Penalty tax for intentional disregard

Whether the taxpayer, who alters invoices to claim false deductions for work related expenses, is subject to penalty tax under section 226J of the Income Tax Assessment Act 1936 (ITAA 1936) for intentional disregard of the income tax law?

The taxpayer is subject to penalty tax under section 226J (ITAA 1936).

The taxpayer makes substantial claims for work related car expenses in the taxpayer's tax return. Subsequently the taxpayer is audited in relation to these claims. During the course of the audit the auditor discovers that some of the invoices appear to be for work not associated with the taxpayer's vehicle type. A check with the service provider shows that the work was actually done on another vehicle and that the details on the invoices provided by the taxpayer have been altered. When confronted with this information, the taxpayer admits to altering the invoices in order to make a larger claim.

The taxpayer's assessment is amended to disallow the overclaimed deductions 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).

Section 226J (ITAA 1936) imposes penalty tax on a taxpayer if they have a tax shortfall caused by their intentional disregard of the ITAA 1936 or regulations. Taxation Ruling TR 94/4 provides guidelines on when this provision is to apply. To find that a taxpayer has shown intentional disregard requires a finding that the taxpayer has consciously decided to disregard clear obligations imposed by the income tax law. This may be based on direct evidence, such as an admission by the taxpayer, or may be inferred from all the facts and circumstances surrounding the taxpayer's behaviour: paragraph 8 of Taxation Ruling TR 94/4.

In this case, the taxpayer has admitted to altering the invoices to make a larger claim for work related car expenses. The taxpayer is aware of the obligations imposed by the ITAA 1936 and Income Tax Assessment Act 1997 that must be met to claim a legitimate deduction and has deliberately chosen to over-claim the deduction. Accordingly, the imposition of penalty tax under section 226J (ITAA 1936) is warranted.