Interest and penalty tax

TAA-007v5

This ruling replaces TAA-007v4 to clarify the circumstances under which market interest can be remitted, transfer notification default content to Revenue Ruling TAA-008 and improve readability.

Preamble

1. The Taxation Administration Act 1997 (TAA) makes general provision for the administration and enforcement of taxation laws and the reciprocal enforcement of recognised laws. The various taxation laws (Acts and Regulations) that are covered by the TAA are set out in section 4. For example, the Duties Act 2000, the Land Tax Act 2005 (the LTA) and the Payroll Tax Act 2007 are some of the taxation laws to which the TAA applies. 

2. Interest and penalty provisions play an integral role in tax administration because they:

• deter non-compliance by making it unprofitable
• establish a uniform and consistent response to non-compliance
• underscore the advantage of compliance and the consequences of non-compliance
• compensate the Victorian Government for being denied the use of funds to which it is entitled.

3. The TAA provides a fixed penalty scale and also allows the Commissioner to adjust the penalty rate up or down the scale to reflect the level of culpability. The Commissioner may:

1. Determine that no penalty tax applies if he is satisfied that there were mitigating circumstances, i.e. that reasonable care was taken or a Tax Default or Notification Default (as explained later in this Revenue Ruling) occurred for reasons beyond the taxpayer’s control,
2. Reduce the rate of penalty tax where there has been a voluntary disclosure, or
3. Increase the rate of penalty tax where there has been:
   • intentional disregard of a taxation law, or
   • hindrance to an investigation.

4. The purpose of this Revenue Ruling is to explain the operation of the penalty and interest provisions in Part 5 of the TAA and set out the principles under which the Commissioner of State Revenue applies in exercising his discretion after considering all the relevant circumstances in a matter. For details on the application of penalty on a notification default, please refer to Revenue Ruling TAA-008 Notification default. 

5. In relation to the application of the penalty and interest provisions in payroll tax matters, please refer to Revenue Ruling PTA-036v5 – Payroll Tax – Interest and Penalty Tax.

Ruling 

6. Penalty tax is the tax imposed under section 29 of the TAA if a tax default or notification default occurs. For details on the imposition of penalty tax as a consequence of a notification default, please refer to TAA-008. 

7. Interest is imposed under section 24 of the TAA if a tax default occurs. Interest has 2 components, the 'market rate' and the 'premium rate' of interest. 

8. If there was an overpayment of tax (that is within the time permitted for a refund) at the time the tax default occurred, the overpayment can be offset against unpaid tax so that interest or penalty tax is assessed on the net amount of unpaid tax. The offsetting of an overpayment against an underpayment must not extend beyond the statutory time limit under the relevant refund provisions.

9. Tax default is defined in section 3(1) of the TAA to mean a failure by a taxpayer to pay (in whole or in part) their tax liability in accordance with a taxation law. For the purposes of this ruling, a payment of the correct tax after the due date is a Late Payment Tax Default and a payment of less than the correct amount of tax is a Tax Shortfall Tax Default. Please refer to section 3(1) of the TAA for the definition of tax and taxpayer.

Penalty tax

When is penalty tax imposed?

10. Penalty tax is imposed where a tax default or notification default has occurred. However, no penalty tax would be imposed if the penalty tax amount is less than $20. 

Tax default

11. The Commissioner has classified tax defaults into 2 categories: Tax Shortfall Tax Defaults and Late Payment Tax Defaults. 

12. A Tax Shortfall Tax Default occurs when no tax, or less than the full tax assessed, has been paid. 

13. A Tax Shortfall Tax Default may include:

• a failure to register and pay tax as required under a taxation law
• the understatement of a tax liability and the associated underpayment of tax
• the incorrect application of an exemption resulting in an underpayment of tax
• a failure to notify the Commissioner of the cessation of an exemption resulting in an underpayment of tax, or
• a failure to notify the Commissioner of a breach of the conditions attached to a private ruling.

