CPN 024: Interest and penalty tax guidelines
Summary of Interest and Penalty Tax
The TAA provides for the administration and enforcement of various taxation laws. These provisions include the imposition of interest and penalty tax. The amount of interest and penalty tax imposed depends on the degree of culpability and are aimed at compensating the Government for the opportunity cost of unpaid revenue and deterring customers from defaulting on their tax liabilities. Taxation laws include:
Betting Tax Act 2001
Duties Act 1997
Emergency Services Levy Act 2017
Gaming Machine Tax Act 2001
Health Insurance Levies Act 1982
Insurance Protection Tax Act 2001
Land Tax Act 1956
Land Tax Management Act 1956
Parking Space Levy Act 2009
Payroll Tax Act 2007[1]
Payroll Tax Deferral (BlueScope Steel) Act 2015
and a regulation under any of these Acts.
For the purpose of the administration and enforcement of the payment of royalties to the Crown, the following provisions are taken to be taxation laws, and a royalty is taken to be a tax:
Part 14 of the Mining Act 1992
Divisions 2 and 3 of Part 4.4 of the Offshore Minerals Act 1999
Division 7 of Part 4 of the Petroleum (Offshore) Act 1982
Part 7 of the Petroleum (Onshore) Act 1991
and the regulations under these provisions, to the extent that they relate to royalties
The interest and penalty tax provisions in the TAA also apply to the:
Unclaimed Money Act 1995 (a payment of unclaimed money is taken to be a tax)
If a tax default occurs, there is a liability to pay interest on the amount of unpaid tax calculated on a daily basis from the end of the last day of payment until the day it is paid. The interest rate is the sum of the market rate component and the premium component.
The market rate component for each financial year is adjusted quarterly in line with the 90-day Bank Accepted Bill Rate published by the Reserve Bank of Australia for the months of May, August, November and February immediately before the commencement of each quarter.
Market rate interest is intended to compensate the Government for not having the benefit of a tax payment from the time it was due. Market rate interest will only be remitted in exceptional circumstances (see circumstances outside the control of the taxpayer).
The premium component is 8 per cent per annum. The premium rate is imposed to deter non-compliance and ensure that defaulting taxpayers are not advantaged when compared to taxpayers who meet their taxation obligations. The premium rate of interest may be remitted if the Chief Commissioner considers it appropriate in the circumstances.
Background
If a person fails to pay tax by the due date, a tax default occurs. The TAA provides for interest to be applied whenever a tax default occurs. Penalty tax is applied to a tax default if the taxpayer has failed to take reasonable care.
An assessment is the calculation of any tax under the relevant taxation law and includes interest and penalty tax. Under section 15 of the TAA, a notice of assessment following a tax default must specify any interest and penalty tax payable by the taxpayer under Part 5 or section 95 in respect of a tax default.
Primary tax, interest and penalty tax are separate tax liabilities. A taxpayer must make full payment, or, where required, lodge a return by the due date otherwise a tax default occurs.
A liability to interest arises as soon as a tax default occurs. This means:
- late lodgement interest is imposed from the first day following the prescribed due date for lodgement of a return/instrument if the return/instrument is not lodged on time;
- late payment interest is imposed on unpaid amounts from the due date for payment if full payment is not received on time.
In certain circumstances the Chief Commissioner may remit any amount of the market rate component or the premium component of interest or both.
The taxpayer is also liable to pay penalty tax in respect of tax defaults if the taxpayer fails to take reasonable care. Penalty tax is payable in addition to interest. However, penalty tax is not payable in respect of a tax default that consists of a failure to pay interest or penalty tax previously imposed.
Note: There is no liability to pay an amount of interest if the amount is less than $20.
Commissioner's Practice Note
Remission of Interest (sec.25)
When a tax default occurs, interest is calculated on the amount of unpaid tax calculated on a daily basis from the end of the last day for payment until the day it is paid.
The Chief Commissioner may remit the market rate component or the premium component of interest, or both, by any amount depending on the circumstances affecting the tax default. Where the remission of interest is warranted, the amount remitted will, generally, be either both the premium and market rate or the premium rate only.
Requests for remission of interest should be made to the Chief Commissioner in writing. The Chief Commissioner will assess all facts and circumstances affecting the tax default before deciding to either remit any or all of the interest.
