Cap on shortfall penalties

Section 141JAA of the Tax Administration Act 1994

Section 141JAA of the Tax Administration Act 1994, which caps some shortfall penalties, has been clarified so it does not apply if the taxpayer makes a disclosure at the time the tax position is taken (that is, a disclosure under section 141H of the Tax Administration Act 1994).

Background

Shortfall penalties can be reduced for different reasons. Under section 141G of the Tax Administration Act 1994 a shortfall penalty is reduced by between 40% and 100% if it is voluntarily disclosed before the beginning of an audit. Under section 141H of the Tax Administration Act 1994 a shortfall penalty for an unacceptable tax position or an abusive tax position is reduced by 75% if the taxpayer makes adequate disclosure of their tax position at the time they take their tax position.

Under section 141JAA of the Tax Administration Act 1994 a shortfall penalty for not taking reasonable care or for taking an unacceptable tax position can be limited to $50,000 if the taxpayer voluntarily discloses their tax position or the Commissioner determines the shortfall, no later than the date that is the later of:

1. the date that is 3 months after the due date of the return to which the shortfall relates; and
2. the date that follows the due date of the return to which the shortfall relates by the lesser of -
   1. 1 return period; and
   2. 6 months.

It was not clear under the previous rules that the limit in section 141JAA was intended to apply only to voluntary disclosures under section 141G and not to disclosures made under section 141H. It was never intended that section 141JAA apply to disclosures made at the time the tax position is taken (under section 141H), because if it applied to these disclosures taxpayers could take tax positions that did not meet the standard of being "about as likely as not to be correct" knowing the maximum penalty they would face would be a penalty of $50,000.

Application date

The amendment applies from 21 December 2010.