14. A Late Payment Tax Default occurs when a: 

• registered taxpayer pays the correct tax for a return period after the due date for payment, but before the Commissioner has issued an assessment for tax for that period
• taxpayer lodges a document/statement after the time permitted by legislation and pays the correct tax at the time of lodgement
• taxpayer fails to pay an assessment (for tax or penalty tax) by the due date shown on the notice of assessment, or
• taxpayer fails to pay an instalment by the due date under an instalment arrangement.

15. A Late Payment Tax Default will generally not attract penalty tax but will attract interest at the sum of the market and premium rates. 

16. However, the Commissioner may impose penalty tax for Late Payment Tax Defaults if the same registered taxpayer pays tax late more than twice within a financial year. The rate of penalty tax imposed will depend on whether the Commissioner considers that the taxpayer has demonstrated a failure to take reasonable care or intentional disregard of a taxation law. Penalty tax may also be assessed on late annual reconciliation payments. Please refer to Revenue Ruling PTA-036v5 - Payroll Tax – Interest and Penalty Tax for further information about penalty tax and payroll tax. 

Penalty tax rates

17. The starting point for the imposition of penalty tax is 25% of:

• the unpaid tax in relation to a tax default, or
• the additional amount of tax that would have been payable had a notification default not occurred. 

The Commissioner may then remit, increase or reduce the rate of penalty tax from 25% depending on the particular circumstances. 

18. There are a number of steps that the Commissioner will take to determine whether to remit, increase or reduce the rate of penalty tax from 25%:

1. Penalty tax will be remitted if the Commissioner is satisfied that the taxpayer took reasonable care to comply with the taxation law, or that the tax default or notification default occurred solely because of circumstances beyond the taxpayer’s control. This means no penalty tax will be assessed.
2. The rate of penalty tax will be increased to 75% if the Commissioner is satisfied that the taxpayer’s intentional disregard of a taxation law contributed to the tax default or notification default.
3. The rate of penalty tax will be increased by 20% (either from 25% to 30% or from 75% to 90%) if, during an investigation into a known or suspected tax default or notification default, the taxpayer concealed information or hindered the Commissioner from becoming aware of the nature and extent of the tax default or notification default.
4. In situations where the taxpayer has made a voluntary disclosure to the Commissioner, the rate of penalty tax will be reduced by: 
   • 80% (either from 25% to 5% or from 75% to 15%) if the taxpayer made a voluntary disclosure to the Commissioner before an investigation into a known or suspected tax default or notification default
   • 20% (either from 25% to 20% or from 75% to 60%) if the taxpayer made a voluntary disclosure to the Commissioner during an investigation into a known or suspected tax default or notification default.

Reasonable care

19. All taxpayers are expected to take reasonable care to ensure they meet their tax obligations. However, the standard of reasonable care may vary depending on a taxpayer’s circumstances. The Commissioner recognises that a tax default or notification default may occur despite a taxpayer’s best intentions and effort to comply with taxation laws.

20. In relation to tax matters covered by this Revenue Ruling, reasonable care requires taxpayers to keep complete and accurate records, make diligent efforts to understand and comply with the relevant laws, seek advice on uncertain or complex matters, be honest in their dealings with the State Revenue Office and promptly notify the State Revenue Office of all relevant circumstances. 

21. As a starting point, the Commissioner will consider the taxpayer’s circumstances to establish what level of care can reasonably be expected from the taxpayer, including: 

1. The taxpayer’s knowledge of tax legislation and the information available on the taxation issue, particularly where the tax default or notification default relates to new legislative provisions which have been in place for less than 12 months.
2. The taxpayer’s access to expert advice.
3. The complexity of the law relating to the tax default or notification default.
4. The taxpayer’s commercial experience and whether standard accounting or commercial practices in the taxpayer’s field or business contributed to the taxpayer’s misapplication of a taxation law.
5. Any individual circumstances that may have contributed to the taxpayer’s misunderstanding or inability to meet their tax obligations in a timely manner.
6. Whether the tax default was due to an isolated, honest, or unintended mistake having regard to the taxpayer’s compliance history.

22. The following actions, alone or in combination, may indicate that a taxpayer had taken reasonable care:

1. The taxpayer had taken reasonable steps to be aware of his or her taxation obligations by seeking professional advice or requesting a private ruling from the State Revenue Office, and had applied the advice or private ruling in good faith.
2. The taxpayer had applied any relevant Revenue Rulings in good faith.
3. The taxpayer had maintained appropriate and proper records.

