When does the Australian Taxation Office charge penalties and interest?

You may be wondering if, why, and when the ATO charges interest and penalties. Well, they do have a method to what appears to be madness!

Penalties

Penalties can be charged on income tax, BAS, PAYGI, and other tax obligations. You risk paying penalties when:

  • Your returns are lodged late
  • You don’t take reasonable care in your tax affairs
  • You make a false or misleading statement in your tax affairs

The ATO’s penalty provisions are in place to encourage taxpayers to take reasonable care in complying with their tax obligations. Penalties paid to the ATO cannot be claimed as business expenses.

Interest

The ATO charges interest to ensure that taxpayers who underpay their tax for a period dont receive an advantage over those who pay on time. This interest is tax-deductible.

Examples of scenarios where Interest may be charged include:

  • Late or unpaid tax
  • Excessive shortfall in an incorrectly varied or estimated income tax instalment
  • An amended return resulting in additional tax payable

Reversing interest and penalties

A common and hopeful plea we hear is “can you get the ATO to reverse interest and penalties?”

Interest

The ATO charges interest because you have used them like a bank. Paying tax may bring you into overdraft, increase your overdraft, or force you to get a loan. All of these incur interest, usually at high rates. You therefore pay interest to the ATO, rather than to your bank. 

Most of the time, the ATO will not reverse or reduce interest charges. 

Penalties  

Penalties are also difficult to get remitted.

The ATO will consider a number of things in determining whether to remit a penalty. These include:

  • Your compliance history
  • Whether tax was deferred or avoided
  • The reason for the increased tax
  • Whether there was voluntary disclosure

The ATO has little patience and sympathy with consistently late taxpayers and asking is usually a lost cause. If there’s a good reason, they’ll consider it. This was particularly the case with the impact of Covid, but as more and more businesses are getting back to normal, it’s not a given.

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