The ATO says its base tax penalty amount may be increased (s284-220) or reduced (s284-225). The base penalty amount may be increased where the taxpayer hinders the ATO, but it also may be reduced in the following circumstances.
Voluntary disclosure
The voluntary disclosure to the Commissioner of a tax shortfall will result in a reduction of the base penalty amount applicable to the shortfall.
Any voluntary disclosure that is made by a taxpayer before being told that an audit is to be conducted will reduce the base penalty amount by 80% if the shortfall is greater than $1,000 or is a scheme shortfall amount or to nil if the shortfall is less than $1,000.
The taxpayer will generally be taken to have made an honest mistake unless there is information to indicate that the taxpayer did not make an honest mistake. The voluntary disclosure must be made in writing, be signed with the appropriate taxpayer or agent declaration and posted to the ATO.
Any voluntary disclosure that is made after being told that an audit is to be commenced and the Commissioner has been saved significant time or resources by the disclosure, the base penalty amount is reduced by 20%. The Commissioner has the discretion to treat this disclosure as having been made prior to being told about the audit.
However repeated voluntary disclosures by taxpayers or their tax agents will not be automatically entitled to the concession if there is an indication the taxpayer has not made an honest mistake or that the agent has been careless. MT 2008/3 explains this concession in greater detail.
The ATO undertakes many different types of reviews and audits under its compliance program. A “tax audit” is defined in s995-1 of the ITAA97 to mean an examination by the Commissioner of an entity’s financial affairs for the purposes of a taxation law.
Non-material amounts
Penalties will not apply to non material shortfalls that result from a lack of reasonable care where it is evident that the taxpayer and agent (if any) have made a genuine attempt to comply with the taxpayer’s obligations and the taxpayer’s overall level of compliance is satisfactory.
Consideration as to a “material” amount will be based on the size of the shortfall relative to the taxpayer’s turnover and the effect of the shortfall on the taxpayer’s overall liability. The shortfall amount will continue to be payable.
Correcting GST mistakes
In certain circumstances taxpayers can correct GST mistakes on a subsequent activity statement without incurring any penalty [see Correcting GST Mistakes: Fact Sheet (07/2004) (NAT 4700)].
In addition, where a registered tax agent prepares an income tax return and cannot reconcile the GST details in BASs prepared by the client of a bookkeeper, the GST may be corrected by including an adjustment (regardless of the amount) in the next BAS to be lodged following the lodgment of the income tax return. Different correction limits apply, depending on the entity’s turnover. The agent must inform the client or bookkeeper of the mistake and initiate action to prevent future occurrences.
Timing adjustments
Penalties will not apply where income amounts or a supply is accidentally or unintentionally included in a period later than the period in which the amount should have been included. Penalties will apply where it is clear the taxpayer was aware of the proper treatment and sought to gain an advantage.
Amounts in another person’s return
Where there has been no overall tax avoided then penalties will usually not apply if income, deductions, a credit or a supply is included in the wrong person’s return. If some tax has been avoided then the penalty will be based on the net tax avoided.
Share trader or investor, and trading stock versus capital asset
Investment products may be held as trading stock by a taxpayer carrying on a business of share trading or options trading. However, whether a particular parcel should be treated as trading stock must be determined on a case-by-case basis.
Generally, the tax issues facing share traders versus passive investors are summarised below.
| Tax treatment of transactions, returns and related items | ||
| Event/item | Share trader | Passive investors |
| Gain on disposal | Sale on trading account | Capital gain |
| Loss on disposal | Sale on trading account | Capital loss |
| Dividends received | Assessable incomeWhen received but may be accounted for when derived (ie when dividend is declared) | Assessable incomeWhen received |
| Share acquisition | Purchases on trading accountAllowable deduction | Capital costNo immediate deduction allowed |
| Broker fees | PurchasesAllowable deduction | Capital costNo immediate deduction |
| GST on broker fees | Financial supplyReduced input tax credits | Capital costNo immediate deduction
No reduced input tax credits as no enterprise |
| Share investment course pre-ownership | If business commenced then allowable deduction, however nexus must be established | Capital costNo immediate deduction |
| Share investment course post-ownership | Professional developmentAllowable deduction | Investment expensesAllowable deduction |
| Technical books | Professional developmentAllowable deduction | Investment expensesAllowable deduction |
| Share trading software | Business expenseAllowable deduction (if not an establishment cost) | Investment expensesAllowable deduction |
| Interest on margin loan | Interest expenseAllowable deduction incurred to obtain assessable income | Investment expensesAllowable deduction |
| Prepaid interest | Deduction up to 12 months if s82KZM satisfied | Deduction up to 12 months if s82KZM satisfied |
| Bank charges on margin loan | Bank feesAllowable deduction | Investment expensesAllowable deduction |
| Costs to establish loan | Borrowing costsAllowable deduction available over five years | Investment expensesAllowable deduction available over five years |