23. A taxpayer would not be considered to have taken reasonable care despite following the advice of their representative if the taxpayer was aware of the falsity of documents being prepared for assessment by the State Revenue Office or had suspected or knew of fraudulent activities conducted to mislead or deceive the State Revenue Office.

Circumstances beyond the taxpayer’s control

24. Circumstances beyond the taxpayer’s control may include (depending always upon the individual case):

1. Postal or delivery delays due to strikes or natural disasters (but not where the taxpayer could have arranged other means of delivery because of knowledge of the likelihood of such a delay).
2. Fires, floods or other natural disasters.
3. Unavailability of key personnel due to sudden resignation, ill health or death.
4. Computer system breakdowns, including third party systems.
5. Changes to applicable taxation laws resulting from court decisions.

25. The Commissioner will not be satisfied that there were circumstances outside the taxpayer’s control unless the taxpayer took all reasonable steps to avoid or mitigate the tax default or notification default.

Intentional disregard of a taxation law

26. Intentional disregard of a taxation law means a deliberate act or omission which causes a tax default or notification default. This may be determined on the basis of direct evidence of a taxpayer’s intention (e.g. admission by a taxpayer) or can be inferred from the surrounding circumstances and conduct of the taxpayer. Conduct that may demonstrate intentional disregard of a taxation law includes:

• tax avoidance or evasion
• knowingly making false or misleading statements or records, or omitting or concealing relevant facts or records
• failing to act in accordance with a private ruling or well-established principle of tax law
• repeated tax defaults or notification defaults on the same or closely related matters
• knowingly failing to notify the Commissioner in accordance with statutory requirements.

Taxpayer’s culpability when a representative or third party has contributed to the default

27. If a taxpayer authorises a person to act as their representative in the conduct of their tax affairs, the Commissioner will consider any action of the taxpayer’s representative to be an action of the taxpayer. Accordingly, the taxpayer will be responsible for a tax default or a notification default which arises from the action or failure of the taxpayer’s representative unless it could be shown that the taxpayer had taken reasonable care. The standard of reasonable care will be evaluated according to the circumstances and the expertise of the taxpayer’s representative, however, the liability for penalty tax remains with the taxpayer.

28. There may be circumstances where a tax default or notification default occurs as a result of the failure of a third party, who is not the taxpayer’s representative, to provide timely or accurate information which is necessary to determine the taxpayer’s liability for tax. The behaviour of a third party will not influence the Commissioner’s consideration of a taxpayer’s culpability for a tax default or notification default. The Commissioner will take into account factors such as whether the taxpayer could reasonably have been expected to know about the accuracy of the information provided by a third party. The Commissioner will also consider whether the taxpayer did all that was possible and reasonable to assist the third party to provide the required information. 

Penalty tax where the State Revenue Office conducts an investigation or where a taxpayer makes a voluntary disclosure

29. The Commissioner may conduct an investigation under Part 9 of the TAA to examine a taxpayer’s compliance with one or more taxation laws. The investigation begins when the State Revenue Office informs the taxpayer in writing that an investigation has commenced. The investigation is completed when the State Revenue Office has provided a taxpayer with formal acknowledgement that the State Revenue Office has completed the investigation. 

30. A voluntary disclosure must be in writing and disclose sufficient information to enable the nature and extent of the tax default or notification default to be determined. 

31. The penalty tax rate will be reduced by: 

• 80% if, before the Commissioner commences an investigation into a known or suspected tax default or notification default, the taxpayer makes a voluntary disclosure to the Commissioner, or
• 20% if, after the Commissioner commences an investigation into a known or suspected tax default or notification default by the taxpayer and, before it is completed, the taxpayer makes a voluntary disclosure to the Commissioner.

