Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (IMPROVEMENTS TO SELF ASSESSMENT)
BILL (No. 1) 2005
SHORTFALL INTEREST CHARGE (IMPOSITION) BILL 2005
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
Table of contents
Glossary ...................................................................................... 1
General outline and financial impact...................................................... 3
Chapter 1 The Report on Aspects of Income Tax
Self Assessment ........................................................... 7
Chapter 2 The shortfall interest charge ....................................... 11
Chapter 3 Penalties ..................................................................... 31
Chapter 4 Regulation impact statement....................................... 39
Index .................................................................................... 47
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
Commissioner Commissioner of Taxation
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
TAA 1953 Taxation Administration Act 1953
the Report Report on Aspects of Income Tax
Self Assessment
the Review Review of Aspects of Income Tax
Self Assessment
1
General outline and financial impact
The shortfall interest charge
Schedule 1 to this Bill amends the Taxation Administration Act 1953 to
provide for a special interest regime -- the shortfall interest charge -- that
will apply to under-assessments of income tax (known as `shortfalls'). For
income tax shortfalls, the shortfall interest charge will replace the existing
general interest charge with a charge that is four percentage points lower
than the general interest charge rate.
The Shortfall Interest Charge (Imposition) Bill 2005 is also being
introduced to ensure the constitutional validity of the charge.
Date of effect: These amendments will apply to amendments of
assessments for the 2004-05 income year and later income years.
Proposal announced: These amendments were announced in the
Treasurer's Press Release No. 106 of 16 December 2004 as part of the
Government's response to the Report on Aspects of Income Tax
Self Assessment.
Financial impact: The financial impact of the amendments is expected to
be:
2005-06 2006-07 2007-08 2008-09
$11.5 million $21.5 million $36.5 million $61.5 million
Compliance cost impact: Nil.
Penalties
Schedule 2 to this Bill amends the administrative penalty regime in the
Taxation Administration Act 1953 to repeal the penalty for failing to
follow a private ruling, to require the Commissioner of Taxation to supply
reasons why an entity is liable to a penalty and why the penalty has not
been remitted in full, and to make a technical clarification of when a
statement by an entity about a large income tax item is reasonably
arguable.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
Date of effect: The clarification of when a large income tax item is
reasonably arguable applies from Royal Assent. The other amendments
will broadly apply from the 2004-05 income year for income tax and from
corresponding years for other taxes.
Proposal announced: These amendments were announced in the
Treasurer's Press Release No. 106 of 16 December 2004 as part of the
Government's response to the Report on Aspects of Income Tax Self
Assessment.
Financial impact: Nil.
Compliance cost impact: Nil.
Summary of regulation impact statement
Regulation impact on business
Impact: All taxpayers whose assessments are amended to increase a
liability will benefit from the reduced interest charges proposed by the
changes to the interest regime.
The proposed penalties changes impact on entities who receive an
administrative penalty for a shortfall amount. Entities will benefit from a
shift in the balance of responsibility for accuracy in self assessing income
tax liabilities in their favour in three ways.
Main points:
Income tax shortfall currently incurs the general interest
charge. The general interest charge is generally higher than
commercial borrowing alternatives, to discourage using the
Australian Taxation Office as a source of finance. However,
in pre-amendment `shortfall' cases, taxpayers are usually
unaware of their debts, and so are unable to respond to this
incentive premium. The measure introduces a new, lower
shortfall interest charge in lieu of the general interest charge
for the period before assessments are amended. This measure
also allows for the Commissioner of Taxation (Commissioner)
to remit the shortfall interest charge where the Commissioner
considers it fair and reasonable to do so.
4
General outline and financial impact
The Commissioner is currently required to notify a taxpayer
that a tax shortfall penalty applies, but is not required to tell
the taxpayer the reasons that the penalty applies. Similarly, if
the Commissioner decides not to remit a penalty in full, the
Commissioner is not required to give reasons for that decision.
This measure amends the law to provide that when an
administrative penalty applies and the Commissioner decides
the penalty should not be remitted in full, the Commissioner
will provide the taxpayer with an explanation of why the
penalty applies and why it has not been remitted in full.
5
Chapter 1
The Report on Aspects of Income Tax Self
Assessment
Outline of chapter
1.1 This chapter summarises the self assessment system for income
tax and explains the background to the Report on Aspects of Income Tax
Self Assessment (the Report) that recommended the changes proposed in
this Bill.
The self assessment system
1.2 Since 1986-87, income tax in Australia has operated under a self
assessment system. Before self assessment, taxpayers were obliged by law
to make a `full and true disclosure' of the relevant information to the
Australian Taxation Office (ATO) to permit the ATO to apply the law to
their circumstances -- in other words, assessment of taxpayers' liabilities
was performed by the ATO.
1.3 Under the self assessment system, taxpayers' returns are
generally accepted at face value, subject to post-assessment audit or other
verification by the ATO. Under this system, while the ATO issues notices
of assessment to create the formal obligation to pay tax, a taxpayer's
statement in their return is taken to represent their view about how the law
applies to their circumstances.
1.4 In 1989-90, the returns of companies and superannuation funds
became subject to a system of full self assessment, under which the
taxpayer calculates their liability and pays their tax when lodging their
return. The ATO does not issue notices of assessment to these taxpayers.
1.5 For both individuals and full self assessment taxpayers, the ATO
may review and amend an assessment within a prescribed period.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
1.6 The self assessment system was modified in 1992 by the
Taxation Laws Amendment (Self Assessment) Act 1992 to include:
a system to permit the ATO to issue binding public and
private rulings
a regime of penalties for understatements of income tax
liability
an extension of the period within which a taxpayer could
object against an assessment,
and
a system of interest for underpayments and late payments of
income tax.
The Review of Aspects of Income Tax Self Assessment
1.7 On 24 November 2003, the Treasurer announced the
Review of Aspects of Income Tax Self Assessment (the Review)
(Press Release No. 98). The purpose of the Review, which was conducted
by the Treasury, was to determine whether the self assessment
arrangements struck the right balance between protecting the rights of
individual taxpayers and protecting the revenue for the benefit of the
Australian community.
1.8 In March 2004, the Government released a discussion paper that
examined this balance in light of a number of aspects of Australia's income
tax self assessment system and several comparable international
arrangements. In response to the discussion paper, the Review received
over 30 submissions, received a number of phone calls, emails and
background papers from interested partes, and held face to face
consultation with taxpayer representatives, professional bodies and other
government agencies.
1.9 On 16 December 2004, the Treasurer announced the
Government's response to the Report and released the Report to the public
(Press Release No. 106). The Report identified a number of refinements to
the self assessment system to reduce uncertainty and compliance costs for
taxpayers, while preserving the ATO's capacity to collect legitimate
income tax liabilities. The Treasurer announced that the Government
would adopt the 30 legislative recommendations made in the Report, and
that the Commissioner of Taxation had advised that the ATO would
implement the relevant administrative recommendations as soon as
practicable.
8
The Report on Aspects of Income Tax Self Assessment
Implementing the legislative recommendations in the Report
1.10 This Bill implements part of the Government's response to the
Report. It amends the existing law to reduce the consequences of the
uncertainty that is inherent in a self assessment system by mitigating the
interest and penalty consequences of taxpayer errors.
1.11 In particular, this Bill:
imposes a separate interest charge, with a lower rate than the
general interest charge, for shortfalls of income tax
improves the transparency of the process of imposing
penalties on taxpayers who understate a tax liability,
and
abolishes the separate penalty for failing to follow an
ATO private ruling.
1.12 In its response to the Report, the Government also announced
that improvements would be made by:
providing for a better framework for the provision of
ATO advice and introducing ways to make that advice more
accessible, timely and binding in a wider range of cases,
and
reducing the periods allowed for the ATO to increase a
taxpayer's liability in a wide range of situations.
1.13 The Government will introduce the amendments necessary to
implement these changes in a future Bill (or Bills).
9
Chapter 2
The shortfall interest charge
Outline of chapter
2.1 Schedule 1 to this Bill amends the Taxation Administration
Act 1953 (TAA 1953) to apply a special interest regime -- the shortfall
interest charge -- to understatements of income tax liability.
2.2 The shortfall interest charge will replace the existing general
interest charge with a charge at a lower rate for the period between when
the shortfall amount would originally have been due and when the shortfall
is corrected.
2.3 These provisions also allow for the remission of the shortfall
interest charge in appropriate circumstances, with review rights where the
shortfall interest charge is significant relative to the size of the shortfall.
