AUSTRALIA TAXATION

Module 11
ADMINISTRATION OF THE TAX SYSTEM
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Contents
Preview 467
Introduction
Objectives
Teaching materials
Income tax self-assessment 469
Income tax self-assessment
Requirements to lodge tax returns
Lodging of tax returns and assessments 470
Tax returns
Assessments
Amended assessments
Tax audits 472
Why tax audits are needed
The audit process
Australian Taxation Office information gathering powers
Objections, reviews and appeals 475
Objections
Reviews
Appeals
Tax reporting and payment obligations 480
Payment dates
Pay-As-You-Go withholding system
Pay-As-You-Go instalment system
Business activity statement
Instalment activity statement
Running balance account
Australian Taxation Office guidance documents and rulings 485
The rulings system
Law companion guidelines
Law administration practice statements
Australian Taxation Office interpretative decisions
Penalties and interest charges 488
Administrative civil penalties
Criminal penalties
General interest charge and shortfall interest charge
Identifying Part IVA 494
Part IVA of the Income Tax Assessment Act 1936 (Cwlth)
Purpose of the adviser
Discharge of duty to the client
Promoter penalty regime 496
What is the regime?
Operation of the scheme
Penalties
Exclusions and exceptions

Summary and review 500

Suggested answers 501

References 503
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Module 11:
Administration of the
tax system
Study guide

Preview
Introduction
The taxation system is administrated by the federal government through its delegated authority,
the Australian Taxation Office (ATO). The ATO is headed by the Commissioner of Taxation and
decisions are made by the ATO acting in the authority of the appointed Commissioner. The ATO
is in charge of administering the income tax self-assessment system with which all taxpayers must
comply. The ATO has powers to conduct audits under the self-assessment system.

The ATO publishes taxation guidance through a variety of publications, including public and
private rulings, law companion guidelines, practice statements and interpretative decisions.
These are introduced in this module. This module also examines the lodgment of returns
and assessments, fines and penalties for non-compliance, the application of the Part IVA
anti‑avoidance laws and the operation of the promoter penalty regime.

Also discussed is the formal objections, review and appeals process, to which taxpayers may
apply if they do not agree with the Commissioner’s treatment of a certain tax issue.

The module content is summarised in Figure 11.1.

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Figure 11.1: Module summary—taxation administration

Lodge returns
Self-assessment Penalties and
system interest charges
Issue
assessments ATO Guidance
and Rulings

ATO conducts Taxation Part IVA

audits administration obligations

Promoter
penalty regime

Objections Tax payment

and reporting
obligations

Reviews

Appeals

Source: CPA Australia 2019.

Objectives
After completing this module, you should be able to:
• apply the income tax legislation associated with the lodgment, assessment and amendment
of income tax returns in a given situation;
• identify the tax reporting and payment obligations of withholding and instalment taxes;
• examine the purposes of various ATO guidance documents;
• analyse situations where a taxpayer may be subject to tax penalties and/or interest
charges; and
• explain how the general anti-avoidance provisions of Part IVA operate.

Teaching materials
• Legislation:
–– Administrative Appeals Tribunal Act 1975 (Cwlth)
–– A New Tax System (Goods and Services Tax) Act 1999 (Cwlth) (GST Act)
–– Crimes Act 1914 (Cwlth)
–– Criminal Code Act 1995 (Cwlth)
–– Higher Education Support Act 2003 (Cwlth)
–– Fringe Benefits Tax Assessment Act 1986 (Cwlth) (FBTAA)
–– Income Tax Assessment Act 1936 (Cwlth) (ITAA36)
–– Income Tax Assessment Act 1997 (Cwlth) (ITAA97)
–– Superannuation Industry Supervision Act 1993 (Cwlth) (SIS Act)
–– Taxation Administration Act 1953 (Cwlth) (TAA)
–– Trade Support Loans Act 2014 (Cwlth)
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• Glossary:
–– Following is a link to a glossary of common tax and superannuation terms. You may want
to consult the glossary when you come across an unfamiliar term: https://www.ato.gov.au/
Definitions/
–– For languages other than English: https://www.ato.gov.au/general/other-languages/
in-detail/information-in-other-languages/glossary-of-common-tax-and-superannuation-
terms/

Income tax self-assessment

Income tax self-assessment
Liability to pay income tax arises upon the assessment of a taxpayer.

Assessment is defined in s. 6(1) of ITAA36 as the ascertainment of the amount of taxable income
and of the tax payable on that taxable income. The process of assessment is completed by the
serving of a notice on the taxpayer.

Australian income tax operates on a system of self-assessment. This means that the onus is
on the taxpayer to complete the tax return and to report all assessable income and allowable
deductions. The taxpayer has the responsibility to understand taxation law and apply it correctly
in preparing and lodging their tax returns and other documents. There is a large emphasis on
post-assessment checking for compliance. Compliance is reviewed through taxation audits,
discussed in the ‘Tax audits’ section of this module.

Under the partial self-assessment system, which applies to most taxpayers, the ATO generally
accepts the statements made in a tax return at face value and issues a tax assessment based on
the taxpayer’s return. The return is not generally subject to close technical scrutiny by the ATO
prior to the assessment being issued.

For a full self-assessment, the relevant taxpayer (companies and superannuation funds come
under the full self-assessment guidelines) lodging a return creates an automatic deemed
assessment based on the information in the return. Assessments are discussed in more detail
in the ‘Assessments’ section of this module.

Requirements to lodge tax returns

Each income tax year, a legislative instrument is made that sets out which entities are required
to lodge returns under ITAA36, ITAA97, TAA, the SIS Act, the Higher Education Support Act and
the Trade Support Loans Act. It is published on the Federal Register of Legislation: http://www.
legislation.gov.au.

Most individuals, sole traders, partnerships, trusts, superannuation funds and companies are
required to lodge income tax returns. All these taxpayers have the option of using a registered
tax agent to lodge their return. The tax agent must be registered with the Tax Practitioners Board
(TPB) (discussed in Module 1). The separate requirements are as follows.
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• Individuals (excluding sole traders): Resident taxpayers (full or part year) earning over the
tax-free threshold ($18 200 in the 2018–19 tax year, or threshold apportioned for part-year
residents) are generally required to lodge an income tax return. There are exceptions for those
resident taxpayers with special circumstances, which means they may not have to complete
a return. These exceptions include those receiving a type of Australian Government taxable
allowance or payment with income under a certain amount (and where other conditions
are met), and special rules also apply for minors and beneficiaries of a trust (among others).
The ATO provides a comprehensive tool for individuals that determines whether they need to
lodge a tax return.

There is an online tool available via the ATO website aimed at individuals, which determines if the
individual taxpayer needs to lodge a tax return. Access it here: https://www.ato.gov.au/Calculators-
and-tools/Host/?anchor=DINTL&anchor=DINTL/questions#DINTL/questions.

• Sole traders: They are required to lodge tax returns even if the income derived is below the
tax-free threshold or they are in a tax-loss situation.
• Partnerships: The partnership is required to lodge a partnership tax return and is required to
report the partnership’s net income (as discussed in Module 7). Each individual partner must
also report their share of the partnership’s net income or loss, as well as any other individual
assessable income (such as salary, wages, rent and dividends).
• Trusts: Trustees are required to lodge a trust tax return. Each beneficiary of the trust is also
generally required to lodge an individual tax return, where they must declare any income
they receive from the trust, as well as any other individual assessable income (such as salary,
wages, rent and dividends).
• Superannuation funds: All superannuation funds, including self-managed superannuation
funds (SMSFs), are required to lodge a separate superannuation fund trust return.
• Companies: Companies are required to lodge a company income tax return. ‘The company
reports its taxable income, tax offsets and credits, Pay-As-You-Go (PAYG) instalments
and the amount of tax it is liable to pay on that income or the amount that is refundable’
(ATO 2018) on the company tax return. Certain large companies are also required to
complete a ‘Reportable tax position schedule’, which identifies contentious or disputable
positions they have taken on significant tax arrangements. Company income is separate
to individual income.

Lodging of tax returns and assessments

Tax returns
As presented in the previous section of this module, there are separate requirements for
individuals and entities regarding the lodgment of tax returns.

A registered tax agent has the authority to lodge income tax returns on behalf of individuals
and entities based on the tax agent’s lodgment program (see later in this section). They also
have the authority to undertake communications on the taxpayer’s behalf in relation to income
tax returns.

A registered BAS agent has the authority to lodge business activity statements (BASs) and
instalment activity statements (IASs); see later in the module for a description of those
documents. They have the authority to undertake communications on the taxpayer’s behalf
in relation to the BAS and the IAS.

A tax return must be in the approved form and contain the prescribed information. The return
must be signed by the taxpayer (and the registered tax agent, where they have prepared it)
and contain a declaration that the return is true and correct.
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Tax returns are due to be lodged by specified lodgment dates. For most individual taxpayers,
the due date for lodgment is usually 31 October following the end of the tax year.

However, the ATO has the power to extend the time for lodgment of a return, and the
Commissioner of Taxation uses this power to create ‘lodgment programs’ for tax agents.
Where a taxpayer’s return is prepared and lodged by a registered tax agent, an extension
of time to lodge is usually available in accordance with the tax agent’s lodgment program.
The ‘Tax reporting and payment obligations’ section examines lodgment dates in more detail.

Further and special tax returns

In addition to ‘normal’ annual tax returns, the Commissioner of Taxation also has power under
s. 162 of ITAA36 to require a ‘further’ return—for example, where the Commissioner is not
satisfied with the original return lodged by the taxpayer, or the taxpayer has not lodged a return.

The Commissioner of Taxation may also, under s. 163, require a ‘special’ return where the normal
lodgment time would not be appropriate or effective—for example, because the taxpayer
proposes to leave Australia before the normal lodgment date.

Assessments
For taxpayers not subject to the full self-assessment system, the ATO provides a notice of
assessment of the taxation payable after the income return has been lodged.

A tax assessment issued by the ATO is deemed prima facie to be correct when challenged
under the statutory objections, reviews and appeals process as contained in Part IVC of the TAA.

