“In a tax matter, if someone gets it wrong, such as not disclosing income or claiming a deduction, the ATO can impose penalties and it all comes down to whether the taxpayer has paid reasonable care [to their claim or omission] or was reckless,” he said.

“If they have a RAP, they will do much better regarding any penalties imposed.”

Butler explained that a RAP is a position where relevant authorities such as a tax law specialist or qualified specialist accountant look at relevant case law or public rulings to put together an argument that can be used to support a claim if it is disputed.

“Under section 284-15 of Schedule1 of the Tax Administration Act 1953 (Cth) (Act), a matter is reasonably arguable if ‘it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’,” he said.

The Commissioner considers that he (the ATO) will only be satisfied that this criterion has been met if the position in the advice was at least reasonably arguable. To be reasonably arguable, the taxpayer’s position “must be cogent, supported by relevant authorities and persuasive”.

“Typically, in preparing a RAP a lawyer would put together relevant law, court decisions, and ATO materials to have a persuasive and reasonably arguable case. In this case, if the taxpayer’s position is successfully challenged by the ATO, penalties should typically be no more than 5 per cent in addition to the primary tax payable on the tax shortfall,” Butler said.

Under section 284-75 of Schedule 1 to the act, an administrative penalty may be imposed when a taxpayer makes a statement to the Commissioner that is false or misleading in a material particular.

Omitting material information can also constitute a false and misleading statement. This could arise, for example, where:

• An unpaid present entitlement (UPE) in a family trust owing to a private company is omitted from the trust’s tax return.
• A loan to a shareholder or an associate of a private company is omitted from a company tax return.

“Further, a statement will be ‘false’ if it is contrary to fact or is wrong and will be ‘misleading’ if it creates a false impression, even if true. The statement must also be false or misleading in ‘a material particular’, where a ‘material particular’ is something likely to affect a decision regarding the calculation of an entity’s tax-related liability or entitlement to a payment or credit.”

Butler said there are three levels of penalties that can be applied.

“If you took reasonable care, you can minimise the chance of penalties but if you haven’t taken reasonable care the penalty will typically be 25 per cent of the shortfall amount, if the error is considered ‘reckless’ the penalty could increase the penalty to 50 per cent of the shortfall amount, and an intentional disregard of a tax law could increase the penalty to 75 per cent of the shortfall amount,” he said.

“So, for example, if you are considered reckless and you owe $10,000 in tax, you could be slugged with an extra 50 per cent of that amount, but if you took reasonable care, and had a RAP you could reduce that to around five per cent.”

He added that to be considered “reckless” a taxpayer would generally not have “done any research or taken advice”.

“Even going to an accountant may not be enough if you are making any complex or ‘novel’ transaction, as there are some cases that suggest that you should obtain legal advice from a tax lawyer in these types of situations to show you have taken a reasonable amount of care,” he said.

Butler said a RAP is particularly important regarding NALI/E claims for SMSF trustees.

“There are many advisers, for instance, that are providing discounts to SMSFs for their staff without having a documented staff discount policy. While such a policy does not, by itself, constitute a RAP, the ATO has stated in its ruling LCR 2021/2 that the firm providing discounted services is expected to have made a reasonable attempt to determine an arm’s length expenditure amount for the services provided to the fund,” he said

Butler commented that SMSF trustees need to be mindful that super fund rules are quite stringent and with the ATO announcement that nine out of 10 rental property owners are making mistakes, it pays to be prudent.

“The ATO is looking at the high level of non-compliance and SMSFs have traditionally got rental properties, but if you have exercised reasonable care, and prepared a RAP, any penalties imposed may be just the primary tax and a little bit of interest,” he said.

“Thus, where there is a significant renovation or material amount of expenses on a rental property being claimed as repairs, a well-prepared RAP should be top of mind.”

He added that it is best to engage a tax expert to prepare the RAP and that tax and SMSF lawyers are well-positioned.

“One advantage of engaging a tax/SMSF lawyer is that their advice is privileged and they do not have to notify the relevant professional body or Tax Practitioner Board if there is a significant breach of the code of professional conduct following recent changes to the Tax Agents Services Act 2009 (Cth) requiring registered tax agents to ‘dob in’ a tax agent where they have reasonable grounds to consider the adviser has breached the code,” he concluded.