Penalties and interest

Remission of statement penalties

The purpose of the penalty provisions is to encourage taxpayers to take reasonable care in complying with their tax obligations. If an entity has made a genuine attempt to report correctly, it will generally be the case that no penalty applies because of the exercise of reasonable care, safe harbour exemption applies or because the law was applied in the accepted way.

A major objective of applying penalties is to promote consistent treatment by reference to specified rates of penalty. That objective would not be achieved if the penalties applied at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course.

The discretion to remit penalties is approached in a fair and reasonable way, including ensuring that prescribed rates of penalty do not cause unintended or unjust results.

Factors we consider when deciding whether to remit

In some cases, a shortfall amount represents an amount of tax paid at the wrong time, rather than an amount of tax permanently avoided. In such cases, there may be scope to remit the penalty in full or in part. The level of remission would be influenced by the period of deferral of the tax and any tax avoided as a result of the deferral.

There are some instances when a taxpayer who makes a mistake on an activity statement may correct that mistake on a subsequent activity statement without incurring a penalty.

For examples of when a taxpayer who makes a mistake reporting their GST obligation on an activity statement may correct that mistake on a subsequent activity statement without incurring a penalty, refer to Correcting GST mistakes (NAT 4700).

In some cases, an amount may be mistakenly included in a tax return or activity statement for the wrong period but by the right person or entity. If, after the amendments, there is no shortfall amount in overall terms, the penalty may be remitted in full. Equally, if a deduction or credit is claimed in the wrong taxpayer's tax return or activity statement and there was no shortfall amount in overall terms, the penalty may be remitted in full. If the two taxpayers have different tax rates there will be different shortfall amounts for each taxpayer and a net overall shortfall amount. If this happens, the penalty may be remitted so it equals the penalty that would be applied to the net overall shortfall.

An unintended or unjust outcome justifying some remission may result from the mechanical process of the law. This can occur in income tax cases when, under the law, the shortfall amount is not reduced by any related increases in credit amounts, such as PAYG withholding credits. Remission is appropriate to the extent that the credits reduce the additional tax actually payable.

There may be other cases when the prescribed rate of penalty does not provide a just result to the taxpayer.

For a more detailed explanation of the factors we consider when deciding whether to remit statement penalties, refer to Law Administration Practice Statement: PS LA 2012/4 Administration of penalties for making false or misleading statements that do not result in shortfall amounts PS LA 2012/5 Administration of penalties for making false or misleading statements that result in shortfall amounts.