Lodgement in Australia
3.1 The main objective of Australia's tax system is to raise revenue efficiently for redistribution to the community in accordance with government priorities. Tax assessments are fundamental to tax collection and represent the end result of the process of ascertaining a taxpayer's taxable income and calculating the tax payable on that income. In Australia, a critical part of the assessment process is the completion and lodgement of an income tax return.
3.2 Section 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that:
Every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for the year of income within the period specified in the notice.
3.3 Annually, the Commissioner of Taxation publishes a notice calling for the lodgement of income tax returns. This notice is contained in a Legislative Instrument which is registered in the Federal Register of Legislative Instruments8. Contained in the notice are the due dates for lodgement as well as the thresholds and circumstances under which taxpayers are required or not required to lodge.
3.4 The instrument is highly detailed and prescriptive and has been referred to by the Federal Court as ... long and convoluted ....9 Exceptions are few so that effectively all individual Australian taxpayers with taxable income in excess of the prescribed threshold amount (currently $6,000) are required to lodge a return.
3.5 Under the system of self assessment, taxpayers are required to make an annual determination as to whether they have an obligation to lodge an income tax return, in accordance with the Legislative Instrument. Importantly, taxpayers do not have to advise the Tax Office where they have determined that their circumstances do not require them to lodge an income tax return.10 To support taxpayers with this task, the Tax Office has developed an interactive online tool that asks questions about a taxpayer's circumstances to help determine whether they need to lodge. The online tool reflects the requirements set out in the Legislative Instrument but in a more 'user-friendly' format.
3.6 For those taxpayers who are required to lodge, timely lodgement is important to the administration of the tax system. This fact is reinforced by the instrument which clearly sets out the penalties for non-compliance11. The Commissioner of Taxation has the discretion to provide an extension of time for an entity to lodge their income tax return12. The Commissioner's policy on granting an extension of time to lodge a return is set out in the ATO Receivables Policy.
3.7 The Commissioner also has the ability to request the early lodgement of returns in certain circumstances including:
- where there is a history of late or non-lodgement by a taxpayer;
- where early establishment of debt will assist in recovery (that is, persistent debtors);
- where there is a reason to believe it would otherwise be late, or not occur; and
- where a return is required for a specific purpose, for example, assessment of child support.
3.8 Personal income taxpayers (individuals) are by far the largest category required to lodge — with 11,510,959 individual returns out of the 13,509,811 income tax returns lodged (85.2 per cent) in the 2005-06 financial year.13 The Australian self assessment regime has always operated on the basis that effectively all individuals who are taxpayers should lodge a return to report their assessable income and claim deductions and offsets. The main reason for this is that the current tax system is not a 'cumulative withholding' system — it does not attempt to ensure that by the end of the financial year most taxpayers have paid the correct amount of tax14.
3.9 For most individual taxpayers, lodging an annual income tax return is their only interaction with the Tax Office. The lodgement of a return provides the Tax Office with a range of information about a taxpayer's affairs, which enables the Tax Office and other agencies to accurately assess a range of obligations and entitlements, such as child support, HECS-HELP liabilities and family tax benefits. The lodgement of returns also provides the Government and the community with information about the taxpayer community that can be used for statistical analysis.
3.10 Comprehensive annual filing enables the collection of information relating to various social security payments and offsets such as a taxpayer's level and source of income. Access to this information provides the Government with the platform to in turn pay appropriate levels of support to those in need.
3.11 The lodgement of returns is also ingrained in Australian culture. A number of studies undertaken by both the Tax Office15 and independent researchers have found that the concept of an annual return and the hope of receiving a refund cheque is so prevalent, that an attempt to abolish annual returns for these taxpayers would most likely encounter strong opposition and require amendment to the law16. These studies have revealed that taxpayers view the issue of a refund as their only chance to 'recoup' their money from the system or to have 'a sense of control' and 'get their fair share'17 and is a means of forced savings.
