Voluntary Disclosure in an “Honest Mistake” Scenario

It’s logical that when an honest mistake is made, a person should be able to make corrections without fear of being hit with a sledgehammer. So, in cases where there is a tax shortfall as a result of an honest mistake, your voluntary disclosure will result in a reduced base penalty. The amount will be determined specific to the shortfall. Present your disclosure in a written, signed declaration (legible or typed), and post it to the ATO. Generally, the ATO will believe the taxpayer made an unintentional error, unless there is significant information suggestive of deliberate effort to mislead. Note that the concessions described here are at the Commissioner’s discretion, and repeated instances of “honest mistakes” may make you ineligible for such concessions.

Make your declaration as soon as you note that you need to, and you might avoid the auditing process entirely. (A “tax audit” refers to the Commissioner examining your financial affairs for the purposes of determining your compliance or otherwise with tax laws). In the best case scenario when you need to report an honest mistake, you disclose your error before learning of an audit. You may be able to reduce your base penalty amount by 80% if shortfall exceeds $1,000 (or even to nothing, if the shortfall is less than this).

However, if you report your shortfall after learning that you will be under audit, the best you can hope for is that the work of the audit has not yet begun. The Commissioner can choose to treat your disclosure as if you made it prior to learning about the audit, making you eligible for the deductions described above. At the very least, you can reduce your base penalty by 20% because you are saving the Commissioner the time and effort of completing the audit.

Calendar/Timeline Mistakes

The good news for you is that these are almost always taken in good faith as a form of “honest mistake.” You’ll avoid any penalties when the income amount is erroneously reported later than the correct tax period. The exception is if it is determined that you attempted to benefit from inaccurate reporting.

Non-material Shortfalls

In this case, the Commissioner will determine if you made a reasonable, honest attempt to comply with tax obligations, particularly considering your overall, historical compliance. You might escape any penalty for a non-material shortfall, if the error is untypical for you and your reporting is generally satisfactory. The amount to be made up (if they require it of you) will always be based on the size of the shortfall relative to your turnover, as well as the shortfall’s effect on your overall liability.

Goods and Services Tax (GST) Mistakes

You will sometimes be able to disclose and correct any mistakes regarding your GST obligations without incurring any penalty. These corrections are made on activity statements.

If you are an agent who made a GST mistake during work for a taxpayer-client, you must inform the client immediately, and you are responsible for correcting this reporting error straight away. It might be the case that you are unable to reconcile details from your client’s BASs; if so, you should include an adjustment in the next BAS with the correct GST reported. There are some limits to the corrections allowed.

Reporting in the Wrong Person’s Return

In a situation when income, deduction, credit, or supply is reported on the wrong return, there are usually no penalties as long as no overall tax was avoided. However, there will be a penalty if tax was avoided. In such an instance, penalty will be based on the amount avoided.

Regardless of what type of inaccuracy you have on you returns, the most important thing to do in order to avoid high penalties is to report any errors as soon as they are discovered—and don’t make that same mistake ever again!