The tax commissioner is not trying to put people out of business. Just make sure you don’t give him the justifiable reasons to do that. By TERRY HAYES of Thomson Legal & Regulatory
By Terry Hayes
The tax office plans to step up its campaign to force small businesses to pay their tax bills with new aggressive strategies, and a recent case before the Administrative Appeals Tribunal (AAT) is a salutary reminder for SMEs not to forget their tax obligations.
And, more importantly, not to get so busy with their businesses that they let a tax deadline slip. The tax office is understanding, but penalties are invariably applied when a tax deadline is missed.
In this case, the tax commissioner originally imposed tax shortfall penalties of 75% on husband and wife taxpayers in relation to their failure to lodge their tax returns for the 2004 income year (which also included a capital gain on the disposal of a property in Queensland), after being requested to do so. As a result, the husband apologised to the tax office for his “tardiness” and explained that:
“Save that I work a normal 10 hour job, have set up three businesses in the last two years and have been travelling overseas trying to set up another business as well as coaching girls basketball at the state championship level in Victoria. Unfortunately, I have little time for sleep, let alone anything else. Once again, I apologise for not getting back to you, and I have this day deposited $50,000 into the ATO bank account as a sign of good faith that I am not trying to avoid my taxation liabilities”.
His wife explained that “I do not have an excuse for such lateness, although I would like to say that I look after three businesses as well as the home and it leaves me little time for much else in life. While this is no excuse I hope that you understand that I have been very busy and not managing my affairs as well as I should”.
The tax commissioner is not unsympathetic, and subsequently exercised his discretion under the tax law to reduce the penalties to 25% following the taxpayers’ above apologies. This reduction resulted in the husband’s tax shortfall penalty being reduced from $60,054.10 to $13,276.43 and his wife’s tax shortfall penalty being reduced from $54,480.65 to $12,359.64. That is a substantial reduction in penalties.
Running several businesses at once is a big call, and it pays to be organised. And being organised includes ensuring that tax affairs are in order. The husband and wife’s explanation and subsequent action in making a substantial deposit towards their tax liabilities was commendable, and clearly accepted by the tax office, but a tax penalty (although reduced) was still applied – the law is, after all, still the law.
However, matters did not end here. The husband and wife took their cases to the AAT and argued for a further reduction in the penalty on the basis that their failure to lodge was due to the fact they were busily occupied with business affairs and were overseas attending to business at the time lodgement was due and that, in any event, they had notified the commissioner they would attend to this on their return (by way of penning a notation on a letter to the commissioner).
However, the AAT ruled that this did not amount to what is known as “special circumstances” under the tax law that warranted a further reduction in the penalty.
In this regard, the AAT stated that it “is not for a taxpayer to disregard a deadline imposed by legislation… on the basis that immediate compliance is inconvenient, and that the necessary formalities will be addressed at a later time more suitable to the taxpayer”.
The tribunal also found that the cursory notation advising the commissioner that the matter would be dealt with on their return, did not amount to a bona fide attempt by the husband and wife to comply with their statutory tax obligations or mitigate any inability to comply.
The husband and wife’s circumstances in this case may well strike a chord with many SME operators: it’s hard enough just to successfully run the business itself without having to worry about other things. But a business operator clearly has to be concerned with other matters – and tax is definitely one of those other matters.
The moral of the story is don’t miss tax deadlines; if this looks likely or possible, make sure you tell the tax office beforehand. It is a large organisation, but can be understanding if given the chance. The tax commissioner not infrequently says he doesn’t try to put people out of business because of their outstanding tax debts, so just make sure you don’t give him the chance (or justifiable reasons) to do that.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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