The Australian Taxation Office (ATO) is required to be informed of your company for taxation purposes. You have from 1 July until 31 October to lodge your income tax return, or you risk a default assessment. Put simply, a default assessment is bad news, and comes with severe penalties. Below, we answer some of the frequently asked questions of these assessments.
Why have I been issued a default assessment?
The ATO can issue a default assessment in two situations;
- A taxpayer has an overdue lodgement obligation to the ATO. This may take form of a return, notice or other document.
- A return has been lodged, but the ATO is unsatisfied by the document.
Will the ATO immediately issue a default assessment?
Before issue, the ATO will generally send the taxpayer or their registered agent a warning letter. This letter outlines the details of the default assessment, and the date the overdue obligation needs to be lodged by.
Issue without warning
The ATO has the right to issue without warning the person if;
- They consider there to be risk of flight, dilution of assets, or movement of funds outside Australia.
- The matter is urgent.
What’s the problem with receiving a default assessment?
There are three major issues with receiving default assessments, all of which are harmful to your pocket, and your name.
Penalties
When issued with a default assessment, an administrative penalty applies of 75% of the tax owed. As a result, you are paying nearly double what’s necessary in lodging tax. In addition, after your first assessment, each subsequent one incurs an additional 20% penalty.
If your tax owed is $40,000, then your administrative penalty is 75% of this – $30,000. This is a hefty penalty for simply not lodging your return on time.
Deductions
The ATO is not required to consider any deductions/credits you may be entitled to in your tax return. Consequently, you will likely pay more than necessary. This can be fixed after the fact, however, is considered more difficult.
Prosecution
Failing to lodge your tax return is your responsibility. Thus, failing to respond to your assessment can result in prosecution, additional fines and imprisonment for up to 12-months.
How is a default assessment calculated?
The ATO considers numerous factors when calculating your assessment. These include;
- Previously-lodged tax returns.
- Income from financial institutions and government bodies.
- Income reported by employers.
- Annual tax statistics.
- Gross Domestic Product (GDP) growth rate.
What should I do if I’ve been given a default assessment?
You need to act immediately to avoid further sanctions. If you agree with the assessment, you should pay the specified amount at once. Additionally, you can contact the ATO to organise a payment plan.
If you disagree with the assessment, you have the right to lodge an objection. Furthermore, you may attempt to object to the administrative penalty. You must outline your reasons for dissatisfaction, and provide evidence supporting your objections.
Final thoughts
In conclusion, there are two guarantees in life – death and taxes. Failing to lodge your tax return results in receiving a default assessment, which comes with significant penalties. If you’ve been issued this assessment, or a warning of it, a tax lawyer can save you thousands.