Circumstances outside the control of a taxpayer[2]
Where there is evidence that the default was outside the control of the taxpayer (or their representative), the Chief Commissioner may remit interest. Events over which a taxpayer has no control include but are not limited to:
- natural disasters such as fire or flood
- computer system breakdowns including third party systems such as electronic funds transfer systems
- illness or death of a principal taxpayer
- Revenue NSW fault affecting receipt of payment, including processing problems
- circumstances where it is impossible to lodge or pay on time (excluding financial incapacity including hardship)
In cases of financial incapacity, taxpayers may apply for relief in the form of an extension of time to pay, including an instalment arrangement
Reasonable care taken by the taxpayer[3]
Where there is sufficient evidence to prove that the default was within the control of the taxpayer (or their representative), but reasonable care has been taken to ensure the payment of the tax, the Chief Commissioner will usually remit the premium rate component of the interest. Events that may indicate that the taxpayer took reasonable care include (but are not limited to):
- being honest and forthright when dealing with the Chief Commissioner
- cooperation with the Chief Commissioner
- the default is attributable to calculation errors
- making diligent efforts to understand and comply with the law
- maintaining appropriate and proper recording systems in accordance with normal practice i.e., systems that minimise the risk of tax default, allow reconciliation of the tax paid or payable with returns required to be lodged and fulfil the taxpayer's obligation under the taxation laws to maintain records for the purposes of Revenue NSW investigations or audits
- taking reasonable steps to be aware of and comply with his/her taxation obligations and to be familiar with the legislative requirements
- applying any relevant revenue rulings in good faith
- seeking professional advice[4] or private rulings for uncertain or complex matters where no revenue ruling applies, or where circumstances differ from those described in a revenue ruling
- acting promptly to seek advice[5] or provide information once made aware, from any source, that the taxpayer might have a tax liability
- the taxpayer has used and reasonably relied on data, statements or other information provided by a third party.
Meeting one or more of these examples does not necessarily mean that reasonable care has been taken; all relevant factors leading to the tax default will be taken into consideration.
Note: Remission of the premium rate will only occur in special circumstances.[6]
Intentional disregard of a taxation law
Intentional disregard of a taxation law includes circumstances where a tax default is caused by a deliberate act or omission by the taxpayer, or person acting on behalf of the taxpayer. This is determined on the basis of direct evidence of a taxpayer's intention (e.g. admission by the taxpayer) or can be inferred from the surrounding circumstances and conduct of the taxpayer.
Interest will not usually be remitted where there is evidence that there is an intentional disregard of the law. Examples of this conduct, which may demonstrate intentional disregard of a taxation law include (but are not limited to):
- use of avoidance schemes which are knowingly legally flawed
- tax evasion or fraud
- knowingly making false or misleading records or statements
- knowingly concealing relevant facts about a tax liability
- ignoring a private or public ruling of which the taxpayer is aware
- ignoring a finding or decision of NCAT or a Court (without proper reason) of which the taxpayer is aware
- a deliberate act of non-compliance with the legislation
- hindering or obstructing an authorised officer of the Chief Commissioner exercising functions of investigation under the TAA
- intentional failure to fully and truly disclose all the facts and circumstances affecting a tax liability which are known to the taxpayer or taxpayer’s representative and which are known to be required to be disclosed
- failure to keep records known to be required under a taxation law
- failure to make records readily available as and when required by the Chief Commissioner
- wilfully destroying relevant records known to be required to be kept under a taxation law
- falsifying or deliberately concealing the identity, address or location of a place or residence or business of the taxpayer or of another person required under a taxation law
- by act or omission facilitating the falsification or concealment of the identity or the address or location of a place of residence or business of the taxpayer or another person
- deliberately failing to assess in accordance with established principles of a taxation law
- deliberately failing to meet a tax liability after being advised of its existence by Revenue NSW or another appropriately qualified person
- repeating a tax default on the same matter or a closely related matter that has been brought to the taxpayer's attention as a tax default.
Imposition of Penalty Tax (secs 26 & 27)
Penalty tax is generally imposed after all the facts and circumstances surrounding the tax default are considered. In certain circumstances the Chief Commissioner may increase the rate of penalty tax or determine that no penalty tax is payable.
