Penalties and interest
Penalties and interest
Australia's revenue system relies on taxpayers providing correct information to establish their tax liability under the law and paying the correct amount of tax.
Sometimes taxpayers fail to correctly report an amount they are required to or do not meet other tax obligations. Taxpayers who fail to meet their tax obligations may be liable for penalties and interest charges. When we find an error or omission, we take into account your relevant circumstances, including your compliance history, when deciding what action to take, particularly for any penalties or possible prosecution action. Relevant circumstances include the reasons for the discrepancy or failure to meet a tax obligation and how well you have complied with your tax obligations in the past. We also consider your attitude towards complying with the tax laws.
A penalty is an amount that is calculated using either a statutory formula (for example, most false or misleading statement penalties) or in multiples of a penalty unit. A penalty unit is currently $170. If the penalty is for an offence that occurred before 28 December 2012, the value of a penalty unit is $110.
The types of penalty which apply can be administrative, civil or criminal. Civil and criminal penalties are imposed by courts and administrative penalties are imposed without the need for court action. This guide explains administrative penalties (excluding scheme penalties).
Interest charges apply to unpaid amounts, such as shortfall amounts, late payments and tax debts. Interest charges apply whether or not a penalty applies. Having interest charges applied to a shortfall amount does not depend upon, or imply, dishonesty on your part.
An interest charge is worked out daily on a compounding basis on amounts that are unpaid. The interest charge is calculated by applying the interest rate, which is determined quarterly, to the unpaid amount. Interest charges are designed to:
- encourage taxpayers to pay their tax liabilities by the due date
- ensure that taxpayers who do not pay their tax liabilities on time do not get an advantage over those who do pay in full and on time
- compensate the government for the effect of late payments.
You will usually not have an interest charge applied for a shortfall amount if you reasonably rely in good faith on either:
- advice given to you or your agent by us or a statement in a publication approved in writing by us, unless the advice, statement or publication is labelled as non-binding
- our general administrative practice.
Penalties that can apply
Uniform penalty provisions apply to most tax laws. Broadly, this means that if you fail to meet a tax obligation under any tax law you will be liable under the same penalty provision. For example, the failure to lodge penalty will apply if you fail to lodge a tax return or you fail to lodge an activity statement.
The uniform penalty provisions consist of penalties for all of the following:
- statements, unarguable positions and schemes
- failing to lodge documents on time
- failing to withhold amounts as required under the pay as you go (PAYG) withholding system
- penalties for failing to meet other tax obligations.
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There are separate penalties for breaching some superannuation obligations. For more information, refer to:
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If you are liable to pay a penalty, we will notify you in writing of the penalty amount and the due date for payment of the penalty (which will be at least 14 days after the notice is given). We will also give you a written explanation of why the penalty applies.
In certain circumstances, we may decide no penalty should be payable. This is called remitting the penalty. The penalty amount may be remitted, in full or in part, if we consider it fair and reasonable to do so. If the penalty amount is not remitted in full, we will provide you with written reasons for this.
You may object in writing against either:
- a penalty assessment for statements or unarguable positions
- a remission decision if the amount of the penalty remaining after the decision is more than two penalty units (currently $340).
Penalties for statements and unarguable positions
There are currently four types of penalties for statements and unarguable positions. Three of these penalties must be assessed by us using a statutory formula. The other is assessed in multiples of a penalty unit. This means that if you are liable for a penalty, a base penalty amount will apply. The base penalty amount is explained below. This amount will be increased or reduced for any aggravating or mitigating factors, which are discussed later in this guide. These penalties are discussed below.
1. False or misleading statement penalty - shortfall amount
If you make a false or misleading statement (for example, in a tax return, activity statement or amendment request) that results in you having a shortfall amount, you will be liable for this penalty. The penalty will not be applied if one of the following applies:
- you took reasonable care in making the statement
- the shortfall amount occurred because your statement treated a tax law as applying in accordance with advice given to you or your agent by us or on our behalf
- the shortfall amount occurred because your statement treated a tax law as applying in accordance with a statement in a publication approved in writing by us
- the shortfall amount occurred because your statement treated a tax law as applying in a particular way and that way agrees with our general administrative practice under a tax law.
The base penalty amount that applies is a percentage of the shortfall amount. A shortfall amount is the difference between the correct tax liability or credit entitlement, and the liability or entitlement worked out using the information you provided to us. The percentage used is determined by the behaviour that led to the shortfall amount. The amount of the penalty will depend on our assessment of your behaviour and the factors set out in the legislation that increase or reduce the penalty.
