Penalties and interest: Shortfall penalties
Adopting an abusive tax position
The penalty for taking an abusive tax position is 100% of the resulting tax shortfall. The purpose of the penalty is to deter taxpayers from entering into arrangements for the main purpose of avoiding tax.
An abusive tax position is one that:
- is based on an unacceptable tax position, and
- has tax avoidance as a dominant purpose.
For an abusive tax position shortfall penalty to be imposed on tax positions taken before 1 April 2008, the tax shortfall must be more than $20,000.
There are several signs that a dominant purpose of a tax position or scheme is to avoid tax. They include artificiality, contrivance, circularity of funding, concealment of information and unreliable interpretations of the law.
Promoter penalty
If an arrangement is offered, sold, issued or promoted to 10 or more people in a tax year and it involves an abusive tax position, the promoter will be liable for a promoter penalty. The penalty will be the sum of the tax shortfalls the investors could have obtained. This means that if the arrangement affects income tax, the promoter penalty is calculated on the maximum tax-related benefits of each investor at the rate of 39 cents in the dollar.
If a promoter is penalised, the penalty on the investors is reduced from 100% to 20%.
Date published: 26 Mar 2008
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