Australia: Changes to taxation law to allow Commissioner to hold tax refunds pending verification checks

Taxation and Revenue Alert: 12 Mar 2012
Last Updated: 14 March 2012

By Justin Byrne, Special Councel; Hannah Byrne

Taxation and Revenue Alert: Changes to taxation law to allow Commissioner to hold tax refunds pending verification checks - 12 Mar 2012

The Treasury recently introduced draft legislation to provide the Commissioner of Taxation with the discretion to withhold taxpayer refunds, such as those claimed through GST returns, until verification checks have been completed.

Here, special counsel Justin Byrne and solicitor Hannah Byrne outline the proposed legislation, and how it could affect those taxpayers and businesses that rely on refunds to supplement their income.

Key points

  • Under the proposed legislation, if the Commissioner decides to retain a tax refund, the taxpayer must be notified either within 30 days of lodging the claim for the refund, or the day before the RBA interest day.
  • The Commissioner can then hold the refund for 60 days after notifying the taxpayer, to allow time to conduct integrity checks. The Commissioner can continue to retain the refund beyond this 60 day period if it is considered reasonable to require further verification. A taxpayer can only challenge the Commissioner's decision to retain a refund after the initial 60 day period expires.
  • While it is reasonable for the Commissioner to delay the payment of refunds if there may be fraud or evasion, the ability to withhold refunds to allow for the "verification of information" may inadvertently catch businesses that aren't guilty of fraud or evasion. Many businesses rely on refunds to supplement their cash flow, and the changes could result in cash flow issues for smaller businesses, even where no breach of the law has occurred.

Why has the draft legislation been introduced?

The draft legislation was introduced to address the outcome of the Full Federal Court case of Commissioner of Taxation v Multiflex Pty Ltd.

The main issue in the Multiflex case was whether under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth), the Commissioner had an implied power to withhold a refund to allow reasonable time to determine whether the refund was truly payable (for example, to rule out fraudulent claims).

The taxpayer in this case lodged GST returns under which refunds were due as a result of certain acquisitions the taxpayer claimed to have made. The refunds were withheld to allow the Commissioner time to investigate the factual background to the refunds to confirm that the taxpayer had actually made the acquisitions.

The Full Federal Court held that under the current legislation, the ATO was required to pay a net GST refund amount within such a period as is reasonable in the circumstances, which is the period required to administratively make the refund but not to undertake an investigation, which may or may not result in a GST assessment on the taxpayer.

The Commissioner then sought leave to the High Court, which was refused.

How long can the refund be withheld?

The current drafting of the legislation does not require the Commissioner to have reasonable grounds to suspect fraud or evasion (or even an innocent error on the part of the taxpayer), meaning the Commissioner does not need to justify to the taxpayer why their refund amount is being held.

The Commissioner may retain the refund until one of the following options is satisfied:

  • The Commissioner is satisfied that it would no longer be reasonable to require verification of the information.
  • The Commissioner amends the taxpayer's assessment, and as a result, there is a change in the amount to be refunded.
  • 60 days has passed from the day the Commissioner was required to notify the taxpayer of the decision to retain the refund.

The 60 day period can be extended by the period of time it will take the taxpayer to provide information to the Commissioner, if requested.

At the end of the 60 day period, the Commissioner may continue to retain the refund if he or she considers it reasonable to require further verification of the information provided. The Commissioner must consider:

  • the likelihood that the information provided by the taxpayer is inaccurate;
  • the likelihood that the information was affected by fraud or evasion, intentional disregard of a taxation law, or recklessness;
  • protection of revenue - including whether the Commissioner would be able to recover a refunded amount if the information was subsequently found to be incorrect;
  • the complexity involved in verifying the information;
  • the impact of retaining the amount on the entity's financial position; and
  • any other matters the Commissioner considers relevant.

The Commissioner is required to notify the taxpayer of his or her decision to retain the refund past the 60 day period within 14 days of the end of the 60 day period.

Can a taxpayer object to the Commissioner's decision to retain the refund?

A taxpayer may object to the Commissioner's decision to retain the refund either:

  • when the Commissioner notifies the taxpayer of its decision to further retain the refund past the 60 day period; or
  • 14 days after the 60 day period.

The draft legislation is likely to go through Parliament in the next few months.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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