ATO Interpretative Decision

ATO ID 2001/250 (Withdrawn)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. Taxation Ruling IT 2444 and PS LA 2006/11 provide guidelines for determining when the Commissioner will remit the General Interest Charge.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

1. Whether the taxpayer, who knowingly lodges an incorrect tax return because details of a trust distribution are not yet known, is subject to penalty tax under section 226G of the Income Tax Assessment Act 1936 (ITAA 1936) for lack of reasonable care.

2. Whether the General Interest Charge (GIC) imposed under section 170AA (ITAA 1936) should be remitted under section 8AAG of the Taxation Administration Act 1953 (1953).

Decision

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

2. The GIC should not be remitted under section 8AAG (TAA 1953).

Facts

The taxpayer makes an investment in a unit trust. The taxpayer is aware that a capital gain distribution will be received from the unit trust for the year of income. The tax agent preparing the tax return for the unit trust has not yet finalised the financial statements for the trust and receives an extension of time to lodge. The taxpayer goes to a different tax agent to prepare the taxpayer's own tax return and is advised that the trust distribution cannot be included in the taxpayer's return until the taxpayer receives advice from the trust's tax agent about the distribution.

The taxpayer does not want to delay lodging the taxpayer's own tax return. The taxpayer considers that they can ask for a debit amended assessment when the advice is received about the trust distribution and that, in any event, the taxpayer is covered by the extension granted to the trust's tax agent. The taxpayer lodges the tax return through the tax agent without including the trust distribution and receives a notice of assessment resulting in tax payable.

The taxpayer subsequently requests an amendment of the original assessment when the details of the trust distribution become available. The taxpayer's assessment is amended, and penalty tax is imposed under section 226G (ITAA 1936) equal to 25% of the tax shortfall caused by the taxpayer's failure to take reasonable care. This penalty tax is reduced by 80% under section 226Z (ITAA 1936) because of the voluntary disclosure by the taxpayer. The taxpayer is also made liable to pay the GIC under section 170AA (ITAA 1936).

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.

The taxpayer showed a lack of reasonable care by lodging the tax return when the taxpayer knew that an assessable trust distribution relating to the relevant year of income would subsequently be received. The extension granted to the trust's tax agent did not cover the taxpayer. The taxpayer, knowing the requirement to include income from all sources, should have requested an extension of time to lodge the taxpayer's own tax return. The penalty tax that was imposed under section 226G (ITAA 1936) for lack of reasonable care and reduced under section 226Z (ITAA 1936) for the voluntary disclosure is warranted.

Where an assessment is amended to increase the amount of tax payable, a taxpayer is generally liable to pay the GIC under section 170AA (ITAA 1936). However, section 8AAG (TAA 1953) allows the Commissioner to remit all or part of the GIC payable. Taxation Ruling IT 2444 and the ATO Receivables Policy provide guidelines that the Commissioner uses to determine whether remission is warranted. It is clear from these guidelines that although remission will only be granted in limited circumstances, the GIC will be remitted where by reason of the particular circumstances, it is considered fair and reasonable to do so. However, in this case, there is nothing in the taxpayer's circumstances to warrant remission of the GIC.

Legislative References:
Income Tax Assessment Act 1936
   section 226G
   section 226Z

Related Public Rulings (including Determinations)
TR 94/4
IT 2444

Other References:
ATO Receivables Policy

Keywords
Tax administration
General interest charge
Income tax penalties
Income tax shortfall
Remission of penalties
Remission of Section 170AA interest

Business Line:  Small Business/Individual Taxpayers

Date of publication:  27 August 2001

ISSN: 1445-2782