Gregory Ross, of Eakin McCaffery Cox, and Adrian Abbott, of Sydney Tax Advisory, discuss which “mistakes” potentially qualify for the ATO’s Penalty Relief for Small Business which started on 1 July 2018.
Penalty Relief for Small Business
With effect from the 1st July 2018 the Australian Tax Office (ATO) has granted penalty relief for small business.
“We understand that people make mistakes” the ATO concedes.
What sort of penalty relief is being provided? Well, the answer is “Inadvertent errors” in tax returns and activity statements.
Just what does “inadvertent” mean?
PSLA 2012/5 being a public statement on administration of penalties, gives two examples of an inadvertent mistake without giving it a definition. The two examples are “transposition errors” and “overlooked documents”.
Those inclusive words are very narrow in meaning. One wonders whether the word “inadvertent” will be used more widely by the ATO in this penalty relief exercise.
The Cambridge Dictionary defines “inadvertent” as being an act that is not “intentionally carried out”. So, the words accidentally, unintentionally, unwittingly, mistakenly, innocently, would seem to apply. Those words show a non-guilty mind.
In the web page announcing the penalty relief, QC 56164 notes that inadvertent errors would apply when those errors were due to “failing to take reasonable care” or “taking a position on income tax that is not reasonably arguable“.
Curiouser and Curiouser
It is curious for ATO to suggest that penalty relief will be made when a taxpayer or advisor does not take reasonable care, or does not take a reasonably arguable position.
Does that mean that penalty relief can also applies when you do take reasonable care and do have a reasonably arguable position but just get something wrong?
To whom can it apply?
Penalty relief applies to individuals and entities with a turnover of less than $10 million, namely small business. Note the turnover has been increased from $2 million. The relief also applies to self-managed superannuation funds, strata title bodies, not-for-profit organizations and cooperatives.
The ATO states that a taxpayer cannot apply for penalty relief. It is automatically provided when a taxpayer is in the process of an audit. That is a position of beneficence for which ATO has not previously had a reputation, but ATO has embarked on a much more ‘user friendly” relationship with taxpayers.
Query whether taxpayers might find it tempting to make a suggestion to an auditor that the penalty relief should be applied.
The question arises whether the decision not to apply penalty relief is itself an administrative decision that can be challenged?
PSLA 2012/5 makes it clear there are a number of circumstances where penalty relief does not apply. This includes other taxes such as fringe benefits tax and super guarantee. It also does not apply to wealthy individuals and their businesses, or associates of those wealthy individuals and of course does not apply to public groups, being restricted to small business only.
While the penalty relief commenced on 1 July 2018 the ATO will apply the penalty relief for periods prior to that time, if an audit covers those earlier years.
The ATO makes it clear that the entity seeking relief must be carrying on a business, not being part of a hobby.
What is “business” will be the subject of a further note. But broadly, it is where the entity is registered, obtained an ABN, intends to make a profit, has appropriate size and scale, keeps appropriate business records, has separate bank accounts, operates from business premises and has an activity which is planned, organized and carried out “in a businesslike manner“.
But not if you and the ATO have had issues
The penalty relief provision will not be available in the quite understandable circumstances where a taxpayer in the past three years has had penalty relief applied, been penalized for recklessness and intentional disregard, evaded tax or committed fraud and where there has been phoenix activity. It is hardly surprising that the Commissioner will not provide penalty relief in those circumstances.
The ATO should be congratulated on another progressive step in the right direction.
The text of the paper is only a summary and discussion of particular facts and principles. It is not to be taken as legal or commercial advice as to any particular factual circumstances. Gregory and Adrian can be contacted, if readers have any issues.
LLB, BEc, FCIS, FGIA, CTASydney Tax Advisory
LLB AIMM, QM AAPCM
Accredited Specialist Government and Administrative LawEakin McCaffrey Cox