Whoever subscribes to the theory about the certainty of death and tax, probably hasn’t stood in the shoes of a legal personal representative (LPR) attempting to administer the estate of a deceased person in a modern taxation system.

An LPR is personally exposed to liability for income tax in relation to the affairs of the deceased and of their estate, although the liability may be limited to the value of the assets that come into their hands, an LPR seeking to maximise the value of a deceased person’s estate should seek tax advice if their proposal involves the subdivision and/or demolition of the deceased’s dwelling.

An LPR might start to question their decision to take up the role when they find that the deceased had outstanding tax returns and there are no records to accurately identify the amount of the deceased’s taxable income.

This newsletter is one of two that considers ways that an LPR might obtain a level of comfort regarding their tax exposure that matches their appetite for risk. In this part we focus on voluntary disclosures.

Voluntary disclosures

In a broad sense, you make a voluntary disclosure if you tell the ATO you should have lodged a tax return or that you have not paid enough tax or have claimed too much credit. [1]

We have found voluntary disclosures to the ATO to be particularly useful in bringing about some LPR certainty in respect of a deceased person’s tax position. In our experience, the ATO looks favourably upon an LPR who can demonstrate that they have gone to great lengths to try and address the deceased’s tax obligations.

For some of our disclosures, the ATO has determined that it will take no further action – this may be because the ATO itself cannot find relevant information or because it determines that there has been no fraud or evasion (so that an amendment cannot be made because the amendment period has expired). In other cases, penalties and interest charges have been remitted or reduced.

The ATO has published information on its website about how to make a voluntary disclosure. [2] Basically, you must:

• give the ATO the information it requires to assess the error or correct position
• provide the information in the required manner, such as by letter, through an approved ATO electronic channel, or (in limited circumstances) by phone or face-to-face
• provide a declaration signed by you or an authorised person.

What penalties and interest charges may apply?

To ensure the tax system is fair for everyone,

• penalty provisions are intended to encourage taxpayers to take reasonable care in complying with their tax obligations in a timely manner – they can apply if you fail to lodge a document [3] or to take reasonable care in claiming a deduction to which you are not entitled or making a false or misleading statement. [4]
• interest charges are intended to ensure that taxpayers who underpay their tax for a period don’t receive an advantage over those who have paid their tax on time. The interest charges also compensate the community for the impact of late payment
• shortfall interest is applied where an additional amount of tax is payable because of an amended assessment – the SIC rate for September-December 2020 is 3.01% [5]
• general interest charge is applied to an unpaid liability from the date it was due to be paid until it and any accrued interest charges are paid – the GIC rate for September-December 2020 is 7.01%.

Remission of penalties

The Commissioner has a discretion to remit penalties imposed for failing to lodge documents (including tax returns) on time. Law Administration Practice Statement PS LA2011/19 provides that the discretion should be exercised if a taxpayer can demonstrate that:

• the failure to lodge was caused by circumstances beyond their control
• those circumstances could not be predicted, and
• they or their agent were not in a position to request a further time to lodge.

It explains that remission would ordinarily be appropriate in these cases:

• taxpayer or their agent was sick with a severe life-threatening illness such as battling cancer
• taxpayer was caring for another person who was sick with a severe life-threatening illness
• taxpayer could not lodge as they had not received information from other parties such as employers (a payment summary for example) that would enable them to lodge (ideally, the taxpayer should be able to demonstrate that they have persistently tried to obtain this information)
• taxpayer was struck with a natural disaster such as fire or flood which took their complete attention and perhaps meant that some records were lost.

The Commissioner has a discretion to reduce penalties where a voluntary disclosure is made in relation to a prior statement.[6] Miscellaneous Taxation Ruling MT 2012/3 outlines the way in which this discretion is likely to be exercised. Broadly, the penalty may be reduced by 20%, 80%, or, in limited cases, to nil. There is a useful flow chart in Appendix 2 of the Ruling that demonstrates how the legislation applies.

Generally, the amount of the reduction will depend on whether the taxpayer made the voluntary disclosure before, or after, it is notified by the Commissioner that an examination is to be conducted of its affairs.

Remission of shortfall interest charges

The ATO practice in respect of the remission of shortfall interest charges is set out in Law Administration Practice Statement PS LA 2006/8. It explains:

Where a taxpayer makes a voluntary disclosure of a shortfall amount, the disclosure itself is not a ground for remission of SIC. However, there may be cases where the circumstances surrounding the voluntary disclosure will make it fair and reasonable to remit interest charges.