The different behaviours and the relevant penalty percentages are:
- Failure to take reasonable care - If you failed to take reasonable care the base penalty amount is 25% of the shortfall amount. Generally, you fail to take reasonable care if you have not done what a reasonable person in the same circumstances as you would have done. These circumstances include your age, health, knowledge and education. If you have taken reasonable care in making the statement, no false or misleading statement penalty is applied; however, you may still be subject to a penalty under another penalty provision - for example, adopting a position for an income tax matter that is not reasonably arguable.
- Recklessness - If you have acted recklessly, the base penalty amount is 50% of the shortfall amount. You are reckless if a reasonable person in your circumstances would have been aware that there was a real risk of a shortfall amount arising and you disregarded, or showed indifference to, that risk by failing to take steps to reduce the risk.
- Intentional disregard - If you have intentionally disregarded the law, the base penalty amount is 75% of the shortfall amount. You intentionally disregard the law if you are fully aware of a clear tax obligation and you disregard the obligation with the intention of bringing about certain results (underpaying tax or over-claiming an entitlement).
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For more information, refer to Law Administration Practice Statement PS LA 2012/5 Administration of penalties for making false or misleading statements that result in shortfall amounts.
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2. False or misleading statement penalty - no shortfall amount
If you make a false or misleading statement (for example, in an objection, private ruling request or during an audit) that does not result in you having a shortfall amount, you will be liable for this penalty. The penalty will not be applied if one of the following applies:
- you took reasonable care in making the statement
- your statement treated a tax law as applying in accordance with advice given to you or your agent by us or on our behalf
- your statement treated a tax law as applying in accordance with a statement in a publication approved in writing by us
- your statement treated a tax law as applying in a particular way and that way agrees with our general administrative practice under a tax law.
The base penalty amount that applies is calculated as a multiple of a penalty unit. The multiple used is determined by the behaviour that led to the false or misleading statement. The amount of the penalty will depend on our assessment of your behaviour and the factors set out in the legislation that increase or reduce the penalty.
The different behaviours and the relevant penalty unit multiples are:
- Failure to take reasonable care - If you failed to take reasonable care the base penalty amount is 20 penalty units (currently $3,400). Generally, you fail to take reasonable care if you make a false or misleading statement that a reasonable person in the same circumstances as you would not have made. These circumstances include your age, health, knowledge and education. If you have taken reasonable care in making the statement, no false or misleading statement penalty is applied.
- Recklessness - If you have acted recklessly, the base penalty amount is 40 penalty units (currently $6,800). You are reckless if a reasonable person in your circumstances would have been aware that there was a real risk that the statement was false or misleading and you disregarded, or showed indifference to, that risk.
- Intentional disregard - If you have intentionally disregarded the law, the base penalty amount is 60 penalty units (currently $10,200). You intentionally disregard the law if you are fully aware that a statement is false or misleading and you choose to make it anyway with the intention of bringing about certain results (for example, underpaying tax or over-claiming an entitlement).
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For more information, 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.
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This penalty applies only to income tax, not other taxes. If you treat an income tax law as applying in a manner that is not reasonably arguable, a base penalty amount of 25% of the shortfall amount will apply if the shortfall amount exceeds a threshold amount.
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For an explanation of 'reasonably arguable', refer to MT 2008/2 Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable.
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For partnerships and trusts, the threshold is any amount more than the greater of $20,000 or 2% of the net income (if any) worked out on the basis of the return of the partnership or trust. The threshold for other taxpayers is any amount more than the greater of $10,000 or 1% of the income tax worked out on the basis of the taxpayer's tax return.
Example 1: Shortfall amount less than the threshold
XYZ Pty Ltd is liable to pay $40,000 in income tax based on their tax return for the income year. XYZ Pty Ltd claimed a deduction in their tax return that is not allowable and for which they do not have a reasonably arguable position. The deduction has resulted in a shortfall amount of $6,000. In this case, the greater of $10,000 and 1% of the income tax payable ($400) is $10,000.
Because the $6,000 shortfall amount is less than $10,000, XYZ Pty Ltd is not liable for a penalty for not having a reasonably arguable position. However, they may be liable for a false or misleading statement penalty.
Example 2: Shortfall amount greater than the threshold
YZX Pty Ltd is liable to pay $10 million in income tax based on their tax return for the income year. Their tax return omitted taxable income from the sale of property, resulting in a shortfall amount of $500,000.