Context of amendments
2.4 These provisions have been developed as part of the
Government's response to the recommendations made in the Report on
Aspects of Income Tax Self Assessment (the Report). Background to the
Report, and the recommendations made, is in Chapter 1 of this explanatory
memorandum.
2.5 A shortfall is different from a late payment of tax, which occurs
where a stated liability (whether correct or not) is not fully paid by the due
date.
2.6 Currently, a shortfall is treated the same way as a late payment,
with the general interest charge being applied from the due date of the
original assessment to the time the amount is paid. This occurs because the
due date for payment of a shortfall amount is the same as for the original
(understated) assessment, automatically triggering the application of the
general interest charge from that date. Thus, when the shortfall is
corrected, the general interest charge will be imposed for the `shortfall
period' (the period between due date for the original assessment and the
correction of the shortfall).
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
2.7 The general interest charge is set at a high rate (compared with
indicator rates for commercial borrowing) to encourage prompt payment of
tax liabilities.
2.8 The Report recommended that a lower interest charge should
apply for the period prior to a taxpayer being notified of their shortfall, as
they would not generally be in a position to respond to the incentive
premium that is built into the general interest charge (see Chapter 5 of the
Report).
2.9 These amendments implement these recommendations.
Summary of new law
2.10 Where a taxpayer's income tax assessment is amended so as to
increase their liability, the taxpayer is liable to pay the shortfall interest
charge on the increase -- that is, on the shortfall amount. The shortfall
interest charge replaces the current liability to pay the general interest
charge during the shortfall period.
2.11 The shortfall interest charge rate is calculated in the same way as
the general interest charge rate, but will be four percentage points less per
annum. The shortfall interest charge has a three percentage point uplift
over the base rate (which is an average of bank bill yields), in contrast with
the seven percentage point uplift used by the general interest charge.
2.12 The shortfall interest charge applies on a daily compounding
basis from the due date for payment of the earlier, understated assessment
to the end of the day before the assessment is amended.
2.13 The due date for payment of the tax shortfall and the related
shortfall interest charge is 21 days after the date on which the
Commissioner of Taxation (Commissioner) gives the notice increasing
liability. Once this due date for the amended assessment has passed, the
general interest charge will apply automatically to any unpaid tax and
shortfall interest charge.
2.14 The shortfall interest charge is tax deductible.
2.15 The Commissioner has the power to remit the shortfall interest
charge where the Commissioner considers it fair and reasonable to do so.
The Commissioner will give written reasons for rejecting remission
requests.
12
The shortfall interest charge
2.16 Taxpayers whose unremitted shortfall interest charge exceeds
20 per cent of the shortfall have objection rights and appeal rights under
Part IVC of the TAA 1953 (the generic objection and appeal provisions)
available to them.
2.17 The shortfall interest charge applies to shortfalls in assessments
for the 2004-05 and later income years. The general interest charge
(and, where relevant, the older under-payment interest charge under section
170AA of the Income Tax Assessment Act 1936 (ITAA 1936)) will
continue to apply to shortfalls in assessments relating to the 2003-04 and
preceding income years -- regardless of when those amendments are
ultimately made.
Comparison of key features of new law and current law
New law Current law
Income tax shortfalls attract the Income tax shortfalls attract the
shortfall interest charge, with a three general interest charge, with a seven
percentage point uplift over the base percentage point uplift over the base
rate, from the due date of the rate, from the due date of the
original assessment to the day before original assessment until paid.
the shortfall is corrected.
The due date for payment of the tax The due date for payment of the tax
shortfall and related shortfall interest shortfall is the due date for the
charge will be 21 days after the original assessment.
amounts are notified to the taxpayer.
Shortfall amounts not paid by the Shortfall amounts attract the general
new due date will attract the general interest charge from the due date for
interest charge from that date. the original assessment.
The shortfall interest charge is tax The general interest charge is tax
deductible. deductible.
The Commissioner has the power to The Commissioner has the power to
remit the shortfall interest charge if remit the general interest charge.
the Commissioner considers it fair
and reasonable to do so.
The Commissioner must give written A taxpayer can only request reasons
reasons for rejecting remission for a remission decision through
requests. certain administrative law
mechanisms.
Where the unremitted shortfall A taxpayer can only challenge a
interest charge exceeds 20 per cent remission decision through certain
of the tax shortfall, the taxpayer may judicial review mechanisms in
object to and appeal the decision administrative law.
(ie the objection and review rules in
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
New law Current law
Part IVC of the TAA 1953 apply).
Detailed explanation of new law
Creation and imposition of the shortfall interest charge
The role of the shortfall interest charge
2.18 The rationale for imposing an interest charge during the shortfall
period is to ensure that taxpayers who understate their liability in self
assessing do not receive an advantage -- in the form of a `free loan' --
over those who meet their tax liabilities in full by the due date.
2.19 This goal suggests a charge aimed at neutralising the
`loan benefits' that taxpayers could otherwise receive from the temporary
use of the shortfall amount.
2.20 The existing approach of applying the general interest charge to
shortfalls has had significant administrative advantages. However, before
the Commissioner notifies a taxpayer of a shortfall, the taxpayer would not
generally be in a position to respond to the premium that is built into the
general interest charge as an incentive for prompt payment.
2.21 Accordingly, the Government has decided to create a new, lower
interest charge specifically for the shortfall period.
2.22 The loan benefits that can arise from a shortfall will vary
according to the circumstances of the individual taxpayer, reflecting factors
such as the taxpayer's usual borrowing rate, the rate of return earned from
investing the shortfall amount or -- where the shortfall amount was spent
on consumption -- whether the taxpayer would knowingly have borrowed
for that purpose.
2.23 However, administrative practicality and transparency demand
that a single rate of the shortfall interest charge be imposed for all affected
taxpayers. The shortfall interest charge will not be fine tuned to offset the
actual loan benefit (if any) received by a particular taxpayer from a
particular shortfall. Rather, the shortfall interest charge rate will reflect
benchmark business borrowing rates.
14
The shortfall interest charge
2.24 Accordingly, the objects clause is stated in terms of neutralising
the general potential for taxpayers to receive loan benefits from shortfalls.
[Schedule 1, item 1, section 280-50]
Liability for the shortfall interest charge
2.25 A taxpayer is liable to pay the shortfall interest charge on an
additional amount of income tax they are liable to pay because the
Commissioner amends their assessment for an income year. A shortfall
does not exist unless the taxpayer's overall liability is increased -- even
though the Commissioner might have increased a particular element of the
earlier assessment. [Schedule 1, item 1, subsection 280-100(1)]
Example 2.1: Amended assessment with no shortfall
John is an office worker in the 30 per cent tax bracket (plus a
1.5 per cent Medicare levy).
When preparing his tax return, John incorrectly claims a
$380 deduction for his telephone line rental, but also neglects to
claim a valid $603 deduction for work related car expenses.
A later audit of John's work related expense claims leads to the
Australian Taxation Office (ATO) querying the deduction for
telephone line rental. In reviewing the TaxPack, John acknowledges
that he was not entitled to that deduction, but does become aware of
his entitlement to the car deduction.
The amended assessment reduces John's overall liability by $70
(ie 31.5% × (380 603)). John does not have a shortfall and is not
liable for the shortfall interest charge on the invalid $380 telephone
line rental deduction.
Liability to the shortfall interest charge is unrelated to penalties
2.26 The shortfall interest charge applies regardless of whether or not
the taxpayer is liable to any penalty. Liability to the shortfall interest
charge does not depend upon -- nor imply -- culpability on the part of the
taxpayer. [Schedule 1, item 1, subsection 280-100(4)]
Government bodies -- liability to pay the shortfall interest charge
2.27 Neither the Commonwealth nor an authority of the
Commonwealth is liable to pay the shortfall interest charge. [Schedule 1,
item 1, subsection 280-100(5)]
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
2.28 State and territory bodies subject to income tax are liable to pay
the shortfall interest charge on shortfall amounts of income tax.
Imposition of the shortfall interest charge
2.29 The Shortfall Interest Charge (Imposition) Bill 2005 accompanies
this Bill, imposing the shortfall interest charge as a tax, but only to the
extent to which it cannot otherwise be validly imposed.
The shortfall interest charge period
2.30 The liability exists for each day in the period during which the
taxpayer's liability was understated. In most cases, the period will run
from the due date of the original (understated) assessment to the day before
the Commissioner gives notice that the assessment has been amended
upwards on account of the shortfall (a `debit amendment'). [Schedule 1,
item 1, subsection 280-100(2)]
Example 2.2: Simple shortfall case
John is an office worker in the 30 per cent tax bracket (plus a
1.5 per cent Medicare levy).
