Compensation considered for small businesses that are found to be unfairly fined

A recommendation from the Inspector-General of Taxation (IGT) is being seriously considered by the government. The recommendation would see small businesses that have been fined by the Tax Office, and this fine being subsequently found to be incorrect, able to apply for financial compensation.

Minister for Finance and Acting Assistant Treasurer Mathias Cormann said the government will consider proposals contained in a report from the IGT, Ali Noroozi, regarding the Tax Office’s penalty regime.

Financial penalties are just one of the compliance tools available to the Tax Office when either individuals and businesses fail to comply with tax laws, but the IGT report found that small and medium-sized businesses tend to bear the brunt of most fines dished out — which over the 2010-11 to 2012-13 income years totalled $4.25 billion.

Of that total, the IGT found that micro businesses (defined as employing between one and five staff) took the biggest hit, being saddled with $1.4 billion in fines over that period, or 51% of total penalties issued. Small to medium sized enterprises (up to 20 employees, or annual turnover of less than $20 million) were penalised $439.2 million for the same period, or a share of 16%.

By comparison, large businesses were issued with $525.9 million (19%) in tax penalties over the three years, and individuals $349.4 million (13%). Not-for- profit groups made up the remaining 1%.

Noroozi’s report identified that the Tax Office’s reversal of decisions over this period resulted in a 25% reduction in financial penalties, and that these U-turns came about for a number of reasons. The IGT identified many instances where information was not provided to the Tax Office when audits were conducted. The tax officers in these instances had not been able to reliably make the right decision, and when a penalty had been imposed this may not have been explained sufficiently to the business concerned.

The Inspector-General noted a widely-held perception that the Tax Office may have been imposing penalties as a means of ending a dispute, and that the cost to individuals and businesses of questioning a penalty decision, both financially and emotionally, can stifle their decisions to challenge.

“In the case of micro businesses, the penalties may be so large that the company may become insolvent if the penalty amount and the associated tax shortfall are required to be paid,” said Noroozi.

Cormann said in a statement that the government will consider the IGT recommendation relating to whether or not taxpayers should be compensated if they are wrongly penalised. “Given interaction between the penalties regime and the broader system of taxation administration, the government will consider these issues once the tax white paper process has been finalised,” he said.

Of the reasons for being issued with a penalty, “failure to take reasonable care” accounted for the most in financial penalties, and made up 23% of total fines over the three year period of the IGT’s study. Next came “intentional disregard of taxation law” (17%) followed by “failure to provide a document” (14%). The most frequently imposed penalty, but which yields less in financial total (11%), was “failure to lodge”, which was imposed roughly three times more than the most lucrative of the Tax Office’s fines.

Please note that these recommendations have not been implemented at the time of writing.

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