On the 15th February the government released an Exposure Draft (ED) which basically gives the ATO the ability to retain Running Balance Account (RBA) funds pending verification. This proposed legislation has significant implications for small business. Firstly, any retention of a refund has a negative impact on cash-flow and this proposed legislation has the potential for a 90 day delay of funds! Secondly, we aren’t just talking refunds of GST but all refunds payable by the ATO (including income tax).
Background to the Exposure Draft (ED):
TThis particular Exposure Draft (ED) has been put forward by the government as a legislative solution to the outcome of the recent decision in the Multiflex case. The Multiflex case was one which involved payment of a GST refund where the ATO suspected that Tax Invoices were fraudulent. The Full Court of the Federal Court held that the ATO does not have the power to withhold the payment of a Running Balance Account (RBA) surplus pending verification – such is the ‘importance of a prompt refund’ in the scheme of the law. The Court noted that if this represented a flaw in the current GST scheme then it was an issue for the Parliament to address. The Commissioner appealed to the High Court but was refused.Hence a new section (s. 8AAZLGA) of the Income Tax Assessment Act 1953 is proposed which will potentially change the current procedure for RBA refunds pending integrity checks.
What would be the new procedure?
Essentially, where the Commissioner considers that it would be ‘reasonable to require verification of information’ then the new procedure would be:
- notification of the taxpayer by the ATO within 30 days of the refund being withheld;
- refund being held for up to 60 days unless the matter is otherwise resolved;
- ATO entitled to request additional information whereby the 60 day period may be extended; and
- the retention period may also be able to be extended where the Commissioner ‘is satisfied that it would be reasonable to require verification or further verification’.
Per the Exposure Draft, at the 60 day point the impact on the taxpayer is considered in the application of 6 factors in deciding whether or not to extend the withholding period.
Response from the Business, Professional and wider community?
Despite only 5 days of consultation for this Exposure Draft (ED), there has been a flow of submissions from the business, professional and wider community. The professional bodies, in particular, are opposed to the introduction of the provision.CPA Australia is concerned that the balance between the need for refund verifications by the ATO and the continued cash-flow and financial viability of compliant business taxpayers will ‘not be achieved if the legislation is enacted as drafted’. CPA Australia also highlights its concern that the scope of the proposed amendment goes beyond GST refunds and extends to all other refunds payable by the Commissioner.Similarly, the Institute of Chartered Accountants (CAA) believes the proposed amendment does not strike the appropriate balance between revenue protection and taxpayer refund entitlements. Further, the CAA submits that given the ‘potential impact of this provision… a consultation period of 5 working days is inadequate and inappropriate’. The CAA is ‘disappointed that there was not a greater degree of transparency’ in the consultation process.Taxpayers Australia considers that the ‘new legislation may sink businesses’ due to the ‘negative cash flow impact’ that a delay in RBA refunds may cause.Likewise the Tax Institute maintains that ‘retention of a refund which a taxpayer is entitled can have irreversible impacts on a business’. Further it considers that the proposed legislation is ‘fundamentally flawed in the breadth of power it confers upon the Commissioner’.
These new changes are still ‘proposed’ and not yet law. Once the ED receives Royal Assent then it will take effect. Given the amount of power this new legislation confers on the Commissioner, it is hoped that Treasury carefully considers the submissions made by the business, professional and wider community opposed to this amendment to the Taxation Administration Act 1953.We will keep you updated – so stay tuned on the status of this proposed change!
For more information on the topic of the proposed legislation allowing the ATO to retain Running Balance Account (RBA) surpluses pending verification refer to: