The post on 9 January 2012 (link) discussed the Multiflex case and serious concerns with the previous proposed legislative amendment allowing the Commissioner to retain net refund amounts claimed on Business Activity Statements pending verification of the refund entitlement by the ATO.
On 15 February 2012 Treasury released a revised draft (link) of proposed section 8AAZLGA to be inserted into the Taxation Administration Act.
While some of the concerns with the previous draft version of section 8AAZLGA have been addressed, in its present draft form the proposed provision still seriously inhibits taxpayers’ rights, particularly start-ups or taxpayers normally in a net payment position which make large one-off capital acquisitions, including property developers.
While the Commissioner needs to have the power to protect the revenue from suspected fraud or evasion, the balance has shifted too far in the Commissioner’s favour. It also potentially has application beyond just GST refunds, for example into income tax refunds and fuel tax credit claims.
The draft legislation allows the Commissioner to retain a refund amount in a BAS if the Commissioner is satisfied that it would be reasonable to require verification of information contained in the BAS and relating to the refund amount. The Commissioner must inform the taxpayer that the refund is being retained (which does not even need to be in writing), in most cases within 14 days of lodging the BAS.
The Commissioner may then continue to retain the refund for a further 60 days, extended by the time within that 60 day period in which the Commissioner is waiting for the taxpayer to respond to an information request. For at least 74 days there is then no requirement for the Commissioner to even give any reasons for the continued retention of the refund or make any information request.
After the end of that 60 day period (as extended due to information requests), the Commissioner can extend the period even more, indefinitely, provided the Commissioner informs the taxpayer within a further 14 days. At least this further ability to continue to retain the refund is supposedly fettered to some extent, as various factors are listed which the Commissioner must have regard to, namely:
(a) the likelihood that the information in the BAS is inaccurate, and the extent of the inaccuracy;
(b) the likelihood that the information was affected by fraud or evasion, intentional disregard or recklessness;
(c) whether retaining the amount is necessary for the protection of the revenue, including the likelihood of the Commissioner being later able to recover any refund paid;
(d) any complexity involved in verifying the information;
(e) the impact on the taxpayer’s financial position of retaining the amount; and
(f) any other matter the Commissioner considers relevant.
These are however exceptionally broad, especially (a), (d) and (f), and only one of these, (e), recognises any taxpayer rights. The Explanatory Memorandum also states any one other factor may outweigh (e) anyway.
The taxpayer does then have the right to object against the Commissioner’s decision to retain the refund once this further “indefinite period” starts, but this is not an objection in respect of the net amount for the tax period but only against the reasonableness of the Commissioner’s decision to retain the refund for further verification, where the listed factors are so heavily stacked in the Commissioner’s favour anyway. Even if the taxpayer was successful the Commissioner could then issue an assessment which the taxpayer would also need to object against. The whole process could then be extremely protracted.
The only other possible recourse for a taxpayer would seem to be to institute judicial review proceedings under the Administrative Decisions (Judicial Review) Act at any stage on the basis that the Commissioner did not act reasonably in requiring verification.
To achieve any sort of sensible fairness the draft legislation must be changed to compel the Commissioner to issue an assessment or pay the refund far earlier. The equivalent New Zealand legislation requires payment of the refund within 30 days of lodgement of the return.
The Full Federal Court in the Multiflex case referred to New Zealand GST case law on its legislative provision in commenting that GST is intended to operate and does operate in a business environment where “offsetting” of input tax credits avoids a “cascading” of tax, so that confidence in the GST system would be eroded by delay on the part of the Commissioner in making refunds.
There is a need for a balance between the prompt payment of refunds and the protection of the GST system from abuse, but for the Commissioner to effectively have the power to withhold a taxpayer’s refund entitlement indefinitely without even needing to give an explanation and with very limited ability of the taxpayer to expeditiously challenge the Commissioner’s decision, is unacceptable in any business environment.
It is reasonable to presume that the ATO has had significant input into these proposals. While the Commissioner will have the ability to pay refunds more quickly or issue assessments more promptly to bring matters to a head, in practice it is not too hard to envisage the legislated timeframes becoming normal ATO practice, regardless of whether there is suspected fraud or evasion.
Consultation on the draft legislation is extremely short, closing on 21 February 2012. The legislation is proposed to commence as soon as it receives Royal Assent.
Regardless of the final form of the new legislation, taxpayers would be well advised to contact the ATO prior to making any unusual net refund claim and present documentary evidence of the claim, to hopefully avoid a significant delay in its payment.
