Interest and penalty tax
Version Number: 1
Legislation: Payroll Tax Act 2009
Date Issued: 19 January 2011 (effective from 1 July 2010)
Revenue Rulings do not have the force of law.
The Payroll Tax Act 2009 (the “Act”) is a taxation law for the purposes of the Taxation Administration Act 1996 (the “TAA”). Any failure to pay the correct amount of payroll tax when it falls due is a tax default which is subject to interest and penalty tax under the TAA. Revenue Ruling TAA001: Application of Penalty & Interest outlines RevenueSA’s general policy on the application if interest and penalty tax.
The Act harmonises the payroll tax legislation in a number of Australian jurisdictions. As part of the payroll tax harmonisation initiative, interest and penalty tax policies in relation to payroll tax defaults have also been harmonised.
This Revenue Ruling explains in detail the application of interest and penalty tax to a range of payroll tax defaults and should be read in conjunction with TAA001.
However, where there is an inconsistency between PTA036 and TAA001 in regards to the application of penalty tax or interest, PTA036 prevails to the extent of the inconsistency.
A. Tax default
A payroll tax default occurs when a taxpayer fails to pay tax in accordance with the Act. The TAA provides for interest and penalty tax to be applied to a tax default.
The interest rate consists of a market rate component and a premium rate component. The market rate component is to reimburse the Government for the financing costs incurred due to the late payment of tax. The premium rate component of 8% per annum is imposed to deter late payments and ensure that a defaulting taxpayer is not advantaged when compared with a taxpayer who paid on time.
Penalty tax is imposed, in addition to interest, on the amount of tax unpaid when a tax default occurs.
For the purposes of applying interest and penalty tax to payroll tax, the Commissioner of State Taxation (the “Commissioner”) categorises tax defaults as follows:
- a late payment; or
- a tax shortfall.
1. Late payment
A tax default is regarded as a late payment when the correct tax is paid in full after the due date but before any action has been taken by the Commissioner.
As a general rule, a late payment tax default will not be charged penalty tax but will attract interest at the sum of the market rate plus the premium interest rate. Interest will apply from the due date for payment until the actual date of payment.
However, an exception to the rule is when a registered employer pays the monthly tax after the due date but before the Commissioner issues an assessment on more than 2 occasions within a financial year (this means, a repeat late payer). This late payment tax default will attract market rate of interest and penalty tax of 5%.
Examples of late payment tax defaults include:
- a registered employer pays the correct amount of tax for a month after the due date but before the Commissioner issues an assessment for the tax owing for the month;
- an assessment issued by the Commissioner is not paid by the due date shown on the notice of assessment; or
- a taxpayer fails to pay an instalment by the due date under an arrangement to pay tax by instalments.
2. Tax Shortfall
Any tax default other than a late payment is regarded as a tax shortfall. As a general rule, a tax shortfall will attract:
- penalty tax at a rate reflecting the taxpayer’s culpability (see attached table); and
- interest at the market rate only.
A tax shortfall will not attract penalty tax in the following circumstances:
- If the Commissioner considers that an employer took reasonable care to comply with the Act. However, to impose only the market rate of interest on the tax unpaid would place this taxpayer at an advantage when compared with a taxpayer who paid tax on time. Therefore, interest will be charged at the sum of the market rate plus a premium rate of 8% per annum;
- If the taxpayer made a voluntary disclosure before an investigation commenced. Interest will be charged at the sum of the market rate plus a premium rate of 8% per annum; or
- If the Commissioner considers that the tax shortfall occurred due to circumstances outside the employer’s control.
The following circumstances are examples of tax shortfalls:
The Commissioner may remit interest in part or in full in such circumstances as the Commissioner considers appropriate. Interest may be fully remitted for a late payment tax default if the Commissioner is satisfied that the late payment occurred as a result of circumstances beyond the control of the taxpayer. Examples of circumstances when interest may be remitted in full include, but are not limited to:
- official postal and DX delays; and
- natural disasters such as a fire or flood.
A taxpayer is entitled to a 20% reduction in the penalty tax if the taxpayer voluntarily makes a written disclosure during an investigation into a known or suspected tax default which enables the Commissioner to determine the nature and extent of the tax default.
The penalty tax will be increased by 20% if the taxpayer hinders or conceals information during an investigation into a known or suspected tax default.
C. Annual Reconciliation (AR) Process
At the end of each financial year, every registered employer is required to lodge an AR return for the purpose of reconciling the employer’s tax liability for the financial year with the tax previously paid for that year.
When an employer finds that further tax is payable for the financial year, the AR return should be lodged by the due date together with the payment of the tax outstanding. For an employer who has overpaid payroll tax for the financial year, the lodgement of the AR return constitutes a request for RevenueSA to refund the overpayment.
Due date for lodging the AR return
The due date for lodging the AR return is 21 July, or the next business day if the 21st falls on the weekend or a public holiday, immediately following the financial year to which the AR return relates (the AR period).
There is no tax default if the employer lodges the AR return and pays any outstanding tax by the due date. A tax default occurs when the correct amount of tax owing for the financial year has not been paid, or where the AR return has not been lodged by the due date.
If the employer makes a payment of tax without lodging an AR return, the Commissioner is unable to determine whether the total tax paid is the correct tax payable for the year. Therefore, even though a payment of tax was made, given that no AR return is lodged, the Commissioner will issue an assessment of any estimated tax owing as though a tax default had occurred.
Treatment of tax defaults related to the AR process
- AR lodged or tax paid after the due date but before assessment is issued
If an employer lodges its AR return or pays the tax owing after the due date but before the Commissioner issues an assessment for the tax owing for the AR period, any tax paid after the due date or remaining unpaid will attract interest at the market rate plus premium interest at the rate of 8% per annum.
- AR lodged or tax paid after assessment is issued
If an employer fails to lodge its AR return or pay the tax owing and the Commissioner issues an assessment for the tax owing for the AR period, any tax paid after the due date or remaining unpaid will attract penalty tax of 25% and interest charged at the market rate.
If the AR return is subsequently lodged, the penalty tax and interest will be adjusted accordingly based on the wages stated on the return. If the AR return subsequently lodged shows that no tax was outstanding at the due date, the interest and penalty tax will be fully remitted.
D. Payment of tax in error to another jurisdiction
A tax shortfall may arise because tax has been paid in error to the ATO or another jurisdiction. If RevenueSA is satisfied that the tax was paid to another party in error, no penalty tax will be imposed. Further, if the full amount of tax payable in SA was received by the wrong party on or before the due date, interest will be remitted in full. If the tax liability payable in SA is greater than the amount of tax paid to the wrong party, full remission of interest will still apply, provided the difference is paid to RevenueSA by a date specified by the Commissioner.
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