3.12 The Tax Office has made major investments to support the efficient lodgement of individual income tax returns and to reduce the administrative burden on both self preparers and tax agents. For example, lodgement of individual tax returns is now almost wholly dependent on electronic lodgement systems. In 2007-08, 88 per cent of individual income tax returns were lodged electronically (an increase of 6 per cent from 2006-07).18 There is also technology to support electronic lodgement by tax agents and their practice management by providing a portal to Tax Office systems and, most recently, the e-tax system for individual self preparers. The efficiency and integrity of the e-tax system is supported by, most recently, pre-populating returns with third-party information. In Australia, users of e-tax have benefited over the last few years with an expansion in the range of pre-filling options, including information supplied by employers and major agencies such as Medicare and Centrelink.19 Pre-population continues to grow with over 1 million of the 1.9 million people who used e-tax for their 2006-07 returns having used the pre-filling option.20
The legal framework addressing non-lodgers in Australia
3.13 Parliament has established a legal framework to support lodgement compliance, as detailed below.
The Commissioner may call on any person to lodge a return
3.14 The form of action undertaken by the Commissioner to achieve lodgement varies depending on the circumstances of each case. In the majority of cases, the first step will be to make direct contact with the taxpayer or their tax agent through either a reminder letter or a telephone call. Where a taxpayer fails to comply, section 162 of the ITAA 1936 enables the Commissioner to issue a final notice requiring lodgement by a specified date. Included in the final notice are details regarding the Commissioner's ability to impose penalties or to commence prosecution action.
3.15 A number of actions are available to the Commissioner to resolve the lodgement of outstanding returns:
- impose a 'failure to lodge' penalty;
- raise a liability (for example, issuing a default assessment); and
- begin prosecution action.
Failure to lodge penalty
3.16 Section 286-75 of Schedule 1 of the TAA 1953 provides the power to the Commissioner to penalise taxpayers that fail to lodge a return on time or in the appropriate form as required by a taxation law. For individual taxpayers the maximum amount of (FTL) penalty that can be imposed is five penalty units (with a 'penalty unit' of $110 being imposed under section 4AA of the Crimes Act 1914 for each period of 28 days, or part thereof, that a return remains outstanding).
3.17 Further discussion of the FTL penalty, including the Tax Office's practices and performance, is included in Chapter 4.
Raising a liability to address a taxpayer's failure to lodge
3.18 Section 167 of the ITAA 1936 enables the Commissioner to make a default or arbitrary assessment of the amount upon which, in his judgement, income tax ought to be levied. One of the main circumstances under which the Commissioner acts is where a taxpayer has not lodged their tax return.
3.19 In making a default assessment, the Commissioner must undertake calculations in accordance with the income tax legislation and must not ignore any relevant facts, avoid investigation or make uninformed guesses (R v DCT (WA); Ex parte Briggs (No 2) (1987) 18 ATR 570; FCT v Dalco (1990) 20 ATR 1370)21.
3.20 A taxpayer is entitled to object to a default assessment and in turn appeal a decision regarding the objection. However, the onus in both circumstances is with the taxpayer to show that the assessment is excessive.
3.21 It is a criminal offence under paragraph 8C(1)(a) of the TAA 1953 for a person to fail to lodge outstanding tax returns if required to do so by the Commissioner. Prosecution action to encourage or secure lodgement is the strongest compliance approach. A matter should not proceed to prosecution where an administrative penalty by itself or some other administrative response will result in the current offence being rectified and future compliance by the taxpayer.22 It must also be remembered that administrative penalties cannot be imposed once prosecution has been instituted (further discussion regarding this issue is included in Chapter 4).
3.22 Generally, prosecution will be reserved for taxpayers who have either ignored opportunities to comply or have a history of non-compliance, or can reasonably be categorised as high-risk by their actions or inaction. In rare cases where the taxpayer has a history of poor compliance, has previously been successfully prosecuted, or in cases where urgent action is required, it may be appropriate to commence prosecution without prior contact.
