As the mistakes are typically not deliberate in the first place, such SME penalties do nothing to change taxpayer behaviour but they do impose financial difficulties on taxpayers who are often in no place to carry that additional cost.
The ATO have proposed changes on how they address SME penalties covering small business owners who make honest mistakes in their tax returns, or who make a late lodgement due to genuinely not knowing submission dates or struggling to get everything together in time to make a full submission.
The proposed changes, if implemented, will apply to businesses with an annual turnover of less than $2 million.
The ATO propose to no longer automatically impose a penalty on individuals and small businesses, which make inadvertent mistakes in their tax return. The ATO will give them one chance. This means that they will effectively be “let off” the penalty the first time they make such a mistake. Subsequent times, they will still get a penalty. In addition, they’ll still get a penalty if they acted recklessly or dishonestly.
The ATO also propose to no longer automatically impose a penalty on individuals and small businesses, who lodge their income tax return or BAS late. Gain, these people will be given one chance – that means that if they lodge late a second or subsequent time, they’ll still get a penalty.
After a defined period of time – say three or four years – the clock will be reset and taxpayers will get “one chance” again.
Under the current regime, many individuals and small businesses make inadvertent mistakes and are then punished by the application of punitive penalties of up to 25% of the tax underpaid. In 2015, small businesses received 22,000 penalties (57% of the total issued) for making “false or misleading statements” (the type which might now be waived) and also suffered 83% of the total number of penalties for failing to lodge on time.
As the mistakes covered by these penalties are typically not deliberate in the first place, such SMEs penalties do nothing to change taxpayer behaviour but they do impose financial difficulties on taxpayers who are often in no place to carry that additional cost. Getting the ATO to remit a penalty is possible but is likely to require the time consuming involvement of your tax adviser or accountant to sort it out. Either way, then, there’s a cost on business.
These new proposals are very welcome since – if implemented – they will introduce a degree of flexibility and fairness and will help to level the playing field with larger businesses, which often have the resources to successfully challenge ATO penalties.
Mark Chapman, Director of Tax Communications, H&R Block
