Reduction of penalty tax: disclosure before tax audit notified

Whether the taxpayer, a process worker, who intentionally does not include some income in the their tax return, is entitled to a reduction in penalty tax under section 226Z of the Income Tax Assessment Act 1936 (ITAA 1936) for a voluntary disclosure.

The taxpayer is entitled to a reduction in penalty tax under section 226Z (ITAA 1936).

The taxpayer is employed as a process worker. The taxpayer is required to perform most of their work at the employer's premises. However, the employer also allows additional work to be carried out by the taxpayer at the taxpayer's home. The taxpayer does the work at home under assumed names so the taxpayer's group certificate only shows the income derived by the taxpayer at the employer's premises. The taxpayer only includes the income shown on the group certificate in the taxpayer's tax return.

The employer is audited, with the focus of the audit being the home work arrangements. While at the employer's premises, the auditor speaks to all the employees collectively and invites the employees to discuss their situation if they would like to do so.

The taxpayer subsequently speaks to the auditor and provides details of the omitted income in a written statement, which identifies the work performed at home by the taxpayer and lists the assumed names used.

An amended assessment is processed to include the income not previously disclosed to the ATO by the taxpayer and penalty tax equal to 75% of the amount of the tax shortfall caused by the taxpayer's intentional disregard of the income tax law is attracted under section 226J (ITAA 1936). The shortfall is in excess of $1,000.

Section 226Z (ITAA 1936) reduces penalty tax otherwise imposed where a taxpayer voluntarily tells the Commissioner in writing about a tax shortfall for a year before the Commissioner has informed the taxpayer that a tax audit relating to the taxpayer will be carried out. Where the shortfall is at least $1,000, the penalty tax is reduced by 80%.

Taxation Ruling TR 94/6 provides guidance on the reduction of penalty tax where there has been voluntary disclosure. Paragraph 7 of Taxation Ruling TR 94/6 states that to qualify for an 80% reduction of the penalty otherwise attracted, the disclosure must be made voluntarily and must be a full and true statement of all the relevant facts that will allow the Commissioner to make a correct adjustment of the taxpayer's assessment. For the purposes of section 226Z (ITAA 1936), the disclosure will be treated as being made voluntarily if it is made before the ATO first makes contact with the taxpayer or taxpayer's representative about an audit into the taxpayer's affairs.

In this case, the taxpayer has provided a full, written statement identifying the omitted income. The taxpayer made this disclosure voluntarily as this statement was made at a time when the taxpayer had not been notified of an audit into the taxpayer's own taxation affairs. Under section 226Z (ITAA 1936) the penalty tax otherwise applied should be reduced by 80%.