Legislation analysis – Exposure draft to allow Commissioner to retainer refunds pending verification

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.

Notification requirement

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.
Sub-section 8AAZLG(4) provides that the 60 day period is extended by any period of time between the Commissioner requesting information and the entity providing that information.
The effect of these sub-section is that, unless the Commissioner changes his mind, the entity will have to wait at least 60 days.  Also, if the Commissioner issues an information request within the 60 day period, the time will effectively stop running until the entity provides the information.  Further, the provisions do not appear to prevent the Commissioner from issuing multiple information requests, which could cause this 60 day period to be extended almost indefinitely.  Paragraph 1.29 of the Explanatory Memorandum would appear to support the power of the Commissioner to issue multiple information requests as it refers to “the 60 day period referred to in subsection 8AAZLG(3) (plus any extensions)“. [emphasis added]
Retaining the refund after 60 days
Sub-section 8AAZLGA(5) allows the Commissioner to retain the refund beyond 60 days (plus extensions) if he is satisfied that it would be reasonable to require verification (or further verification). Sub-section 8AAZLG(8) outlines a number of matters that the Commissioner must have regard in deciding whether to further retain the refund.  These factors are:
  • 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:
  1. fraud or evasion;
  2. intentional disregard of a taxation law; or
  3. 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
The Commissioner still has a broad discretion as the last matter is “any other matter the Commissioner considers relevant”.
Sub-section 8AAZLG(7) provides that the Commissioner may retain the refund until:
  • 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.
Unlike the initial retaining of refund – there is no end date, save that the entity will have certain objection rights (discussed below).
Notification requirement
Sub-section 8AAZLG(6) provides that the Commissioner “must” inform the entity that he has retained the amount under subsection (5) (i.e., for the further period) and that he must do so within 14 days of the end of the period.
The words of this section would appear clear – i.e., the Commissioner can only continue to retain the refund if he gives the requisite notice to the entity.  However, when regard is had to the Explantory Memorandum, this may not be the case.  In discussing the entity’s objection rights, the Explanatory Memorandum says as follows (at 1.29):
The right to object arises at the earlier of when the Commissioner informs the taxpayer of the decision to retain the amount, or 14 days after the 60-day period referred to in subsection 8AAZLGA(3) (plus any extensions). This ensures a taxpayer’s objection rights are triggered even where the Commissioner fails to inform the taxpayer of his or her decision, as required by subsection 8AAZLGA(6) [emphasis added]
This is an unsatisfactory position and may well lead to disputes.  The words of ss 8AAZLGA(6) are clear – if the intention of Parliament is to allow the Commissioner to retain the refunds beyond the initial 60 day period (plus extensions) without giving any notification to the entity, then the legislation should expressly say so.
Objection rights
Sub-section 8AAZLGA(9) provides that the entity can object to the decision of the Commissioner to retain the refund after the initial 60 day period (plus extensions).  The new sub-paragraph 14ZW(1)(aad) provides that the time for objecting arises on the earlier of the day of informing the taxpayer or 14 days after the end of the period.
Further, the effect of these provisions is that the entity will not be able to object to the Commissioner’s conduct for at least 120 days (longer if the Commissioner effectively extends the initial 60 day period by issuing information request(s)), with a decision on the objection some time after that.  This period is simply too long.
One also wonders how these provisions will operate in the context of the proposed “self-assessment regime”, where a GST return will be an assessment.  Under the proposed “self-assessment” regime, a taxpayer could lodge an objection after lodging a GST return (which will be regarded as an assessment) – whereas under this proposed new section, the entity will not be able to lodge an objection against a GST return for at least 120 days.
 

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