The AAT has confirmed an ATO decision to impose a penalty on a taxpayer who failed to lodge her income tax return on time.
The facts were these.
The Taxpayer was late lodging her 2014/15 tax return. She had a tax agent, and might have been able to lodge as late as May 2016, under his lodgement program. But 5 months after that, between 28 October 2016 and 20 January 2017, the ATO sent the taxpayer’s accountants letters directing the taxpayer to lodge her 2015 tax return. Those letters also outlined the consequences of failing to do so.
On 31 March 2017 the ATO issued a default assessment to the taxpayer and also imposed 2 penalties:
- an FTL penalty of $900 for failing to lodge her income tax return on time pursuant to s 286-75 of the TAA. ; and
- an administrative penalty of $36,219 (75% of the tax shortfall), pursuant to s 284-75(3), for failing to provide a return that was necessary to determine her tax liability accurately.
- The ATO subsequently reduced this to 50% of the shortfall.
The taxpayer finally lodged her income tax return with the ATO on 3 April 2017 and the ATO issued a notice of amended assessment showing a higher taxable income than in the default assessment.
The law works this way.
- Division 286 imposes administrative penalties based on ‘penalty unit’ amounts used in criminal cases, based on the number of days the return is lodged late.
- Division 284 imposes various administrative penalties based on the amount of the ‘shortfall’ in tax. These penalties ‘really hurt’ because they are based on a significant percentage of a significant amount and they are not tax deductible. The 75% penalty for failure to lodge tax is not well known and can be a devastating impost. The statute imposes this penalty, at the highest 75% level, so that a person who does lodge a return can’t be worse of for doing so on a false or misleading way but really needs an exercise of the remission power to do anything like justice – as typically, the taxpayer is not doing anything like as culpable as lodging at return that is deliberately wrong.
- Division 298 contains a general remission power, which applies to the failure to lodge shortfall penalty (and is the means by which justice can be done (see s298-20 in particular).
- Practice Statement PS LA 2014/4 gives guidance to the Commissioner’s staff about out how these penalties work and how the remission power should be exercised.
The issues for determination by the AAT were:
- whether the administrative penalty was correctly imposed; and
- whether it should be remitted further.
The AAT said that the ATO is not required to warn a person that a penalty may be imposed and therefore the administrative penalty was correctly imposed even if the taxpayer had not received the warning letters.
The AAT also looked at Practice Statement PS LA 2014/4 (which relates to the 75% penalty for failure to lodge and its remission) and found there was no basis to remit the penalty further:
- the taxpayer did not have a genuine, but mistaken, belief that lodgment was not required;
- there were no circumstances beyond the taxpayer’s control that affected her ability to lodge; and
- the amount of the penalty did not provide an unjust result, taking into account the taxpayer’s history of failing to lodge returns on time and that penalties for late lodgment had been imposed on her previously, there was no explanation why her return was lodged late and the penalty had already been reduced by the ATO.
(Ford and FCT  AATA 3039, File No: 2017/7678, Grigg M, 23 August 2018.)
[LTN 166, 29/8/18; Tax Month – August 2018]
Comprehension questions (answers available)
- Was the taxpayer about a year late in lodging her 2015 tax return (even allowing her to lodge under her tax agent’s deferred lodgement program) by the time the default assessment issued?
- Was the imposition of a 75% of shortfall in tax assessed on the default assessment, the only administrative penalty the Commissioner imposed?
- Did the Commissioner remit the 75% Div 284 penalty?
- Did the AAT further remit the Div 284 penalty?