3.23 Further discussion of the prosecution process, including the Tax Office's practices and performance, is included in Chapter 4.
The accumulation of non-lodged tax returns
3.24 The late 1980s move to self assessment and to the associated risk management approach to compliance means that not every compliance issue, including the non-lodgement of some income tax returns, can be followed up. The result has been a build up over the years of a large number of non-lodged returns and the numbers continue to grow. In 1988 the Tax Office attempted to deal with the issue23 through a lodgement amnesty whereby taxpayers with outstanding returns were given a 'one-off' opportunity to lodge without fear of being prosecuted or having to pay late lodgement penalties. As outlined in Table 3.1 only 28 per cent of lodgements received through the amnesty (between 31 May 1988 to 30 June 1990) were by individuals who owed money to the Tax Office. The majority (57 per cent) were by taxpayers seeking to collect money from the Tax Office.
|Debit assessments||Credit assessments||Non-taxable assessments||Total|
|Number of assessments||245,708||510,893||133,915||890,516|
|Balance Payable ($'000s)||404,673||321,798||n/a||82,875|
3.25 The amnesty enabled a 'tidy-up' of the non-lodgement situation and increased public awareness of lodgement responsibilities. However, it did not provide any ongoing change in Tax Office practice or procedure regarding lodgement.
3.26 The Australian population has since increased and so has the individual lodger population. In 2007-08, 14,880,273 income tax returns were processed — an increase of 4 per cent from 2006-07.25 As outlined in Chapter 5 of this report, Tax Office information shows that non-lodged returns continue to accumulate.
8 The notice relating to the 2003-04 tax year was the final notice published in the Commonwealth of Australia Gazette before the change over to the Federal Register of Legislative Instruments (following the enactment of the Legislative Instruments Act 2003). The notice, titled Lodgement of returns in accordance with the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Taxation Administration Act 1953 and the Superannuation Industry (Supervision) Act 1993.
9 Australian Wool Testing Authority Ltd v Federal Commissioner of Taxation (90 ATC 4896 at 4901).
10 However, taxpayers have the option to complete a Non-lodgement advice form which is available on the Tax Office website.
11 See paragraph 4.41 for detail regarding the failure to lodge penalty.
12 Section 388-55 of Schedule 1 of the Taxation Administration Act 1953
13 Australian Taxation Office, Taxation Statistics 2005-06 (published March 2008).
14 In other words, the amounts withheld throughout the year do not necessarily equate to the amount that the Tax Office would issue as a tax assessment following the lodgement of a return.
15 'Simplifying Income Tax: A Report on Forty Community Consultations' (Australian Taxation Office, 2000) -this research was commissioned by the ATO in 2000 as part of its Simplifying Personal Income Tax Project.
16 'Tax refund versus tax return?', Associate Professor Cynthia Coleman (Faculty of Economics and Business, University of Sydney), (Personal Income Tax Reform Symposium - April 2007, Atax, Faculty of Law, University of New South Wales - see page 13-2 ).
17 'Simplifying Income Tax: A Report on Forty Community Consultations' (Australian Taxation Office, 2000) -at page 57.
18 Tax Office Annual Report 2007-08 (at page 31).
19 There is no legislative requirement for information providers to give information to the Tax Office for the purposes of pre-filling. They are, however, required by law to report information to the Tax Office for compliance purposes.
20 Compliance program 2008-09 (Tax Office publication) at page 13.
21 Australian Tax Handbook 2008 - Thomson (page 1674).
22 ATO Receivables Policy.
23 An internal Tax Office review of lodgement enforcement activities in early 1988 indicated that traditional efforts were not achieving the result of voluntary lodgement of income tax returns by all taxpayers. It was estimated that up to 360,000 taxpayers with a liability to lodge returns were not doing so (source: Tax Office Annual Report 1989 - at page 23).
24 Tax Office Annual Report 1989-90 - at page 143.
25 Tax Office Annual Report 2007-08 - at pages 43 and 44.