Accordingly, it is the responsibility of the taxpayer to challenge the tax assessment. They can
undergo a statutory review and appeal process through Part IVC of the TAA. When relying on
the statutory right to a review or appeal under Part IVC, the taxpayer must not only show that
the assessment is excessive but also demonstrate the correct amount. This process is discussed
further in the section on ‘Objections, reviews and appeals’ later in the module.

Where some taxpayers might be tempted to avoid assessment simply by not lodging a tax
return, in these cases the Commissioner of Taxation has the power under s. 167 of ITAA36 to
issue a ‘default’ assessment (it may be issued as an original or amended assessment), based
upon the amount of tax the Commissioner believes is payable.

Amended assessments
The ATO recognises that not every assessment issued by them will be correct, so there needs to
be a method of correcting, that is amending, an issued assessment. Similarly, a taxpayer is also
able to request the ATO to amend their return—known as self-amendment—in the same time
frames as for amended assessments in general.

The time frames for amending an assessment, which apply to both the ATO and the taxpayer,
are as follows:
• two-year time limit: applies to most individuals and small business entities (SBEs), and is
two years from the day the ATO served (or is deemed to have served) the original notice of
assessment on the taxpayer (ITAA36, s. 170(1), Items 1–3)
• four-year time limit: applies to other taxpayers, namely larger entities, individuals with
complex affairs or higher-risk taxpayers, and is four years from the day the ATO served
(or is deemed to have served) the original notice of assessment on the taxpayer (ITAA36,
s. 170(1), Item 4).
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In very limited circumstances, the ATO has unlimited time to amend an assessment. This applies
if they suspect there has been tax avoidance or tax evasion. The amendment gives effect to a
decision on review or appeal, or if the amendment relates to a specific provision that allows for
an unlimited time frame.

Section 170(3) of ITAA36 permits the Commissioner of Taxation to re-amend an assessment for
a second or subsequent time in prescribed circumstances. The ATO may repeat this process—
but only for some items—within two or four years of the later assessment.

The Commissioner can amend an assessment after the expiry of the normal time limit where,
before the expiry of the time limit:
• the taxpayer requested an amendment (s. 170(5)), or
• the taxpayer had applied for a Private Ruling (s. 170(6)). Rulings are discussed later in
this module.

The Commissioner can also, under s. 170(7), obtain an extension to amend where the ATO has
begun but not completed an examination of the taxpayer’s affairs before expiry of the time limit,
and either:
1. the Federal Court in its discretion grants an extension, or
2. the taxpayer consents in writing to an extension.

Example 11.1: Amendment of assessment—time limits

The ATO served a notice of income tax assessment for the 2015–16 tax year on Reece Morris on
20 November 2016. Reece is an individual taxpayer who works as an employee in a retail store and
has very simple tax affairs. In his tax returns there is only a salary, a small amount of interest income
from a bank account and a few deductions.

The ATO has been conducting a tax audit of Reece for some time, but has not yet completed it. The ATO
intends to issue an amended assessment for the 2015–16 year to Reece.

As Reece is an individual with simple tax affairs, the time limit for amendment under s. 170(1) Table item 1
is two years. As more than two years have passed since the 20 November 2016 assessment of Reece,
the ATO could use the s. 170(7) extension procedure to apply to the Federal Court, or ask Reece for
an extension. If an extension cannot be obtained under s. 170(7), the ATO can only issue an amended
assessment against Reece if it can establish, for example, that Reece entered into a scheme for the
dominant purpose of obtaining a tax benefit (s. 170(1), Table item 1(e)), or there has been fraud or
evasion (Table item 5).

Tax audits
Why tax audits are needed
Most taxpayers in Australia endeavour to comply with their tax obligations (‘voluntary
compliance’), and the ATO over recent years has introduced a number of initiatives to help
taxpayers ‘do the right thing’—for example, education programs, simplified tax returns and
‘pre‑filling’ of returns by the ATO.

Nevertheless, there are some taxpayers who attempt to avoid paying the correct amount of
tax—for example, by failing to declare all income they derive or incorrectly claiming deductions
or tax offsets.
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To prevent this, the Commissioner of Taxation needs some method of checking a taxpayer’s
affairs, to confirm that they are paying the correct amount of tax. One of the chief ways of doing
this is to conduct taxation audits.

The ATO does not have the resources—or the political will of the people and governments—
to audit every Australian taxpayer to ensure they are correctly adhering to the self-assessment
taxation regime.

The audit process

The ATO needs to be able to obtain timely and accurate information about taxpayers and their
transactions in order to identity who to target.

To do this, the ATO uses ‘data-matching’ technology. This means it compares items that
taxpayers have declared or claimed in their returns with information from other sources such as
banks (interest income), companies (dividends), land title offices (land purchases), the Family
Assistance Office (spouse rebates and other tax concessions), AUSTRAC fund transfers, and other
government and non-government organisations. Data matching also identifies persons who
should have lodged a return but have not done so. The use of data matching is improving
rapidly, and each year more taxpayers are being detected where their assessable income does
not match the sources of their income.

See: https://www.ato.gov.au/datamatching.

Enhanced third-party reporting, prefilling and data matching have improved audit activity.
For example in 2017, the ATO investigated taxpayers in the sharing economy, such as those
working as Uber drivers, letting rooms on Airbnb and offering services through Airtasker. As the
transactions in the sharing economy are made electronically, they are easy to trace.

The ATO can also mine social media sites, such as Instagram, for disparities between assessable
income declared and images of a more expensive lifestyle. For example, a person may be
identified as having $25 000 assessable income in the last tax year, but their Instagram shows
images of extended European holidays or the purchase of expensive sports cars.

Where the ATO suspects that a taxpayer has not declared all assessable income in a particular
tax year in their tax return, or is not entitled to all the deductions they have claimed, the ATO may
initiate a risk review. This is important given voluntary disclosures at this stage can often give rise
to significant penalty reductions. This is when they will serve the taxpayer with an initial ‘please
explain’ letter.

If matters cannot be resolved on review, the ATO may decide to conduct an audit. This may be
either an internal audit, or an audit in the field, with officers attending the taxpayer’s premises
to seek information and examine documents.

Where an audit reveals inaccuracies in the taxpayer’s return (or the fact that they should have
lodged a return), the ATO will issue an amended assessment.
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Australian Taxation Office information gathering powers

Often when the ATO is undertaking an audit, it will ask the taxpayer for information informally in
the first instance. The taxpayer generally has a reasonable time to respond to the initial ‘please
explain’ notice.

Failure to respond can result in the ATO using its formal powers to gather information.

Under s. 353-10 of Schedule 1 of the TAA, a person (whether the taxpayer or not) is required to:
• provide specified information
• attend before one or more taxation officers to give evidence on relevant matters
• produce specified books, documents and other papers in their custody or control
• attend, give evidence and produce documents, and
• give the ATO information about rights or interests in property.

Section 353-15 of Schedule 1 of the TAA is the power of the ATO to make access visits in order
to gather information. These are the ‘access powers’ and they will generally only be used if the
ATO cannot obtain the documents or information required from the taxpayer. Under these access
powers, the ATO can enter and remain on any land, premises or place, and they can have full and
free access to books, documents, goods or other property. Access rights can only be exercised
for the purposes of the taxation laws administrated by the ATO.

The ATO publishes detailed guidance on its information gathering and access powers, which can
be found at: https://www.ato.gov.au/about-ato/commitments-and-reporting/in-detail/privacy-
and-information-gathering/information-management/access,-accountability-and-reporting/.

Limitations in ATO power

While the ATO’s powers are very wide, they do have important limitations. The two main
limitations are the legislated legal professional privilege and the administrative-only
accountants’ concession.

The ATO cannot obtain access to documents or communications that are protected by
legal professional privilege. This privilege applies to protect from disclosure confidential
communications (or a relevant part of a communication) between a taxpayer and their legal
adviser, which were created for the dominant purpose of giving or receiving legal advice or
for use in current or anticipated litigation. See FC of T v. Citibank Ltd [1989] ATC 4268; JMA
Accounting Pty Ltd & Entrepreneur Services Pty Ltd v. Carmody [2004] ATC 4736; AWB Ltd v.
Cole [2006] 152 FCR 382).

While legal professional privilege only applies to communications with a lawyer, most tax advice
these days is given by accountants, and there is accordingly a strong argument for extending similar
protection to such advice. Accordingly, the ATO has for some years provided an ‘accountants’
concession’, under which the ATO will seek access to ‘source documents’ such as contracts and
other documents that record a transaction, but will only seek access to ‘restricted source’ and
‘non‑source’ documents in ‘exceptional circumstances’.

‘Restricted source’ documents are those prepared by an external accountant at the time of
planning or implementing a transaction for the sole purpose of advising on that transaction.
‘Non-source’ documents cover advice provided after the completion of a transaction, or papers
prepared as part of an audit or due diligence report.
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Example 11.2: ATO information gathering powers

Mark Evans, ATO tax auditor, was not able to find all the information and documents he wanted during
his access visit to BTC Enterprises (BTC). Accordingly, the ATO decided to issue a notice to BTC under
s. 353-10 of TAA 53, requiring BTC to:
• provide specified information about the tax planning scheme that they have been promoting
• produce all documents relating to the scheme for the period 1 July 2015 to 1 July 2018
• attend before the ATO and others to be examined on oath about aspects of the scheme.

Subsequently BTC refuses to provide the information, arguing that it will require time and trouble
to assemble it; refuses to produce the documents requested on the basis that they are all protected
by legal professional privilege; and attends examination, but refuses to answer any questions on the
basis that the answers might be incriminating.

The fact that compliance with the notice may require some effort is not a valid reason for refusing
to comply. While legal professional privilege is a valid defence to a notice, a vexatious claim for
privilege where it is clearly not available amounts to obstruction, so BTC would need to be sure
that the privilege was arguably available.

Objections, reviews and appeals

Objections
Some tax assessments issued by the ATO will contain errors, or apply interpretations of the law or
facts with which the taxpayer disagrees. Procedural fairness therefore requires that the taxpayer
must have some way to challenge or dispute an assessment. A taxpayer may object to a tax
assessment, determination, notice or decision.

A taxpayer who is unhappy or dissatisfied with an income tax assessment can lodge a written
objection against that assessment within prescribed time limits and on the approved form,
stating fully and in detail the grounds on which the taxpayer relies. The taxpayer may lodge their
objection within two years (or within four year for more complex matters). This time limit begins
from when the notice of assessment is served, unless there is an agreed extension. (See s. 14ZU
and 14ZW of the TAA regarding how and when taxation objections are to be made.)