A liability to penalty tax arises when a tax default occurs. Penalty tax is in addition to interest. The amount of penalty tax is 25% of the amount of unpaid tax or 50% if the taxpayer is a significant global entity within the meaning of the Income Tax Assessment Act 1997 of the Commonwealth. The Chief Commissioner may increase the amount of penalty tax to 75% of the unpaid tax if the tax default was caused wholly or partly by the intentional disregard of the taxation law. Penalty tax may be reduced if a taxpayer makes or voluntary disclosure of a tax default before or during an investigation.
Voluntary disclosure
Penalty Category | Prime Rate % | Before Investigation % | During Investigation % | Concealment or hinderance % |
---|
Failure to take reasonable care but no intentional disregard of the law | 25 | 5 | 20 | 30 |
Failure to take reasonable care but no intentional disregard of the law by significant global entity[7] | 50 | 10 | 40 | 60 |
Intentional disregard of the law | 75 | 15 | 60 | 90 |
The Chief Commissioner also has a general discretion to remit penalty tax by any amount in such circumstances as the Chief Commissioner considers appropriate (s 33 of the TAA).
Where there is evidence that the taxpayer (or their representative) took reasonable care to comply with the taxation law, or the tax default occurred solely because of circumstances beyond their control (excluding financial incapacity), the Chief Commissioner will usually determine that no penalty tax is payable.
Before an investigation commences (sec.28)
If before the Chief Commissioner informs the taxpayer that an investigation is to be carried out the taxpayer discloses in writing sufficient information to enable the nature and extent of the tax default to be determined, the penalty tax will be reduced by 80 per cent.
For example:
Where penalty tax is 25 per cent (20 per cent of 25 per cent) = 5 per cent
Where penalty tax is 50 per cent (20 per cent of 50 per cent) = 10 per cent
Where penalty tax is 75 per cent (20 per cent of 75 per cent) = 15 per cent
Note: This reduction does not apply to a taxpayer if the taxpayer is registered under a taxation law. The taxpayer needs to demonstrate reasonable care to that the tax default was outside the taxpayer’s control (sec 28(2)).
During an investigation (sec.29)
If, after the Chief Commissioner informs the taxpayer that an investigation is to be carried out and before the investigation is completed and before an assessment notice is served, the taxpayer discloses in writing sufficient information to enable the nature and extent of the tax default to be determined, the penalty tax will be reduced by 20 per cent.
For example:
Where penalty tax is 25 per cent (80 per cent of 25 per cent) = 20 per cent
Where penalty tax is 50 per cent (80 per cent of 50 per cent) = 40 per cent
Where penalty tax is 75 per cent (80 per cent of 75 per cent) = 60 per cent
Note: This reduction does not apply to a taxpayer if the taxpayer is registered under a taxation law. The taxpayer needs to demonstrate reasonable care to that the tax default was outside the taxpayer’s control (sec 29(2)).
Note: Unregistered payroll tax customers may be entitled to a remission of 50% of the penalty tax assessed when tax defaults are discovered during an investigation.[8]
Preventing or hindering an investigation (sec 30)
If, after the Chief Commissioner informs the taxpayer that an investigation is to be carried out and before the investigation is completed, the taxpayer takes steps to prevent or hinder the Chief Commissioner from becoming aware of the nature and extent of the tax default in whole or part, the penalty tax will be increased by 20 per cent.