In this case, the greater of $100,000 (1% of the income tax payable) and $10,000 is $100,000. Because the $500,000 shortfall amount is more than $100,000, YZX Pty Ltd must have a reasonably arguable position to support the non-inclusion of the income from the sale of the property to avoid being liable for a penalty of 25% of the shortfall for not having a reasonably arguable position.
4. Penalty for failing to make a statement
You are liable to a penalty of 75% of the tax-related liability if both of the following apply:
- you fail to lodge a document necessary to establish your tax-related liability
- in the absence of that document, we determine your tax-related liability.
This penalty will apply if, for example, you fail to lodge your tax return and we determine your income tax liability by other methods.
Penalty for failing to lodge a document on time
When you must lodge a document in an approved form and fail to lodge that document by the due date, you are liable for a penalty. The penalty applies for each 28-day period, or part thereof, that the statement remains unlodged - to a maximum of five periods. In most cases, before issuing a failure to lodge penalty notice, we will contact you or issue you with a reminder. The amount of the penalty is one penalty unit for each period. If you are a medium withholder, the penalty is multiplied by two. If you are a large withholder, the penalty is multiplied by five.
If you receive a penalty notice for failing to lodge a document on time and you believe that the penalty should be remitted in full or in part, you should phone us (if the request is below $10,000) - otherwise, lodge a written request for remission outlining the circumstances that led to the delay in lodgment and the reasons why the penalty should be remitted.
We recognise that sometimes events will take place that prevent you from meeting your lodgment obligations on time. Generally, full remission will only be granted if the delay in lodgment occurred because the circumstances were beyond your control and it is fair and reasonable to remit.
Penalty for failing to withhold or pay a withheld amount
The requirement to withhold amounts applies to payments made to employees, directors, office holders or other individuals in various capacities, as well as to enterprises that do not quote an Australian business number (ABN) for a supply.
If you must withhold an amount from a payment made under a pay as you go (PAYG) withholding obligation and you fail to withhold the required amount, you are liable for a penalty. The penalty amount is equal to the amount that you should have withheld from the payment.
Likewise, if under the PAYG withholding obligations you must pay an amount for alienated personal services payments or non-cash benefits and you fail to pay that amount, you are liable for a penalty. The penalty amount is equal to the amount that should have been paid.
Penalties for failing to meet other tax obligations
There are other obligations for taxpayers contained in the various tax laws. The penalties for failing to meet these obligations apply in multiples of a penalty unit.
Other obligations (together with the penalty for failing to meet those obligations) include, but are not limited, to all of the following:
- keeping or retaining records as required (20 penalty units)
- retaining or producing declarations as required (20 penalty units)
- providing access and reasonable facilities to an authorised tax officer (20 penalty units)
- applying for or cancelling goods and services tax (GST) registration when required (20 penalty units)
- issuing a tax invoice or adjustment note when required (20 penalty units)
- both principal and agent must not issue tax invoices or adjustment notes for the same taxable supply or adjustment event (20 penalty units)
- registering as a PAYG withholder when required (five penalty units)
- lodging an activity statement electronically when required (five penalty units)
- paying an amount electronically when required (five penalty units).
Increases and decreases in the base penalty amount
The base penalty amount for false or misleading statement penalties, and the penalty for taking an income tax position that is not reasonably arguable, are increased or reduced if certain aggravating or mitigating factors exist.
The base penalty amount which applies is increased by 20% if you did one of the following:
- took steps to prevent or obstruct us from finding out about the shortfall amount, or the false or misleading nature of the statement
- became aware of the shortfall amount, or the false or misleading nature of the statement but did not inform us within a reasonable time
- were previously liable for a false or misleading statement penalty, or a penalty for taking an income tax position that is not reasonably arguable.
The penalty will generally be reduced if you voluntarily tell us about the error. The amount of the reduction depends on when you tell us.
The penalty will be reduced by 80% if you tell us about a shortfall amount before the earlier of the day:
- we tell you that an examination of your financial affairs is to be conducted
- by which we have publicly requested voluntary disclosure be made about a transaction that applies to your financial affairs.
If the false or misleading statement does not result in a shortfall amount or the shortfall amount is less than $1,000, the penalty will be reduced to nil if you tell us before the earlier of the above days. However, the reduction to nil does not apply if we have publicly requested voluntary disclosures.
If the voluntary disclosure is made after you are told that an examination of your affairs will be conducted, the penalty is reduced by 20% if the disclosure can reasonably be estimated to have saved us a significant amount of time or resources.
In limited circumstances, we may treat taxpayers who qualify for the 20% reduction as if they qualify for the 80% reduction.
