Deductions - tax shortfall penalty

Can a taxpayer claim a deduction for a tax shortfall penalty paid during the income year, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Tax shortfall penalties are not incurred in gaining or producing assessable income. In addition, section 26-5 of the ITAA 1997 specifically disallows deductions for penalties of any kind.

The taxpayer's amended assessment for a previous year includes amounts in respect of a tax shortfall penalty.

The amended assessment is paid during the current income tax year.

An amount may be deductible under section 8-1 of the ITAA 1997 where a taxpayer incurs the expense or loss: (a) in gaining or producing assessable income, or (b) where it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

A tax shortfall penalty is incurred when a taxpayer omits income or overclaims deductions, rebates or tax offsets in a particular year. It is directly attributed to the taxpayer's actions when completing their income tax return. A tax shortfall penalty can be characterised as a penalty in relation to the taxpayer's actions rather than to their income producing activities.

A deduction in respect of a tax shortfall penalty is therefore not available under section 8-1 of the ITAA 1997.

In addition to this, section 26-5 of the ITAA 1997 states: 'You cannot deduct under this Act: (a) An amount (however described) payable, by way of penalty, under an *Australian law or a *foreign law; or (b) An amount ordered by a court to be paid on the conviction of an entity for an offence against an *Australian law or a *foreign law.'

Penalties of any kind are not deductible. It does not matter whether those penalties were specifically incurred in order to gain or produce assessable income.