The Australian Taxation Office (ATO) has an extensive system in place that imposes financial obligations on taxpayers in Australia. This means that, whether you’re an individual taxpayer or business owner, you’re responsible for shouldering the burden of all of these obligations to avoid getting in trouble with the ATO.
If you’re caught not paying the correct amount of tax or submitting incorrect information for your business, you’ll likely be liable for a penalty, increased interest charges, and any other offences related to non-compliance. Keep reading to learn more about Australian tax fines and how to avoid them.
Why are penalties imposed?
We get it – it’s frustrating to think that you might have to pay extra just because you miss a deadline or accidentally input incorrect details about your income or deductibles. However, according to the tax laws, the ATO is within its rights to impose administrative penalties when you don’t meet your tax obligations.
Penalty units are put in place so that everyone’s treated equally and fairly, so rest assured that you’re not the only one being subjected to tax fines. They’re enforced to make sure you take reasonable care in complying with your tax obligations, rather than winging them and hoping for the best.
How penalties are calculated
The ATO calculates the penalty amount you’re liable to using either a statutory formula, based on your behaviour and how much tax has been avoided, or multiple penalty units.
What do penalty units mean?
When you get a tax fine from the ATO, you might get a certain amount of penalty units that you need to pay. The amount each unit amounts to will depend on when the infringement occurred, including:
- On or after 1 July 2023: Penalty unit = $313
- 1 January 2023 to 30 June 2023: Penalty unit = $275
- 1 July 2020 to 31 December 2022: Penalty unit = $222
Reasons for tax fines in Australia
There are many reasons why the ATO might serve you with a fine, including:
Making false or misleading statements (with a shortfall amount)
You might be liable for a fine if you make false or misleading statements on your tax return which leads to you having a shortfall amount. A shortfall amount is the difference between the correct tax liability and how much you were told to pay depending on the information you submitted in your return. Submitting incorrect information might mean you end up paying less than you should, which is why you’ll be liable for a fine.
Base rate of penalties depending on your behaviour:
- Failure to take reasonable care: 25% of the shortfall amount
- Recklessness: 50% of the shortfall amount
- Intentional disregard: 75% of the shortfall amount
Making false or misleading statements (without a shortfall amount)
Even if your false statement doesn’t lead to a shortfall amount, you’ll still be at risk of a fine if the ATO finds out. For example, if you declare false information during an audit or during a private ruling request, you’ll be liable for a penalty despite it not resulting in a shortfall amount.
Base rate of penalties depending on your behaviour:
- Failure to take reasonable care: 20 penalty units
- Recklessness: 40 penalty units
- Intentional disregard: 60 penalty units
Taking a position on income tax or PRRT that isn’t reasonably arguable
If you can’t reasonably argue how you use an income tax or Petroleum Resource Rent Tax (PRRT) law, and it results in a shortfall amount that exceeds a certain threshold, you may get a fine for 25% of the shortfall amount.
Base rate of penalties:
- For partnerships and trusts: If your shortfall amount exceeds $20,000 or 2% of the entity’s net income, you may get fined for 25% of the total shortfall
- For other taxpayers: If your shortfall amount exceeds $10,000 or 1% of your income or PRRT return, you may get fined for 25% of the total shortfall
Failing to make a statement
If you fail to lodge a document necessary to support your tax-related liability by the deadline, and as a result, the ATO determines your tax-related liability, you are liable for a fine. This will be 75% of the tax-related liability, so they can quickly add up if you’re not careful!
An example of this would be if you failed to lodge your tax return on time, so the ATO determined your income tax liability by using different methods.
Failure to meet other tax obligations
There are also several other reasons why you might be liable for tax fines in Australia. If you’re found to be liable for any of the following penalties, you’ll be given penalty units that you’ll have at least 14 days to pay.