John incorrectly claims in his 2004-05 tax return a $600 deduction for
an ordinary business suit. The due date for payment of the assessment
based on that return is 21 November 2005.
A later audit of John's work related expense claims results in his
liability being increased by $189 (ie 31.5% × 600), with the
amendment being notified to him on 30 January 2007.
The shortfall interest charge would apply on the $189 for the 435 days
from 21 November 2005 to 29 January 2007 (inclusive).
2.31 Under the current law, a `nil assessment' (such as where the
taxpayer has a tax loss for the income year) does not constitute an
assessment. The Government will introduce amendments later this year, as
part of its proposed improvements to self assessment for amendment
periods, that will have the effect that the shortfall interest charge applies to
cases where a taxpayer's liability is adjusted from nil to a positive amount.
In such cases, the shortfall interest charge period will commence on the day
that tax would have been due had a positive amount been assessed.
[Schedule 1, item 1, paragraph 280-100(2)(a)]
2.32 In some cases the shortfall does not arise from an error in the
original assessment, but from the taxpayer later requesting an amendment
that incorrectly reduces their liability (an erroneous `credit amendment').
16
The shortfall interest charge
Although a shortfall would arise, the taxpayer would not have received a
benefit until they received the erroneous credit. Accordingly, in such cases
the shortfall interest charge period will commence from the due date of the
amended assessment that incorrectly reduced the previously assessed
liability. (Due dates for amended assessments are explained in
paragraph 2.43.) [Schedule 1, item 1, subsection 280-100(3)]
Example 2.3: An erroneous credit amendment
John is an office worker in the 30 per cent tax bracket (plus a
1.5 per cent Medicare levy).
John files his tax return for the income year 2004-05. The due date
for payment of the assessment based on that return is 21 November
2005.
Later, a colleague remarks that he had claimed a workplace deduction
for a suit, prompting John, who had purchased a $600 business suit in
May 2005, to request an amendment to his assessment reducing his
liability by $189 (ie 31.5% × 600). John is notified of this
amendment, and receives a cheque for $189. The amended
assessment has a due date of 20 December 2005.
A later audit of John's work related expense claims results in his
liability being increased by $189, with the amendment being notified
to him on 30 January 2007.
The shortfall interest charge would apply on the $189 for the 406 days
from 20 December 2005 to 29 January 2007 (inclusive).
Cases of multiple amendment.
2.33 The cases outlined above demonstrate the principle that the
shortfall interest charge, rather than the general interest charge, applies to
income tax shortfalls during the period in which a taxpayer has not been
notified of a shortfall.
2.34 Where complex overlays of debit and credit amendments arise, it
is intended that the shortfall interest charge apply to the various shortfall
amounts during their respective shortfall periods. The shortfall interest
charge periods pertaining to multiple amendments may run concurrently.
Example 2.4: Multiple amendments
John is an office worker in the 30 per cent tax bracket (plus a
1.5 per cent Medicare levy).
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
When preparing his tax return, John omits to declare $800 in
dividend income and incorrectly claims a $380 deduction for his
telephone line rental. The due date for payment of the assessment
based on that return is 21 November 2005.
Later, a colleague remarks that he had claimed a workplace deduction
for a suit, prompting John, who had purchased a $600 business suit in
May 2005, to request an amendment to his assessment reducing his
liability by $189 (ie 31.5% × 600). John is notified of this
amendment, and receives a cheque for $189. The amended
assessment has a due date of 20 December 2005.
Computerised income matching identifies the omitted dividend
income, resulting in an amended assessment increasing his liability
by $252 (ie 31.5% × 800), being notified to him on 2 March 2006.
A later audit of the John's work related expense claims denies
the deductions for telephone line rental and the business suit,
resulting in an amended assessment increasing his liability by $308
(ie 31.5% × (380 + 600)), being notified to him on 30 January
2007.
The shortfall interest charge would apply as follows:
For the dividends: on $252 (ie 31.5% × 800) for the 101 days
from 21 November 2005 to 1 March 2006 (inclusive).
For the phone: on $119 (ie 31.5% × 380) for the 435 days
from 21 November 2005 to 29 January 2007 (inclusive).
For the suit: on $189 (ie 31.5% × 600) for the 406 days from
20 December 2005 to 29 January 2007 (inclusive).
The shortfall interest charge rate
2.35 The shortfall interest charge rate is a daily rate arrived at by
dividing an annualised rate by the number of days in the calendar
year -- as occurs with the general interest charge. [Schedule 1, item 1,
subsection 280-105(2)]
2.36 In annualised terms, the shortfall interest charge rate is
four percentage points lower than the general interest charge, employing a
three percentage point uplift factor over the same base rate that the general
interest charge uses. [Schedule 1, item 1, subsection 280-105(2)]
2.37 The shortfall interest charge uses the same base rate as the
general interest charge. The base rate is adjusted quarterly, as the mean
yield on 90-day bank accepted bills for the middle month of the preceding
18
The shortfall interest charge
quarter. [Schedule 1, item 1, subsection 280-105(2) and, item 22, subsection 995-
1(1)]
Example 2.5: Calculation of the shortfall interest charge rate
Assume the mean yield on 90-day bank accepted bills for
November 2005 is 5.5 per cent per annum. The base rate applying in
the first quarter of 2006 would therefore be 5.5 per cent per annum.
The annualised shortfall interest charge rate applying during that
quarter would therefore be 8.5 per cent (ie 5.5% + 3%) per annum,
resulting in a (daily) shortfall interest charge rate of
0.02328767 per cent.
In contrast, the applicable general interest charge rate during the
quarter would be 12.5 per cent per annum, corresponding to a daily
general interest rate of 0.03424657 per cent.
Calculation of the shortfall interest charge
2.38 The shortfall interest charge rate is applied on a daily
compounding basis to the shortfall amount, for the duration of the shortfall
interest charge period. That is, for any day in the period, the shortfall
amount and any shortfall interest charge accumulated to date is multiplied
by the (daily) shortfall interest charge rate. [Schedule 1, item 1,
subsection 280-105(1)]
Example 2.6: Calculation of the shortfall interest charge
A taxpayer has a $1,000 shortfall for (exactly) the whole of the first
quarter of 2006, during which the base rate was 5.5 per cent.
On 1 January 2006 the shortfall interest charge would be
$0.23 ($1,000 × 0.0002328767).
On 2 January 2006 the shortfall interest charge would be
$0.23 ($1,000.23 × 0.0002328767).
Over the whole 90 days of the quarter, the total shortfall interest
charge will amount to $21.18, compared with the general interest
charge of $31.30 that would have been imposed on the shortfall under
the current legislation.
Notification by the Commissioner
2.39 The Commissioner must give the taxpayer a notice stating
the amount of the shortfall interest charge liability. This amount can
be included in another notice that the Commissioner gives to the
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
taxpayer -- such as the notice of the amended assessment. The notice will
serve as prima facie evidence of the shortfall interest charge liability.
[Schedule 1, item 1, section 280-110]
2.40 Section 29 of the Acts Interpretation Act 1901 describes what is
meant by `give' in these provisions. In most cases the ATO will be
considered to have given notice by addressing and posting a notice as a
letter, and the notice is deemed to have been given to the taxpayer at the
time the letter would be delivered in the ordinary course of the post.
Due date for payment of amended assessments
2.41 Under the current law, an amended assessment is due and
payable at the same time as the original assessment. Also, the general
interest charge that accrued each day during the shortfall period would
have been due at the end of each day.
2.42 The new arrangements provide a prospective due date, allowing a
21 day payment period for notified amounts of shortfall and related
shortfall interest charge. [Schedule 1, item 7, subsections 204(2) and (2A) of
the ITAA 1936]
2.43 The amount of tax that a taxpayer is liable to pay because of an
amended assessment will be due 21 days from when the taxpayer is given
notice of the amendment. [Schedule 1, item 7, subsection 204(2) of
the ITAA 1936]
2.44 Any shortfall interest charge that a taxpayer is liable to pay will
be due 21 days from when the taxpayer is given notice of the charge.
[Schedule 1, item 7, subsection 204(2A) of the ITAA 1936]
Credit amendments
2.45 The prospective due date will apply to all amended
assessments -- including amendments decreasing a taxpayer's liability
(ie credit amendments).
2.46 In the case of credit amendments, no additional amount of tax
will become due and payable at that date. However, the due date for the
amended assessment will be the starting point for any shortfall interest
charge period that might arise from erroneous credits in that amended
assessment. [Schedule 1, item 1, subsection 280-100(3)]
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The shortfall interest charge
Ongoing relevance of previous due dates
2.47 Although an amended assessment has a new, prospective due
date, the due date of the original assessment -- and any intervening
amended assessments -- will continue to be relevant for determining any
shortfall interest charge or general interest charge arising from those
assessments.
