“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.