On 15 February 2012 the Treasury released an Exposure Draft of Legislation which appears to be aimed at addressing the decision of the Full Federal Court in the Multiflex case. Submissions are due by 21 February 2012, which is a very tight timeframe.
The Explanatory Memorandum summarises the new law as follows:
“1.8 Where the Commissioner is satisfied that it would be reasonable to verify information provided by the taxpayer relating to the amount the Commissioner would have to refund, the Commissioner may retain the refund while verifying that amount.
1.9 The Commissioner must notify the taxpayer if he or she exercises this discretion, and if the Commissioner has not refunded the amount or made (under Division 105 in Schedule 1 to the TAA 1953) or amended the assessment after a set period of time, taxpayers may object to the Commissioner’s decision to retain a refund.”
The draft legislation seeks to make the following amendments to the Taxation Administration Act:
- inserts s 8AAZLGA
- inserts sub-paragraph (aad) before s 14ZW(1)(ab)
- inserts section (4) at the end of s14ZW
The initial right/discretion to withhold refunds
Sub-section 8AAZLG(1) provides that the Commissioner “may” retain an amount that he is otherwise required to refund to an entity under s 8AAZLF of the TAA (i.e., having a positive balance in the Running Balance Account) if he is satisfied that it would be “reasonable” to require verification of the information in the “notification” (e.g., a GST Return) that relates to the refund.
In the Explanatory Memorandum this right is referred to as a “discretion” given to the Commissioner to retain refunds. However, unlike s 8AAZLG(5) (discussed below), the section is silent as to what factors the Commissioner is to have regard in deciding whether to retain the amount. The Explanatory Memorandum also provides no real guidance as to the sort of matters to be taken into account by the Commissioner and arguably gives the Commissioner a blanket discretion to refuse to pay refunds.
As can be seen by the problems caused by the discretion in s 105-65 of Schedule 1 to the TAA (allowing the Commissioner to refuse to pay refunds of overpaid tax in certain circumstances), drafting discretions in such broad terms is unhelpful. The Commissioner may well adopt a similar approach as with s 105-65 and seek to fill the gaps with a lengthy Ruling outlining how he proposes to exercise the discretion (see MT 2010/1) – but those views are no substitute for the legislation itself.
Sub-section 8AAZLGA(2) requires the Commissioner to “inform the entity” that it has retained the refund. The entity must be informed within set periods of time. For a positive balance in a RBA, this would appear to be 14 days after the GST return is lodged.
Importantly, there is no power of extension in the legislation, so the failure of the Commissioner to comply with the requirement will (or should) mean that the section cannot apply.
Unhelpfully, there is no guidance as to what “inform the entity” means – from my research, those words do not otherwise appear in the TAA or in Schedule 1 to that Act. This will likely give rise to disputes about whether the Commissioner has given the appropriate information to the entity before the time expires.
Time period in which the Commissioner can retain the refund
Sub-section 8AAZLG(3) provides that the Commissioner may retain the refund until:
- he changes his mind;
- there is a change in the amount of the refund as a result of amending an assessment or the Commissioner making an assessment under S 105-5 of Schedule 1 to the TAA;
- 60 days expires.
- the likelihood that the information contained in the notification is inaccurate, and the likely extent of the inaccuracy;
- the likelihood that the information was affected by:
- fraud or evasion;
- intentional disregard of a taxation law; or
- recklessness as to the operation of a taxation law.
- whether retaining the amount is necessary for the protection of the revenue, including the likelihood that the Commissioner could recover any of the amount if the information was found to be incorrect after the amount had been refunded
- any complexity that would be involved in verifying the information
- the impact of retaining the amount on the entity’s financial position
- any other matter the Commissioner considers relevant
- he changes his mind; or
- there is a change in the amount of the refund as a result of amending an assessment or the Commissioner making an assessment under S 105-5 of Schedule 1 to the TAA.