32. The penalty tax reduction for a voluntary disclosure before an investigation into a known or suspected tax default or notification default is a concession for taxpayers who co-operate fully in providing the Commissioner with information and thereby avoid the need for a full investigation. Depending on the circumstances, the reduction in the rate of penalty tax for a taxpayer who makes a voluntary disclosure before the Commissioner commences an investigation into a known or suspected tax default or notification default applies as follows: 

• Penalty tax imposed at the standard rate of 25% (which could not be remitted on the basis of reasonable care or circumstances outside the control of the taxpayer) would be reduced to 5%, or
• Penalty tax imposed at the standard rate of 75% (due to the taxpayer’s intentional disregard of a taxation law contributing to the tax default or notification default) would be reduced to 15%.

33. A voluntary disclosure during an investigation into a known or suspected tax default or notification default occurs when a taxpayer actively assists the investigation by obtaining, compiling and providing the information necessary to determine the nature and extent of a tax default or notification default. A taxpayer’s response to the commencement of an investigation will not be considered to be a voluntary disclosure if the taxpayer does no more than respond to requests for information and allow investigators access to books and records. The reduction in penalty tax for a voluntary disclosure during an investigation provides an incentive for taxpayers, because it reduces the time and work required by an investigator to complete an investigation once it has commenced. Depending on the circumstances, the reduction in the rate of penalty tax for a taxpayer who makes a voluntary disclosure after the Commissioner commences an investigation but before it is completed applies as follows:

• Penalty tax imposed at the standard rate of 25% (which could not be remitted on the basis of reasonable care or circumstances outside the control of the taxpayer) would be reduced to 20%, or
• Penalty tax imposed at the standard rate of 75% (due to the taxpayer’s intentional disregard of a taxation law contributing to the tax default or notification default) would be reduced to 60%.

Limitation on the reduction of penalty tax for voluntary disclosures

34. The reduction in the rate of penalty tax for a voluntary disclosure either before or during an investigation into a known or suspected tax default or notification default does not apply to payroll tax matters where there is a tax default and:

1. The tax default involved the failure to lodge a return and pay tax by the due date under a taxation law, or
2. The taxpayer lodged a return by the due date that disclosed a liability to pay tax but a tax default arose because the taxpayer did not pay that amount of tax by the due date.

35. The purpose of this limitation is to deny an automatic reduction in the rate of penalty tax to a taxpayer who, as a person registered to lodge payroll tax returns and pay tax on a periodic basis, fails to meet these obligations. It is the Commissioner’s practice to raise an assessment of estimated tax payable when a registered taxpayer has failed to lodge a payroll tax return and pay tax for a period. However, if the taxpayer subsequently provides a payroll tax return or information showing that the estimated liability for the period is incorrect, this information will not be regarded as a voluntary disclosure before an investigation. A reassessment will be made and penalty tax will be recalculated by applying the rate of penalty tax, used in the initial assessment, to the correct amount of tax. 

When will the Commissioner increase the rate of penalty tax?

36. The penalty tax rate will be increased by 20% if, after the Commissioner commences an investigation into a known or suspected tax default or notification default, the taxpayer conceals information or hinders the Commissioner during the investigation. 

37. Concealment or hindrance of an investigation means an act or omission by a taxpayer, occurring during the course of an investigation, which prevents or hinders the Commissioner from finding the existence, nature or extent of a tax default or notification default. 

38. Depending on the circumstances, the increase in the rate of penalty tax for a taxpayer who conceals information or hinders the Commissioner during an investigation into a known or suspected tax default or notification default applies as follows:

• Penalty tax imposed at the standard rate of 25% (which could not be remitted on the basis of reasonable care or circumstances outside the control of the taxpayer) would be increased to 30%, or
• Penalty tax imposed at the standard rate of 75% (due to the taxpayer’s intentional disregard of a taxation law contributing to the tax default or notification default) would be increased to 90%.

Commissioner’s discretion to remit penalty tax by any amount

39. Section 35 of the TAA authorises the Commissioner to remit penalty tax in part or in full in appropriate circumstances. It is this provision which enables the Commissioner to impose penalty tax at rates other than the standard rates outlined in this Ruling. 

40. When considering whether to remit penalty tax under this provision, the Commissioner will examine all the relevant circumstances and take into account any mitigating factors. 

