Australia: Refunds delayed, refunds denied - the Commissioner's new powers to retain refunds of GST

Key Point:

The Commissioner of Taxation's general power to withhold refunds to allow "verification of information" could cause additional funding costs for taxpayers and affect the financial viability of those taxpayers or their projects.

What happens when an unstoppable object hits an immoveable post? Of course, the problem is not in the answer, but in the question. If the existence of two things is contradictory, then both cannot exist simultaneously.

The recent decision of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 has highlighted the contradictory forces at work in the administration of GST – the Commissioner's need to secure the revenue and taxpayers' needs to receive their input tax credits in a timely fashion.

Amendments proposed to the Taxation Administration Act 1953 (TAA) now seek to rebalance the equilibrium of these forces in favour of the Commissioner. Under the proposals, the Commissioner will have a right to retain refunds to allow completion of "verification checks". Taxpayers out of pocket will have to wait almost three months before they can object to the Commissioner's decision to retain the refunds.

Read on for more information.

GST – not intended to be a cost to business

The features of GST which make it unique must always inform the approach of advisers, regulators and legislators.

GST is not intended to be a cost to business. GST is collected from entities making taxable supplies. Entities making taxable supplies are intended to pass the economic burden of that GST on to their customers. However, where those customers are carrying on their own business, an input tax credit is allowed to those customers, negating the economic cost of the GST.

This statement of "GST belief" may seem trite, but these features are too commonly overlooked in the administration of the tax.

While the GST itself is not intended to be a cost to business, the practical operation of the tax is that it will inevitably give rise to compliance and funding costs. The Commissioner has a responsibility not only to ensure that the tax is recovered but also that the compliance and funding costs for taxpayers are not necessarily increased.

The problem with the Multiflex decision

The Multiflex litigation involved a taxpayer who had lodged GST returns in respect of which refunds were due to the taxpayer. The refunds were the result of certain acquisitions the taxpayer claimed it had made. The Commissioner had concerns as to whether the taxpayer had indeed made the acquisitions which gave rise to the input tax credits and, in turn, the refunds claimed by the taxpayer.

The taxpayer sought an order from the Federal Court that the Commissioner was required to pay the refunds, notwithstanding that the Commissioner had yet to confirm the facts substantiating the claims. The problem faced by the Commissioner was that although the time being taken by the Commissioner to investigate the factual background to the refund claims may have been reasonable in the circumstances, there was simply no statutory power entitling the Commissioner to withhold the refund to enable the investigation to be conducted. Rather, the Court held that the implication of the statutory framework was that the Commissioner could only withhold the refund for such period as would have been necessary to process the refund, having accepted the prima facie validity of the returns. The Commissioner appealed to the Full Federal Court and sought special leave to appeal to the High Court to have that decision overturned – and was unsuccessful each time.

Why a power to retain is a cause for concern

As a consequence, the Commissioner has sought legislative amendments to the TAA to give the Commissioner an express power to withhold refunds during the period of an investigation.

Of course, it is reasonable for the Commissioner to have the power to delay payment of refunds when the Commissioner suspects fraud or evasion. However, a general power to withhold refunds to allow "verification of information" needs to be approached with care. It has the scope to cause not only additional funding costs for taxpayers but also affect the financial viability of those taxpayers or their projects.

For example, a developer will usually secure finance for the expected costs of a development. The level of that finance facility will be set by reference to the GST exclusive cost of construction. As amounts are expended from the facility, input tax credits will be received by the developer and repaid into the facility. Any delays in receiving those refunds will place strain on the facility. However, it is such developers that often have large refund claims and, as such, are legitimately the source of scrutiny by the Commissioner.

Similarly, a taxpayer may embark on a significant expansion of their business, involving capital expenditure and the claiming of significant input tax credits. The level of their expenditure would be set by reference to the GST exclusive cost of that capital expenditure, on the assumption that the refund of amounts expended on account of GST will be speedily received as a refund. If that refund does not materialise, it could place significant strain on the taxpayer's business. If the taxpayer had counted on that refund to fund its ongoing operations, the taxpayer may be unable to pay its trade debtors as and when they fall due.

In both cases, it is reasonable for the Commissioner to investigate the refund claims. However, in both cases, innocent taxpayers can find themselves in difficult financial positions because of the time taken by the Commissioner to investigate legitimate claims.

Operation of the proposed amendment

The proposed amendments insert a new section 8AAZLGA into the TAA that will allow the Commissioner to "retain an amount" otherwise refundable to a taxpayer wherever the "Commissioner is satisfied that it would be reasonable to require verification of information" relating to the refund. There is no need for the Commissioner to have reasonable grounds to suspect fraud, evasion or even innocent error on the part of the taxpayer.

The Commissioner may continue to withhold the refund during the period of the investigation until:

• the Commissioner is satisfied that it is no longer reasonable to require verification of the information;
• there is a change to how much needs to be refunded – because of the issuance of an amended assessment; or
• 60 days after the RBA interest day for the payment (usually 14 days after lodging the GST return) or 30 days after lodgement of the refund notification in some cases.

Although referred to as a "60 day" period, the delay is up to 90 days after notifying the Commissioner of the refund. To this is added the time taken by the taxpayer to provide information to the Commissioner. That is, if the Commissioner requests information and it take the taxpayer 30 days to provide that information to the Commissioner, the "60 day" period is extended by 30 days. If before the expiry of the "60 day" period the Commissioner requests further information, then the period will be extended again.

As such, it is easy to see how the "60 day" period could easily stretch out to many months.

Formal extension of the "60 day" period

However, if at the end of the "60 day" period the Commissioner still considers that it is reasonable to retain the refund and require verification of information, the Commissioner may continue to do so for whatever period the Commissioner considers reasonable. In reaching this decision, the Commissioner must have regard to:

• the likelihood of the accuracy of the information provided;
• the likelihood that the information provided was affected by fraud, evasion, intentional disregard of the law;
• protection of the revenue;
• the complexity of verifying the information; and
• the impact of retaining the amount on the entity's financial position.

Rather oddly, the Commissioner is not required to notify the taxpayer of the decision to retain the refund past the "60 day" period until 14 days after the end of the period.

Remedies available to the taxpayer

The taxpayer has no remedy to challenge the Commissioner's decision to retain the refund during the "60 day" period. If the Commissioner decides to retain the refund past the end of that period, the taxpayer can object to the Commissioner's retention of the refund under Part IVC of the TAA. Importantly, this is not a dispute over the correct "net amount" for the tax periods affected by the refund claim. Rather, this is only a dispute regarding the reasonableness of the Commissioner's retention of the refund based on the information provided by the taxpayer.

Practical impact

The competing forces of protecting the revenue and speedy payment of refunds will always be in conflict. These rules significantly strengthen the Commissioner's hand in dealing with taxpayers and shift the equilibrium in his favour. If enacted in their current form, taxpayers will have to do everything they can to ensure that they do not get mired in endless requests for further information.

The burden of proof in relation to all tax matters sits with taxpayers. These provisions will make it more important for taxpayers to have ready access to all relevant information that substantiates input tax credit claims, particularly where those claims are going to give rise to a net refund position. Taxpayers should also consider ensuring that the ATO is informed of potential refund claims before they are made in order to ensure that verification checks can be completed as quickly as possible after the refund claims are lodged.

Submissions

The current form of the proposed amendments reflects significant consultation by Commonwealth Treasury. However, further submissions in relation to the current draft may be provided to Commonwealth Treasury before 21 February.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.