Penalty for royalties
A penalty will be automatically imposed when any of the following happens:
- a royalty return is not lodged for a return period and we make an assessment of royalty liability (a default assessment)
- we make a reassessment and the first assessment was a default assessment
- we make a reassessment that increases the royalty liability compared to an earlier assessment or reassessment, and the first assessment was not a default assessment.
The penalty is 75% of the understated royalty, or of the liability assessed on a default assessment. However, we have the discretion to fully or partially remit it. For more information, see these rulings:
The penalty can be increased by up to 20% if a resource authority holder hinders or stops us from becoming aware of their true royalty liability. This includes not notifying us where the correct liability is more than the amount stated in an assessment.
Calculating the penalty
The penalty will be calculated in the following cases.
|Default assessment||75% of the royalty as assessed|
|Reassessment where first assessment was a default assessment||75% of the royalty as reassessed|
|Other reassessment that increases royalty liability||
If the royalty liability on the reassessment is greater than the royalty liability on the first assessment, the penalty is 75% of the difference|
Otherwise, the penalty is 75% of the difference between the reassessed royalty and the lowest royalty assessed on an earlier reassessment
The following examples show how the penalty is applied.
Example 1 – default assessment when return not lodged
XYZ Co. has a royalty liability for the April-June quarter, but does not lodge a royalty return. Based on information from other sources, we make a default assessment for $8,000,000.
A penalty of $6,000,000 (i.e. 75% of the $8,000,000) is imposed.
Example 2 – reassessment following overstated liability
Consider the same facts as example 1, but we then find, during a subsequent investigation, that XYZ Co.'s actual royalty liability for the quarter is $7,500,000. We reassess the liability to reduce the primary royalty amount.
As the first assessment of liability was a default assessment, the total penalty imposed is $5,625,000 (i.e. 75% of $7,500,000).
Example 3 – reassessment following understated liability
XYZ Co. has a royalty liability of $7,500,000 for the April-June quarter, but lodges a return for the period stating that the royalty payable was $5,000,000. We discover the understatement of their royalty liability during a subsequent investigation.
We reassess XYZ Co.'s liability, and a penalty of $1,875,000 (i.e. 75% of the $2,500,000 increase) is imposed.
Example 4 – penalty following 2 reassessments
XYZ Co. lodges a return for the period stating that the royalty payable was $8,000,000, which is the value we use for the assessment.
XYZ Co. then tells us that the royalty liability for the period should have been $7,000,000. We accept this based on the evidence provided, and reassess the liability using the new value.
However, during a subsequent investigation, we find that the actual liability for the period is $7,500,000.
We reassess XYZ Co.'s liability, and a penalty of $375,000 – that is, 75% of the difference between $7,500,000 (the reassessed royalty) and $7,000,000 (the lowest royalty assessed on an earlier reassessment) – is imposed.
Increases or decreases in penalty
The penalty can be increased by up to 20% if we believe that the resource authority holder has hindered or stopped us from knowing their true liability. This includes not notifying us where the correct liability is more than the amount stated in an assessment.
We can remit a penalty amount in part or in full. When deciding this, we will consider the reasons for the understatement of the liability and to what extent the resource authority holder is responsible.
Prosecution and the penalty
Penalty tax is not payable if you are prosecuted for the corresponding offence.
Understated royalty or no return lodged
The penalty will apply for all default assessments and reassessments that increase your royalty liability, regardless of when the liability was first payable. We can remit a penalty amount in part or in full.