An unusual feature of self-assessment is that a taxpayer may choose to prepare their return on
the basis of an ATO ruling or interpretation (even though they disagree with that interpretation)
in order to avoid the risk of imposition of penalties. However, the taxpayer may then object
against an assessment based on their own return, in effect arguing that the ATO interpretation
is wrong and their interpretation—even though not reflected in their return—is right.

Where a taxpayer wishes to object against an amended assessment, the objection must be
lodged by the later of:
• the normal two- or four-year limit applying to the original assessment, or
• 60 days after the notice of amended assessment has been served.

Any objection to an amended assessment is limited to the particular issues that were amended
by the later assessment (s. 14ZV). The taxpayer has the right to withdraw their objection up to the
time the Commissioner of Taxation decides to accept or reject the objection. Once the objection
is withdrawn, the Commissioner can no longer make an ‘objection decision’ in relation to it.
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Unless the objection is withdrawn, the Commissioner of Taxation must make an objection
decision on whether to allow or disallow the objection. Where the Commissioner has not
made a decision on their objection within the prescribed time (most often 60 days after the
objection was lodged with the Commissioner), the taxpayer can give the Commissioner a
notice requiring the Commissioner to make a decision on the objection.

If the Commissioner of Taxation fails to make a decision within a further 60 days, the
Commissioner is deemed to have disallowed the objection, and the taxpayer can then
seek review of this decision. Reviews and appeals will be discussed shortly.

Table 11.1 shows the type of decisions and time limits for each area of tax law to lodge an
objection. This table is adapted from the ATO.

Table 11.1: Types of decisions and time limits for lodging an objection

Fringe benefits tax (FBT)

You can object to How long you have

Assessments Four years from the date the assessment was given to you.

Amended assessments Until the later of:

• 60 days from the date the amended assessment was given to you
• four years from the date the original assessment (that was amended)
was given to you.

Private rulings Until the later of:

• 60 days from the date the ruling was given to you
• four years from the last day for lodging the relevant return.

You cannot object to a private ruling if you have an assessment for the
period concerned—object to the assessment instead.

Goods and services tax (GST)

You can object to How long you have

Assessments Four years and one day from the date the assessment was given to you.

For assessments relating to tax periods that started before 1 July 2012,
you have until the later of:
• 60 days from the date the assessment was given to you
• four years from either the:
– end of the relevant tax period
– date of importation (for imported goods).

Amended assessments Until the later of:

• 60 days from the date the amended assessment was given to you
• four years after the assessment that has been amended was given
to you.

For amended assessments relating to tax periods that started before

1 July 2012, you have until the later of:
• 60 days from the date the amended assessment was given to you
• four years from either the
– end of the relevant tax period
– date of importation (for imported goods).
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You can object to How long you have

Private rulings Until the time you lodge a BAS that takes into account the matter to
which the ruling relates.

For private rulings relating to tax periods that started before 1 July 2012,
you have until the later of:
• 60 days from the date the ruling was given to you
• four years from either the
– end of the relevant tax period
– date of importation (for imported goods).

You cannot object to a private ruling if you have an assessment for the
period concerned—object to the assessment instead.

Reviewable GST decisions 60 days from the date the decision was given to you.

Failures to make an 60 days—starting 30 days after the date you gave notice requesting
assessment an assessment.

Decisions to retain refunds Your objection period starts 75 days (plus any time you take to provide
additional information the ATO asks for) after you lodge your activity
statement. It ends when you receive an amended assessment (or equivalent
for refunds relating to tax periods that started before 1 July 2012).

Income tax

You can object to How long you have

Assessments Two or four years from the date the assessment was given to you:
• two years for most individuals and small businesses
• four years for all other taxpayers.†

Amended assessments Until the later of:

• 60 days from the date the amended assessment, was given to you
• two or four years from the date the assessment that has been
amended was given to you
– two years for most individuals and small businesses
– four years for all other taxpayers.†

Private rulings Until the later of:

• 60 days from the date the private ruling was given to you
• two or four years from the last day for lodging the relevant return
– two years for most individuals and small businesses
– four years for all other taxpayers.†

You cannot object to a private ruling if you have an assessment for the
period concerned—object to the assessment instead.

Decisions to retain refunds Your objection period starts 90 days (plus any time you take to provide
additional information we ask for) after you lodge your income tax return.
It ends when you receive an amended assessment.

Penalties and interest

You can object to How long you have

Shortfall penalty Until the later of:

• 60 days from the date the penalty assessment notice was given to you
• the last day for lodging an objection to the assessment to which the
penalty relates.

Penalty for failing to provide Until the later of:

a document • 60 days from the date the penalty assessment notice was given to you
• the last day for lodging an objection to the assessment to which the
penalty relates.
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You can object to How long you have

Decisions not to remit 60 days from the date the decision was given to you.
shortfall interest charge (SIC),
but you cannot object to our
decision not to remit SIC if
the interest is 20% or less of
the shortfall amount.

For example, if your shortfall

is $2000, 20% is $400. If the
SIC you were left to pay after
the ATO had made a decision
on remission was $400 or less
you could not object to it.

Other administrative
penalties, but you cannot
object to a decision not to
remit (waive) a penalty if
the amount you are faced
with paying is less than $340
(two penalty units).

Superannuation

You can object to How long you have

Excess contributions tax Four years from the date the assessment was given to you.
assessments

Excess transfer balance cap Four years from the date the assessment was given to you.
tax assessment

Excess transfer balance 60 days from the date the determination was given to you.
determination

Termination payments 60 days from the date the assessment was given to you.
surcharge assessments

Superannuation guarantee 60 days from the date the assessment was given to you (note—an
charge employee does not have a right to object to a superannuation
guarantee assessment).

Administrative penalties 60 days from the date you were notified of the decision.

Superannuation: Reviewable decisions

You can ask for a review of How long you have

A notice about a complying 21 days from the date that you first received notice of decision.
fund status

A notice of disqualification 21 days from the date that you first received notice of the decision.
of an individual from being
a trustee

All other reviewable decisions 21 days from the date that you first received notice of the decision.
made by the Commissioner
as regulator under the
Superannuation Industry
(Supervision) Act 1993 (Cwlth)

†
‘All other taxpayers’ refers to companies, superannuation funds and individuals that are not eligible for
the two-year period. Income tax assessments include tax offsets and rebates.

Source: Adapted from ATO 2018, ‘Decisions you can object to and time limits’, accessed March 2019,
https://www.ato.gov.au/general/dispute-or-object-to-an-ato-decision/object-to-an-ato-decision/
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Example 11.3: Objection to amended assessment

A notice of assessment for the 2017–18 tax year is received by Joe Canon (who carries on a business
but is not an SBE taxpayer) on 11 October 2018. As a result of an audit, the Commissioner of Taxation
served a notice of an amended assessment on 8 September 2019. Joe would need to lodge an objection
to the amended assessment by the later of 7 November 2019 (60 days after the service of the notice of
the amended assessment) or 11 October 2022 (four years after the service of the original assessment).

Reviews
Where a taxpayer is dissatisfied with the Commissioner of Taxation’s objection decision, they can
choose in almost all cases to seek review of that decision by either applying to the Administrative
Appeals Tribunal (AAT) or appealing to the Federal Court. (TAA, s. 14ZZ) (see also the definition
of ‘reviewable objection decision’ in TAA, s. 14ZQ). Additionally, individuals, small businesses
or not-for-profits with a tax or superannuation dispute can use the ATO’s in-house facilitation
service. This form of alternative dispute resolution (ADR) is commonly used for less complex
disputes and can be used at any stage from the audit up to and including the litigation stage.

The majority of reviews and appeals are settled by the parties through ADR through the in-house
facilitation service and the AAT, or ADR via the Federal Court. Litigation via the Federal Court
is the last step, and comparatively few tax matters end in litigation.

Process of review
Taxpayers can seek a review of an objection decision through an AAT and then with litigation
through the Federal Court of Australia. In most cases, the taxpayer must lodge an objection and
be dissatisfied with the outcome before an external review can be applied for.

The taxpayer may be able to access a test case litigation program where the ATO will reimburse
some or all of the legal costs if they decide the case has important implications for the
administration of the revenue system.

Procedure of review
Both the AAT and Federal Court use ADR processes to help resolve tax disputes that come
before them. Such ADR processes can occur at any time, including after a position paper has
been issued following an audit, to even the early stages of litigation.

Where the dispute cannot be settled, it will proceed to the AAT or Federal Court for a court-
based hearing and adjudication. When a taxpayer takes a review to the AAT or the Federal Court
for litigation, they will need to supply evidence. The onus is on the taxpayer to prove that the
decision should not have been made, or should have been made differently. They should also
show what the correct assessment should be. The onus is on the taxpayer of proving the case
of the civil law balance of probabilities (TAA, s. 14ZZK(b)(i), 14ZZO(b)(i); Brookdale Investments
Pty Ltd v. FC of T [2013] ATC 10-310). Basically, this means that the Commissioner of Taxation
does not have to prove that the assessment is correct or not excessive. If the arguments of the
Commissioner and taxpayer are evenly balanced, the taxpayer will lose (FC of T v. Dalco [1990]
168 CLR 614; Healey v. FC of T (No. 2) [2012] ATC 20-365; Gashi v. FC of T [2013] ATC 20-377).

Appeals
A taxpayer can appeal a review decision of the AAT to the Federal Court, but only ‘on a question
of law’ (s. 44(1) of the Administrative Appeals Tribunal Act). This means that the Federal Court is
limited to determining whether or not the AAT decided the disputed question of law correctly—it
does not re-hear the entire case (Bell v. Commissioner of Taxation [2013] FCAFC 32; FC of T v. Trail
Bros Steel & Plastics Pty Ltd [2010] ATC 20-196, 11, 213–4; Politis v. FC of T [1988] ATC 5029, 5032).
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If the taxpayer is dissatisfied with the Federal Court judge’s decision, they can appeal to the
Full Federal Court. If still dissatisfied, they can seek special leave to appeal to the High Court—
however, special leave is not often granted.

