Out of time but AAT has a heart

In a recent AAT case, the taxpayer was successful in reducing the penalty imposed by the ATO for understating taxable income.

The taxpayer made a substantial superannuation contribution which was intended as a deductible contribution.  But for one issue, the taxpayer was entitled to claim a tax deduction for the contribution.  Unfortunately, the taxpayer lodged the “Notice of Intent to Claim a Deduction” out of time.  Had the Notice been lodged on time, the taxpayer would have been entitled to the tax deduction.

The claim for the deduction was duly denied and the ATO imposed a 25% administrative penalty on the unstated income amount.

The taxpayer’s appeal to the AAT was purely on the issue that the 25% administrative penalty was unreasonable in the circumstances.  The taxpayer accepted that the Notice was lodged out of time and the AAT referred to the inflexible time limit set by s290-170(1)(b) of the Income Tax Assessment Act, 1997.

The AAT decided that it was harsh for the ATO to impose an administrative penalty in excess of $10,000 when the reason for the understatement of income was “a shortcoming in the paperwork, pure and simple”.

There are two significant lessons to be taken from this case.  The first is that the time limits of s290-170 are inflexible and must be satisfied if a deduction is to be claimed for personal super contributions.  The second is that the AAT has a heart and may well override the ATO’s single-minded imposition of tax penalties where there is a “shortcoming in the paperwork, pure and simple”.

Case reference: Johnston v The Commissioner of Taxation [2011] AATA 20.