2.48 The due date of an original assessment will continue to be the
starting date for the shortfall interest charge on any further shortfalls
arising from the original assessment and for the general interest charge on
unpaid amounts from the original assessment.
Example 2.7: Relevant due dates and amended assessments
John is an office worker in the 30 per cent tax bracket (plus a
1.5 per cent Medicare levy).
When preparing his tax return for the income year 2004-05, John
omits to declare $800 in dividend income and incorrectly claims a
$380 deduction for his telephone line rental.
John files his tax return well before the 31 October 2005 lodgement
deadline and, based on that return, receives a tax assessment for
$10,000, due and payable on 21 November 2005. After allowing for
$9,000 of tax that had been withheld from his salary over the course
of the year, John has an outstanding tax liability of $1,000. John
makes no payments against that $1,000, and the general interest
charge commences to accrue from 21 November 2005.
Computerised income matching identifies the omitted dividend
income. On 2 March 2006, John is notified of an amended
assessment increasing his liability by $252 (ie 31.5% × 800) and of
the shortfall interest charge on that amount for the 101 days from
21 November 2005 to 1 March 2006 (inclusive). John pays the
increased liability and the shortfall interest charge before the due date
of 23 March 2006.
The general interest charge, which has been accruing on a compound
basis since 21 November 2005, will continue to accrue on the unpaid
$1,000 from the original assessment and the unpaid general interest
charge.
A later audit of John's work related expense claims denies the
deduction for telephone line rental, resulting in a further amended
assessment. On 30 January 2007 John is notified that his liability for
2004-05 has been increased by $119 (ie 31.5% × 380) and that the
shortfall interest charge applies on this amount for the 435 days from
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Shortfall Interest Charge (Imposition) Bill 2005
21 November 2005 to 29 January 2007 (inclusive). The due date for
payment of these amounts is 20 February 2007.
As John has still made no payments against the unpaid $1,000 from
the original assessment or the resulting general interest charge, the
general interest charge on those overdue amounts continues to accrue
daily.
2.49 Similarly, the due date of an amended assessment remains
relevant even where that amended assessment is itself later amended:
The shortfall interest charge period for a shortfall that arises
from an erroneous credit amendment always commences at the
due date for that credit amendment (see Example 2.3)
[Schedule 1, item 1, subsection 280-100(3)].
The general interest charge on any amounts remaining unpaid
from an earlier amended assessment always accrues from the
due date of that earlier amended assessment
(see paragraph 2.53).
Interest charge implications of the prospective due date
2.50 Having a prospective due date for amended assessments has
implications for interest charges.
The payment period
2.51 Consistent with the treatment of the original assessment, neither
the shortfall interest charge nor the general interest charge will apply
during the 21 day payment period. This ensures that the taxpayer can
settle the matter by paying the notified amount by the due date, without
further (un-notified) interest having accrued.
2.52 Similarly, to encourage immediate payment of notified amounts,
taxpayers will be eligible for early payment interest under the terms of the
Taxation (Interest on Overpayments and Early Payments) Act 1983. The
prospective due date will automatically give rise to this entitlement for
early payment of the increase in assessed liability. The amendments extend
the entitlement to early payment of the shortfall interest charge. [Schedule 1,
item 29, paragraph 8A(1)(a) of the Taxation (Interest on Overpayments and Early
Payments) Act 1983]
22
The shortfall interest charge
The general interest charge
2.53 The general interest charge applies automatically from the due
date of any unpaid tax liabilities, and so will commence to accrue daily at
the end of the 21 day payment period on any unpaid shortfall amount. The
amendments extend this treatment to unpaid shortfall interest charge.
[Schedule 1, item 7, subsections 204(2), (2A) and (3) of the ITAA 1936 and item 24,
subsection 8AAB(4)]
2.54 The higher general interest charge is applied in such cases
because, once the amounts owing have been notified and a payment period
allowed, the shortfall taxpayer would generally be in a position to respond
to the incentive premium that is built into the general interest charge.
2.55 No shortfall amount will be subject to both the general interest
charge and the shortfall interest charge in respect of the same day.
Interest charges and credit amendments
The shortfall interest charge
2.56 Where an assessment has been amended because of a purported
shortfall and that shortfall is later overturned, the shortfall interest charge
relating to that shortfall will be annulled. [Schedule 1, item 3, subsection 172(1)
of the ITAA 1936; item 4, subparagraph 172(1)(a)(ii) of the ITAA 1936; item 6,
subsection 172(2) of the ITAA 1936]
2.57 A taxpayer is generally eligible for overpayment interest on an
overturned shortfall, under the Taxation (Interest on Overpayments and
Early Payments) Act 1983. The amendments make the taxpayer also
entitled to overpayment interest on the related shortfall interest charge that
they had paid. [Schedule 1, item 27, subparagraph 3(1)(a)(iiia) of the
Taxation (Interest on Overpayments and Early Payments) Act 1983; item 28,
subparagraph 3(1)(a)(iv) of the Taxation (Interest on Overpayments and Early
Payments) Act 1983]
The general interest charge
2.58 Under the current law, the uniform due date for all assessments
and amendments of assessments means that a credit amendment
automatically corrects any general interest charge implications of the
earlier overstatement of a taxpayer's liability.
2.59 The amendments ensure that any such general interest charge
implications continue to be corrected. Where a shortfall amount (and
related shortfall interest charge) is not paid by the due date, that
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
outstanding liability will initially be reflected in the general interest charge
applying to the later period. Should the shortfall later be overturned, the
general interest charge will be recalculated as if the unpaid shortfall
amount (and related shortfall interest charge) had never existed.
[Schedule 1, item 4, paragraph 172(1)(a) of the ITAA 1936]
Example 2.8: Credit amendment and the general interest charge
Assume the base rate is a constant 5.5 per cent.
Company F completes its income tax assessment for the income year
2004-05, which has a due date of 1 December 2005. From time to
time, Company F has various outstanding tax liabilities posted to its
ATO running balance account, which attract the general interest
charge.
An ATO compliance program results in Company F's assessment
being amended to increase the liability by $30,000. Company F is
notified on 2 March 2006 of the amended assessment and the related
shortfall interest charge of $642 (ie on an amount of $30,000 at a rate
of 8.5 per cent for the 91 days from 1 December 2005 to 1 March
2006 inclusive), with the due date for payment being 23 March 2006.
Company F makes no payments against the shortfall amount or the
shortfall interest charge, and from 23 March 2006 the $30,642 debt
would be reflected in the daily general interest charge accruing on
Company F's ATO running balance account.
Company F later successfully objects to the debit amendment. The
general interest charge for the period from 23 March 2006 is
recalculated with the effects of the unpaid $30,000 shortfall and $642
of the shortfall interest charge negated by equal credits with the same
effective date of 23 March 2006.
Reversal of credit amendments
2.60 Where a credit amendment is later overturned, the general interest
charge and the shortfall interest charge that had been eliminated by that
credit amendment will be reinstated. [Schedule 1, item 5, subsection 172(1A) of
the ITAA 1936]
Tax deductibility of the shortfall interest charge
2.61 The shortfall interest charge is tax deductible. This is consistent
with the tax deductibility of the general interest charge and its predecessor
the under payment interest charge. [Schedule 1, item 20, paragraph 25-5(1)(c)]
24
The shortfall interest charge
Remission of the shortfall interest charge
2.62 The Commissioner can remit all or part of the shortfall interest
charge where the Commissioner considers it fair and reasonable to do so.
[Schedule 1, item 1, subsection 280-160(1)]
2.63 Remission can be requested by the taxpayer or initiated by the
Commissioner.
2.64 In considering whether to grant remission, the Commissioner
must have regard to two key principles [Schedule 1, item 1,
subsection 280-160(2)]:
Remission should not occur just because the benefit the
taxpayer received from the temporary use of the shortfall
amount is less than the shortfall interest charge [Schedule 1,
item 1, paragraph 280-160(2)(a)]. In particular, a taxpayer should
not expect that remission would be granted for the sole reason
that their rate of finance is lower than the shortfall interest
charge rate.
Remission should occur where the circumstances justify the
Commonwealth bearing part of the cost of delayed receipt of
taxes [Schedule 1, item 1, paragraph 280-160(2)(b)]. Such cases
would usually entail delay, contributory cause or fault on the
part of the ATO or others. Where the Commissioner is aware
that these circumstances arise, the Commissioner should
initiate remission.