Example 11.4: Analysis of the review and appeals process

Peter has been involved in a dispute with the ATO, involving substantial amounts of what Peter believes
are non-assessable amounts, but which the ATO regards as the proceeds of a tax avoidance scheme.

The ATO has rejected Peter’s objection against its assessment, and Peter is trying to decide whether
to take the case to the AAT or Federal Court.

The issue in dispute raises some interesting and difficult legal issues and has not previously been taken
to court. There is a considerable amount of potential tax and penalties at risk.

If the result of the case depends on how a discretion should be exercised by the Commissioner of
Taxation, the AAT will be able to re-exercise the discretion, whereas the Federal Court can only override
the exercise of a discretion by the Commissioner where it involves an error of law.

AAT members are very experienced in tax matters, but so are members of the Tax Division of the
Federal Court.

It will usually be much more expensive to go to the Federal Court than the AAT, so unless there are
substantial amounts at issue, the AAT may be preferable.

In Peter’s circumstances, if there are complex legal issues involved and Peter can afford it, many advisers
would suggest going to the Federal Court, with the availability of appeal to the Full Court and the
possibility that on a complex and important legal question arising for the first time, the High Court
might grant special leave if it were necessary to appeal beyond the Federal Court.

Tax reporting and payment obligations

Payment dates
The annual dates for when taxation is due vary depending on the entity:
• Individuals or trustees who lodge income tax returns on or before the lodgment date: the
payment of any outstanding tax is due 21 days after the notice of assessment. If a tax return is
late or not lodged at all, the default payment date is 21 days after the due date for lodgment
of the return.
• Self-assessment entities (such as companies and superannuation funds): the payment of any
outstanding amounts is due on the first day of the sixth month after the end of the tax year.
As most of these taxpayers apply the standard tax year ending on 30 June, the payment date
is generally 1 December.

These dates represent the final date for any outstanding tax amounts. Generally, taxpayers will
have already made some payments of tax (directly or indirectly) during the tax year by way of the
PAYG withholding and/or instalment systems.
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Pay-As-You-Go withholding system

The PAYG withholding system is the process of deducting tax from payments made to others
(such as employees) and remitting that tax directly to the ATO. For example, an employer is an
entity who has a responsibility to withhold tax on behalf of the employee and remit that tax to
the ATO.

The rules governing when a withheld amount should be paid to the Commissioner of Taxation
largely depend upon the status of the ‘withholder’ as being large, medium or small. Large
withholders are those where the amounts withheld during the financial year, ending at least
two months before the current month, exceed $1 million. Depending on the day of the week,
large withholders will remit the tax within a week. For medium withholders where the withholding
is greater than $25 000, payment of tax will be due by the 21st or 28th day after the end of the
month in which the amount was withheld. For small withholders where the amount withheld is
less than $25 000, the payment of the tax will be due by the 21st or 28th day after the end of the
quarter in which the amount was withheld (TAA, Schedule 1, ss. 16-75, 16-85).

From 1 July 2019, where an entity fails to comply with the PAYG requirements when paying
employees and contractors, a deduction for the payment will be denied (s. 26-105).

Common types of payments from which entities are required to withhold tax and the amount
that should be withheld are set out in Table 11.2.

Table 11.2: Withholding rates for 2018–19

Type of payment Withheld amount

Payments of salary or wages to an employee Amount calculated via the withholding schedules
or remuneration to a director (as above) (based on progressive rates)

Where no TFN supplied, 47%† for residents or 45%

for non-residents

Payments to a resident arising from an investment 47%† (for dividends, withholding only applies
where no tax file number (TFN) or Australian to unfranked portion unless streamed through
Business Number (ABN) has been provided certain trusts)

Dividends paid to non-residents For unfranked dividends, 30%, but may be reduced
under a double tax agreement

Interest paid to non-residents 10%

Royalty paid to non-residents 30%, but may be reduced under a double taxation
agreement

Business transaction payments where recipient does 47%†

not quote an ABN

†
The rate of 47 per cent represents the top marginal tax rate of 45 per cent plus the 2 per cent
Medicare levy.

Source: Based on Income Tax Rates Act 1986 (Cwlth), Schedule 7, Federal Register of Legislation,
accessed April 2019, https://www.legislation.gov.au/Details/C2018C00364; ATO 2018, ‘Withholding rate’,
accessed April 2019, https://www.ato.gov.au/Business/PAYG-withholding/In-detail/Investment-income-
and-royalties-paid-to-foreign-residents/?page=5.
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Payees (such as employees) who have had amounts withheld under the PAYG withholding rules
are entitled to tax credits for the amounts withheld, which are claimed through their annual tax
returns. Payees are advised of the total amount withheld (with some exceptions) in a year via a
payment summary, a document that must be issued to them by the payer within 14 days after the
end of the financial year.

Pay-As-You-Go instalment system

The PAYG instalment system is the paying of instalments on expected tax liabilities for business
and/or investment income.

The aim of the PAYG instalment system is to spread larger tax obligations over time through the
progressive collection of income tax in a financial year. The system applies to entities such as
companies, superannuation funds and individuals that have business and/or investment income.

A taxpayer is only liable to make PAYG instalments if they have been issued an instalment rate
by the Commissioner of Taxation.

Despite some exceptions, instalments are generally paid quarterly, or monthly for large
taxpayers. Taxpayers (all entities, including individuals, trusts, companies and superannuation
funds) with ordinary income of over $20 million must pay their PAYG instalments monthly.

Some taxpayers may be eligible to pay their PAYG instalment through one annual payment.
Taxpayers will be eligible for annual payments if:
• their most recent notional tax assessment was less than $8000
• if they are registered for GST and report and pay GST annually
• if they are a partner in a partnership that is registered for GST, and reports and pays
GST annually
• in the case of a company, the company is not part of an instalment group, head company
of a consolidated group, or a participant in a GST joint venture (ATO 2017a).

The instalments paid by the taxpayer result in a credit against their actual tax liability at the time
of annual assessment.

Calculating the PAYG instalments

There are two main ways of calculating PAYG instalments: the GDP-adjusted notional tax method
(TAA, Schedule 1, s. 45-112) and the instalment rate method (TAA, Schedule 1, s. 45-110).

For the GDP-adjusted notional tax method, the Commissioner of Taxation provides a taxpayer
with their GDP-adjusted notional tax, which is based on the tax liability from the last lodged tax
return, and multiplied by a GDP adjustment factor that is based on the gross domestic product
(GDP) activity of the previous two calendar years and that is supposed to reflect expected
changes in the Australian economy (TAA, Schedule 1, s. 45-405). Those who may be eligible
for this method include individuals, small companies and superannuation funds. The taxpayer
may vary their GDP-adjusted notional tax instalment by calculating their estimate of their
benchmark tax. They must advise why a variation is being sought—for instance, changes in
trading conditions. If the PAYG instalment amount is varied down and the taxpayer pays
less than 85 per cent of their actual tax liability, then the general interest charge (GIC) might
be levied.
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Both the taxpayer and Commissioner contribute to the instalment rate method. The
Commissioner of Taxation issues the taxpayer with an instalment rate. The taxpayer can vary
this rate if they consider it is not appropriate (TAA, Schedule 1, s. 45-205). The taxpayer calculates
their instalment income, which is ordinary income derived over the quarter (or month for monthly
payers). Instalment income generally excludes statutory income such as capital gains.

The instalment income is then multiplied by the instalment rate (TAA, Schedule 1, ss. 45-110,
45‑114).

The taxpayer is obliged to inform the Commissioner of their instalment income in the approved
form—even if it is nil (TAA, Schedule 1, s. 45-20). As with the GDP-adjusted notional tax method,
a taxpayer can vary the instalment rate provided by the Commissioner. However, if doing so
results in a rate (varied rate) that is less than 85 per cent of the benchmark instalment rate,
GIC may be payable. The benchmark instalment rate is the rate calculated in reference to
benchmark tax. Benchmark tax is tax payable on taxable income less net capital gains.

Example 11.5: Calculating Pay-As-You-Go instalments

Grace is eligible to pay her PAYG instalments on the basis of the GDP-adjusted notional tax method.
Before the first quarterly payment was due, she was notified by the Commissioner of Taxation that
her annual GDP-adjusted notional tax was $100 000, so for the first quarter of the income tax year she
paid 25 per cent of that amount ($25 000).

By the next quarter, Grace had lodged a further tax return, and the Commissioner of Taxation notified
her that her annual GDP-adjusted notional tax was now $120 000. The second quarter payment due
was then calculated under s. 45-400 of Schedule 1 of TAA to be (50% × $120 000) – $25 000 (already
paid) = $35 000.

➤➤Question 11.1
Vivienne is eligible to pay her PAYG instalments on the basis of the instalment amount method.
When the first quarterly payment became due, she was notified by the Commissioner of Taxation
that her annual instalment amount was $200 000, and so for the first quarter of the income tax
year she paid 25 per cent of that amount ($50 000).
By the next quarter, Vivienne had lodged a further tax return, and the Commissioner notified
that her annual ‘GDP-adjusted notional tax’ was now $220 000.
What is Vivienne’s second quarter payment?

Check your work against the suggested answer at the end of the module.

Table 11.3 compares the main features of the PAYG withholding system and the PAYG
instalment system.
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Table 11.3: PAYG withholding versus PAYG instalment system

PAYG withholding system PAYG instalment system

Deduction of tax from payments made to others and Paying instalments on expected tax liabilities for
remitting that tax to the Commissioner of Taxation investment and business income

Applies to individual taxpayers, both residents and Applies to companies, superannuation funds and
non-residents individuals with business or investment income

Withheld from payments made to the taxpayer Generally paid quarterly, or monthly for large
taxpayers with ordinary income of over $20 million.
Some taxpayers, with a notional tax assessment
of less than $8000 and who are registered for GST
and pay GST on an annual basis, may be able to
make annual payments

Amount to be withheld from payments Two methods of calculation:

• Instalment amount method
TAA (Schedule 1, s. 15-10) contains a summary of (tax liability of last return × GDP adjustment
withholding payments, and the relevant sections factor)
of TAA indicate how much to withhold • Instalment rate method
(taxpayer given an instalment rate that they
Example—interest paid to non-residents: can then vary. Based on ordinary income over
10% is withheld the quarter)

Source: CPA Australia 2019.

