Compliance
Penalty
A penalty is a financial charge imposed by the ATO for breaching tax obligations, such as lodging late, understating tax or failing to keep records. Amounts are set by legislation and can change.
Tax penalties exist to encourage people and businesses to follow the rules. In Australia, administrative penalties are imposed by the ATO under the tax laws when someone does not meet an obligation. They are separate from the tax itself and from interest. A person can therefore owe the original tax, plus interest on the unpaid amount, plus a penalty for the breach.
There are several common types. A failure to lodge penalty applies when a return or Business Activity Statement is late. A shortfall penalty applies when a false or misleading statement leads to too little tax being paid. There are also penalties for failing to keep or produce records, for not meeting certain reporting duties and, in serious cases, for conduct that is criminal and can be prosecuted in the courts.
Many penalties are expressed in penalty units, which is a measure set in legislation and indexed from time to time. Because the value of a penalty unit changes, any dollar figure quoted for a particular penalty can quickly become out of date. The ATO publishes the current amounts, so check there before relying on a number.
The amount of a penalty can depend on the size of the entity, how long the breach lasted, the amount of tax involved and the person's level of care. For shortfalls, the law distinguishes between failing to take reasonable care, recklessness and intentional disregard, with higher penalties for more serious conduct. Taxpayers who disclose mistakes voluntarily before the ATO starts an audit may receive a significant reduction.
Penalties are not automatic in every case. The ATO has the power to remit, meaning reduce or cancel, penalties in appropriate circumstances. People who can show they acted reasonably, were affected by circumstances beyond their control, or have a good compliance history may be able to request remission. The request should explain what happened and include supporting information.
The best protection is prevention. Lodging on time, even if you cannot pay in full, is usually better than lodging late, because the failure to lodge penalty can build up over time. If you cannot pay, contacting the ATO early and arranging a payment plan can limit the consequences. Using a registered tax or BAS agent can also help, as agents often have access to extended lodgment programs.
Rights of review apply. If you disagree with a penalty, you can object, and if the objection is unsuccessful, there are options for external review. This page is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A small business lodges its quarterly BAS several weeks late and owes net GST of $4,400. The ATO charges the failure to lodge penalty, calculated by penalty units for each 28-day period the BAS is overdue, up to a maximum, plus the general interest charge on the unpaid $4,400. The business asks for remission, explaining a family emergency, and the ATO considers it.
Practical tips
- Lodge on time even if you cannot pay, and then contact the ATO about a payment arrangement.
- Check the ATO website for the current penalty unit value, because dollar amounts change.
- If you are penalised, consider asking for remission and explain the circumstances with evidence.