The general interest charge (GIC) rate for late payments of tax is worked out by adding 7 percentage points to the base interest rate for that day and dividing by the number of days in the year. The shortfall interest charge (SIC) is calculated similarly, except that only 3 percentage points are added to the base rate and SIC has only applied to amended income tax liabilities from the 2004-2005 and later income years.
On 1 August 2006, the Australian Taxation Office (ATO) issued practice statement PS LA 2006/8, “Remission of shortfall interest charge and general interest charge for shortfall periods".
PS LA 2006/8 sets out a number of general remission guidelines in respect of GIC and SIC. In particular:
- The Commissioner of Taxation may remit all or part of SIC or shortfall GIC where the Commissioner considers it fair and reasonable to do so. In relation to the SIC, the Commissioner must have regard to the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.
- The extent of the remission must take into account the individual circumstances of a case - including the extent to which factors beyond the taxpayer’s control were responsible for the size and duration of the shortfall.
- Remission can be requested by the taxpayer (at any time) or initiated by the Commissioner. The taxpayer’s application should be in writing, describing their circumstances,and the grounds on which the taxpayer relies for remission.
Circumstances where remission may be considered
Remission would not normally be granted where a case involves fraud or evasion.
Circumstances to be considered when determining an application for remission include:
- ATO delay - examples where remission may be appropriate include:
- delays in commencing an audit
- the expected audit completion date is exceeded
- unreasonable delays or periods of inactivity outside the taxpayer's control (generally a full remission of interest charges is warranted if there has been no action on a case for 30 days or more and it was possible for the case to progress during this time)
- ATO delay in obtaining information from a third party
- longer resolution times due to complexity of issues, and
- delays in Large Corporate audits (shortfall GIC and SIC will generally be remitted to the base interest rate for the period that a Large Corporate audit extends beyond 2 years, where the audit commenced after 1 July 2005).
- Taxpayer delay - remission may be appropriate where taxpayer delay has occurred. For example, where:
- the delay is outside of the taxpayer’s control (note however that where the taxpayer unreasonably delays, obstructs or obfuscates the progress of an audit, and the audit is completed beyond the expected audit completion date, remission will not generally be warranted), or
- the taxpayer requests further time, for example a request for a deferment of action during an audit (note however that if the taxpayer's delay is due to the delay of a taxpayer's associate or agent, remission will not usually be given).
- Claims for legal professional privilege or access to professional advisers’ working papers - Taxpayers may seek advice from professional advisers on issues such as the application of legal professional privilege to certain documents or the right of access to professional accounting advisers’ working papers. If reasonable claims lead to the case being completed beyond the expected audit completion date, interest charges would generally be remitted to the base rate for the period that goes beyond that completion date.
- Unprompted voluntary disclosure - where a taxpayer makes a voluntary disclosure of a shortfall, the disclosure itself is not a ground for routine remission. However, there may be some cases where the circumstances surrounding the voluntary disclosure will make it fair and reasonable to remit interest charges.
- Advance payment of shortfall amount - paying the shortfall amount before the issue of an amended assessment does not stop SIC accruing. However, the SIC for the period after full payment will be remitted in full, subject to any interest the taxpayer may be entitled to under the Taxation (Interest on Overpayments and Early Payments) Act 1983.
- Tax shortfall offset by related credit - where the tax shortfall on which the SIC was imposed is offset by a related credit or overpayment, for example on an associated taxpayer’s account, it may be reasonable to remit the interest charges to the base rate.
- Cost of administration - remission may be appropriate where the amount of interest charge is minimal.
- Reliance on ATO advice or general administrative practice - a taxpayer will be protected under the law from the GIC or the SIC that relates to a shortfall if:
- the taxpayer relies in good faith on advice given to them or their agent by the Commissioner or a statement in a publication approved in writing by the Commissioner, unless the advice or the statement or publication is labelled as non-binding, or
- the taxpayer relies in good faith on the Commissioner’s general administrative practice.
- Reliance on ATO Interpretative Decisions (ATO IDs) - in certain circumstances where a tax shortfall arises as a result of a taxpayer having reasonably relied in good faith on an ATO ID by applying it to their own circumstances (which are not materially different from those described in the ATO ID) and that ATO ID is later found to be incorrect, interest charges are not imposed for the period up until 21 days after the Commissioner notifies the taxpayer of the correct position.
- Reliance on subsequently overturned judicial interpretation - where a taxpayer prepares a return or activity statement having regard to a decision of an independent tribunal or a Court and, subsequent to lodgement of the return or activity statement, a Court of higher authority overturns that decision, resulting in an unexpected tax shortfall, interest charges will be remitted in full, provided certain requirements are satisfied.
- Taxpayer could not have been aware of shortfall when lodging return - a tax shortfall may arise because when the taxpayer lodged their original return or activity statement, they did not know and could not have known that a shortfall would arise. It may be appropriate to grant full remission of interest charges related to the shortfall, usually on the condition that appropriate amendment requests are lodged within a reasonable time after the need to amend arises.
- Change or potential change in legislation with retrospective effect - in relation to income tax, where a tax shortfall arises as a result of a change in legislation which has retrospective effect, interest charges will be remitted in full for taxpayers who actively seek to amend their returns within a reasonable time after the enactment of the new law that increases their tax liability. If the taxpayer does not lodge an amendment request within a reasonable time, then interest charges will apply from 28 days after the amending law receives Royal Assent.
Immediate opportunity for SIC remission from 1 July 2005
As SIC only applies to amended income tax liabilities for the 2004-2005 and later income years, shortfalls in respect of other taxes, and shortfalls that relate to income tax liabilities for income years 2000-2001 to 2003-2004 will continue to attract GIC from the original due date for payment.
However, the Commissioner’s position in relation to the application of the GIC and SIC has received greater clarity. In particular, the application of GIC and SIC to income tax shortfalls for the 2003-2004 and earlier income years has been addressed. PS LA 2006/8 allows for a partial remission of GIC incurred from 1 July 2005 in relation to 2003-2004 and earlier year income years. It states that for income tax shortfalls for the 2003-2004 and earlier income years it would be fair and reasonable to remit any GIC (approximately 12.6 per cent) incurred from 1 July 2005 to the day before the amended assessment is issued to the SIC rate (approximately 8.6 per cent).
The example in the Practice Statement provides a good indication of how this should operate:
“Example: An amendment to Service Pty Ltd's 2002-2003 income tax assessment issues on 15 March 2006. Shortfall GIC accrues from 1 December 2003.
The GIC would be remitted by 4 percentage points for the period from 1 July 2005 to 14 March 2006. This will equate the GIC for that period to the SIC rate. Further remission during the shortfall period may occur if some other circumstance exists which would warrant further remission in accordance with the guidelines contained in this practice statement."
Since the Practice Statement has effect from 1 July 2005, there is an opportunity, when reviewing amended assessments or drafting penalty submissions, to ensure that GIC is not incurred by the taxpayer at greater than the SIC rate for periods after 1 July 2005 to the day before the amended assessment is issued.
For further information, please complete the following form, or contact:
Michael Bersten, Partner
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 2 8266 6858
Edwina McLachlan, Director
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 2 8266 4930
Daniel McInerney, Senior Associate
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 3 8603 5625
