ATO Interpretative Decision

ATO ID 2001/194

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Whether the taxpayer, who incorrectly claims a repayment of principal as an interest deduction, is subject to penalty tax under section 226G of the Income Tax Assessment Act 1936 (ITAA 1936) for failing to take reasonable care.

Decision

The taxpayer is subject to penalty tax under section 226G (ITAA 1936).

Facts

The taxpayer, a doctor, claims a substantial interest deduction against interest and dividend income in the taxpayer's tax return. Subsequently, the taxpayer is audited and it is found that approximately 60% of the total deduction claimed is actually a repayment of principal on the loan.

The taxpayer's assessment is amended to disallow the deductions for the amount that was a repayment of principal and the taxpayer is made liable to pay penalty tax equal to 25% of the amount of the tax shortfall caused by the taxpayer's failure to take reasonable care.

The Commissioner's Guarantee in TaxPack states, amongst other things, that if a taxpayer uses TaxPack properly and makes an honest mistake, then the taxpayer will not be liable to pay penalty tax. The taxpayer claims to have used TaxPack properly in preparing the tax return and maintains that the inclusion of the repayment of principal in the deduction was an honest mistake. On this basis, the taxpayer claims to be covered by the Commissioner's Guarantee and believes that no penalty tax should be imposed.

Reasons For Decision

The taxpayer cannot rely on the Commissioner's Guarantee as the taxpayer has claimed a repayment of principal as a deduction and there is nothing in TaxPack to suggest that a principal repayment is an allowable deduction. Consequently, making such a claim on the basis only of the information contained in TaxPack is not a proper use of that document. As a result, the Commissioner's Guarantee does not apply to the imposition of penalty tax in this case.

Under section 226G (ITAA 1936) penalty tax is attracted where a taxpayer has a tax shortfall caused by their failure to take reasonable care. Taxation Ruling TR 94/4 provides guidelines as to what constitutes reasonable care. Paragraph 6 of Taxation Ruling TR 94/4 states that the reasonable care standard requires a taxpayer to take the care that a reasonable person would exercise, in their particular circumstances, to fulfil the taxpayer's tax obligations. Provided that a taxpayer may be judged to have tried his or her best to lodge a correct return, having regard to the taxpayer's experience, education, skill and other relevant circumstances, the taxpayer will not be liable to pay penalty.

The taxpayer, an educated professional, failed to exercise the standard of care that would be expected of a reasonable person in the particular circumstances when preparing their income tax return. The nature of the incorrect claim and the quantum relative to the total claim should have made it apparent to the taxpayer that the deduction was not allowable. The penalty tax imposed under section 226G (ITAA 1936) for failure to take reasonable care is warranted.

Year of income:  Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   ITAA 1936 226G

Related Public Rulings (including Determinations)
TR 94/4

Keywords
Tax administration
Income tax penalties
Income tax shortfall
Remission of penalties

Business Line:  Small Business/Individual Taxpayers

Date of publication:  14 August 2001

ISSN: 1445-2782