Compliance
Shortfall penalty
A shortfall penalty is charged when a false or misleading statement leads to too little tax being paid. The percentage depends on how careless or deliberate the error was.
A shortfall penalty is imposed by the ATO when a taxpayer makes a statement to the ATO that is false or misleading and, as a result, pays less tax than they should have. The statement could be in a BAS, an income tax return, an activity statement or other document. The penalty applies to the shortfall, which is the difference between what was paid and what should have been paid.
The law grades the penalty according to the level of culpability. If the taxpayer failed to take reasonable care, the base penalty is 25% of the shortfall amount. If the taxpayer was reckless as to the correct position, it is 50%. If the taxpayer intentionally disregarded the law, the base penalty is 75%. Different penalties apply to schemes and other situations, and the ATO can apply increases or reductions depending on the circumstances.
For GST, the penalty can apply where, for example, a business claims credits it is not entitled to, reports sales incorrectly, or fails to account for GST on a taxable supply. An honest mistake made after taking reasonable care generally does not attract a penalty, although the tax and interest are still payable. The question is whether the taxpayer took the care a reasonable person would in the same circumstances.
The base penalty may be reduced. If a taxpayer voluntarily tells the ATO about an error before the ATO notifies them of an audit or review, the penalty can be reduced significantly. A smaller reduction is available if the disclosure is made after being notified but before the audit is finished. Cooperation with the ATO throughout the process also matters, and the ATO has discretion to remit penalties in appropriate cases.
A reasonably arguable position can in some cases protect against a penalty. This means there is a position supported by authority that is reasonably arguable, even if the ATO disagrees. Relying on a private ruling or a public ruling that you follow correctly can also protect against penalties and interest.
The penalty is in addition to the tax and the interest. A taxpayer who disagrees can object to the penalty, and other review rights may follow. The best protection is sound record keeping, careful preparation of the BAS and prompt correction of mistakes. Using a registered tax or BAS agent also shows that care was taken, though the taxpayer remains responsible.
This page is general information only. Confirm your situation with the ATO or a registered tax professional.
Worked example
A business claims $8,000 in GST credits on private purchases, because it did not check them. This leads to a shortfall of $8,000. If the ATO decides the business failed to take reasonable care, the base penalty is 25% of $8,000, which is $2,000. If the business had voluntarily disclosed the error before any audit notice, the penalty could be reduced substantially.
Practical tips
- Check credit claims against tax invoices before lodging, because careless claims can attract a 25% base penalty.
- Disclose mistakes voluntarily before the ATO contacts you, as this can reduce the penalty significantly.
- Where you rely on ATO guidance or a private ruling, keep a copy as evidence.