Penalty tax and voluntary disclosure

Where the Commissioner has informed the taxpayer of a failure to return income, will the subsequent advice from the taxpayer of the amount of income omitted be treated as a voluntary disclosure for the purposes of making an assessment of additional tax payable under subsection 227(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No, where the Commissioner has informed a taxpayer of a failure to return income, the subsequent advice from the taxpayer quantifying the income omitted will not be treated as a voluntary disclosure.

The taxpayer had an interest in a property that returned rental income until the lease terminated in the income year ended 30 June 2000. A capital gain was made on the sale of the taxpayer's interest in the property in the income year ended 30 June 2000.

The taxpayer objected to the amount of net capital gain included in the taxpayer's assessable income for the income year ended 30 June 2000. In considering the objection, the Commissioner determined that no rental income was returned. The taxpayer was requested to provide the details of the net rental income received from the property, which was subsequently disclosed to the Commissioner.

The taxpayer sought to have the disclosure of income received in these circumstances treated as a voluntary disclosure. The reason provided for the omission of income was that the taxpayer's former tax agent failed to return that income even though that agent had all the necessary information available.

Broadly, a tax shortfall is the difference between the tax properly payable by a taxpayer and the lowest amount of tax that would have been payable by the taxpayer if it were assessed on the basis of the taxpayer's income tax return. Additional tax is calculated under the shortfall provisions contained in Part VII of the ITAA 1936.

The omission of the rental income in the taxpayer's income tax return for the income year ended 30 June 2000 was discovered whilst the Commissioner was considering the taxpayer's objection on a separate issue. The taxpayer accepts that the general interest charge is payable on the omitted income, but considers the advice quantifying the rental income omitted is a voluntary disclosure and should not be subject to a penalty for the resulting shortfall.

In the circumstances where a tax agent was aware that a taxpayer was in receipt of rental income, the omission of that income is considered a failure to exercise reasonable care (paragraphs 14(a), 14(d), 14(e) and 14(k) of Taxation Ruling TR 94/4). Where a tax shortfall or part of it was caused by the failure of the taxpayer or a registered tax agent to take reasonable care to comply with the ITAA 1936 or the regulations, the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part (section 226G of the ITAA 1936).

Taxation Ruling TR 94/6 outlines the Commissioner's policy on voluntary disclosures for the purpose of administering penalties in respect of tax shortfalls.

The term 'voluntary' is not defined in the legislation. Its normal meaning implies an act done without prompting, persuasion or compulsion. A disclosure will be treated as having been made voluntarily if it is made without having been prompted by action from the Commissioner.

In this case, the tax shortfall was discovered by the Commissioner in the course of deciding the taxpayer's objection. There was no intention on the part of the Commissioner to conduct an audit to quantify the rental income omitted. The amount of the omitted income was to be determined directly from the taxpayer. Therefore, section 226Z of the ITAA 1936 cannot be applied to reduce the penalty tax.

When advised that no rental income had been returned, the taxpayer expeditiously confirmed that an omission occurred, and in time provided advice quantifying the rental income omitted. As the advice was received after the Commissioner notified the taxpayer of the omission, the receipt of that advice is not considered to be a voluntary disclosure.

However, due to the level of cooperation and assistance by the taxpayer in quantifying the rental income omitted, a 20% reduction in the penalty otherwise attracted is considered appropriate. A significant amount of time and resources that would otherwise be required to determine the amount of the omitted income was saved as a result of the taxpayer's cooperation and assistance. Therefore, the penalty is to be reduced from 25% to 20%.