Administration of penalties and interest charges in relation to the notional liabilities of the States

The Commissioner's view on whether and how the uniform penalty regime in Part 4-25 of Schedule 1 to the Taxation Administration Act 1953 (TAA) and interest charges apply to the Commonwealth, States and Territories is contained in MT 2011/1.

For a period before the Commissioner's view was expressed in MT 2011/1, the Commissioner placed a moratorium on the application of penalties and interest charges in relation to net amounts [1] of State and Territory entities that share the immunities of the Crown. The moratorium ceases from the date of publication of this practice statement.

Before the moratorium, the Commissioner did not apply penalties on State and Territory entities that shared the immunity of the Crown. However, interest charges were applied in accordance with normal practice and policy.

In summary, the Commissioner's view in MT 2011/1 is: • The Crown in right of the Commonwealth and untaxable Commonwealth entities: [2] (i) can only have notional liabilities [3] (ii) cannot be liable to penalties in relation to its notional liabilities, and (iii) cannot be liable to interest charges due to the specific exemptions in subsection 8AAB(3) of the TAA (for the general interest charge (GIC) and subsection 280-103(2) of Schedule 1 to the TAA (for shortfall interest charge (SIC)). • The Crown in right of the States and State government bodies: (i) can have both legal and notional liabilities [4] (ii) can be liable to penalties and interest charges in relation to legal liabilities, and (iii) cannot be liable to penalties and interest charges in relation to notional liabilities. [5] • The Crown in right of the Australian Capital Territory (ACT) and Northern Territory (NT) and government bodies of the ACT and NT: (i) have and can have only legal liabilities, [6] and (ii) can be liable to penalties and interest charges in relation to legal liabilities.

This practice statement applies: • to returns, activity statements or other documents in an approved form under a taxation law that are lodged on or after the date of issue of this practice statement, in relation to tax periods to which the views in MT 2011/1 apply. [7] • to amendments, revisions and voluntary disclosures that are made or lodged on or after the date of issue of this practice statement in respect of those returns, activity statements or other documents which relate to tax periods to which the views in MT 2011/1 apply.

This practice statement provides guidance on: (i) how the Commissioner will administer shortfall penalties in circumstances where the underlying liability of a State may be notional or legal, and (ii) how the Commissioner will administer the interest charges in those same circumstances.

This practice statement does not apply to: • the NT, the ACT or their bodies because, apart from National Tax Equivalent Regime (NTER) liabilities, the liabilities of the NT and the ACT will always be legal liabilities [8] • government related entities that are not part of a State for the purposes of section 114 of the Constitution [9] because the liabilities of those entities are always legal liabilities • the Commonwealth or untaxable Commonwealth entities because all of the Commonwealth's liabilities are notional liabilities, [10] and • liabilities arising under the NTER because all NTER liabilities are notional liabilities.

This practice statement does not address notional penalties and notional interest charges which may be payable by a State body pursuant to State law.

This practice statement does not address the remission practices for the penalty regime. The ATO remission practices for various sections of the penalty regime are set out in Law Administration Practice Statements including PS LA 2000/9, PS LA 2002/8, PS LA 2005/2, PS LA 2007/3, PS LA 2007/4, PS LA 2011/2, PS LA 2011/19 and PS LA 2012/5.

This practice statement does not address the remission practices for GIC imposed under section 8AAG of the TAA and SIC under section 280-160 of Schedule 1 to the TAA. The ATO policy on the remission of these interest charges is set out in PS LA 2006/8 and PS LA 2011/12.

In this practice statement, unless otherwise stated: • all legislative references are to Schedule 1 to the TAA • a reference to a 'State' is a reference to entities which form part of the State for the purpose of section 114 of the Constitution • 'legal liability' refers to a liability that arises under a 'taxation law' and is imposed under the relevant imposition Act • 'shortfall penalty' refers to the provisions in Part 4-25 of Schedule 1 to the TAA where a liability to a statement penalty arises where there is a shortfall amount. Penalties imposed where there is no shortfall amount are not within the scope of this practice statement [11] • 'notional liability', refers to any amounts that are the notional equivalent of tax that would have arisen under a taxation law and imposed under the relevant imposition Act, and • 'uniform penalty regime' refers to the scheme of uniform administrative penalties in Part 4-25 of Schedule 1 to the TAA.

The shortfall penalty provisions apply in relation to the legal liabilities of a State. The shortfall penalty provisions cannot apply to a State to the extent that the underlying tax liability is a notional liability. [12]

Similarly, a State is liable to interest charges to the extent that its underlying tax liability is a legal liability and not to the extent that the underlying tax liability is a notional liability.

