Tax Administration Act shortfall penalties — base, intentional disregard and reckless

The shortfall penalty regime

The shortfall penalty regime is governed by Division 284 of Schedule 1 to the Taxation Administration Act 1953 (Cth). This division outlines administrative penalties applied when a false or misleading statement leads to a tax shortfall. These penalties are designed to address non-compliance with tax obligations.

The amount of the penalty is calculated as a percentage of the shortfall amount. The base penalty amount is determined by the behaviour that caused the shortfall.

Penalties can be adjusted. They may be increased if a taxpayer obstructs the Australian Taxation Office (ATO) or decreased if the taxpayer makes a voluntary disclosure.

Base penalty rates

The base penalty rates for shortfall penalties are determined by the degree of fault involved. A penalty of 25% of the shortfall applies where a person fails to take reasonable care. A penalty of 50% of the shortfall applies where a person is reckless as to the operation of the law.

A penalty of 75% of the shortfall applies where a person intentionally disregards the law. This level of disregard may also be relevant where a person took a position that was not reasonably arguable, provided the shortfall exceeds a threshold. Part IVA ITAA 1936 — general anti-avoidance may be engaged in these circumstances.

These percentages are calculated on the amount of the shortfall. The assessment of fault is a factual inquiry, considering all relevant circumstances.

Increases and reductions

The amount of a shortfall penalty can be increased or reduced depending on the taxpayer’s actions. A penalty is increased by 20% if the taxpayer prevented or hindered the Commissioner from finding out about the shortfall.

Conversely, penalties can be reduced. An 80% reduction applies if the taxpayer voluntarily discloses the shortfall before being advised of an examination. A 20% reduction applies if the taxpayer voluntarily discloses after being advised of an examination but before the examination starts.

A safe harbour exists for taxpayers who engaged a registered tax agent. This safe harbour, outlined in section 284-75(6), applies where the taxpayer provided all relevant information to the agent, and the agent did not take reasonable care.

Significant global entities

Significant global entities (SGEs) face increased shortfall penalties. SGE status is determined at the global parent level. From 1 July 2017, SGEs with annual global income of $1 billion or more are subject to doubled penalties under section 284-155.

SGEs have additional reporting obligations. These include country-by-country reporting and the lodgement of general purpose financial statements.

A separate category, the ‘country by country reporting entity’ (CBC reporting entity), was introduced from 1 July 2019, with a $1 billion threshold.