2.65 The following examples illustrate where remission should be
considered in accordance with this second principle, having regard to the
extent to which factors beyond the taxpayer's control were responsible for
the size and duration of the shortfall:
The ATO took longer to complete an audit than could
reasonably have been expected, having regard to all the facts
and circumstances of the case.
Even though there was no delay by the ATO, the complexity
of issues involved resulted in an abnormal time between the
commencement of the audit and the amendment of the
assessment.
The ATO has, by advice or action, contributed to the
taxpayer's error giving rise to the shortfall.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
The taxpayer relied on judicial interpretation that was later
overturned.
The taxpayer is affected by a retrospective change in
legislation.
2.66 It is also intended that remission be considered in the following
cases:
A shortfall caused negligible or no revenue impact. An
example of this would be where joint income has been
incorrectly apportioned between taxpayers with equal
marginal rates.
The amount of the shortfall interest charge remitted is minor
-- for example, the Commissioner might round down the
amount of the shortfall interest charge payable or remit in full
a minor amount of charge.
Practical administration favours remission -- for example,
where calculation of the precise shortfall interest charge is
complex, the Commissioner might apply an approximation
that does not disadvantage the taxpayer.
2.67 Remission may also be considered to encourage taxpayers to
voluntarily self amend when they become aware that they have a shortfall.
This would not generally include cases where a taxpayer is merely
responding to an ATO announcement that certain arrangements were
ineffective -- although the ATO may offer interest incentives to settle in
such cases. Similarly, specific interest rate remission policies could be
adopted by the ATO as part of particular compliance programs.
2.68 The considerations set out above are not intended to be
exhaustive, and the Commissioner is given a broad discretion to remit
where the circumstances make it fair and reasonable to do so. [Schedule 1,
item 1, section 280-160]
2.69 Conversely, the Commissioner has the discretion not to remit
where a taxpayer has acted in bad faith or where other circumstances mean
that it would not be fair and reasonable to remit.
Reasons for remission decision
2.70 To improve confidence in the objectivity of ATO remission
decisions, the Commissioner must provide reasons for the remission
26
The shortfall interest charge
decision where a taxpayer requests remission of the shortfall interest
charge and the Commissioner decides not to remit all of the amount.
[Schedule 1, item 1, section 280-165]
2.71 The Acts Interpretation Act 1901 (section 25D) provides for
what constitutes written reasons. This states that `...the instrument giving
the reasons shall also set out the findings on material questions of fact and
refer to the evidence or other material on which those findings were
based.'.
2.72 In order for this provision to be administratively workable,
reasons will only be required to be provided where the taxpayer has
initiated the remission through making a remission request in the approved
form.
2.73 Any existing right to request reasons under other administrative
law mechanisms (eg the Administrative Decisions (Judicial Review) Act
1977) is not affected by these amendments.
Objection and appeal against certain remission decisions
2.74 The amendments introduce a new avenue of review for taxpayers
with shortfalls. Under the general interest charge regime, there is no
mechanism to challenge a remission decision under the tax law. No review
of the merits of the decision is available.
2.75 As shown above, a range of judgements might need to be made
by the Commissioner when deciding whether or not to remit some or all of
the shortfall interest charge. It is appropriate therefore that merits review
of remission decisions be available where the potential for the shortfall
interest charge to have penalty effects is significant relative to the
administrative costs of such a review process.
2.76 Accordingly, where the unremitted shortfall interest charge
exceeds 20 per cent of the tax shortfall, the objection, review and appeal
rights available in Part IVC of the TAA 1953 will be available to the
taxpayer. The rights available include a right to object to the merits of a
decision made by the Commissioner, a right to have the Administrative
Appeals Tribunal review the objection decision and a right to appeal the
decision to the Federal Court. [Schedule 1, item 1, section 280-170]
2.77 Without the 20 per cent threshold, the cost of objections and
appeals is likely to be excessive relative to the potential penalty effect from
the shortfall interest charge being above loan benefits that taxpayers
receive from the temporary use of the shortfall funds.
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Shortfall Interest Charge (Imposition) Bill 2005
2.78 It is recognised that large shortfalls can result in large amounts of
the shortfall interest charge without exceeding the 20 per cent threshold.
However, a large shortfall interest charge does not, of itself, imply a large
penalty effect. As noted in paragraphs 2.22 and 2.23, determining the loan
benefit for a particular taxpayer -- and hence the actual penalty effect of
the shortfall interest charge rate -- can be complex and any decisions
based on that judgement would raise concerns over transparency.
2.79 Accordingly, formal objection and appeal rights will not be
available merely because the amount of the shortfall interest charge is large
in absolute dollar terms. This does not prevent the Commissioner initiating
remission (or further remission) where the affected taxpayer lacks formal
appeal rights.
2.80 The provision applies regardless of whether the remission
decision is initiated by the taxpayer or the Commissioner. However, a
remission decision must have been made before the rights will be triggered.
The taxpayer is not required to request remission before objecting to a
failure to remit an amount of the shortfall interest charge if the
Commissioner has already made a decision not to remit.
2.81 The provision applies regardless of whether the Commissioner
has remitted in full or in part, so long as the total unremitted amount is
more than 20 per cent of the shortfall amount.
2.82 The current review mechanisms (and any associated right to
request reasons for a decision) available under the Administrative
Decisions (Judicial Review) Act 1977 or other administrative law
mechanisms are not affected by these amendments.
Overpayment interest on delayed remission of shortfall interest charge
2.83 Where a taxpayer requests and receives remission of the general
interest charge, but there is a delay in granting that remission, the taxpayer
can receive overpayment interest for the period from the beginning of the
30th day after the request was made. The amendments extend this
entitlement to delayed remission of shortfall interest charge. [Schedule 1,
item 30, subparagraph 12A(1)(ia) of the Taxation (Interest on Overpayments and
Early Payments) Act 1983]
28
The shortfall interest charge
Consequential amendments
Definitions
2.84 Consequential amendments are made to include the new terms
`shortfall interest charge' and `base interest rate' in the definition
provisions in the ITAA 1936 and Income Tax Assessment Act 1997 (ITAA
1997). [Schedule 1, item 2, subsection 6(1) of the ITAA 1936; items 22 and 23,
subsection 995-1(1) of the ITAA 1997]
Assessable recoupment
2.85 The shortfall interest charge will have equivalent treatment to the
general interest charge as an assessable recoupment. [Schedule 1, item 18,
subsection 20-25(2A); and item 19, paragraph 20-25(2A)(a) of the ITAA 1997]
2.86 An assessable recoupment occurs where the Commissioner has
repaid an amount to the taxpayer. Because the taxpayer is entitled to claim
a deduction for the shortfall interest charge, the taxpayer must include any
recouped shortfall interest charge in their assessable income.
The shortfall interest charge as a tax liability
2.87 In order to trigger the appropriate collection and recovery
provisions in the TAA 1953, the shortfall interest charge has been included
as a tax related liability in the TAA 1953. [Schedule 1, item 25, subsection
250-10(2)]
2.88 Consequently, the shortfall interest charge is included in the
provisions that allow for release from liability in a situation of serious
hardship. [Schedule 1, item 26, subsection 340-10(2)]
Applying the shortfall interest charge where the general interest charge
currently applies to shortfall cases
2.89 Consequential amendments are made to miscellaneous situations
where the general interest charge can currently apply to a shortfall of
income tax. These are:
negligence of registered tax agents
agents and trustees,
and
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Shortfall Interest Charge (Imposition) Bill 2005
persons in receipt or control of money from non-residents.
2.90 These amendments are needed to treat the shortfall interest charge
in the same manner as the general interest charge, to include references to
how the shortfall interest charge is worked out and in some cases to avoid
confusion between the shortfall interest charge and the general interest
charge where the term `the charge' is used. [Schedule 1, items 8 to 17 and 21]
Application and transitional provisions
2.91 These amendments apply to amendments of assessments for the
2004-05 income year and later income years. [Schedule 1, item 31]
30
Chapter 3
Penalties
Outline of chapter
3.1 Schedule 2 to this Bill amends the administrative penalty regime
in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953),
which applies where entities fail to meet various tax obligations, to:
abolish the penalty for a tax shortfall resulting from a failure
to follow a private ruling issued by the Commissioner of
Taxation (Commissioner)
require the Commissioner to provide an explanation of why
an entity is liable to a penalty and why the penalty has not
been remitted in full,
and
clarify the definition of when a statement by an entity about
its income tax liability is `reasonably arguable' (and therefore
not subject to the penalty for a tax shortfall resulting from
taking a position about a large item that is not reasonably
arguable) in relation to income tax law.
