ATO Interpretative Decision

ATO ID 2001/188 (Withdrawn)

Income Tax

• This ATOID is a simple restatement of the law and does not contain an interpretative decision. The meaning of the expression 'reasonable care' is discussed in Taxation Ruling TR 94/4 at paragraph 6, and paragraphs 13 to 14.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Whether the taxpayer is subject to penalty tax under section 226G (ITAA 1936) for failing to exercise reasonable care when the taxpayer lodges their first tax return through an unregistered tax agent and makes incorrect claims for work related expenses.

Decision

In the circumstances, the taxpayer is not liable to pay penalty tax under section 226G (ITAA 1936).

Facts

The taxpayer is an apprentice carpenter who arranges for another individual to prepare and lodge the taxpayer's first tax return. The taxpayer is not aware that the other individual is an unregistered tax agent.

The taxpayer is audited in relation to substantial claims for work related expenses made in the tax return. The taxpayer is unable to substantiate any of the claims made, many of which are also not allowable under section 8-1 of the Income Tax Assessment Act 1997. The taxpayer states that the expenses were actually incurred and that the individual who prepared the tax return had advised the taxpayer that the expenses were allowable to an apprentice carpenter. The individual who prepared the taxpayer's first tax return did not mention the substantiation requirements.

As a result of the audit, the taxpayer's assessment is amended 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 taxpayer objects to the penalty imposed on the basis that the taxpayer believed that the individual who provided advice and prepared the tax return was a registered tax agent. Additionally, the taxpayer did not know that the claims were incorrect.

Reasons for Decision

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.

Under the circumstances, the taxpayer used best endeavours to lodge a correct tax return. The taxpayer had never lodged a tax return before and used the services of an individual who the taxpayer thought was a registered tax agent. Consequently, the taxpayer believed that all the claims were correct. In view of the taxpayer's experience, education and skill, it is possible to conclude that the taxpayer has taken reasonable care to fulfil the taxpayer's tax obligations. Accordingly, no penalty tax should be imposed under section 226G (ITAA 1936).

Year of income:  year ended 30 June 1997

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

Related Public Rulings (including Determinations)
TR 94/4

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

Business Line:  Small Business/Individual Taxpayers

Date of publication:  10 August 2001

ISSN: 1445-2782