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.
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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).
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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.
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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.
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Interest charges
There are two types of interest charge:
- the general interest charge
- the shortfall interest charge.
General interest charge
The general interest charge (GIC) is a uniform interest charge worked out daily on a compounding basis. The GIC rate is updated quarterly. The charge applies if one of the following applies:
- an amount of tax, charge, levy or penalty remains unpaid
- there is an underpayment of tax following an amendment of an assessment
- an instalment of tax is underestimated
- tax returns are lodged late
- there is a failure to remit certain amounts by electronic funds transfer.
For shortfall amounts for income tax years earlier than 2004-05, PAYG withholding and indirect taxes, such as GST, the GIC is calculated on the shortfall amount from the original due date for payment until the debt is fully paid.
Shortfall interest charge
The shortfall interest charge (SIC) replaced the general interest charge with a lower rate for the period between when the shortfall amount would originally have been due and when the assessment is corrected. The shortfall interest charge only applies when an income tax assessment for the 2004-05 and later income years is amended and, as a result, there is an increased tax liability. The SIC rate is less than the GIC rate as taxpayers are usually unaware of a shortfall amount until we issue an amended assessment.
The due date for payment of the additional tax and for the SIC is 21 days after the day we give you the notice of the amended assessment. Once the due date has passed, the GIC will apply automatically to any unpaid tax and SIC.
Remission of interest charges
We have the discretion to remit interest charges, in full or in part, if there are special circumstances that would make it fair and reasonable to remit.
We use different factors when we consider remission of general interest charges for late payment, and for general interest charge or shortfall interest charge that accrues during the shortfall period.
Remission of GIC on late payment of debts
If GIC is applied on a debt, you may ask that it be remitted in part or in full. In considering whether to remit the GIC amount, we will consider any extenuating and unforeseen circumstances and the steps you have taken to relieve the effects of those circumstances. Examples of this would include one of the following:
- when circumstances that contributed to the delay in payment of the debt were not due to you (these may include natural disasters, industrial action, the unforeseen collapse of a major debtor or the sudden ill health of key personnel) and you have taken reasonable action to relieve, or relieve the effects of, those circumstances
- when circumstances that contributed to the delay in payment of the debt were due to you, and you have taken reasonable action to relieve, or relieve the effects of, those circumstances, and it is fair and reasonable to remit
- when there are special circumstances that make remission of the GIC fair and reasonable - for example, if the payment of the full amount of GIC would result in serious financial hardship for you.
A request for the remission of GIC must be made in writing and should set out the relevant circumstances. The request should outline fully the circumstances that led to the delay in payment and any steps you have taken to reduce the delay.
If your request for remission is refused in part or in full, you do not have a formal objection right. However, you may be able to seek a review of the decision in the Federal Court under the Administrative Decisions Judicial Review Act 1977.
Remission of SIC and GIC for shortfall periods
Remission can be requested by you or initiated by us. If you request a remission of interest, we will consider your request based on the information which is provided and other information available to us. We may remit some, all or none of the interest charge.
We will initiate remission if it is readily apparent it is appropriate to do so. Some facts that indicate it is readily apparent and appropriate are one of the following:
- we delay the start of an audit, or the expected time to complete an audit is exceeded by our actions
- there are periods of unreasonable delay caused by us during the course of an audit
- during an audit either of us experience a delay in obtaining information from a third party and this information is not otherwise available to you
- there is a delay in us processing your amendment request.
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For a more detailed explanation of factors we consider, refer to Law Administration Practice Statement PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods.
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If the interest charge is not remitted in full, we will give you a written explanation of the remission decision.
The letter explaining our decision will outline options available if you disagree with our decision. In certain circumstances, you have the right to object to the remission decision. In other circumstances, you may request a review of the decision.
You may object to a SIC remission decision if the amount of interest that remains payable is greater than 20% of the shortfall amount the interest relates to. In all other circumstances you may request a review of the remission decision.
More information
For more information, you can phone:
- 13 28 66 for business enquiries
- 13 28 61 for individual enquiries.
If you do not speak English well and need help from the ATO, phone the Translating and Interpreting Service on 13 14 50.
If you are deaf, or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below:
- TTY users, phone 13 36 77 and ask for the ATO number you need
- Speak and Listen (speech-to-speech relay) users, phone 1300 555 727 and ask for the ATO number you need
- internet relay users, connect to the NRS on www.relayservice.com.au and ask for the ATO number you need.
Last Modified: Friday, 21 December 2012
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