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When is a penalty for failing to withhold imposed on an entity under section 16-30 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

The penalty under section 16-30 of Schedule 1 to the TAA is imposed at the time the entity failed to withhold from the payment.

After 1 July 2000 an entity makes a payment to another entity from which an amount was required to be withheld under Division 12 of Schedule 1 to the TAA.

The ATO commenced an audit of the payer's affairs.

The Commissioner identified that the payer had failed to withhold from the payment and notified the payer of the liability to a penalty.

With effect from 1 July 2000, an entity that fails to withhold an amount as required by Division 12 of Schedule 1 to the TAA is liable to pay to the Commissioner a penalty equal to that amount under section 16-30 of Schedule 1 to the TAA.

The current section 16-30 was inserted by Tax Laws Amendment (2006 Measures No. 2) Act 2006 (TLA 2006), replacing the former section 16-30 with effect from 22 June 2006. The TLA 2006 also extended the application of the machinery provisions for administrative penalties in Subdivision 298-A of Schedule 1 to the TAA to penalties imposed under Division 16 of Schedule 1 to the TAA.

The amendments mean that with effect from 22 June 2006, section 298-10 of Schedule 1 to the TAA requires the Commissioner to give written notice of the penalty and section 298-15 of Schedule 1 to the TAA sets the due date for payment of the penalty as the date specified in the notice. This date must be at least 14 days after the notice is given. Prior to the amendments, the due date for payment of the penalty was set by former subsection 16-30(2) of Schedule 1 to the TAA as the time the entity was required to pay to the Commissioner the amount it should have withheld.

The issue for consideration is whether the amendments change the time at which the penalty is imposed.

Section 16-30 of Schedule 1 to the TAA is a self-executing provision. This means that the liability to penalty arises when the condition outlined in the provision is satisfied, that is, when the failure to withhold occurs.

Support for the view that the penalty is imposed at the time when the failure to withhold occurred can be found in Madera v. Federal Commissioner of Taxation [2004] FCA 1616 (Madera) . In Madera, the Court was required to determine if a taxpayer who had been notified of a penalty under section 16-30 of Schedule 1 to the TAA was entitled to a statement of reasons. The Commissioner claimed that section 16-30 of Schedule 1 to the TAA was a self-executing provision and that liability arose when the conditions referred to in the provision were satisfied. The Commissioner also claimed that the process of notification did not involve any decision "under an enactment" that is reviewable under the Administrative Decisions (Judicial Review) Act 1977. The Court agreed with these views.

Although the amendments made by TLA 2006 require the Commissioner to notify the entity of the liability to penalty and set a due date for payment from that notification, the amendments did not change the self executing nature of the section. Both before and after 22 June 2006, the penalty is imposed when the failure to withhold occurs. The requirement to notify the entity of the liability is a separate obligation of the Commissioner.