Business activity statement

Entities registered for GST must complete a BAS for each reportable tax period. Types of tax
reported on are:
• GST
• PAYG withholding
• PAYG instalments
• FBT instalments
• wine equalisation tax
• luxury car tax.

Instalment activity statement

An entity that is not registered for GST will be issued an IAS instead of a BAS. Individuals and
trustees with investment income are also issued with an IAS. Types of tax covered in the IAS
and the BAS are:
• PAYG instalments
• PAYG withholding
• FBT.

The effect of both a BAS and IAS is that taxpayer credits and obligations are offset and the
taxpayer pays one lump sum for all types of tax listed previously.
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Running balance account

The running balance account (RBA) consolidates the reporting of a taxpayer’s liabilities and
payments. Debit entries arise when assessments are raised or interest charges imposed,
while credits occur when instalments are paid.

Difficulties can arise due to the fact that this is a consolidated account and the Commissioner
of Taxation has a discretion to apply a refund from one activity statement amount—say, GST—
against a different tax debt before the latter is due and payable. The taxpayer may apply to the
ATO for a refund and/or request that future refundable amounts are only applied against debts
due and payable.

Australian Taxation Office guidance documents

and rulings
Tax law can raise very difficult issues, but under self-assessment a taxpayer may be liable for
substantial penalties if they do not report their income and deductions correctly. To help
taxpayers navigate through the tax legislation and practice, the ATO publishes a range of
‘advice’ in the form of guidance documents setting out the ATO’s views on key issues.

This guidance is set out in a variety of publications, including public and private rulings,
law companion guidelines, practice statements and interpretative decisions.

The rulings system

There are several different categories of rulings issued by the Commissioner of Taxation to
provide taxpayers with guidance regarding how the ATO interprets the tax legislation.

The Commissioner of Taxation can issue rulings about the application of tax legislation to
a specified fact situation, and accordingly the ATO can rule not only on actual tax liability,
but also on matters such as collection and payment of tax, administrative or procedural
matters, and ultimate conclusions of fact such as whether an activity is a hobby or a business
(TAA, Schedule 1, s. 357-55).

Rulings are the statement of the ATO’s opinion on how the law applies to a particular situation—
they are not the law (strictly speaking), though they will bind the ATO in specified circumstances.

Acting in accordance with a ruling will protect the taxpayer against liability for tax, interest
and penalties.

A ruling binds only the Commissioner of Taxation. The taxpayer is not required to follow a ruling,
though if they do not do so and the ruling is found to be correct, the taxpayer may be liable to
penalties (TAA, Schedule 1, ss. 357-60, 357-65).

Crucially, a ruling will only apply and bind the Commissioner of Taxation where the taxpayer’s
facts fall within the scope of the ruling. If the taxpayer’s arrangement is materially different
to the situation covered by the ruling, the ruling (and its protection) will not apply to the
taxpayer’s arrangement.
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Public rulings
A public ruling is issued by the ATO to provide guidance on issues the ATO regards as being
of general importance, and sets out the ATO’s opinion on how a particular provision of an Act
applies to taxpayers or a class of taxpayers in relation to an arrangement outlined in the ruling.

To be a (binding) public ruling, it must state that it (or a specified part of the document) is a
public ruling and be published by the Commissioner of Taxation (TAA, Schedule 1, s. 358-5).

A public ruling will apply automatically to anyone who is acting in accordance with its terms.
Unlike a private ruling, the taxpayer does not have to ‘apply’ for the protection of a public ruling.

Public rulings include, among others:

• taxation rulings
• GST rulings
• tax determinations
• product rulings—these are rulings that apply to all taxpayers who participate in a particular
‘product’ such as a primary production scheme
• class rulings—these are rulings applying to all members of a particular class (such as
employees, shareholders or the like) who engage in a particular arrangement, and
• product grants and benefits rulings (e.g. for agriculture, mining and forestry operations).

A public ruling applies from the time it is published—or such earlier or later time as is specified
in the ruling—and ceases to apply when it is withdrawn, or else at the time specified in the ruling.
A public ruling is withdrawn from the time specified by the Commissioner of Taxation in a notice
published in the Government Notices Gazette (TAA, s. 358-20).

Taxation determinations
A taxation determination is a type of public ruling that covers a very specific point of tax law.
Taxation determinations have exactly the same status as taxation rulings, but they only deal with
a single issue, whereas a taxation ruling may look at a number of tax issues that are evident in
an arrangement or transaction.

Private rulings
A taxpayer may be contemplating a transaction not covered by a public ruling, or may wish to
challenge the interpretation applied in a public ruling. In such cases, the taxpayer can apply for
a private ruling.

A private ruling is ‘personal’ to the person whose tax affairs are ruled on (the ‘rulee’) and no-one
other than the rulee can rely on it, even if their facts are very similar or even identical. However,
a private income tax ruling given to the trustee of a trust also applies to the beneficiaries of the
trust and any replacement trustee (TAA, Schedule 1, s. 359-30).

In addition, a private ruling only applies to the particular scheme (set of facts) described in the
ruling. Thus, if the taxpayer changes the arrangement in any significant way, the ruling will not
apply to the changed arrangement (CTC Resources NL v. FC of T [1994] ATC 4072). A new private
ruling will have to be applied for.

For the guidance of other taxpayers, summaries of each private ruling issued are posted on the
ATO website, but all names and other identifying features are removed. It is important to note
that these rulings are not updated when legislation changes and so the advice they contain can
be out of date.
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See private ruling requirements: https://www.ato.gov.au/general/ato-advice-and-guidance/in-detail/

private-rulings/reference-guide-for-private-rulings/?page=1#Section_A__Taxpayer_details.

Oral rulings
Oral rulings by the Commissioner of Taxation can only be given to individuals over the telephone.
An oral ruling is an expression of the ATO’s opinion of how a provision of the law applies to an
individual in relation to their specific circumstances (TAA, Schedule 1, s. 360-5).

The ruling is given orally and the taxpayer is provided with a registration identifier only. There is
no written record of the ruling. As with other rulings, an oral ruling will be binding on the
Commissioner of Taxation where it applies to the rulee and the rulee acts in accordance with
it (s. 357-60).

Law companion guidelines

A law companion guideline is a form of public ruling. Its purpose is to provide the view of the
ATO on how recently enacted law applies. It is usually developed at the same time as the drafting
of the legislation Bill.

For example, there have been a large range of superannuation law companion guidelines
developed in line with superannuation changes enacted in 2017.

The ATO normally releases a law companion guideline in draft form for comment when the Bill
is introduced into parliament. It is finalised after the Bill receives royal assent. It provides early
certainty in the application of the new law, before it can be tested through the rulings system.

A law companion guideline is usually finalised as a public ruling when the law is enacted. As they
are prepared so early on in the existence of the law, a law companion guideline is not informed
by experience of the new law operating in practice. While they offer the same protection in
relation to underpaid tax, penalties or interest as a normal public ruling, this only applies if the
taxpayer relies on it in good faith.

Law administration practice statements

The ATO produces law administration practice statements, to provide direction and assistance
to ATO staff on approaches to take when performing duties involving the laws they administer.
Practice statements are published on the ATO’s legal database.

Practice statements are not law and are not public rulings. They are not intended to provide
interpretative advice, but technical issues may be discussed in the practice statements in the
course of providing directions to ATO staff.

Australian Taxation Office interpretative decisions

According to the ATO (2017b):
An ATO interpretative decision (ATO ID) is an edited version of a decision we have made on
an interpretative matter and gives an indication of how we might apply a provision of the law.
We produce ATO IDs to help us apply the law consistently and accurately. They set out the
precedential ATO view that we must apply in resolving interpretative issues. ATO IDs don’t
provide advice to taxpayers and they are not rulings (ATO 2017b).
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Penalties and interest charges

The ATO will accept most taxpayers’ returns at face value, subject to some basic cross-checking.
This is the basis of the self-assessment system.

Because of this, there needs to be a system of penalties in place for taxpayers who fail to
correctly report an amount of income or over-claim tax deductions and benefits, whether
through mistake, carelessness or intentional evasion. The penalty system is split into two—
actual administrative and criminal penalties—and a system of interest charges on unpaid or
late taxation.

Accordingly, Part 4-25 of Schedule 1 of the TAA imposes administrative and criminal penalties,
and penalty interest on taxpayers who do not properly meet their tax obligations. Other penalties
are imposed by the Crimes Act 1914 (Cwlth) and related legislation.

Administrative civil penalties

Administrative penalties relating to statements (such as tax returns) are specified as a base
penalty amount that can be varied according to the behaviour of the taxpayer during the
process of sorting out the issue with the ATO.

A taxpayer will be liable to a penalty if they applied the tax legislation in a manner that is not
‘reasonably arguable’ and there is a significant tax shortfall (ss. 284-75(2), 284-90(1); see items
4–6 of the ‘Base penalty amount’ table in s. 284-90(1)). The threshold amount is the greater
of $10 000 and 1 per cent of the tax liability based on the tax return for an individual, or $20 000
and 2 per cent for the tax return of a partnership or trust.

In simple terms, a position will be ‘reasonably arguable’ if, when the relevant authorities are
applied to the facts, it would be concluded that the taxpayer’s argument is ‘about as likely to
be correct as incorrect’—that is, the arguments for and against the taxpayer’s interpretation are
finely balanced (s. 284-15; Walstern Pty Ltd v. FC of T [2003] ATC 5076).

Tables 11.4 and 11.5 present a summary of these penalties relating to the behaviour of the
taxpayer.

Table 11.4: Summary of penalties relating to statements—behaviour of the taxpayer

Base penalty if no Base penalty as

shortfall (penalty a percentage
Behaviour of taxpayer units—see Table 11.5) of shortfall
No reasonable care 20 25%

Recklessness 40 50%

Intentional disregard 60 75%

No reasonably arguable position† with a significant shortfall 25%

Failure to make a statement 75%

†
‘A position is reasonably arguable if it would be concluded in the circumstances, having regard to the
relevant authorities’, that what is argued for is ‘about as likely to be correct as incorrect, or is more likely
to be correct than incorrect’ (TAA, Schedule 1, s. 284-15(1)).

