When failure to lodge tax returns becomes more than a tax problem

Failing to lodge a tax return is often considered to be merely an administrative oversight. However, it is an omission which could lead to significant legal issues, even if no monies are owed.

The Australian Taxation Office (ATO) can exercise its extensive powers upon the non-lodgment of tax returns, including issuing default assessments, imposing administrative penalties, commencing recovery action, and pursuing criminal prosecution.

This article explains the risks associated with failing to lodge a tax return, and provides some practical tips that taxpayers can take to minimise their exposure.

Who is required to lodge a tax return?

Broadly, taxpayers are required to lodge tax returns if any of the following apply:

• their taxable income (including capital gains) exceeds the tax-free threshold ($18,200 for Australian tax residents);
• they have had tax withheld from their income, even if their total income is below $18,200;
• they have an active Australian Business Number (ABN), regardless of whether the business has derived income above or below the tax-free threshold;
• they receive family assistance payments (e.g. Family Tax Benefit or Child Care Subsidy); or
• they have incurred a tax loss or made a net capital loss, or are seeking to apply prior-year losses to reduce their taxable income.

Taxpayers who are entitled to a tax refund must also lodge a return.

Non-lodgment advice

Taxpayers who are not required to lodge returns may formally notify the ATO by lodging a ‘non-lodgment advice’ (NLA).

A NLA may be lodged with respect to previous income years, dating back to 2000. A NLA may also be lodged to advise the ATO that a return is not necessary for the current year and future income years. A NLA will prevent the ATO from treating a return as overdue, and will avoid automated compliance actions or the imposition of ‘failure to lodge’ (FTL) penalties.

The FTL penalty is equal to one penalty unit for every 28 days (or part thereof) that each tax return is late, up to a maximum of 5 penalty units for individuals. For each late return, this is a maximum of $1,650 (based on a current penalty unit of $330). However, as discussed below, where the ATO commences criminal prosecution for non-lodgment, individuals can face significant penalties for a failure to comply with the requirements under a taxation law.

Unlimited amendment period

One of the most significant consequences of non-lodgment is that the Commissioner will have an unlimited amendment period, and may issue default assessments many years later.

Broadly, a two-year amendment period applies to individuals, while a four-year amendment period applies to taxpayers with complex tax affairs, including businesses. This amendment period commences on the day after the Commissioner issues an income tax assessment to the taxpayer. This means that once the two-year or four-year amendment period has expired, the ATO cannot go back and reassess the taxpayer (except in the case of fraud or evasion).

Accordingly, a key reason to lodge a tax return is to limit the ATO’s amendment period, as a taxpayer who does not lodge will remain exposed to assessment for an unlimited period.

Default assessments

The ATO is empowered to issue default assessments to taxpayers who fail to lodge tax returns. A default assessment is the ATO’s estimate of an individual’s taxable income, based on information from third party sources, including data-matching and banking records.

A default assessment is not invalid if the ATO has made errors in estimating a taxpayer’s taxable income. On the contrary, a default assessment is itself ‘conclusive evidence’ that the assessment was made correctly, and of the tax owing. The taxpayer has the burden of proving that the assessment is incorrect, which can be extremely difficult where years have passed since the relevant transactions have occurred.

Where the ATO issues a default assessment, it may also impose penalties of up to 75% of the tax shortfall for intentional disregard of a taxation law, or 50% for recklessness. Even when a taxpayer engages a tax agent, the taxpayer may still be liable for penalties if they cannot demonstrate that they have made a genuine attempt to comply with their tax obligations.

The Commissioner’s default assessments have been upheld in recent decisions, including:

• Rusanov & Anor v FCT — default assessments were issued to the taxpayers for several years, which included assessing Mr Rusanov on amounts in unexplained bank deposits claimed to be gifts, totalling $1,636,000 between the 2012 and 2014 income years.
• FCT v Cheung — during the 2005 to 2015 income years, the taxpayer received almost $30.3 million into his and his wife’s bank account, with a further $2.5 million deposited into accounts of associated entities. The Commissioner issued default assessments to the taxpayer for each year, who failed to prove that the assessments were excessive.

Criminal prosecutions by the ATO

The failure to lodge a tax return is a criminal offence under section 8C of the Taxation Administration Act 1953 (Cth) (TAA). As this is a strict liability offence, the ATO is not required to prove intent, knowledge, reckless or negligence. We have observed a significant increase in the ATO pursuing prosecutions for failing to lodge tax returns, even against taxpayers who did not have a tax liability and were ultimately in a refund position.

The maximum penalty for a criminal offence (for ‘failure to comply with a taxation law’) is 20 penalty units for a first offence, and 40 penalty units for a subsequent offence. For individuals, the penalty for each taxation offence is capped at $5,000. For example, if an individual has failed to lodge tax returns for 15 years, the maximum penalty is $75,000 ($5,000 x 15 years). The individual may also face imprisonment for up to 12 months (s.8E(3), TAA).

Where a taxpayer receives a criminal conviction, there are significant personal consequences. A criminal conviction can impact an individual’s employment, an inability to obtain finance approvals, exclusions from rental housing, and restrictions on international travel.

It is possible to obtain an order from the Court for a discharge, without any criminal conviction (under s.19B of the Crimes Act 1914 (Cth)). However, the Court must be satisfied as to various matters, including the character of the taxpayer, their age, health or mental condition, whether the offence was of a trivial nature, or committed under extenuating circumstances. There is no guarantee that a Court will make such an order that no conviction be recorded.

What to do if you have an outstanding tax return

While the late lodgment of a tax return may be viewed as a compliance issue, ongoing non-compliance can expose taxpayers to escalating consequences, including FTL penalties, default assessments and criminal prosecutions.

If you receive a notification from the ATO regarding the need to lodge outstanding returns, it is critical that you take steps to lodge all outstanding returns to reduce the risk of further enforcement action by the ATO.

Contact us

We have successfully represented taxpayers in objecting to default assessments, achieving reductions of primary tax, and remissions of interest and penalties. We have also represented clients in criminal prosecutions regarding non-lodgment of returns.

If you have received a notification from the ATO regarding outstanding lodgments, or have been issued with default assessments, please contact Tamara Cardan, Special Counsel in our Tax group, to discuss next steps, including challenging this assessment through the formal objection process.

If the ATO has commenced recovery proceedings or instituted a criminal prosecution against you, please contact Julie Callea, Partner in our Litigation & Dispute Resolution group.

_{References:
Rusanov v FCT (No.3) [2025] FCAFC 117
FCT v Cheung [2026] FCAFC 75
Practice Statement PS LA 2011/19 – Failure to Lodge Penalties
Practice Statement PS LA 2007/24 – Default Assessments}