• Small businsess, individual taxpayers and their advisers.


  • The Australian Taxation Office has proposed a concessional administrative treatment for shortfall penalties that will apply to small businesses and individuals.


  • The proposed penalty treatment, although concessional, adds to the already complex penalty regime. Taxpayers involved in disputes in which penalties may apply should seek specialist advice.

On 8 September 2016, the Australian Tax Office (ATO) issued a consultation paper on proposed changes to the penalty regime for small business and individuals (the Paper). In doing so, the ATO sought community views on proposed penalty concessions for small business and individual taxpayers – with a closing date of 24 October 2016.

Penalties are a significant part of dealing with ATO disputes, and accordingly McCullough Robertson welcomed the opportunity to provide a tax lawyer perspective on the proposed changes.

The tax penalty regime can be quite complex, but experienced advisors can achieve significant reductions of the amount assessed (or potentially assessable) to a taxpayer – either in assisting in voluntary disclosures, or during an ATO review or audit.

Imposition of penalties under the current law
Under the current penalty provisions, penalties are imposed as a percentage of any tax shortfall. The base penalty rate is determined by reference to the taxpayer’s behaviour that gave rise to the shortfall. The three ‘basic’ penalty rates are:

  • 25% - if the shortfall arises due to a taxpayer’s ‘failure to take reasonable care’
  • 50% - if the shortfall arises due to ‘recklessness’ on the part of the taxpayer, and
  • 75% - if the shortfall is due to an ‘intentional disregard of the law’ on the part of the taxpayer.

The terms ‘failure to take reasonable care’, ‘recklessness’ and ‘intentional disregard of the law’ all have particular meanings drawn from case law and ATO rulings – delving into those meanings is outside the scope of this article, but each requires a higher level of culpability by the taxpayer.

Once the appropriate base penalty rate is determined, there can be a range of modifiers that can increase or decrease the penalty, such as:

  • up to an 80% reduction for a voluntary disclosure of a tax shortfall, or
  • a 20% increase in the penalty rate if for instance a taxpayer takes steps to obstruct the ATO’s investigations (including failing to provide documents).

Once an appropriate base penalty rate has been determined and relevant modifiers have been taken into account, the Commissioner then has a discretion to determine whether the any balance penalty should be remitted or reduced.

The current penalty provisions are reasonably complex and legal advice can greatly assist a taxpayer in ensuring penalties are minimised by correctly identifying if a shortfall arises for penalty purposes, determining the correct base rate and identifying any mitigating factors. Lawyers are generally better equipped to assist in this regard than other advisers, as compelling submissions must be made to the Commissioner – a lawyer, as an advocate, has the best skill set to do this.

Proposed changes
The ATO has proposed a concessional administrative approach relating to penalties for small businesses (currently, businesses with annual turnover of less than $2 million) and individuals. The ATO is calling this proposed approach the ‘one chance’ system.

The ‘one chance’ system would operate such that penalties would be remitted in full (utilising the discretions available under the existing law), without lengthy submissions being required, for an error made by a taxpayer.

The ‘one chance’ system would be limited in that:

  • it would apply only where the ATO levies penalties for:
    • ‘failure to take reasonable care’ (i.e. 25%), or
    • failure to lodge on time (a penalty of up to $980 per return or activity statement, for individuals), and
  • the taxpayer would only benefit from the ‘one chance’ once (as the name suggests) – although the ATO is seeking submissions on whether the ‘one chance’ should be refreshed periodically.

What it means for taxpayers
The proposed changes should be of benefit to small businesses and individual taxpayers – potentially reducing exposure to penalties, which in some instances may place significant pressure on cashflows.

McCullough Robertson, in its submissions, has largely agreed with the proposed changes to the penalty regime, but has sought the ATO confirm that:

  • the concession will apply to errors affecting multiple periods identified at the same time, and
  • the ‘one chance’ will reset after a certain period of time, but will not apply to mistakes of the same nature as those which previously have generated shortfalls to which the concession has applied.

Specialist advice should still be sought regarding complex matters where the ‘one chance’ concession potentially does not apply.

More information regarding the proposed changes can be found here.

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.