One common mistake when people lodge their tax return is not including all the interest earned for the year.
Omitted interest/dividend letter
If you receive an omitted interest letter, it is because the ATO believe that you may not have included all your interest or dividend income for the year.
The letter will detail the difference between the interest or dividend amounts included in your tax return verses a list of the total amounts that the ATO believe you have earned.
Amending your tax return
This letter may be sent up to 4 years after you have received your notice of assessment (although usually it will be 1-2 years later).
Common reasons people forget to include interest
A few reasons why you might have forgotten to include interest you earned are:
- You have an account you forgot about (for example, you closed an account during the year and forgot to include the interest).
- You earned interest on a property settlement.
- You earned more interest on a term deposit than you thought.
Interest taxable on a cash basis
Interest is taxable when it is received. So if you have a term deposit for 12 months that expires on 1 July 2013 into your bank account, the interest is taxable on 1 July 2013 (eg. the 2014 financial year 1 July 2013 – 30 June 2014). This is despite the fact that the interest has really been earned over the previous 12 months.
If the ATO are wrong – write a letter
Occasionally the ATO are wrong (in cases I have seen, the taxpayer has put their tax file number against a bank account that is for their kids or super fund or it is a joint account but only one spouse put their tax file number against the bank account). If the ATO are wrong, you must write to them and provide evidence (such as a bank statement).
If the ATO are right – amended assessment will issue
If the letter is correct, there is no need to do anything and the ATO will issue an amended assessment in due course. The ATO will increase your taxable income by this amount and then calculate the additional tax payable, plus add interest on the balance from the day your tax return was originally due.
Amended assessment for omitted interest example
Say you earned $50,000 in 2010 and forgot to include $250 of interest income. On the $250 difference, you would pay 30% extra tax on taxable income and 1.5% Medicare levy. You would also receive a lower low income tax offset (at 4%). In total you would pay 35.5% of the $250 discrepancy ($88.75) plus interest from the day your tax return was originally due.
As you can see, not including all your interest or dividend income can be expensive.