The ATO can now issue a tax-records education direction which will require an entity to complete an approved record-keeping course in lieu of a penalty.

Late last year, the Treasury Laws Amendment (2022 Measures No 2) Bill 2022 passed Parliament and received Assent. Among other things, it contained a measure to allow the ATO to issue a “tax-records education direction” which will require an entity to complete an approved record-keeping course where the Commissioner reasonably believes that there has been a failure to comply with one or more specified record-keeping obligations under tax law. This will be an alternative to imposing a penalty.

This measure came into effect on 13 March 2023 and as a result, PS LA 2005/2 relating to the penalty for failing to keep or retain records has now been updated to include this new power. In addition to general principles in administering a penalty for failing record-keeping obligations, it 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 Part X of the Fringe Benefits Tax Assessment Act 1986 or Div 900 of the ITAA 1997. Furthermore, although it also does not apply to the Superannuation Guarantee (Administration) Act 1992, 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, is only issued to entities that are carrying on a business and is 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;
  • the entity has not been issued an education direction previously;
  • the entity is new to business (ie trading less than 2 years);
  • and 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.

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 Commissioner is able to vary the terms if certain circumstances arise (ie course unavailable, natural disaster etc). The entity is also able to 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 (ie 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 (ie $5,500).

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