Income tax: tax shortfall penalties: calculation of a tax shortfall and allocation of additional tax

This Ruling outlines the general basis on which additional tax should be calculated under sections 226G, 226H, 226J, 226K, 226L and 226M (the shortfall sections) of the Income Tax Assessment Act 1936 (ITAA).

Additional tax under the shortfall sections is calculated in respect of a tax shortfall or part of a tax shortfall. While a tax shortfall is broadly the gross difference between the tax properly payable by a taxpayer and the tax that would have been payable by the taxpayer if it were assessed on the basis of the taxpayer's return, a tax shortfall will frequently need to be split into its component parts to determine the correct application of the shortfall sections.

The examples below illustrate the calculations to be followed in applying shortfall sections. The examples recognise that in the course of an audit a tax officer may detect a number of items that require adjustment, some of which may warrant penalty, some of which may not. In addition, there may be adjustments made in a taxpayer's favour which may or may not relate to the debit adjustments made. Further, the adjustments may be to income, deductions, rebates, foreign tax credits or offsets of franking deficit tax.

The basic rule is that if there is not a tax shortfall for a year then additional tax cannot be imposed. For example, if a taxpayer has omitted an amount of income, but the tax related to that matter is more than offset by an adjustment in the taxpayer's favour (whether or not related to the omitted income), no additional tax would be payable. Accordingly, the examples below only cover situations where, after the various adjustments to the taxpayer's assessment, there is a tax shortfall. Although all of the examples assume that the taxpayer was taxable to start with, the same principles for calculating penalty would apply where a taxpayer had originally returned a loss, provided there was in fact a tax shortfall after all adjustments had been made.

The examples below are assumed to be in respect of assessments for the 1992-93 year of income for a resident individual taxpayer. The principles illustrated apply equally to the calculation of penalty under the shortfall sections for other kinds of taxpayers.

This Ruling (that is, the final Taxation Ruling based on this Draft Taxation Ruling) sets out the current practice of the Australian Taxation Office and is not concerned with a change in interpretation. Consequently, it applies from the date on which the shortfall sections commenced to operate.

The examples below are based around combinations of the following income/rebate/credit adjustments: TAXABLE INCOME AS RETURNED / ASSESSED (TIAR/A) 35,000 INCOME MISSTATEMENT NO. 1 (caused by recklessness - penalty 50%) (IM NO.1) 1,000 INCOME MISSTATEMENT NO. 2 (caused by lack of reasonable care - penalty 25%) (IM NO.2) 2,000 INCOME MISSTATEMENT NO. 3 (not culpable - no penalty) (IM NO.3) 500 INCOME MISSTATEMENT NO. 4 (OVERSTATEMENT OF INCOME UNRELATED TO OTHER MISSTATEMENTS) (UIM) (300) REBATE/CREDIT MISSTATEMENT NO. 1 (caused by recklessness - penalty 50%) (R/C NO.1) 500 REBATE/CREDIT MISSTATEMENT NO. 2 (caused by lack of reasonable care - penalty 25%) (R/C NO.2) 1,000 REBATE/CREDIT MISSTATEMENT NO. 3 (UNDERSTATED REBATE/CREDIT UNRELATED TO OTHER REBATE/CREDIT MISSTATEMENTS) (UR/C) (400)