In a positive move for taxpayers, the Australian Taxation Office (ATO) has advised that from 1 July 2018 they will not apply penalties to tax returns and activity statements where eligible taxpayers have made an ‘inadvertent error’ by failing to take reasonable care or not adopting a reasonably arguable position.

Overview

The ATO announced on 4 July 2018 that they will provide penalty relief to eligible individuals and entities with an annual turnover of less than $10 million who make an inadvertent error in a tax return or activity statement. The new penalty relief rules will apply from 1 July 2018 and will only apply once in any three-year period.

The new initiative will cover errors related to income tax, goods and services tax and Pay-As-You-Go withholding but will not extend to fringe benefits tax or to the superannuation guarantee.

Eligibility to receive penalty relief

Some individuals and entities with an annual turnover of less than $10 million in the income year are eligible to receive penalty relief. These include:

  • Small businesses (including sole traders, partnerships, trusts or companies).
  • Self-managed super funds.
  • Strata title bodies.
  • Not-for-profit organisations.
  • Co-operatives.

For penalty relief to apply, the ‘inadvertent error’ of the taxpayer can only relate to a failure to take reasonable care or not adopting a reasonably arguable position. Other more serious penalties, such as those imposed for recklessness or intentional disregard, will continue to be applied in the normal manner and will not be eligible for the new relief.

The ATO has also excluded the following categories of taxpayers from receiving penalty relief:

  • Wealthy individuals and their businesses.
  • Associates of wealthy individuals that may be classified as a small business entity in their own right.
  • Entities that do not meet the small business eligibility criteria.
  • Public groups, Significant Global Entities and their associates.

When penalty relief does not apply

The new penalty relief will not apply to taxes other than those related to your income tax return or business activity statements (GST), such as fringe benefits tax or the superannuation guarantee.

Further, the ATO will not apply penalty relief where:

  • Penalty relief has already been applied to the taxpayer within a three-year period.
  • The taxpayer has been penalised for recklessness or an intentional disregard of the law.
  • The taxpayer has committed fraud or tax evasion.
  • The taxpayer has been involved in the control or management of another entity which has evaded tax.
  • The taxpayer has incurred debts without the intention of being able to repay those debts, such as phoenixing activity.

The ATO has advised that taxpayers cannot specifically apply for penalty relief. If the ATO undertakes an audit of you or your entity and uncovers an inadvertent error, then they will automatically consider whether you are eligible to receive penalty relief and whether you have previously received this relief. If you are eligible, the ATO will contact you to notify you that they have corrected the error.

While penalty relief applies from 1 July 2018, if the ATO’s audit of you or your entity extends to earlier periods then penalty relief will also apply for those periods.