Context of amendments
3.2 These provisions implement part of the Government's response to
the recommendations made in the Report on Aspects of Income Tax Self
Assessment (the Report). Background to this report and its
recommendations are in Chapter 1 of this explanatory memorandum.
3.3 A generic administrative penalty regime applies to taxation laws
administered by the Commissioner. The broad objective of the regime is to
impose sanctions in the form of an administrative penalty where an entity
fails to meet various obligations under the law. As the regime applies to
various entities with taxation obligations, not just taxpayers, this chapter
refers to `entities', unlike Chapter 2 which discusses the introduction of the
shortfall interest charge and refers to taxpayers.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
3.4 Division 284 of Schedule 1 to the TAA 1953 sets out the
circumstances in which administrative penalties apply for tax shortfalls
resulting from making false or misleading statements, taking a position that
is not reasonably arguable, entering into schemes, and for disregarding a
private ruling. It also sets out how those penalties are to be calculated.
Abolishing the penalty for failing to follow a private ruling
3.5 Under the current law an entity is liable to an administrative
penalty under subsection 284-75(4) of Schedule 1 to the TAA 1953 if there
is a private ruling about the way a taxation law applies to the entity, and
the entity does not follow the ruling and makes a statement treating the
taxation law as applying in a different way, and a tax shortfall results.
3.6 This penalty has the potential to operate as an inappropriate
disincentive to entities seeking Australian Taxation Office (ATO) advice
and, accordingly, it is abolished.
Requiring the Commissioner to supply reasons why an entity is liable to a
penalty and why the penalty is not remitted in full
3.7 The machinery provisions for the generic administrative penalties
regime require the Commissioner to notify an entity that a tax shortfall
penalty applies, but do not require the Commissioner to tell the entity the
reasons that the penalty applies. Similarly, if the Commissioner decides
not to remit a penalty in full, the provisions do not require the
Commissioner to give reasons for that decision. However, the
Commissioner could be required to give reasons if a taxpayer applied under
the Administrative Decision (Judicial Review) Act 1977.
3.8 It is important that taxpayers who are subject to a penalty
understand why they have been penalised. Accordingly, the amendments
require the Commissioner to provide an explanation of why a penalty has
been imposed and why a penalty has not been remitted in full.
Clarifying the definition of reasonably arguable
3.9 Subsection 284-15(1) of Schedule 1 to the TAA 1953 provides
that a matter is reasonably arguable `if it would be concluded in the
circumstances, having regard to relevant authorities, that what is argued
for is as likely to be correct as incorrect, or is more likely to be correct than
incorrect.' Under subsection 284-15(2), reasonably arguable has a
corresponding meaning where the issue is how the Commissioner would
exercise a discretion.
32
Penalties
3.10 An entity is liable to an administrative penalty under
subsection 284-75(2) of Schedule 1 to the TAA 1953 if the entity makes a
statement to the Commissioner in which an income tax law is treated as
applying to the entity for a large item in a way that is not reasonably
arguable, and a tax shortfall results. For individuals and companies, an
item is a large item if there is a tax shortfall exceeding the greater of
$10,000 or 1 per cent of the income tax payable.
3.11 A shortfall amount arises where there is a difference between the
amount of tax, credit or payment entitlement calculated on the basis of the
entity's statement in a document, and the tax properly payable according to
law.
3.12 The ATO has interpreted the current definition in accordance
with the legislative intention that the relevant standard is about as likely to
be correct as incorrect (or more likely to be correct than incorrect), not as
likely to be correct as incorrect, consistent with the explanatory
memorandum of the A New Tax System (Tax Administration) Act
(No. 2) 2000. However, on their face, the words of the definition require a
higher standard.
3.13 The definition of when a matter is `reasonably arguable' is
clarified to confirm that the relevant standard is about as likely to be
correct as incorrect (or more likely to be correct than incorrect), not as
likely to be correct as incorrect.
Comparison of key features of new law and current law
New law Current law
The penalty for a tax shortfall An administrative penalty is
resulting from a failure to follow a imposed where an entity holds a
private ruling is abolished. private ruling about the way the
taxation law applies to them, and
makes a statement to the
Commissioner treating the law as
applying to them in a different way
from the ruled way and, in doing so,
understates their liability.
Where an entity is liable to a penalty The Commissioner is required to
and the Commissioner decides that notify an entity that a penalty applies
the penalty should not be remitted in and of a decision not to remit in full.
full, the Commissioner will provide If the Commissioner decides not to
an explanation in writing of why the remit a penalty in full, the taxation
entity is liable to the penalty and law does not require the
why the penalty has not been Commissioner to give reasons why
remitted in full. the penalty applies or explain the
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
New law Current law
remission decision.
The definition of when a matter is A matter is reasonably arguable if it
reasonably arguable confirms that would be concluded in the
the relevant standard is about as circumstances, having regard to
likely to be correct as incorrect (or relevant authorities, that what is
more likely to be correct than argued for is as likely to be correct
incorrect). as incorrect, or is more likely to be
correct than incorrect.
Detailed explanation of new law
Abolishing the penalty for failing to follow a private ruling
3.14 The provision that imposed an administrative penalty for not
following a private ruling is repealed. [Schedule 2, item 7, subsection 284-75(4)
of Schedule 1 to the TAA 1953]
3.15 The items relating to the shortfall penalty for not following a
private ruling are also omitted. Consequently, the items in the table in
section 284-80, which explain the concept of `shortfall amount' in different
situations, are also amended to remove a shortfall amount situation arising
where a tax-related liability is less than what it would be if the statement
had not been inconsistent with a private ruling. [Schedule 2, item 8, subsection
284-80(1) of Schedule 1 to the TAA 1953]
3.16 Similarly, the amendments omit the base penalty amount of
25 per cent of the shortfall which currently applies where an entity has a
tax shortfall as a result of disregarding a private ruling. [Schedule 2, item 9,
subsection 284-90(1) of Schedule 1 to the TAA 1953]
3.17 However, if an entity has a tax shortfall as a result of a statement
they make (in a return or otherwise), they may still be liable to a shortfall
tax penalty if, for example, they failed to take reasonable care or if they did
not have a `reasonably arguable position' on a large income tax item. If an
entity obtains a private ruling on an issue but does not follow it, to satisfy
the reasonable care standard they would normally need to have taken other
steps, such as obtaining and following the considered advice of a tax
practitioner about the issue.
34
Penalties
Requiring the Commissioner to supply reasons why an entity is liable to a
penalty and why the penalty is not remitted in full
3.18 This Bill amends the law to provide that when an administrative
penalty applies and the Commissioner decides the penalty should not be
remitted in full, the Commissioner will provide the entity with an
explanation in writing of why the penalty applies and why it has not been
remitted in full. The Commissioner is not required to give reasons if he or
she decides to remit the entire penalty. [Schedule 2, items 12 and 14,
section 298-10 and subsection 298-20(2) of Schedule 1 to the TAA 1953]
Example 3.1
Cecelia fails to include a significant amount of interest from her bank
account with Megabank in her income tax return. The facts show that
the statement was made as a result of Cecelia not taking reasonable
care. This is the third time that Cecelia has been liable to a penalty
for a false or misleading statement. She did not voluntarily disclose
the omission, so a penalty is imposed at 30 per cent of the shortfall
amount (ie 25 per cent for lack of reasonable care increased by 20 per
cent for previous shortfall amounts arising from false or misleading
statements).
The Commissioner will give Cecelia a notice explaining:
that the penalty was imposed because she had not taken
reasonable care
the finding of fact (that she had omitted a material amount
from her return) that grounded the conclusion that she had not
taken reasonable care
the evidence on which the finding was based (here, the
statements of interest paid by Megabank)
that the penalty was increased because the same type of penalty
had been imposed on previous occasions,
and
that the penalty was not remitted because the same type of
penalty had been imposed on previous occasions.
3.19 Section 25D of the Acts Interpretation Act 1901 requires that
written reasons set out the findings on material questions of fact and refer
to the evidence or other material on which those findings are based. Notes
adverting to this provision will be inserted. [Schedule 2, items 13 and 15,
section 298-10 and subsection 298-20(2) of Schedule 1 to the TAA 1953]
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
3.20 All penalties imposed under Part 4-25 of Schedule 1 to the
TAA 1953 are subject to generic machinery provisions, which means that
reasons must be supplied for all penalties within the generic penalty
regime.