If there is a question whether a particular liability is notional to some extent, and the circumstances give rise to consideration of the shortfall penalty provisions and interest charges, the State may tell the Commissioner the amounts which it considers are the notional and the legal liabilities. This may occur at any time including at the time of lodgment or revision.

The Commissioner will consider any such information consistently with the general principles of self-assessment. So, if an entity states that it has determined that it is part of the State for the purposes of section 114 of the Constitution and that a specified amount is in respect of a notional liability, the Commissioner will ordinarily accept this statement. It would ordinarily not be necessary for the Commissioner to inquire further.

However, as for any other matter that is subject to self-assessment, the Commissioner may inquire further in relation to whether the entity is part of the State for the purposes of section 114 of the Constitution or whether a liability has been correctly determined to be a notional liability. The Commissioner will seek to resolve any such issue co-operatively with the State entity.

In considering whether a particular transaction is a 'tax on property' of a State for the purpose of section 114 of the Constitution, if the transaction does not clearly fall within a category of transactions identified one way or the other in MT 2011/1, [13] case officers must escalate the issue to the Interpretative Advice area within their business line for consideration and further escalation as required.

Taxpayers may be liable to a penalty for failing to satisfy certain obligations under different taxation laws for which the Commissioner has general administration.

More specifically, Division 284 provides for liability to penalty in certain situations where a taxpayer makes a statement which results in a 'shortfall amount'. The table in subsection 284-80(1) sets out the situations in which an entity has a 'shortfall amount'. For an entity to have a 'shortfall amount', subsection 284-80(1) requires the entity to have a tax-related liability. A 'tax-related liability' is defined in section 255-1 as: a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not due and payable)

Section 114 of the Constitution prevents the Commonwealth from imposing tax on the property of a State. [14] However, a State entity may, under a State law or from other directions, pay to the Commissioner the notional equivalent of what would have been payable under a taxation law but for the operation of section 114 of the Constitution. This amount is a notional liability and is not a 'tax-related liability' for the purposes of section 255-1 of Schedule 1 to the TAA.

However, a State entity is legally liable to pay a liability that is assessed under a taxation law, and that is imposed under the relevant imposition Act because section 114 of the Constitution does not preclude its imposition. These liabilities are legal liabilities and are 'tax-related' liabilities for the purposes of section 255-1 of Schedule 1 to the TAA. Hence, a State entity can have both legal liabilities which are tax-related liabilities and notional liabilities which are not tax-related liabilities.

It follows that certain penalties under Division 284 cannot apply to any shortfall amount of a notional liability as it is not a 'tax-related liability'. A State entity is only liable to penalty on a shortfall amount relating to their legal liability. The penalty amount is determined in accordance with the relevant section in Division 284.

The GIC and SIC are imposed automatically by operation of the law. [15] However, GIC and SIC only apply in respect of a legal liability of a State entity and not in respect of a notional liability.

To enable the Commissioner to efficiently administer the position outlined above, where shortfall penalty and interest charges may apply, the State entity may provide additional information advising: (a) the entity's status as part of the State for the purposes of section 114 of the Constitution, and (b) a statement detailing the legal and notional liabilities that make up the total liability for the relevant reporting period.

This information should be provided in circumstances including, but not limited to: (a) an activity statement or return being revised (including self revision, request for revision lodged with the ATO, and revision as a result of compliance activity), or (b) the State entity failing to pay the tax liability as it falls due.

The State entity may provide this information at any time, for example, when lodging an original or revised activity statement or return, lodging a revision request or when they are advised that interest charges have been applied.

The Commissioner will consider any such information consistently with the general principles of self-assessment. So, if an entity states that it has determined that it is part of the State for the purposes of section 114 of the Constitution and that a specified amount is in respect of a notional liability, the Commissioner will ordinarily accept this statement. It would ordinarily not be necessary for the Commissioner to inquire further.

If the State entity does not provide information as detailed in paragraph 25 of this practice statement, it is ordinarily reasonable for the Commissioner to conclude that the State entity has turned their mind to the nature of the tax liability and the State entity has determined that the entire amount reported for the period relates to a legal liability.

Similarly, where the State entity provides information in respect of a notional liability only, it is also ordinarily reasonable for the Commissioner to conclude that the State entity has turned their mind to the nature of the total tax liability and the State entity has determined that any remaining portion of the total liability remaining after the notional liability is deducted relates to legal liabilities. The Commissioner will apply the usual practices to determine the penalty amount and interest charges to those legal liabilities.

However in any of the circumstances covered in paragraphs 26 to 29 of this practice statement, as for any other matter which is the subject of self-assessment, the Commissioner may inquire further in relation to whether the entity is part of the State for the purposes of section 114 of the Constitution or a liability has been incorrectly determined to be a notional liability. The Commissioner will seek to resolve any such issue co-operatively with the entity.