Source: Based on ATO 2018, ‘Statements and positions that are not reasonably arguable’, accessed
March 2019, https://www.ato.gov.au/General/Interest-and-penalties/Penalties/Statements-and-positions-
that-are-not-reasonably-arguable/.
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Table 11.5: Summary of penalties relating to statements—infringement date

and penalty amount

When infringement occurred Penalty unit amount

Up to 27 December 2012 $110

28 December 2012 – 30 July 2015 $170

31 July 2015 – 30 June 2017 $180

On or after 1 July 2017 $210

Source: ATO 2018, ‘Penalties’, accessed March 2019,

https://www.ato.gov.au/general/interest-and-penalties/penalties/.

Where more than one item applies, the item with the greater base penalty amount is used.

As seen in Table 11.4, failure to take reasonable care results in a penalty of 25 per cent of the
amount owed. Recklessness incurs a penalty of 50 per cent of the amount owed and intentional
disregard attracts a penalty of 75 per cent. Where the taxpayer has ‘aggravated’ the situation
(e.g. by trying to obstruct the Commissioner’s investigation), the base penalty is increased by
20 per cent (e.g. from 25 to 30 per cent) (TAA, s. 284-220(1), Schedule 1, Division 284). Conversely,
if the taxpayer takes steps to assist the Commissioner of Taxation by voluntarily disclosing a tax
shortfall, the base penalty will be reduced by 20 per cent or 80 per cent, depending on when the
disclosure is made (s. 284-225(1)–(5)) and will be reduced to nil where the amount is below $1000
(s. 284-225(3)(b)).

As of 1 July 2017, one penalty unit is $210. There is a sliding scale dependent on when the
infringement the penalty is being applied on actually occurred.

A taxpayer will not be liable for a statement penalty where they (or their agent):
• took ‘reasonable care’ in making the statement (TAA, s. 284-75(5), Schedule 1, Division 284).
‘Reasonable care’ basically requires that the taxpayer and agent take the care that ‘a reasonably
prudent person with the taxpayer’s knowledge, education, experience and skill would take’
(JG & JA Williamson Holdings Pty Ltd v. FC of T [2007] ATC 2206; Practice Statement PS LA
2012/4, paras 69–73; Aurora Developments Pty Ltd v. FC of T (No. 2) [2011] ATC 20-280)
• created a ‘safe harbour’ by providing their registered tax or BAS agent with ‘all relevant
taxation information’, and the false or misleading nature of the statement by the agent did
not result from either intentional disregard or recklessness as to the operation of a taxation
law (TAA, s. 284-75(6))
• followed advice received from the ATO or a general ATO administrative practice in making
the statement (PS LA 2012/4, paras 104–9).

On or after 1 July 2018, eligible individuals and entities with a turnover of less than $10 million
will be able to receive penalty relief after an audit for inadvertent errors in tax returns and activity
statements that have resulted from a failure to take reasonable care or taking a position that is
not reasonably arguable. Penalty relief is available once every three years, provided there has not
been any infringement during a three-year period.

Penalties relating to schemes

Division 284 of TAA penalties will apply where a taxpayer would have obtained a tax benefit from
a taxation ‘scheme’ but for the application of Part IVA of ITAA36 (see the next section of this
module) or other general anti-avoidance provisions. These penalties also cover situations where
a transfer pricing adjustment has arisen.
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Example 11.6: Applying administrative penalties

Susie Brown was involved in complex international share-trading arrangements over the period
2012–14, which yielded substantial profits. Susie did not declare these profits in her tax return for any
of those years.

The ATO discovered these transactions in December 2018, and requested details from Susie on certain
aspects of these transactions, including the amount of the profits. Susie did not answer these queries
or provide any information, despite several reminders.

The ATO subsequently assessed Susie on these profits. It imposed a base penalty of 75 per cent of
the total tax-related liability under s. 284-75(3) due to failure to provide a document necessary for
the Commissioner of Taxation to work out that tax liability. The ATO increased this base penalty by
20 per cent (to a total of 90 per cent of the tax-related liability).

Susie would be liable for the 90 per cent penalty, as the failure to respond to the ATO requests for
information ‘was a step taken to prevent or obstruct the Commissioner of Taxation from finding
out about the shortfall amount’ (Leighton (As Trustee of the Leighton Family Trust) v. FC of T [2010]
ATC 20‑215). The taxpayer may also be liable for failing to lodge a return or other documents on time
under s. 286 80(2) of the TAA, Schedule 1 (discussed in the next section of this module).

The ATO has the ability to increase or decrease the base penalty by 20 per cent for aggravating
or mitigating behaviour. Here, the fact that Susie did not answer the queries despite several
reminders means the increase by 20 per cent is expected. If the taxpayer is dissatisfied with a
TAA Division 284 penalty imposed on them, they can lodge an objection.

Penalties for failing to lodge documents on time

There are administrative penalties for failing to lodge documents on time.

For small entities, the penalty is imposed at the rate of one penalty unit ($210) for each 28-day
period or part of a period of 28 days that a statement (e.g. a BAS) remains unlodged, with a
maximum penalty of five penalty units.

The penalty increases according to the size of the taxpayer.

The basic penalty is doubled (i.e. $420 per 28-day period) for medium-sized PAYG withholders,
entities with an assessable income between $1 million and $20 million in the current year,
or entities with a current annual turnover for GST purposes of between $1 million and $20 million.

The basic penalty is multiplied by five (i.e. $1050 per 28-day period) for large PAYG withholders,
and entities with current annual assessable income or current annual turnover for GST purposes
of $20 million or more (s. 286-80).

The safe harbour defence may be applied by entities for failure to lodge documents (s. 286‑75(1A)).

Penalties for failing to withhold or remit PAYG withholding amounts

Failure to withhold an amount under the PAYG withholding system or to pay it to the
Commissioner of Taxation as required carries a penalty of 10 penalty units ($2100). In addition,
the taxpayer may be required to pay the Commissioner the amount that should have
been withheld.

Alternatively, the taxpayer may be required to pay a penalty equal to the amount that should
have been withheld (s. 16-30).
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Miscellaneous administrative penalties

Penalties for failing to meet other tax obligations are imposed in multiples of $210 penalty units.
Relevant penalties include, among others:
• not keeping or retaining records as required: 20 penalty units (s. 288-25), so $4200
• preventing a tax officer from gaining access to premises or records when permitted:
20 penalty units (s. 288-35), so $4200.

Criminal penalties
Taxpayers and their agents may also face criminal prosecution for tax offences, either under the
TAA or the Crimes Act and related legislation (e.g. the Criminal Code Act).

Natural persons (individuals, sole traders, partners, trust beneficiaries and individual trustees)
may be punishable by penalty units and/or imprisonment for certain offences, while maximum
penalties for a company are five times higher. In each case, a taxpayer is only liable to the extent
they are capable of complying with the requirement (Ganke v. DFC of T (No. 1) [1975] ATC 4097;
Griffin & Elliott v. Marsh [1994] ATC 4354; Ambrose v. Edmunds-Wilson [1988] ATC 4173).

In recent years, a number of taxpayers and advisers have been found guilty of offences under
the general criminal law provisions and sentenced to jail for significant periods.

General interest charge and shortfall interest charge

As introduced earlier, there are interest charges levied on outstanding tax payments and late
payments for taxation. These are the GIC and the SIC.

Why are the general interest charge and shortfall interest charge charged?
Interest is charged on taxpayers to compensate the ATO for the time value of money, to address
inequities between taxpayers who pay their taxes on time and those who do not, and to punish
taxpayers who may be careless about the conduct of their tax affairs.

GIC and SIC interest is calculated on a daily compounding basis.

A deduction may be claimed for GIC or SIC in the year in which the notice of assessment
(which includes the GIC/SIC) is issued (ITAA97, s. 25-5(1)).

Operation of the general interest charge

The GIC is a uniform interest charge with the rate being updated quarterly, and interest
compounding daily (TAA, Part IIA, ss. 8AAA–8AAH). The GIC applies where:
• an amount of tax, charge, levy or penalty remains unpaid (such as a PAYG instalment)
• there is an underpayment of tax (which might occur if an amended assessment is ignored)
• an instalment of tax is underestimated (this generally occurs when an ‘instalment rate’
is varied down)
• returns are lodged late (such as a BAS), or
• there is a failure to remit certain amounts (e.g. PAYG withholding).
The GIC compounding rate covers most taxes including income tax, FBT, GST and PAYG.

As shown in Table 11.6, the GIC is updated quarterly, with rates for the next quarter generally
announced two weeks before the start of that quarter.
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Table 11.6: General interest charge rates

2017–18 income year

Quarter GIC annual rate GIC daily rate

April – June 2018 8.77% 0.02402740%

January – March 2018 8.72% 0.02389041%

October – December 2017 8.70% 0.02383562%

July – September 2017 8.73% 0.02391781%

2018–19 income year

Quarter GIC annual rate GIC daily rate

April – June 2019 8.96% 0.02454794%

January – March 2019 8.94% 0.02449315%

October – December 2018 8.96% 0.02454794%

July – September 2018 8.96% 0.02454794%

Source: ATO 2019, ‘General interest charge (GIC) rates’, accessed December 2018,
https://www.ato.gov.au/rates/general-interest-charge-(gic)-rates/?=top_10_rates.

➤➤Question 11.2
Joseph’s quarterly BAS is lodged late with $15 000 owing. It was due to be lodged on
28 February 2019 (day that tax is due). It is not lodged and the tax is not paid until 17 March
2019. GIC is due for 17 days (28 February to 17 March 2019) at the daily GIC compounding rate
of 0.02454794 per cent.
Added to the GIC is a penalty for failing to lodge on time, which is imposed for each 28-day
period (or part thereof) that a statement is overdue. Assume that Joseph is an SBE. How much
is his penalty, and what is the GIC charge?

Check your work against the suggested answer at the end of the module.
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Operation of the shortfall interest charge

The SIC rate is four percentage points lower than the GIC rate. It is applied in the case of
amended assessments where the amount of tax payable is increased compared with the original
assessment. The SIC replaces the GIC for the period between the due date for payment of the
original (understated) assessment and the day before the amended assessment is issued.