3.21 The law does not specify when the reasons must be supplied.
However, it is intended that the Commissioner supply the reasons at the
same time as, or as soon as possible after, the Commissioner notifies the
entity of the penalty. In some cases, the Commissioner may supply reasons
before issuing notice of the penalty.
3.22 An entity continues to have a right to object to an assessment of a
tax shortfall penalty, and the Commissioner's decision on the objection will
still be reviewable under Part IVC of the TAA 1953.
Amending the definition of reasonably arguable
3.23 The Report recommended that the definition of when a matter is
reasonably arguable should be clarified to confirm that the relevant
standard is about as likely to be correct as incorrect (or more likely to be
correct than incorrect), not as likely to be correct as incorrect.
3.24 This recommendation is implemented by inserting the word
`about' in the relevant subsections of the definition of `reasonably
arguable'. [Schedule 2, items 3 and 4, subsections 284-15(1) and (2) of Schedule 1
to the TAA 1953]
Application and transitional provisions
3.25 These amendments will generally apply from the 2004-05
year, as announced by the Treasurer in Press Release No. 106 of
16 December 2004.
3.26 The abolition of the penalty for not following a private ruling will
apply to:
In the case of income tax -- the 2004-05 income year and
later years.
In the case of fringe benefits tax -- the year of tax starting
on 1 April 2004 and later years.
In the case of other taxes -- the year starting on 1 July 2004
and later years.
[Schedule 2, subitem 16(1)]
36
Penalties
3.27 The new requirement to give reasons why a penalty has been
imposed and not remitted in full applies to notices given and decisions
made after Royal Assent in relation to:
In the case of income tax -- the 2004-05 income year and
later income years.
In the case of fringe benefits tax -- the year of tax starting
on 1 April 2004 and later years.
In the case of other taxes -- the year starting on 1 July 2004
and later years.
[Schedule 2, subitem 16(2)]
3.28 The clarification of the meaning of reasonably arguable position
applies from Royal Assent because it confirms how the law is currently
administered.
Consequential amendments
3.29 As a consequence of abolishing the penalty for failing to follow a
private ruling, references to that penalty in the objects clause and the guide
provisions in the generic administrative penalties provisions are deleted.
[Schedule 2, items 1, 2, 5, 6, 8 and 9, sections 284-10, 284-70 and 284-80 of Schedule
1 to the TAA 1953]
3.30 At present, an entity does not have a shortfall if the entity makes
a statement to the Commissioner that is inconsistent with a private ruling if
there is a court order or decision of the Administrative Appeals Tribunal
that supports the statement that he or she made. Since the general rule
against disregarding a private ruling is abolished, this consequential rule is
deleted. [Schedule 2, item 10, subsection 284-215(3) of Schedule 1 to the TAA 1953]
3.31 Under the current law, there is a 20 per cent increase in the base
penalty amount for failing to follow a private ruling where a penalty for
failing to follow a private ruling was incurred for a previous accounting
period. Since that penalty will no longer exist, the law is amended to
remove this rule. [Schedule 2, item 11, paragraph 284-220(1)(d) of Schedule 1 to
the TAA 1953]
37
Chapter 4
Regulation impact statement
Background
4.1 Since 1986-87, Australia has operated a system of self
assessment of income tax. Under self assessment, taxpayers' returns
are generally accepted at face value in the first instance and the Australian
Taxation Office (ATO) may verify the accuracy of the return and, if
necessary, amend an assessment within a prescribed period. From
1989-90, the returns of companies and superannuation funds became
subject to a system of full self assessment under which the taxpayer
calculates their liability and pays their tax when lodging their return.
4.2 Before self assessment, taxpayers provided the ATO with
relevant information and the ATO applied the law to assess their liabilities
accordingly. While errors of fact could be corrected by the ATO, mistakes
of law could not be. Under that system, the majority of risk and the cost of
mistakes of law by the ATO were borne by all taxpayers. Self assessment
relieved the ATO of the obligation to examine returns lodged by taxpayers
and allows it to amend errors of calculation, mistakes of fact and mistakes
of law after processing the initial assessment and collecting the tax payable
or paying a refund. In some circumstances, returns may be re-opened
many years after the original assessment. In this way, the introduction of
self assessment increased uncertainty for taxpayers and shifted the balance
of risk towards individuals. The change to self assessment meant that the
ATO's resources could be used more efficiently, allowing more revenue to
be collected for the same administrative cost.
4.3 Under self assessment, taxpayers may be uncertain about how the
law applies to their circumstances. Uncertainty exposes taxpayers to costs
(such as a requirement to pay additional tax, penalties and interest, or the
costs of professional advice and litigation) if a shortfall is detected by the
ATO. Uncertainty may have implications for taxpayer perceptions about
the fairness of the tax system (and consequently may affect the level of
voluntary compliance by taxpayers). Finally, uncertainty about the tax
consequences of a proposed transaction may have adverse economic
implications, as taxpayers may be unwilling to enter into economically
beneficial transactions if they are not able to obtain assurance about their
taxation consequences.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
4.4 In Press Release No. 098 of 24 November 2003, the Treasurer
commissioned the Review of Aspects of Income Tax Self Assessment (the
Review) to examine whether the right balance has been struck between
protecting the rights of individual taxpayers and protecting the revenue for
the benefit of the whole Australian community.
4.5 The Review identified refinements to the present system to reduce
both the level of uncertainty for taxpayers and the compliance costs
associated with self assessment, while preserving the capacity of the ATO
to collect legitimate tax liabilities.
Specification of policy objectives
4.6 The broad policy objective is to reduce the level of uncertainty
for taxpayers and the compliance costs associated with self assessment,
while preserving the capacity of the ATO to collect legitimate tax
liabilities.
Implementation and analysis
4.7 The Review examined many aspects of the income tax
assessment system and recommended Government:
improve certainty through providing for a better framework
for the provision of ATO advice and introducing ways to
make that advice more accessible and timely, and binding in a
wider range of cases
improve certainty by reducing the periods allowed for the
ATO to increase a taxpayer's liability in a wide range of
situations
mitigate the interest and penalty consequences of taxpayer
errors arising from uncertainties in the self assessment system,
and
provide for future improvements through better policy
processes, law design and administrative approaches.
40
Regulation impact statement
4.8 An analysis of each aspect will not be addressed within this
chapter due to the complexity of the advice and amendment period
measures. It is proposed that an impact analysis of these measures will be
handled separately.
4.9 The Review considered a range of approaches and recommended
more balanced penalty and interest charge arrangements to better reflect
the inherent uncertainties within the system. The broad categories are
described in more detail below.
General impact group identification
4.10 The measures would have an impact on all taxpayer groups
(individual self preparers, individuals who use tax agents, very small
businesses, superannuation funds, trusts, partnerships, small and medium
businesses and large business) and their advisers.
4.11 The proposals would also have an impact on the ATO as
administrator of the tax law.
4.12 The total administrative cost of the following two measures is
estimated to be $17.8 million over five years. The cost to revenue of these
proposals is estimated to be $131.0 million over five years. Although these
costs are considerable, the package would significantly benefit taxpayers
by improving certainty and reducing compliance costs.
General interest charge
Specific objective
4.13 This measure reduces the consequences of the uncertainty that is
inherent in a self assessment system by mitigating the interest and penalty
consequences of taxpayer errors.
Specific implementation options
4.14 The existing general interest charge was introduced in 1999 to
simplify a complex array of penalties and interest charges applying to late
payments and tax shortfalls. In the case of shortfalls only, this
simplification exercise resulted in higher interest charges for the period
between the original assessment by the taxpayer and any amendment made
to that assessment.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
4.15 The general interest charge is set at a high rate (compared with
indicator rates for commercial borrowing) to encourage prompt payment of
tax liabilities and to discourage using the ATO as a bank. However, in
pre-amendment shortfall cases, taxpayers are usually unaware of their
debts, and so are unable to respond to this incentive premium. Rather, any
differential between the general interest charge rate and their alternative
borrowing rate strikes them as a penalty, even though the conditions for a
formal culpability penalty (such as lack of reasonable care) may not be
satisfied.
4.16 The Review proposed, in the Report on Aspects of Income Tax
Self Assessment (the Report), to remove this `incentive to pay premium' in
shortfall cases. It proposes that a new shortfall interest charge apply in
lieu of the general interest charge in the period prior to assessments being
amended. The shortfall interest charge will use a three per cent uplift over
the base rate, rather than the seven per cent uplift used by the general
interest charge. Over the last two years, such a shortfall interest charge
would have been comparable with benchmark business borrowing rates.