Where both the Commissioner and the State entity are not able to accurately establish the amounts of the liabilities that are legal and notional respectively, the Commissioner may agree with the State entity on a reasonable estimate of the parts of the liabilities that are legal and notional liabilities.

In considering whether a particular transaction is a tax on property of a State for the purpose of section 114 of the Constitution, if the transaction does not clearly fall within a category of transactions identified one way or the other in MT 2011/1, [16] case officers must escalate the issue to the Interpretative Advice area within their business line for consideration and further escalation as required.

On 15 September 2010, State entity A lodged an activity statement for the monthly tax period ended 31 August 2010 reporting an amount payable of $175,000. The amount payable consists of the following: GST payable on taxable supplies (legal liability) $ 80,000 GST payable on taxable supplies (notional liability) 120,000 Input tax credits ( 25,000) Amount payable $175,000

State entity A paid $175,000 on 25 November 2010.

As a monthly taxpayer, the amount payable for the tax period ended 31 August 2010 was due on 21 September 2010. As State entity A paid its net amount after the due date, it is liable to pay GIC but only to the extent of its legal liability. The GIC is payable on the amount of $55,000 which is the amount payable for the period excluding its notional liability.

State entity B lodged an activity statement for the tax period ended 30 September 2010 reporting an amount payable of $70,000 which consists of the following: GST payable on taxable supplies (legal liability) $ 20,000 GST payable on taxable supplies (notional liability) 100,000 Input tax credits ( 50,000) Amount payable $ 70,000

Subsequently, State entity B revised its activity statement and increased the amount payable to $80,000 as follows: GST payable on taxable supplies (legal liability) $ 30,000 GST payable on taxable supplies (notional liability) 100,000 Input tax credits ( 50,000) Amount payable $ 80,000

State entity B may be liable to a penalty under section 284-75 and GIC. The amount of notional GST payable on taxable supplies is disregarded for the purposes of determining whether there is a shortfall amount. This is because a notional liability is not a tax-related liability which forms the basis for working out a shortfall amount under subsection 284-80(1). GST payable (legal liability) Input tax credit Net amount Original statement 20,000 50,000 (30,000) Revised amounts 30,000 50,000 (20,000) Shortfall amount 10,000

State entity C lodged an activity statement for the tax period ended 30 June 2010 reporting an amount payable of $85,000 which consists of the following: GST payable on taxable supplies (legal liability) $65,000 GST payable on taxable supplies (notional liability) 50,000 Input tax credits ( 30,000) Amount payable $85,000

Subsequently, State entity C revised the activity statement and increased the amount payable to $95,000 as follows: GST payable on taxable supplies (legal liability) $35,000 GST payable on taxable supplies (notional liability) 80,000 Input tax credits ( 20,000) Amount payable $95,000

State entity C is not liable to a penalty under section 284-75(1) and GIC because it does not have a shortfall amount. This is because a notional liability is not a tax-related liability and the notional liability component is disregarded in determining whether there is a shortfall amount. GST payable (legal liability) Input tax credit Net amount Original statement 65,000 30,000 35,000 Revised amounts 35,000 20,000 15,000 Shortfall amount nil

State entity D lodged an activity statement for the tax period ended 31 March 2010 reporting an amount payable of $225,000 which consists of the following: GST payable on taxable supplies (legal liability) $200,000 GST payable on taxable supplies (notional liability) 55,000 Input tax credits ( 30,000) Amount payable $225,000

Subsequently, State entity D revised the activity statement and increased the amount payable to $295,000 as follows: GST payable on taxable supplies (legal liability) $200,000 GST payable on taxable supplies (notional liability) 125,000 Input tax credits ( 30,000) Amount payable $295,000

State entity D is not liable to a penalty under section 284-75 because the amount of the revision relates to its notional liability only.

State entity E lodged an activity statement for the tax period ended 30 June 2010 reporting a net refund of $35,000 which consists of the following: GST payable on taxable supplies (legal liability) $ 10,000 GST payable on taxable supplies (notional liability) 55,000 Input tax credits ( 100,000) Amount payable ($ 35,000)

Subsequently, State entity E revised the activity statement and decreases its net refund to $5,000 as follows: GST payable on taxable supplies (legal liability) $ 10,000 GST payable on taxable supplies (notional liability) 55,000 Input tax credits ( 70,000) Amount payable ($ 5,000)

State entity E may be liable to a penalty under section 284-75 and GIC on the shortfall amount that resulted from its claim for input tax credit that is more than it was entitled to. The notional amount is disregarded for the purposes of determining whether or not there is a shortfall amount. GST payable (legal liability) Input tax credit Net amount Original statement 10,000 100,000 (90,000) Revised amounts 10,000 70,000 (60,000) Shortfall amount $30,000