When considering any remission of SIC on the basis of a voluntary disclosure, regard is had to the following:

• the timeliness of the disclosure after the error was first detected
• whether the disclosure was made before being told of the commencement of an examination or publication of an ATO initiative which may have led to the discovery of the shortfall by the Commissioner (remission is more unlikely if such notification or publication had occurred)
• whether the Commonwealth in any way contributed to the taxpayer taking their original position
• the size of the shortfall, either in monetary terms or in relation to the whole of the taxpayer’s affairs, and
• the taxpayer’s compliance history, including the number of times a taxpayer has had to disclose shortfalls following an initial self-assessment of liability.

Remission of general interest charges

The ATO practice in respect of the remission of general interest charges is set out in Law Administration Practice Statement PS LA 2011/12. It explains that GIC may be remitted for example if:

• the circumstances contributing to the delayed payment are not the taxpayer’s fault, and
• the taxpayer has taken reasonable steps to mitigate, or mitigate the effects of, those circumstances

In the context of deceased estates, the Practice Statement indicates that where payment cannot be made because Probate has not been granted, the ATO recognises that this is often outside the control of the LPR of the deceased estate. In these situations, the GIC that has accrued on the account for the period from the date of death until 28 days after Probate is granted will generally be granted.

For GIC accrued during the period of administration, remission may be granted if the LPR of a deceased estate under administration can show that assets were realised promptly and funds were not available at an earlier date to enable payment.

The following facts are based on a real case that we were involved with:

Voluntary disclosure example

The deceased was a retired gentleman who owned his own home in a luxury suburb that was his main residence when he died. He had been an Australian resident for many years. Prima facie, he owned some Australian securities which combined with the full aged pension, appeared to be supporting his retirement.

His solicitor was appointed as his executor. During the administration of the estate it was discovered that:

• The deceased held a substantial Australian investment portfolio valued at over $1 million but never quoted his personal TFN to the investment bodies.
• The deceased changed investment advisors several times over the years and the asset cost base histories were never provided to the new advisors.
• The deceased held a foreign credit card which he had been using to pay for living expenses.
• This card was being repaid in full, monthly from a foreign bank account into which it was discovered that a regular monthly annuity payment was being deposited. The deceased had acquired this bank account some years earlier.
• Significant dividends from three different jurisdictions were also being deposited into this foreign bank account.
• No income tax return had been lodged for over 20 years.
• There were two foreign beneficiaries in the estate.

The executor had an obligation to prepare and lodge 20 years of income tax returns in Australia. They had to reconstruct the global revenue for all 20 years. This involved the restamping of Probate in three different jurisdictions to realise foreign assets and months of work to reconstruct the domestic and overseas income.The executors approached the ATO by way of a voluntary disclosure, declaring all the information they had and demonstrating the extent of the work they had undertaken to collate it.

• The ATO undertook their own due diligence.
• A six-figure payment of tax was made to the ATO with significant reduction in general interest charges.
• A release from the ATO for the executors.

BNR Team regularly undertake and manage voluntary disclosures with the ATO on behalf of LPRs, to address historical tax issues discovered during the estate administration, including those in related entities. This provides the LPRs with not only peace of mind, but also assists in managing their personal exposure to tax liability.

Tax Ombudsman

If the circumstances warrant it, an LPR who has not been able to find satisfaction from the ATO in terms of penalty/ interest remission may, as a last resort, complain to the Tax Ombudsman. The Ombudsman can help you to address complaints about administrative actions (or inaction) of the ATO.

‘Administrative action’ generally covers the fairness and reasonableness of the ATO’s approach in dealings or interactions with you.

We have had a successful outcome through the office of the Ombudsman in respect of interest charges imposed in respect of a mysterious unlodged return the details of which only became apparent with the release of new ATO systems.

References
[1] Although the expression is used more narrowly, for example in the context of provisions relating to false and misleading statements.
[2] QC 33800
[3] See Division 286 of Schedule 1 to the TAA
[4] See for example Subdivision 284-B of Schedule 1 to the TAA
[5] The shortfall interest charge applies to the 2004-05 and later income years. Before then the general interest charge applied from the due date of the original assessment up to the time the amount was paid. The general interest charge is set at a high rate compared to commercial borrowings. The rationale behind this high rate is to encourage prompt payment of tax liabilities. In the case of non-payment of an established and quantified tax debt, this higher rate (or premium) can be managed or avoided by arranging to use alternative low-cost finance. However, taxpayers are usually unaware of a tax shortfall until they are issued with an amended assessment. They may not be ina position to respond to the incentive premium that is built into the general interest charge. For this reason, the government created a new, lower interest charge specifically for the shortfall period while maintaining the general interest charge for late payments of unpaid tax and shortfall interest charge.
[6] section 284-225 of Schedule 1 to the TAA.