4.17 These measures will give the Commissioner of Taxation
discretion to remit the new shortfall interest charge where he considers it
fair and reasonable to do so. Remission should generally occur where
circumstances such as delay, contributory cause or fault on the part of the
ATO justify the revenue bearing part of the cost of delayed receipt of
taxes.
4.18 These proposals would apply to amendments of assessments for
the 2004-05 and later income years.
Impact group identification and analysis
4.19 All taxpayers could potentially benefit from the changes to the
interest regime.
Benefits
4.20 All taxpayers whose assessments are amended to create a liability
would benefit from reduced interest charges proposed by the changes to the
interest regime. (As an indication of the number of taxpayers that would
benefit from this, 270,000 taxpayers in 2003-04 had their assessments
amended to create a liability.)
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Regulation impact statement
4.21 One aspect of this measure is that the shortfall interest charge
rate would be lower than the current general interest charge rate, reflecting
benchmark business borrowing rates. An immediate impact would be a
reduction of the resulting interest charge. By way of illustration, were
recent market rates to continue unchanged, a taxpayer with a $1,000
shortfall over two years would incur a shortfall interest charge around
$100 less than would apply under the general interest charge.
4.22 Another aspect is that a taxpayer should be able to seek a merits
review of an ATO decision not to remit shortfall interest in cases where the
unremitted interest exceeds 20 per cent of the tax shortfall. This proposal
is estimated to directly affect thousands of (predominantly large) business
taxpayers where the interest charged exceeds 20 per cent of their tax
shortfall, through the introduction of greater appeal rights. (As an
indication of the number of taxpayers that could benefit from this, 3,000
taxpayers in 2003-04 would have access to these objection rights under the
proposed rules.)
Costs
4.23 The effect of these measures is estimated to create a cost to
revenue due to the introduction of a lower uplift factor. The administrative
costs of these measures are estimated to be $15.0 million over five years.
The estimate provides $2.8 million for changes to existing ATO business
systems, approximately 60 publications, training for staff, and the increase
in labour required to handle the increased volume of work anticipated by
the ATO.
Penalties
Specific objective
4.24 This measure improves the transparency and fairness of the
uniform penalty regime for tax in the Taxation Administration Act 1953.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
Specific implementation options
4.25 The proposal is to:
abolish the penalty for a tax shortfall resulting from a failure
to follow a private ruling
require the ATO to provide an explanation of why the
penalty has been imposed and has not been remitted in full,
and
clarify the definition of `reasonably arguable position'.
4.26 The measures under the proposal would take effect in respect of
assessments arising from the 2004-05 and later income years.
Impact group identification and analysis
Benefits
4.27 All taxpayers who have their assessments amended making them
potentially liable to penalties (270,000 in 2003-04) could benefit from
these recommended changes to the penalty system.
4.28 The measures improve the transparency of the process of
imposing penalties on taxpayers who understate a tax liability and the
abolition of the separate penalty for failing to follow an ATO private
ruling. It also recommends administrative action to clarify the standard of
care required of taxpayers.
Costs
4.29 The revenue effect of these proposals would be negligible. The
ATO has indicated that minor changes may be required, but the proposal
does not translate into an increase in administrative costs.
Consultation
4.30 The Review invited public submissions and there has been
extensive consultation with tax practitioners, business groups and agencies
with a governance role in the tax system (namely the Australian National
Audit Office, the Commonwealth Ombudsman, and the Office of Small
Business).
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Regulation impact statement
4.31 Consultation for the Review included:
The Review's discussion paper (released on 29 March 2004)
outlined details for making a submission to the Review. The
Review received over 30 comprehensive and detailed
submissions from individuals, professional associations,
companies and representatives of taxpayers.
A website containing information on the Review including
details for contacting the Review, as well as an electronic
registration form to receive a copy of the Review's discussion
paper on its release.
The Review held consultative meetings with professional
representatives around Australia.
All formal public submissions received were published on the
Treasury website when the Report was released on
16 December 2004.
Confidential consultation on the legislative provisions for
these measures was conducted in early 2005 with industry
groups and tax practitioners.
4.32 These measures have been prepared in consultation with the
Inspector-General of Taxation and the ATO. In addition, comments
received after the release of the Report indicate the changes have broad
support from industry groups, tax professionals and Government.
Conclusion
4.33 It is expected that the range of measures recommended by the
Report will facilitate greater taxpayer confidence and a more balanced
penalty and interest charge arrangement to better reflect the inherent
uncertainties within the system. While these measures should considerably
improve certainty, they will not affect the capacity of the ATO to collect
legitimate income tax liabilities.
4.34 The proposed measures will move the balance of fairness
markedly in favour of taxpayers who act in good faith and will build
flexibility into the self assessment system.
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
4.35 The Treasury and the ATO will monitor the implementation of
these measures, as part of the whole taxation system, on an ongoing basis.
46
Index
Schedule 1: Shortfall interest charge
Bill reference Paragraph number
Item 1, section 280-50 2.24
Item 1, subsection 280-100(1) 2.25
Item 1, subsection 280-100(2) 2.30
Item 1, paragraph 280-100(2)(a) 2.31
Item 1, subsection 280-100(3) 2.32, 2.46, 2.49
Item 1, subsection 280-100(4) 2.26
Item 1, subsection 280-100(5) 2.27
Item 1, subsection 280-105(1) 2.38
Item 1, subsection 280-105(2) 2.35, 2.36, 2.37
Item 1, section 280-110 2.39
Item 1, section 280-160 2.68
Item 1, subsection 280-160(1) 2.62
Item 1, subsection 280-160(2) 2.64
Item 1, paragraph 280-160(2)(a) 2.64
Item 1, paragraph 280-160(2)(b) 2.64
Item 1, section 280-165 2.70
Item 1, section 280-170 2.76
Item 2, subsection 6(1) of the ITAA 1936 2.84
Item 3, subsection 172(1) of the ITAA 1936 2.56
Item 4, paragraph 172(1)(a) of the ITAA 1936 2.59
Item 4, subparagraph 172(1)(a)(ii) of the ITAA 1936 2.56
Item 5, subsection 172(1A) of the ITAA 1936 2.60
Item 6, subsection 172(2) of the ITAA 1936 2.56
Item 7, subsection 204(2) of the ITAA 1936 2.42, 2.43, 2.53
Item 7, subsection 204(2A) of the ITAA 1936 2.42, 2.44, 2.53
Item 7, subsection 204(3) of the ITAA 1936 2.53
Items 8 to 17 2.90
Item 18, subsection 20-25(2A) 2.85
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Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005
Shortfall Interest Charge (Imposition) Bill 2005
Bill reference Paragraph number
Item 19, paragraph 20-25(2A)(a) of the ITAA 1997 2.85
Item 20, paragraph 25-5(1)(c) 2.61
Item 21 2.90
Item 22, subsection 995-1(1) 2.37
Items 22 and 23, subsection 995-1(1) of the ITAA 1997 2.84
Item 24, subsection 8AAB(4) 2.53
Item 25, subsection 250-10(2) 2.87
Item 26, subsection 340-10(2) 2.88
Item 27, subparagraph 3(1)(a)(iiia) of the Taxation (Interest on 2.57
Overpayments and Early Payments) Act 1983
Item 28, subparagraph 3(1)(a)(iv) of the Taxation (Interest on 2.57
Overpayments and Early Payments) Act 1983
Item 29, paragraph 8A(1)(a) of the Taxation (Interest on 2.52
Overpayments and Early Payments) Act 1983
Item 30, subparagraph 12A(1)(ia) of the Taxation (Interest on 2.83
Overpayments and Early Payments) Act 1983
Item 31 2.91
Schedule 2: Penalties
Bill reference Paragraph number
Items 1, 2, 5, 6, 8 and 9, sections 284-10, 284-70 and 284-80 of 3.29
Schedule 1 to the TAA 1953
Items 3 and 4, subsections 284-15(1) and (2) of Schedule 1 to the 3.24
TAA 1953
Item 7, subsection 284-75(4) of Schedule 1 to the TAA 1953 3.14
Item 8, subsection 284-80(1) of Schedule 1 to the TAA 1953 3.15
Item 9, subsection 284-90(1) of Schedule 1 to the TAA 1953 3.16
Item 10, subsection 284-215(3) of Schedule 1 to the TAA 1953 3.30
Item 11, paragraph 284-220(1)(d) of Schedule 1 to the TAA 1953 3.31
Items 12 and 14, section 298-10 and subsection 298-20(2) of 3.18
Schedule 1 to the TAA 1953
Items 13 and 15, section 298-10 and subsection 298-20(2) of 3.19
Schedule 1 to the TAA 1953
Subitem 16(1) 3.26
Subitem 16(2) 3.27
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