As shown in Table 11.7, the SIC rate is updated quarterly with rates for the next quarter generally
announced two weeks before the start of that quarter. The applicable SIC rate is the rate in the
quarter where the taxpayer is notified of the amended assessment.

Table 11.7: Shortfall interest charge rates

2017–18 income year

Quarter SIC annual rate SIC daily rate

April – June 2018 4.77% 0.01306849%

January – March 2018 4.72% 0.01293151%

October – December 2017 4.70% 0.01287671%

July – September 2017 4.73% 0.01295890%

2018–19 income year

Quarter SIC annual rate SIC daily rate

April – June 2019 4.96% 0.01358904%

January – March 2019 4.94% 0.01353425%

October – December 2018 4.96% 0.01358904%

July – September 2018 4.96% 0.01358904%

Source: ATO 2019, ‘Shortfall interest charge (SIC) rates’, accessed March 2019,
https://www.ato.gov.au/rates/shortfall-interest-charge-(sic)-rates/.

➤➤Question 11.3
Ava incorrectly claims $700 for clothing, related to her office job in her 2016–17 tax return. The due
date for the payment of her assessment was 21 January 2018. Following an ATO audit carried
out in 2018, her claim of $700 for clothing is disallowed. Her top marginal rate is 32.5 per cent
(plus the Medicare levy of 2 per cent). An amended assessment is issued, increasing her tax liability
by $241.50 (34.5% × $700) and the amendment is notified to her on 20 July 2018.
Determine for which period and at what rate the SIC will apply.

Check your work against the suggested answer at the end of the module.
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Identifying Part IVA

A general discussion on the differences between tax planning, tax avoidance and tax evasion
was provided in the section ‘Distinguishing between terms’ in Module 1.

General anti-avoidance provisions are found in the following taxation legislation:

• income tax—Part IVA of ITAA36
• GST—Division 165 of the GST Act
• FBT—s. 67 of FBTAA.

Part IVA of the Income Tax Assessment Act 1936 (Cwlth)

The anti-avoidance provisions of Part IVA of ITAA36 will apply where it appears that a taxpayer
has entered into a scheme with the sole or dominant purpose of obtaining a tax benefit.
Penalties apply for those found to have entered into a scheme proven to fall under the anti-
avoidance provisions of ITAA36 (TAA, Schedule 1, ss. 284-140–284-160).

The requirements for the application of Part IVA are as follows:

• There is a ‘scheme’ (s 177A).
• It would be concluded, having regard to the eight matters listed in s. 177D(2) of the Act,
and reproduced here, that one or more persons who entered into or carried out the scheme,
or any part thereof, did so for a dominant purpose of enabling the taxpayer to obtain
a tax benefit.
• The Commissioner of Taxation makes a determination that the whole or part of the tax
benefit is cancelled (s. 177F).

Scheme is defined in s. 177A of ITAA36 and is expressed in very broad terms. The term is used
in a neutral and not a moral sense, and refers to:
(a) any agreement, arrangement, understanding, promise or undertaking, whether express
or implied and whether or not enforceable, or intended to be enforceable, by legal
proceedings; and
(b) any scheme, plan, proposal, action, course of action or course of conduct (ITAA36, s. 177A).

Section 177C(1) provides that a tax benefit is obtained in a number of different ways, including:
(a) an amount not being included in the assessable income of the taxpayer in a year of income
where that amount would have been included, or might reasonably be expected to have been
included … if the scheme had not been entered into or carried out; or
(b) a deduction being allowable to the taxpayer in … a year of income where the whole or a part
of that deduction would not have been allowable, or might reasonably be expected not to
have been allowable … if the scheme had not been entered into or carried out …; or
(ba) a capital loss being incurred by the taxpayer (ITAA36, s. 177C(1)).

To determine whether a tax benefit has arisen under s. 177C, the actual tax position must be
compared with what would have arisen, or might reasonably be expected to have arisen, if the
scheme had not been entered into. This involves a comparison with an alternative postulate
(i.e. a theoretical alternative situation or counterfactual).

In FC of T v. Futuris Corporation Ltd [2012] FCFCA 32, the Full Federal Court dismissed the
Commissioner’s appeal, accepting the view that the taxpayer might have pursued transactions
different from the counterfactual offered by the Commissioner had it not used the beneficial
transactions that it did.

See FC of T v. Futuris Corporation Ltd [2012] FCFCA 32: https://www.ato.gov.au/law/view/

document?DocID=JUD/2012ATC20-306/00001&PiT=99991231235958.
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The purpose test is an objective one based on the facts of the case. In this respect, s. 177D(2)
provides that regard should be had to:
• the manner in which the scheme was entered into or carried out
• the form and substance of the scheme
• the time and duration of the scheme
• the result that would be achieved by the scheme
• the change in the financial position of the relevant taxpayer that resulted, or may reasonably
be expected to result from the scheme
• the change in the financial position of any person connected with the taxpayer
• any other consequences for the taxpayer or other person connected with the taxpayer, and
• the nature of any connection between the relevant taxpayer and other person connected
with the taxpayer.

Consideration of the dominant purpose of the scheme is critical. In FC of T v. Spotless Services

& Anor [1996] 186 CLR 104, the High Court upheld the Commissioner’s assessment on the basis
of Part IVA. A rational commercial purpose for the arrangement entered into was to increase
the after-tax returns for the taxpayer by investing in the Cook Islands rather than in Australia.
However, the commercial purpose was consistent with a dominant purpose of obtaining a tax
benefit. The investment at a much lower interest rate was only sensible if Australian tax could
be avoided and this suggested that the dominant purpose of the arrangement was to obtain a
tax benefit.

See FC of T v. Spotless Services & Anor [1996] 186 CLR 104: https://www.ato.gov.au/law/view/docum
ent?DocID=JUD/96ATC5201/00001&PiT=99991231235958.

When Part IVA is contravened

If a scheme is found to be in breach of Part IVA, then the Commissioner of Taxation can cancel
the tax benefit arising under the scheme by including the amount as assessable income,
or denying a deduction.

The taxpayer may be subject to scheme penalties of 50 per cent of the tax avoided. This may be
reduced to 25 per cent of the tax avoided if the taxpayer has a contrary position that is able to
be reasonably argued (see TAA, Schedule 1, s. 284-160).

Other key cases on Part IVA

Some other key cases on Part IVA include FC of T v. Peabody [1994] 181 CLR 359; FC of T v.
Consolidated Press Holdings Ltd (No. 1) [2001] ATC 4343; Eastern Nitrogen Ltd v. FC of T [2001]
ATC 4164; FC of T v. Metal Manufactures Ltd [2001] ATC 4152; FC of T v. Hart [2004] 50 ATC 4599;
and FC of T v. Mochkin [2003] ATC 4272.

These issues are discussed in more detail in the subject Australia Taxation – Advanced.

Purpose of the adviser

The case, FC of T v. Consolidated Press Holdings Ltd (No. 1) [2001] ATC 4343, deals with a
financing structure put into place by Australian Consolidated Press (ACP) to effect a takeover of
an overseas company. The High Court found that, regardless of the overall commercial purpose
of a wider scheme, it is permissible to identify within the wider scheme a tax avoidance scheme
in respect of s. 177D (the purpose). In this case, but for a step in the wider scheme of interposing
an entity, interest deductions would not have been available.
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The ACP taxpayer group retained the services of a firm of accountants as a tax adviser.
ACP argued that it was unaware of the implications of a complex transaction and merely relied
upon their adviser. The High Court was prepared to accept attribution of the purpose of a
professional adviser to a person who entered into the scheme.

Discharge of duty to the client

The taxpayer is not only subject to penalties for entering into the scheme (TAA, ss. 284-140–
284-160), but may also suffer costs and reputation damage. The tax adviser is also at risk of
becoming personally liable under contract law and tort of negligence. There may be sanctions
through the tax practitioners regime (discussed in Module 1) for registered tax agents negligently
causing a taxpayer to be liable to pay a fine, penalty or a GIC.

Under laws of negligence, a duty of care arises from the relationship of professional and
client, where the latter may be expected to rely on advice. This is a positive duty to give
advice regardless of whether it is specifically requested. Given the uncertainty associated with
application of Part IVA, a mere disclaimer is inadequate within any advice and the client should
be assisted in making a decision regarding the risk of a prospective scheme.

Frequently, a client is unaware that Part IVA could apply to a scheme having a commercial
purpose, so it is important to stress that the purpose test is an objective one that does not
usually try to uncover any subjective intention. This reassurance will make it easier to raise the
issue of further investigation of the facts, perhaps involving consultation with other specialists.
The possibility of applying for a private ruling to achieve certainty should be considered,
being careful to specifically ask whether the Commissioner of Taxation may apply Part IVA to
the arrangement.

Promoter penalty regime

What is the regime?
The promoter penalty regime is in place in order to deter the promotion of tax avoidance
and tax evasion schemes (TAA, Schedule 1, Division 290).

Before the introduction of the promoter penalty regime, there were no civil or administrative
penalties available for the promotion of these schemes. This meant that promoters could
obtain substantial profits from the sales of these schemes, while investors could be subject to
penalties under the existing Part IVA and other tax avoidance provisions. By introducing this law,
the government has now addressed the imbalance of the taxpayer bearing the risk while the
scheme promoters avoided any penalty.

The ATO has provided clarity, stating that these laws are not intended to obstruct advisers or tax
practitioners and intermediaries from giving typical advice to their clients.

Operation of the scheme

Section 290-50 of Schedule 1 of the TAA states the following:
Promoter of tax exploitation scheme
(1) An entity must not engage in conduct that results in that or another entity being a promoter
of a tax exploitation scheme.
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Implementing scheme otherwise than in accordance with ruling

(2) An entity must not engage in conduct that results in a scheme that has been promoted on the
basis of conformity with a product ruling being implemented in a way that is materially different
from that described in the product ruling.
Note: A scheme will not have been implemented in a way that is materially different from that
described in a product ruling if the tax outcome for participants in the scheme is the same as that
described in the ruling (TAA, Schedule 1, s. 290-50).