41. In relation to notification defaults, relevant circumstances may include:

• whether the taxpayer has notified the Commissioner of the correct ownership details of the subject land at the time of acquisition
• whether the taxpayer has notified the Commissioner of any change to the use of the subject land which may affect whether it is taxable under the LTA
• whether the State Revenue Office contributed to the error or omission in the assessment
• the complexity of the matter
• the level of sophistication and commerciality of the taxpayer
• the compliance history of the taxpayer. 

42. The penalty tax rates can be summarised as follows:

Interest

When is interest imposed?

43. If a tax default occurs, interest is imposed on unpaid tax and unpaid penalty tax.

44. Interest is also imposed on a judgment debt that includes an amount of unpaid tax. A judgment debt is a judgment given, or entered, by a court for an amount of unpaid tax.

45. Interest is not imposed on any unpaid interest or if the amount of interest calculated on a tax default is less than $20.

46. Because a notification default only results in liability to pay penalty tax and is not a tax default, interest is not imposed. However, a tax default will occur if a taxpayer fails to pay the penalty tax imposed by the due date. Accordingly, interest will accrue on any unpaid penalty tax imposed as a result of a notification default.

47. Under the TAA, interest is comprised of 2 components:

• a market rate component
• a premium rate component fixed at 8% per annum.

Market interest

48. The purpose of imposing interest at the market rate is to reimburse the Victorian Government for the financing costs incurred due to the late payment of the tax. The market rate is established by reference to the Bank Accepted Bills rate unless there is a current order specifying a different rate, made by the Minister and published in the Government Gazette.

49. On 1 July each year, a new Bank Accepted Bills rate is set automatically for the financial year. The market rate is the average of the daily yields for 90-day Bank Accepted Bills published by the Reserve Bank of Australia for the preceding month of May.

Premium interest

50. The purpose of the premium rate is to:

1. Penalise taxpayers for the late payment of tax.
2. Deter similar non-compliance by other taxpayers.
3. Make it unattractive for taxpayers to pay other debts in preference to taxation debts.

51. Therefore the premium rate is usually charged for Late Payment Tax Defaults (other than for repeated Late Payment Tax Defaults which attract penalty tax) and instalment payments not paid by the due date made under approved arrangements to pay arrears of tax.

When will the Commissioner remit interest?

Full remission

52. Section 28 of the TAA allows the Commissioner to remit all or part of any interest imposed in whatever circumstances the Commissioner considers appropriate.

Remission of market rate of interest

53. In determining whether to remit the market rate of interest, the Commissioner will consider whether there is any reason that the Victorian Government should bear the financing costs of revenue forgone as a result of a tax default. Such a situation may be where the State Revenue Office has contributed to the tax default. For example, remission of the market rate may be appropriate if the State Revenue Office has been unable to provide a taxpayer with a decision in a timely manner or has provided advice which has been shown subsequently to be incorrect.

54. The Commissioner may also remit the market rate of interest in exceptional circumstances.

Remission of the premium rate of interest

55. Remission of the premium rate of interest may occur in circumstances where:

• the market rate component of interest is partially or fully remitted, or
• penalty tax has been imposed for a tax default and there is no need for an additional penalty in the form of premium interest.

56. Accordingly, the premium rate of interest is generally remitted in full where penalty tax is imposed.

57. Generally, the Commissioner will partially remit the premium rate of interest where a taxpayer has taken reasonable care to comply with a taxation law, as the imposition of the full premium rate of interest is not required either as a penalty or as a deterrent. However, to impose only the market rate of interest on the unpaid tax would place this taxpayer at an advantage when compared with a taxpayer who paid tax on time by borrowing at normal business rates, often around 3% higher than the market rate. It is therefore equitable to remit the premium interest rate by 5% (from 8% to 3%) for unpaid tax by those taxpayers whose culpability does not warrant penalty tax or premium interest of 8%.

Table of interest and penalty charges

The application of interest and penalty tax to various categories of tax defaults and notification defaults is summarised in the following table.
 

Commissioner of State Revenue

Rulings do not have the force of law. Each decision made by the State Revenue Office is made on the merits of each individual case having regard to any relevant ruling. All rulings must be read subject to Revenue Ruling GEN-001.