ATO proposes changes to small business penalties

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Small business owner
March 5, 2017
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Find out how the ATO changes could impact your business

The Australian Tax Office recently proposed some changes to the way they handle mistakes made by small business owners in their tax returns. The ATO proposes to allow certain small businesses, with annual turnovers of under $2 million, a ‘one chance’ opportunity before applying a penalty, where there has been a failure to take reasonable care or a failure to lodge an activity statement or an income tax return on time. For various reasons, many small businesses in Australia make errors that are not deliberate in their income tax returns or activity statements each year. To make it easier for those who make a reasonable effort to comply, the ATO has proposed changes to its approach to penalties to educate them in a non-threatening manner.

The ATO has stated that it will provide one chance before applying a penalty in the following circumstances;

  • For certain small business and individual clients, we will not apply penalties for false or misleading statements for failure to take reasonable care for errors made in income tax returns and activity statements, and
  • We will not apply failure to lodge on time penalties for late lodgement of income tax returns and activity statements.

This will apply to the first error and late lodgement subject to penalty. The one chance time frame will be refreshed after a set period of time. The ATO will confirm in writing to these small business and individual clients that while they were liable to a penalty, it has chosen not to apply one on this occasion.

The changes would not be available to those who demonstrated reckless or dishonest behaviour and those who disengage and cease communicating with the ATO during an audit or review. All small businesses would receive a clear explanation of how the error occurred and understand what they need to do to get things right in the future After a defined period of time (i.e. a three or four year financial cycle) the opportunity would be reset. Given the frequency of reporting for activity statements, when considering late lodgement penalties this set period may be different for income tax returns and activity statements.

After the one chance opportunity has been provided, failure to lodge on time would automatically apply if lodgment was not received by the due date The ATO has focused on these particular penalties because they represent the majority of penalties imposed on small businesses in 2015.

In 2015, for all false or misleading statements in income tax returns and activity statements, there were approximately:

  • 22,000 (57%) penalties imposed on small businesses
  • 13,000 (34%) penalties imposed on individual clients, and over 50% of all failure to take reasonable care penalty transactions for small business and individuals was under $2000.

In the same year:

  • 83% of all failure to lodge on time penalties were imposed on small business clients and 11% on individuals.

The current penalty amounts are:

22,000 (57%) penalties imposed on small businesses

  • Failure to take reasonable care: This is the lowest level of penalty (25% of the shortfall amount) for a false or misleading statement. It is applied when a client has not made a reasonable effort or taken reasonable care to comply with tax law. A higher penalty is applied if a client is grossly careless or shows disregard to the risk of their errors or indifference to the consequences of their actions.
  • Failure to lodge on time: Clients who do not lodge a return or other documents by the due date for lodgement are liable to a penalty for failing to lodge on time. The penalty is calculated at one penalty unit (currently $180) per 28 days (or part thereof) from the due date to the date of lodgement, or where they haven’t lodged. A maximum penalty of five 28 day-periods is applied ($900 per document for individuals). However, the penalty may increase depending on the size of the entity.

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