The Australian Tax Office has recently proposed some changes to the way they handle mistakes made by small business owners in their tax returns.

For various reasons, many small businesses in Australia make errors that are not deliberate in their income tax returns or activity statements each year. To make it easier for those who make a reasonable effort to comply, the ATO has proposed changes to its approach to penalties.

If implemented, the changes will apply to small businesses with annual turnovers of under $2 million.

The ATO has stated that it will provide one chance before applying a penalty in the following circumstances:

  • where failure to take reasonable care resulted in false or misleading statements being made in income tax returns and activity statements
  • for late lodgement of income tax returns and activity statements

These changes will apply to the first error and late lodgment subject to penalty. The one chance timeframe will be refreshed after a set period of time. The ATO will also confirm in writing to these small businesses that while they were liable to a penalty, it has chosen not to apply one on this occasion.

The changes would not be available to those who demonstrated reckless or dishonest behaviour and those who disengage and cease communicating with the ATO during an audit or review.

All small businesses would receive a clear explanation of how the error occurred and understand what they need to do to get things right in the future.

After a defined period of time (i.e. a three or four year financial cycle) the opportunity would be reset. Given the frequency of reporting for activity statements, when considering late lodgement penalties this set period may be different for income tax returns and activity statements.

After the one chance opportunity has been provided, failure to lodge on time would automatically apply if lodgment was not received by the due date.

The ATO has focused on these particular penalties because they represent the majority of penalties imposed on small businesses in 2015. For example, for all false or misleading statements in income tax returns and activity statements last year, approximately 57 per cent of penalties were imposed on small businesses and over 50 per cent were found to have failed to take reasonable care. In the same year, 83 per cent of all failure to lodge on time penalties were imposed on small businesses.