate 3% higher than the base interest rate (the 90-day Bank Accepted Bill rate published by the Reserve Bank) (“Base Interest Rate”). Generally, the calculation of the SIC is for the period from the date of the original assessment to the date of the amended assessment.
GIC is payable on unpaid tax from the due date of payment. GIC is at a higher interest rate than SIC, being a 7% uplift on the Base Interest Rate.
Dealing with penalties and/or interest
Taxpayers may be able to mitigate penalties and or interest imposed by the ATO by having a reasonably arguable position (RAP) or a PBR, making a voluntary disclosure, seeking remission of penalties and or interest, or objecting to penalties and or the refusal of a request for remission of interest.
Reasonably arguable positions and private binding rulings
A RAP paper may provide protection to a taxpayer against the penalty for not having a reasonably arguable position. However, taxpayers would still liable to any tax shortfalls. Taxpayers should be aware that having a RAP paper does not necessarily mean that the taxpayer has taken reasonable care regarding its tax affairs.
A matter is “reasonably arguable” if it could be concluded in the circumstances, having regard to relevant authorities, that what is argued is about as likely to be correct as incorrect, or is more likely to be correct than incorrect A RAP needs to be determined by applying relevant authorities including taxation laws and materials such as explanatory memoranda, case decisions, and ATO rulings or guidance.
A RAP paper is a document akin to taxation opinion setting out the basis of why a position is reasonably arguable. A key differential between a RAP and tax opinion is that an advice sets out the tax adviser’s opinion on the taxation implications of a matter whereas a RAP paper considers both sides of a tax position and weighs up the probability of the taxpayer’s position being correct (or otherwise).
Applying for a private binding ruling (PBR) from the ATO before a dispute arises can be a means to reduce exposure to penalties as the taxpayer who lodges a return in accordance with the PBR should not have a shortfall amount and the associated penalties.
A PBR requires full disclosure to the ATO for the Commissioner to decide on the tax implications of the situation. The outcome of the PBR (whether positive or adverse) is binding on the ATO but is not binding in relation to a circumstance or period (income year) not encompassed under the PBR itself.
RAP papers are particularly useful for taxpayers who wish to reduce the risk of penalties but whom also wish to adopt a tax position without putting the ATO on notice of the particular transaction, in contrast to a PBR.
Another alternative is to pro-actively engage the ATO and alert them of an issue in relation to a taxpayer’s affairs. This is known as a ‘voluntary disclosure’.
Penalties (if imposed) may be reduced by 80% if a voluntary disclosure is made before the Commissioner conducts an examination of the taxpayer’s taxation affairs. If made after the Commissioner conducts an examination of taxpayer’s taxation affairs, penalties may only reduce by 20% (although the Commissioner has discretion to reduce the penalty by up to 80%).
Seeking remission of penalties and/or interest
In the event a PBR, RAP, or voluntary disclosure was not effective to reduce any penalties, it may be possible to request a remission of the penalties instead.
Remission by the Commissioner of SIC and/or GIC may be possible where it would be fair and reasonable for the Commissioner to do so.
Objecting to penalties and/or refusal of a request for remission of interest
If the ATO imposes penalties and the taxpayer is dissatisfied with the Commissioner’s penalty assessment, the taxpayer may object against that assessment.
A taxpayer may also object against the refusal by the Commissioner to remit SIC but not the refusal to remit GIC.
How can a tax lawyer assist?
The interest and penalty regimes are complex and can increase a taxpayer’s tax liabilities significantly. Taxpayers should consider engaging a tax lawyer at the earliest opportunity to manage their exposure and risk to the imposition of penalties and interest.
In the fifth part of this series, we will consider how best to respond to a ATO review and or audit and how engaging with the ATO can assist a taxpayer in throughout the process of the review or audit.
At Sladen Legal, one of the areas our tax team specialises is in tax disputes including dealing with interest and penalties imposed by the ATO against taxpayers. Please contact us if you have any further questions or need our help.