Australian subsidiaries beware: penalties for Tax Act breaches set to increase

By Phil Shepherd - March 8, 2017

The Federal Government has introduced legislation first flagged in the 2016/17 Budget that would substantially increase the taxation penalties imposed on Significant Global Entities (SGEs).

An Australian company will be a SGE where either the annual global income of the taxpayer on its own, or the combined annual global income of the multinational group of which it is part, exceeds $A1 billion based on the global financial statements lodged by the taxpayer / the group.

For example, an Australian subsidiary of a multinational group will be a SGE if the annual global income of the group exceeds $A1 billion - consequently even small Australian companies can be SGEs.

The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 seeks to increase the taxation penalties imposed on SGEs for (inter alia) failing to lodge documents on time and making false and misleading statements to the ATO.

The proposed increases will apply to:

  • Documents lodged late where that document is required to be given on or after the later of:
    • 1 July 2017
    • The day after the Bill receives Royal Assent (and becomes an Act)
  • Statements made on or after the later of:
    • 1 July 2017
    • The day after the Bill receives Royal Assent (and becomes an Act)

As the value of a penalty unit will also increase from $180 to $210 with effect from 1 July 2017, the combined effect of this change and the proposed penalty ‘multipliers’ for SGEs will mean a substantial increase in the financial consequences for failing to meet their tax compliance obligations!

Increased failure to lodge (FTL) penalties for SGEs

The Bill proposes that where a SGE is liable for a FTL penalty, the base penalty amount is multiplied by 500. The financial consequences for the late lodgement of documents such as income tax returns, fringe benefits tax returns, PAYG annual reports and GST returns will be substantially increased for SGEs.

Under the proposed changes, the financial impact for lodging a document late could be as follows:

Days late

28 or less

29 to 56

57 to 84

85 to 112

More than 112

Significant global entity

(Multiplier 500)

$105,000

$210,000

$315,000

$420,000

$525,000

Another important point to note is that a FTL penalty applies on a ‘document by document’ basis - which means that if a number of documents are lodged late, the FTL penalty ‘multiplier’ for SGEs can apply to each document.

Increased penalties relating to statements and failing to give documents necessary to determine tax-related liabilities by SGEs

The Bill also proposes to double the base penalty amount for penalties imposed on SGEs relating to statements and for failing to give documents necessary to determine tax‑related liabilities to the ATO on time.

The following table is taken from the EM to the Bill and sets out the new penalty amounts that are proposed to apply to SGEs:

Culpable behaviour

Base penalty amount

Statement results in shortfall amount - base penalty amount calculated as % of shortfall

Intentional disregard

150%

Recklessness

100%

No reasonable care

50%

No reasonably arguable position

50%

Statement does not result in shortfall amount - base penalty amount in
penalty units and dollars

Intentional disregard

120 penalty units currently $21,600*

Recklessness

80 penalty units currently $14,400*

No reasonable care

40 penalty units currently $7,200*

Document necessary to determine a tax-related liability - base penalty
amount calculated as % of tax-related liability concerned

Failure to lodge document on time, where document necessary for Commissioner to determine a tax‑related liability accurately

150%

*Penalty amounts are calculated based on the current value of a Commonwealth penalty unit of $180. In the 2016-17 Mid-Year Economic and Fiscal Outlook, the Government announced an increase in the value of a Commonwealth penalty unit to $210, with effect from 1 July 2017.

The penalties that can be imposed on SGEs will also be substantially increased for (among other things), making a false or misleading statement to the ATO, making a statement to the ATO which treats a law as applying in a way that is not reasonably arguable, and failing to give the ATO a document on time that is necessary to determine a tax-related liability.

ATO administrative approach

The ATO has stated on its website that: 

  • The law relating to imposition of penalties, beyond the change to the level of penalty or the multipliers, will not change. For example, an SGE that takes reasonable care will not be liable to a false or misleading statement penalty
  • In broad terms the current approach for the imposition and remission of statement penalties and FTL penalties will be maintained for the increased penalties applying to significant global entities. That is, the increased amount of penalties will not by itself be a relevant factor in considering whether or not a penalty should be remitted

Summary

The looming introduction of substantially increased penalties for failing to lodge documents on time and making incorrect statements to the ATO should serve as a timely reminder for Australian companies to carefully consider the management of their taxation affairs.

The consequences of not having adequate controls and protocols in place to ensure that documents are lodged on time and statements made to the ATO are accurate can be severe.

With the forthcoming increase in penalties, we can expect that the ATO will closely monitor the lodgment performance of companies in the future and carefully consider the accuracy of the statements they make to the ATO.

 


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