5 things to know about failing to lodge tax returns: Tax Law Update
Many people fail to lodge their tax returns or business activity statement (BAS) because they can’t afford to pay their tax debt. Unfortunately, this can often make things worse, as you may end up with a criminal conviction for not lodging or a large tax debt that has accumulated interest from the day the original returns were due. As we approach the end of financial year, we are receiving more questions regarding taxation law and lodging tax returns. We have compiled our list of five things to know about failing to lodge tax returns.
Do I need to lodge a tax return?
You must lodge a tax return if you have earned Australian income in the last financial year. If you have not worked or received any income that year or earned less than the tax free threshold, you still need to tell the ATO in the form of a “Non-Lodgment Advice”. This document explains to the ATO that you don’t need to lodge this year and ensures they don’t list you as having an outstanding return which still needs to be lodged. If you don’t file a non-lodgment advice, the ATO will assume you need to lodge and may take compliance action to force you to lodge.
What if I can’t afford to pay overdue tax?
Even if you don’t have the money in your bank account, it’s easiest to get your tax returns up to date now, rather than later. The ATO can be reasonable about payments on overdue taxes if you get your tax returns lodged accurately and honestly.
It is also important to note that depending on the reasons for lodging your returns late, you may be able to get a remission of the interest and penalties that the ATO charge you with. These amounts can be significant, so it is worthwhile speaking to a taxation lawyer to see if you can get a reduction. In some situations, you may also be able to negotiate a complete release of the debt, or a payment plan to allow you to pay the debt over time.
What are the penalties for failing to lodge a tax return?
The ATO will impose a Failure to Lodge (FTL) penalty on you where your tax return is not lodged by the due date. However, generally the ATO doesn’t apply penalties in isolated cases of late lodgement. The ATO will warn you by phone or in writing if you’ve failed to lodge a tax return. If they choose to apply the FTL penalty they’ll also send a penalty notice stating the amount and due date of the penalty.
If you miss the deadline, the FTL penalty is calculated at the rate of one penalty unit for each period of 28 days or part thereof that the document is overdue, up to a maximum of five penalty units. The value of a penalty unit is currently $180 and the maximum penalty which can be applied for an individual is $900. It is important to note that from 1 July 2017, the value of a penalty unit will increase to $210, and so the maximum penalty will rise to $1050.
The FTL penalty calculation applies for small businesses only. Taxpaying businesses classed as medium (assessable income of more than $1 million and less than $20 million) will have the fine doubled, and entities classified as large (assessable income over $20 million) will have their fine multiplied by five.
Where a penalty is applied, the ATO will sometimes remit where it is ‘fair and reasonable to do so’ for example, in the event of natural disaster or serious illness.
Can I have a criminal conviction for failing to lodge a tax return?
Failure to lodge a tax return is an offence under section 8C of the Taxation Administration Act 1953. There is a possibility that you could be prosecuted for criminal charges under this section for the failure to lodge a tax return. Charges under this offence are serious and are usually only undertaken for severe tax-related fraud offences. Where taxpayers are charged, a criminal conviction can still be avoided and a bond (usually requiring the payment of money) imposed instead if:
- The taxpayer’s lodgments are brought completely up to date prior to the case being heard by the court; and
- Evidence is able to be obtained which would persuade the Court that a conviction is not warranted and that a bond should be imposed instead. This may involve the commissioning of a report from a forensic psychologist setting out any mental health issues which may have prevented the taxpayer from attending to their affairs or which made doing so difficult.
If you have been served with a summons to attend Court for not lodging tax returns, you should seek legal advice from a tax lawyer due to the strict consequences of these offences. The maximum penalties for these charges are:
- Maximum penalty for a first offence: $3400
- Maximum penalty if previously convicted of a relevant offence: $4400
- Maximum penalty if previously convicted of 2 or more relevant offences: Imprisonment for 12 months and/or a fine of $5500
What is a default assessment?
Where a taxpayer has an overdue lodgment obligation, particularly where the failure to lodge encompasses several years-worth of returns, the ATO can issue the taxpayer with one or more default assessments. This is an estimated assessment of the taxpayer’s income, based on data held by the ATO about the taxpayer or similar taxpayers. As these are estimations, they are rarely correct and often show a higher tax liability than the taxpayer actually owes since they often don’t take into account items like deductions. Taxpayers are able to appeal a default assessment but they must be able to show what their actual tax liability was.
Before a default assessment is issued, the ATO will send a default assessment warning letter to the taxpayer, or their registered agent, that includes:
- Details of the default assessment; and
- The date the overdue obligation needs to be lodged by to avoid being issued a default assessment.
If the overdue obligation is not lodged by the date stated in the default assessment warning letter, the ATO will then issue the default assessment.
- If you have a late tax return, lodge it as soon as possible to avoid interest and penalties accumulating;
- If your tax return is late, speak to a taxation lawyer to see if you are eligible to get a remission of the interest and penalties that the ATO charge you with;
- Be aware that there is a possibility that you could be prosecuted for criminal charges for failure to lodge a tax return;
- Keep on top of any correspondence from the ATO. Warning letters, such as default assessment warning letters, are sent to prevent serious action being taken against you; and
- If you’re unsure on whether you have any unlodged tax returns, call the ATO on 13 28 61.