Section 290-60 of Schedule 1 of the TAA defines a promoter as follows:

(1) An entity is a promoter of a tax exploitation scheme if:
(a) the entity markets the scheme or otherwise encourages the growth of the scheme or
interest in it; and
(b) the entity or an associate of the entity receives (directly or indirectly) consideration in
respect of that marketing or encouragement; and
(c) having regard to all relevant matters, it is reasonable to conclude that the entity has had a
substantial role in respect of that marketing or encouragement.
(2) However, an entity is not a promoter of a tax exploitation scheme merely because the entity
provides advice about the scheme.
(3) An employee is not to be taken to have had a substantial role in respect of that marketing or
encouragement merely because the employee distributes information or material prepared by
another entity (TAA, Schedule 1, s. 290-60).

Section 290-65 of Schedule 1 of the TAA defines a tax exploitation scheme as follows:
(1) A scheme is a tax exploitation scheme if, at the time of the conduct mentioned in subsection
290-50(1):
(a) one of these conditions is satisfied:
(i) if the scheme has been implemented—it is reasonable to conclude that an entity
that (alone or with others) entered into or carried out the scheme did so with the sole
or dominant purpose of that entity or another entity getting a scheme benefit from
the scheme;
(ii) if the scheme has not been implemented—it is reasonable to conclude that, if an
entity (alone or with others) had entered into or carried out the scheme, it would have
done so with the sole or dominant purpose of that entity or another entity getting a
scheme benefit from the scheme; and
(b) one of these conditions is satisfied:
(i) if the scheme has been implemented—it is not reasonably arguable that the scheme
benefit is available at law;
(ii) if the scheme has not been implemented—it is not reasonably arguable that the
scheme benefit would be available at law if the scheme were implemented.
Note: The condition in para. (b) would not be satisfied if the implementation of the scheme for all
participants were in accordance with binding advice given by or on behalf of the Commissioner of
Taxation (for example, if that implementation were in accordance with a public ruling under this Act,
or all participants had private rulings under this Act and that implementation were in accordance
with those rulings).
(2) In deciding whether it is reasonably arguable that a scheme benefit would be available at law,
take into account any thing that the Commissioner can do under a taxation law.
Example: The Commissioner may cancel a tax benefit obtained by a taxpayer in connection with
a scheme under s. 177F of the ITAA36 (TAA, Schedule 1, s. 290-65).
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Penalties
If an entity is found to be a promoter of a tax exploitation scheme, the Federal Court can
impose civil penalties. This penalty will be the greater of:
• 5000 penalty units ($1.05 million) for an individual
• 25 000 penalty units ($5.25 million) for a body corporate, or
• twice the consideration received or receivable, directly or indirectly, by the entity or its
associates in respect of the scheme (ATO 2016).

Depending on the type or seriousness of the conduct, the ATO could also consider:
• voluntary self-correction for less significant non-compliance with these laws
• applicants for rulings (including product rulings) providing additional promises or
guarantees to mitigate taxation risks (including material differences in implementation
of the relevant arrangement)
• offers of voluntary undertakings
• issuing of warnings to lower risk entities or ‘cease and desist’ letters to higher-risk entities
(ATO 2016).

Exclusions and exceptions

People who advise on tax planning arrangements, even those who advise favourably on a scheme
later found to be a tax exploitation scheme, are not at risk of civil penalty to the extent that they
have merely provided independent, objective advice to clients (ATO 2016).

However, this ‘advice exclusion’ is limited to balanced and impartial advice. When a tax agent has
marketed or encouraged an arrangement, even by presenting an overly positive view, then the
ATO may regard this as a more ‘entrepreneurial activity’. Promoter penalties may apply if it is
reasonable to expect that a client may use this advice to promote a scheme themselves. In this
respect, the tax agent should be alert to the possibility of unwittingly assisting the promotion
of a scheme.

Employees or other entities that have only minor involvement in a tax avoidance scheme
are excluded.

If the conduct is found to have occurred by mistake or accident, the adviser is exempted.
Similarly, an event that occurs outside an entity’s control is excluded. A four-year time limit for
prosecution under the penalty regime may apply (ATO 2016).

➤➤Question 11.4
Susan Johnson has always had simple tax compliance obligations. On 18 October 2018, Susan
received her income tax notice of assessment for the 2017–18 income tax year. Susan objects
to her notice of assessment. She objects to the refusal of a deduction of expenses for ongoing
maintenance on her investment property, which she rents out through the sharing economy
vehicle, Airbnb, for nine months of the year. The ATO has rejected her claim of $8450 worth
of expenses. The Commissioner of Taxation also indicated that Susan failed to take reasonable
care when making her deductions as they were clearly for capital works and consequently the
Commissioner applied a base penalty unit amount.
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(a) Is Susan liable for a base penalty amount for acting without reasonable care in relation to
this matter?

Susan lodges a written objection to her original notice of assessment on 24 January 2019, which
includes an objection to the application of the penalty for recklessness.
(b) What is the final date that Susan can lodge her objection against the notice of assessment?

(c) How long does the Commissioner of Taxation have to make an objection decision about
Susan’s case?

The Commissioner of Taxation makes their decision and upholds their refusal of Susan’s claim
for the deductions and the application of the penalty. Susan is determined to seek a review of
the objection decision.
(d) Describe the review process as it relates to Susan’s case.

Susan is not successful in the review decision, and the disallowing of her deductions still stands.
(e) Is Susan able to appeal the review decision?

Check your work against the suggested answer at the end of the module.
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Summary and review

Module 11 focused on the administration of the tax system and the interaction between
taxpayers and the tax authority. In particular, the module covered the process by which taxpayers
are to operate under the self-assessment system that applies in Australia.

The module began with an overview of the self-assessment environment and the requirement
of taxpayers to lodge a tax return, in most cases regardless of the type of entity. Upon lodging
a tax return, an individual taxpayer is issued with a notice of assessment, whereas a deemed
assessment arises in the case of companies. An assessment can be amended by the ATO or
requested to be amended by the taxpayer, known as ‘self-amendment’. These amendments
must be done within particular time frames.

As a method of ascertaining the correctness of these assessments, the Commissioner of Taxation

conducts audits after employing data-matching technology and exercising various information
gathering powers. If a taxpayer is dissatisfied with the assessment, the taxpayer can challenge
or dispute it by lodging an objection. There are specific time limits that apply when lodging
objections to various decisions concerning income tax, GST, FBT, superannuation, penalties and
interest, as illustrated in Table 11.1.

Where a taxpayer is still dissatisfied with an objection decision, they can generally seek a review
by either applying to the AAT or the Federal Court.

The next section of the module discussed the tax reporting and payment obligations of taxpayers.
This includes the operation of the PAYG withholding and instalment systems and the lodgment of
BASs and IASs, and maintaining a running balance account. To further assist taxpayer compliance,
the ATO issues a number of guidance documents and rulings in addition to law companion
guidelines, practice statements and ATO interpretative decisions.

However, for those taxpayers who fail to comply with the law and meet their tax obligations,
the tax system imposes penalty and interest charges. These can take the form of administrative
civil penalties for failure to lodge and failure to withhold, or criminal prosecution and penalties
for more serious offences. Along with the tax owing, there is also the GIC and the SIC that
may apply.

The final section of the module referred to the general anti-avoidance rule found in Part IVA
of ITAA36. In particular, the concept of scheme, tax benefit and having a dominant purpose of
obtaining a tax benefit are all critical elements. The operation of the promoter penalty regime
and the penalties that apply in this case are discussed along with the relevant exclusions
and exceptions.
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Suggested answers
Suggested answers

Question 11.1
The second quarter payment due was then calculated under TAA, Schedule 1, s. 45-400, to be
(50% × $220 000) – $50 000 (already paid) = $60 000.

Return to Question 11.1 to continue reading.

Question 11.2
For an SBE, the penalty for late submission of documents (in this case the October–December
BAS) is one penalty unit ($210) for every 28 days or part thereof. Joseph is 17 days late
(28 February–17 March 2019), which is less than 28 days and consequently it would only be
one penalty unit. The GIC is due for 17 days at the daily GIC compounding rate of 0.02454794
per cent levied on the overdue tax amount of $15,000.

The amount of Joseph’s total debt is made up of the outstanding tax and the GIC:

$15 000 × (1.0002454794)17 = $15 062.72

The GIC is $62.72.

Return to Question 11.2 to continue reading.

Question 11.3
The SIC at the daily compounding rate of 0.01358904% per cent (for the July–September 2018
period) would apply as this is when the taxpayer was notified of the amended assessment.

Return to Question 11.3 to continue reading.

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Question 11.4
(a) A base penalty unit amount will only apply where there is no shortfall. There would be a
shortfall in this situation (see Table 11.4).
(b) 18 October 2020—this is two years, which is the time frame that applies to individual taxpayers
with simple affairs in relation to income tax decisions, on an original assessment.
(c) The Commissioner of Taxation generally has 60 days from the date that the objection was
lodged with the Commissioner.
(d) Susan’s first step is to use the ATO’s in-house facilitation service, which is an ADR service used
for less complex disputes, such as Susan’s. If facilitation does not work, or if she does not wish
to use the service, then Susan can seek review of the decision by applying to the AAT.
(e) Susan can appeal a review decision to the AAT or the Federal Court—but only on a question
of law to the Federal Court. If Susan has a question of law on which to appeal—such as a
misunderstanding of the effect of a prior legal case in the area of income versus capital
property deductions—then she would be able to do so (s. 44(1) of the Administrative Appeals
Tribunal Act). If she is still dissatisfied with the Federal Court judge’s decision, she can appeal
to the Full Federal Court. If still dissatisfied, she can seek special leave to appeal to the
High Court, but this is not often granted.

Return to Question 11.4 to continue reading.

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References
References

ATO 2016, ‘Promoter penalty law’, accessed March 2019, https://www.ato.gov.au/general/tax-

planning/promoter-penalty-law/.

ATO 2017a, ‘Annual instalments’, accessed March 2019, https://www.ato.gov.au/general/payg-

instalments/how-often-you-lodge-and-pay/annual-instalments/.

ATO 2017b, ‘ATO interpretative decisions’, accessed March 2019, https://www.ato.gov.au/

General/ATO-advice-and-guidance/ATO-guidance-products/ATO-interpretative-decisions/.

ATO 2018, ‘Income tax return’, accessed March 2019, https://www.ato.gov.au/Business/Reports-

and-returns/Income-tax-return/.

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