Here are the tax obligations you’re liable for, along with the penalty for failing to meet them:
- Keeping or retaining records as required: 20 penalty points
- Retaining or producing declarations as required: 20 penalty points
- Providing access or reasonable facilities to an authorised tax officer: 20 penalty points
- Applying for or cancelling goods and services tax (GST) when registration is required: 20 penalty points
- Issuing a tax invoice or adjustment when required: 20 penalty points
- Both principal and agent issuing tax invoices or adjustment notes for the same taxable supply or adjustment event: 20 penalty points
- Registering as a PAYG withholder when required: 5 penalty points
- Lodging an activity statement electronically when required: 5 penalty points
- Paying an amount electronically when required: 5 penalty points
Considering penalty points can be as much as $313, these fines can quickly amass and become unmanageable. This is why it is so essential to keep track of your finances and understand your responsibility of paying taxes for your business to the best of your ability.
Not lodging on time
The ATO might issue a Failure to Lodge (FTL) penalty if you don’t lodge a report by a particular date, as these dates are considered obligations and missing them is a failure to meet your tax obligations. These might include tax returns, PAYG instalment reports, or activity statements.
Not lodging on time doesn’t always mean you’ll get a fine, as the ATO recognises that life often gets in the way – even if you have the best intentions. For this reason, penalties aren’t generally applied in isolated cases of failing to lodge on time. Before a fine, you’ll often be warned by phone or in writing so you have time to rectify your mistake. If you still don’t lodge, the fine will be issued.
How FTL penalties are calculated
- Small entities: FTL penalties are calculated at the rate of one penalty unit for each 28-day period that the return or statement is overdue, with a maximum of 5 penalty points
- Medium entities: A medium entity is a medium withholder for PAYG withholding purposes or who has an assessable income/ current GST turnover of between $1 and $20 million, and each penalty unit will be multiplied by 2
- Large entities: A large entity is a large withholder for PAYG withholding purposes or who has an assessable income or current GST turnover of over $20 million, and each penalty unit is multiplied by 5
- Significant entities: If you’re a significant global entity, your base penalty amount will be multiplied by 500
Are you entitled to penalty relief?
As we’ve said, it’s not uncommon for people to make mistakes on their tax returns, which is why the ATO offers penalty relief for certain errors. These are applied to penalties that have been issued due to inadvertent errors including:
- Failing to take reasonable care
- Taking a position on income tax that is not reasonably arguable
The ATO finds an inadvertent error on your tax return, they often show you where and what it is, and tell you how to get it right next time. They will also notify you that they’re offering penalty relief, which basically means they’re not applying the penalty at this time – but if you do it again, you may be liable for the fine.
Penalty relief doesn’t apply to everyone, but if you are an individual or an entity with a turnover of less than $10 million, you may be entitled to it. Included entities are:
- Small businesses
- Self-managed super funds
- Not-for-profit organisation
- Cooperatives
- Strata title bodies
You won’t be eligible for penalty relief, however, if in the last three years you have already:
- Had penalty relief issued
- Been penalised for reckless or intentional disregard of the law
- Invaded tax or committed fraud
- Been involved in the control of another entity that has invaded tax
- Amassed without the intention of being able to pay
Penalty relief isn’t offered to everyone, so you can’t apply for it. If the ATO believes you are entitled to it, they will notify you of this as a warning to take better care with your tax returns and statements in the future.
Final thoughts
As a business owner, knowing how to do your taxes is essential for keeping your business safe and protected from possible fines, penalties, and audits. The ATO covers all tax laws and if you’re found to be breaking one, you could come under fire and be made to pay hefty fines for your recklessness or intentional disregard. There are some exceptions for first-time offenders, but penalty relief isn’t a given – so it’s incredibly important that you understand the importance of filing your taxes correctly every year.
Book A Free Strategy Meeting With A Business Accountant Today
One of the best ways to prevent getting yourself into any hot water in regard to your taxes is to hire a business accountant who can help you keep records and file your taxes on time at the end of each financial year. They may have more knowledge than you and be able to spend more time looking through your books to avoid tax fines as much as possible. So, why not book a free strategy meeting with Walker Hill to discuss your options today?