For example:
Where penalty tax is 25 per cent (20 per cent of 25 per cent) = 5 per cent + 25 per cent = increased to 30 per cent
Where penalty tax is 50 per cent (20 per cent of 50 per cent) = 10 per cent + 50 percent = increased to 60 per cent
Where penalty tax is 75 per cent (20 per cent of 75 per cent) = 15 per cent +75 per cent = increased to 90 per cent
Interest and penalty tax matrix
| Interest rate (Per Annum) | Penalty (Flat Rate) |
---|
1 | Return lodged/tax paid after due date but there is evidence the default was due to circumstances outside the taxpayer's (or their representative's) control | 0 | 0 |
2 | Return lodged/tax paid after due date but there is evidence the default was within the taxpayer's (or their representative's) control, but the taxpayer (or their representative) took reasonable care to comply with the taxation law | Market | 0 |
3 | Matters subject to an appeal - interest and penalty tax applied from due date of payment until the date payment is made | Market + 8% Premium | 0 |
4 | Voluntary disclosure by return based customers is made in writing before the commencement of an investigation | Market | 0 |
5 | Return lodged/tax paid after due date - the taxpayer (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure made in writing before an investigation has commenced | Market + 8% Premium | 5% |
6 | Return lodged/tax paid after due date - the taxpayer (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure made in writing during investigation | Market + 8% Premium | 20% |
7 | Return lodged/tax paid after due date - the taxpayer (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure not made | Market + 8% Premium | 25% |
8 | Return lodged/tax paid after due date - the taxpayer (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. The taxpayer takes steps to prevent or hinder the Chief Commissioner after being advised that an investigation is to be carried out | Market + 8% Premium | 30% |
9 | Return lodged/tax paid after due date - the taxpayer who is a significant global entity (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure made in writing before an investigation has commenced | Market + 8% Premium | 10% |
10 | Return lodged/tax paid after due date - the taxpayer who is a significant global entity (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure made in writing during investigation | Market + 8% Premium | 40% |
11 | Return lodged/tax paid after due date - the taxpayer who is a significant global entity (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. Disclosure not made | Market + 8% Premium | 50% |
12 | Return lodged/tax paid after due date - the taxpayer who is a significant global entity (or their representative) has not taken reasonable care and the default was within the taxpayer's (or their representative's) control. The taxpayer takes steps to prevent or hinder the Chief Commissioner after being advised that an investigation is to be carried out | Market + 8% Premium | 60% |
13 | Return lodged/tax paid after due date - clear evidence of intentional disregard to the law by the taxpayer (or their representative) but disclosure made in writing before an investigation has commenced | Market + 8% Premium | 15% |
14 | Return lodged/tax paid after due date - clear evidence of intentional disregard to the law by the taxpayer (or their representative). Disclosure made in writing during investigation | Market + 8% Premium | 60% |
15 | Return lodged/tax paid after due date - clear evidence of intentional disregard to the law by the taxpayer (or their representative) and disclosure not made | Market + 8% Premium | 75% |
16 | Return lodged/tax paid after due date - clear evidence of intentional disregard to the law by the taxpayer (or their representative) and the taxpayer takes steps to prevent or hinder the Chief Commissioner after being advised that an investigated is to be carried out | Market + 8% premium | 90% |
Footnotes
- ^ Revenue Ruling PTA036v3 explains the application of interest and penalty for payroll tax defaults
- ^ Winston-Smith v Chief Commissioner of State Revenue [2018] NSWSC 773 at 81.The four cumulative criteria as to the circumstances in which the premium component of interest should be remitted.
- ^ In Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue (2014) 100 ATR 339, the New South Wales Civil and Administrative Tribunal cited at [95] the case of RVO Enterprises Pty Ltd ATF the R M O'Mara Family Trust v Chief Commissioner of State Revenue 2004 NSWADT 64, where the Tribunal expressed the following view:
In each case, it is essentially a question of fact whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include reasonable attempts to comply with the tax law, reasonable professional and other enquiries to ensure compliance, reliance on professional advice or on official published views of the tax law. Factors which indicate that a taxpayer failed to take reasonable care include oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law.
- ^ Requesting advice from a tax expert but failing to disclose it, does indicate that the taxpayer did not take reasonable care. Winston-Smith v Chief Commissioner of State Revenue [2018] NSWSC 773
- ^ Teebee Holdings Pty Ltd atf Teebee Property Trust v Chief Commissioner of State Revenue [2017] NSWCATAD 338: the taxpayer relied upon his understanding of how the previous owner was treated rather than taking care to obtain appropriate advice
- ^ Chief Commissioner of State Revenue v Incise Technologies Pty Ltd & Anor (RD) [2004] NSWADTAP 19 [at 81]
- ^ A significant global entity is a global parent entity with an annual global income of $1 billion or more, or any member of such a global parent entity’s group (Income Tax Assessment Act 1997- Sect 960.555)
- ^ Commissioner’s Practice Note CPN 012: Remission of penalty tax applied to new payroll tax customers