Tax-records education direction measure now in place

Late in 2022, amendments to the tax law passed Parliament that, among other things, included a measure to allow the ATO to issue a “tax-records education direction” where the Commissioner of Taxation reasonably believes that an entity has failed to comply with one or more specified record-keeping obligations. As an alternative to imposing a financial penalty, such an education direction will require the entity to complete an approved record-keeping course. Successful completion of the course will mean the relevant entity will no longer be liable for a penalty.

This measure came into effect on 13 March 2023 and as a result, Practice Statement Law Administration PS LA 2005/2 relating to the penalty for failing to keep or retain records has now been updated to include the new ATO power. In addition to general principles in administering a penalty for failing record-keeping obligations, the practice statement contains guidance on eligibility for the tax-records education direction, factors the ATO will consider in that assessment, and how to comply with such a direction. 

It should be noted that the “tax-records education direction” does not apply to Pt X of the Fringe Benefits Tax Assessment Act 1986 or Div 900 of the Income Tax Assessment Act 1997. It also does not apply to the Superannuation Guarantee (Administration) Act 1992, although a similar power already exists for not complying with super guarantee record-keeping obligations within the Commissioner’s powers. 

According to the ATO, the purpose of the tax-records education direction is to help educate businesses about their tax-related record-keeping obligations. This type of direction will only be issued to entities that are carrying on a business, and will be best suited to small business entities. A direction to educate will most likely be issued in cases where the ATO believes an entity has made a reasonable and genuine attempt to comply with, or had mistakenly believed they were complying with, their tax record-keeping obligations.

Factors the ATO will consider when deciding whether an education direction is appropriate include: 

• knowledge gaps within the business which may benefit from the completion of a course; 
• inappropriate records kept due to unintentional mistakes or digital illiteracy; 
• whether genuine attempts have been made to comply with tax obligations; 
• that the entity has not been issued an education direction previously; 
• that the entity is new to business (ie trading less than two years); and
• that the entity has cooperated with the ATO regarding information requests. 

The ATO notes that entities that have been or are disengaged from the tax system or deliberately avoiding obligations to keep records will not be eligible for this alternative to penalties. Factors that point to disengagement or deliberate avoidance include poor compliance history, poor engagement with the ATO regarding information requests, deliberate loss or destruction of documents, or fabrication of documents.

Once an education direction has been issued, the ATO is able to vary the terms if certain circumstances arise (eg if a course is unavailable, in the case of a natural disaster, etc). The entity can also request a variation, such as an extension, in writing, before the end of the period specified in the direction. To help businesses understand record-keeping obligations, the ATO states that all “reasonable” extension requests received before the end of the specified period should be granted. 

To comply with the education direction, a relevant individual to the entity (a director, public officer, partner, etc), must be able to show evidence that they have completed the ATO-approved online record-keeping course by the end of the specified period. Successful completion of the course by the due date means the entity will no longer be liable to a penalty. Conversely, if the appropriate course is not completed by the due date, the entity will be liable to a penalty of up to 20 penalty units (currently $5,500).

Source: www.ato.gov.au/law/view/view.htm?docid=%22PSR%2FPS20052%2FNAT%2FATO%2F00001%22 
www.ato.gov.au/business/record-keeping-for-business/index---record-keeping-for-business/