Explanatory Memorandum
(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)Chapter 5 Retention of tax refunds
Outline of chapter
5.1 Schedule 4 to the Bill authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
Context of amendments
5.2 Part IIB of the TAA 1953 provides for the treatment of money that is paid to the Commissioner, or is held by, or is owing to the Commissioner, in relation to taxpayers' tax affairs. The provisions allow the Commissioner to apply money received against a taxpayer's tax debts and require the Commissioner to pay refunds in certain circumstances.
5.3 Subsection 8AAZC(1) provides the Commissioner with a broad discretion to establish 'one or more systems of accounts for primary tax debts', which are known as Running Balance Accounts (RBAs).
5.4 Under the definition of a 'primary tax debt' (section 8AAZA), an RBA may include tax debts that are due but not yet payable to the Commonwealth, as well as debts that are due and payable to the Commonwealth.
5.5 The Commissioner may also maintain other systems of account such as income tax accounts, which are not RBAs.
Application of payments and credits
5.6 Division 3 of Part IIB contains two methods for the application of payments received by the Commissioner and credits arising under the tax laws. Method One (section 8AAZLA) allows the Commissioner to apply the amount to an RBA. Method Two (section 8AAZLB) applies in a similar way to non-RBA tax debts.
5.7 Both methods apply the payment or credit to a particular debt or RBA. If the payment or credit is not exhausted after being applied to the particular debt or RBA, it gives rise to an 'excess non-RBA credit' (subsections 8AAZLA(3) and 8AAZLB(3)) and, in the case of an RBA, an equivalent RBA surplus (section 8AAZA).
5.8 An excess non-RBA credit or RBA surplus is a credit the Commissioner must apply in accordance with the provisions in Division 3 (paragraphs 8AAZL(1)(b) and (c)). That is, the provisions may apply multiple times in relation to a particular credit amount until it is exhausted.
Payment of refunds
5.9 Only when a credit (including an excess non-RBA credit or RBA surplus) is not able to be applied under Division 3 (because there are no remaining debts), is the Commissioner required to refund the amount to the taxpayer (section 8AAZLF). Following the Full Federal Court decision in Commissioner of Taxation v Multiflex Pty Ltd (2011) 82 ATR 153, this obligation must be performed 'within a time fixed by what is reasonably necessary to make that refund'. Of itself, this period does not allow the Commissioner to verify information or undertake other actions.
5.10 This obligation to pay refunds is subject to the Commissioner's discretion to retain refunds in certain circumstances, including where the taxpayer has failed to provide certain information - including a BAS or PRRT notice (section 8AAZLG), or a Single Touch Payroll notification under Division 389 in Schedule 1 to the TAA 1953 (section 8AAZLGB), or where the Commissioner is verifying information provided by the taxpayer (section 8AAZLGA).
5.11 Under section 8AAZLG, the Commissioner may retain the refund until the taxpayer provides the relevant notification to the Commissioner, or the Commissioner makes or amends an assessment of the amount. Under section 8AAZLGB, the Commissioner may retain the refund until they become reasonably satisfied that the taxpayer does not have to give the relevant notification under the Single Touch Payroll provisions in Division 389 in Schedule 1 to the TAA 1953 or does not have a PAYG withholding liability. The Commissioner must pay interest on the amount under the Taxation (Interest on Overpayments and Early Payments) Act 1983 if the refund is further delayed.
5.12 Taxpayers engaged in illegal phoenix activity will often not lodge or will delay lodging returns that will result in a tax liability becoming due. However, these taxpayers may lodge a return (often a BAS) where it will result in a credit arising. Operators may use the delay in the tax liability arising to obtain a refund they would otherwise not be entitled to, strip assets from the company or otherwise frustrate the collection of the liability.
5.13 In more egregious cases, taxpayers with outstanding lodgements may claim a refund consisting of false credits and strip the refund from the company before they place their companies into liquidation. Liquidators are often not in a position to recover these refunds, which has the effect of diluting non-government creditors' claims in the liquidation.
Summary of new law
5.14 The Commissioner may retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
Comparison of key features of new law and current law
| New law | Current law |
| The Commissioner may also retain a refund to a taxpayer that has other outstanding lodgements or information that needs to be provided to the Commissioner. | The Commissioner may retain a tax refund to a taxpayer that has an outstanding notification under the BAS or PRRT provisions. |
Detailed explanation of new law
5.15 Schedule 4 to the Bill extends the operation of section 8AAZLG to authorise the Commissioner to retain refunds from a taxpayer that has a failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. [Schedule 4, item 1, subparagraph 8AAZLG(1)(b)(iii) of the TAA 1953]
5.16 The Commissioner may retain the refund until the return or other information is provided, or the Commissioner makes an assessment of the underlying amount. The Commissioner must then refund the amount or apply a separate discretion to further retain the amount (for example, section 8AAZLGA).
5.17 Where a new tax liability arises before the date the Commissioner must pay a refund, the Commissioner is able to apply the amount that would otherwise have been refunded against the new liability. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
5.18 If the taxpayer is a full self-assessment taxpayer, the lodgement of an outstanding income tax return causes the taxpayer to be taken to have received an assessment, crystallising the taxpayer's income tax liability (see section 166A of the Income Tax Assessment Act 1936 and section 5-5 of the Income Tax Assessment Act 1997 ).
5.19 The introduction of this discretion does not affect the existing discretion the Commissioner has to retain refunds where a notification under the Single Touch Payroll, BAS or PRRT provisions is outstanding. The Commissioner's existing administrative arrangements (see Practice Statement Law Administration 2011/22 ) in relation to this discretion are unaffected by these amendments.
5.20 The Commissioner will release guidance to support the administration of the discretion in the amendments. The Government envisages the Commissioner will apply the new discretion in relation to taxpayers identified as a high-risk, including those engaging in illegal phoenix activity.
Example 5.1 Retention of refunds
Fred is the sole shareholder and director of Super Express Deliveries Pty Ltd, which carries on a business as a courier. It lodges its BAS for the quarter ending 30 June 2019. The lodgement triggers an assessment of the entity's GST liability for the quarter, which reveals the entity is entitled to a credit of $200,000.
At the time, Super Express Deliveries Pty Ltd does not have any outstanding tax debts and would ordinarily be entitled to have the credit paid out as a refund. However, Super Express Deliveries Pty Ltd has not lodged its income tax return for the 2017-18 income year.
The Commissioner reviews the affairs of the Super Express Deliveries Pty Ltd and Fred. The Commissioner identifies that, over the past five years, Fred has owned and operated three other courier companies, each of which has entered into liquidation owing significant debts to its employees, the Commissioner and other creditors. The Commissioner learns ASIC is investigating Fred for engaging in illegal phoenix activity.
The Commissioner exercises his discretion to retain the $200,000 refund until Super Express Deliveries Pty Ltd lodges its outstanding income tax return.
On learning that the refund will not be paid, Fred lodges the outstanding income tax return on behalf of Super Express Deliveries Pty Ltd. The return results in the company being taken to have received an assessment and the crystallisation of a liability of $150,000.
The Commissioner applies the $200,000 credit against the income tax liability, reducing it to nil. The Commissioner pays a refund of $50,000 to Super Express Deliveries Pty Ltd.
The Commissioner continues to explore other avenues to recover the unpaid tax liabilities from Fred's other companies.
Application provisions
5.21 The amendments in Schedule 4 commence on the first day of the quarter following Royal Assent. [Item 3 of the table in subclause 2(1) of the Bill]
5.22 The amendments apply to refunds the Commissioner is otherwise required to pay on or after commencement. [Schedule 4, item 2]