Tax Institute warns of 35% spike in late lodgement penalties

The institute is warning tax practitioners and their clients, failure to lodge penalties is set to increase by more than 35 per cent within the next eight months, which with high inflation and rising costs of living is something that many could not afford.

In the federal budget, the government announced it would increase federal penalty units from $222 to $275 from 1 January 2023. This is set to be indexed on 1 July 2023 based on the last three years in line with inflation. The bill to give effect to this was introduced this week.

Scott Treatt, CTA, general manager, tax policy & advocacy at The Tax Institute, said the high inflation environment of the last three years means the legislated indexing could see penalties for late lodgement spike by over 35 per cent from the current level to over $300 per penalty unit.

“That’s a significant increase, which will come into effect from 1 July 2023, just six months after this latest increase,” he said.

The penalty unit is applicable across a broad range of laws, most appropriately, crimes, where it is necessary to act as a deterrent. For tax purposes, it is applicable to a failure to lodge, among other things.

Automated failure to lodge penalties may be applied to late-lodged returns, reports, and statements, including activity statements, tax returns, fringe benefits tax returns, PAYG withholding annual reports, Single Touch Payroll reports, annual GST returns and information reports, and taxable payment annual reports.

Mr Treatt said there are many reasons why taxpayers may be late in lodging their tax return such as being impacted by a natural disaster or serious illness.

“In some cases, such as criminal activity and the deliberate avoidance of tax obligations, steep penalties may be appropriate,” he said.

“For taxpayers who simply lodge a little late, it’s a significant cost. The Commissioner retains and exercises the power to waive penalties in certain cases. For taxpayers that means understanding their rights and the process to appeal a penalty. For those without a tax agent, this can be very tricky.

“At a time when so many taxpayers are already navigating steep inflation, high cost of living and the lingering effects of COVID-19, a 35 per cent increase in these penalties will certainly sting for anyone caught out. We’re cautioning taxpayers and tax practitioners; they need to be more vigilant in keeping their tax obligations up to date to avoid the risk of these increased penalties.”