Practice Statement Law Administration

PS LA 2021/2

The ATO's administrative approach to the extension of the Commissioner's discretion to retain tax refunds

• This document has changed over time. View its history.

This Practice Statement sets out the ATO's administrative approach to the extension of the Commissioner's discretion to retain tax refunds.

1. What this Practice Statement is about

As part of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Amending Act), changes were made to extend the Commissioner's discretion to retain a refund where a taxpayer has an outstanding notification (other than a notification under the business activity statement (BAS) or petroleum resource rent tax (PRRT) provisions) that:

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is required to be given to us under a taxation law (for example, a tax return), and

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affects or may affect the amount of the refund.^[1]

The law does not limit the application of the extension to the discretion. However, this Practice Statement recognises that the Commissioner's exercise of this extended discretion will not be taken lightly. In particular, the exercise of the discretion will be considered in circumstances where taxpayers are identified as engaged in high-risk behaviour (including those engaging in illegal phoenix activity).^[2]

This Practice Statement provides guidance on when you may exercise the Commissioner's discretion to retain a taxpayer's refund. However, this Practice Statement does not apply to the exercise of the Commissioner's discretion to retain a taxpayer's running balance account (RBA) surplus or credit where:

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a notification under the BAS provisions, the PRRT provisions is outstanding^[3]

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a Single Touch Payroll notification is outstanding^[4], or

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we require verification of information contained in a notification.^[5]

For guidance on exercising these discretions to retain a taxpayer's refund, refer to Law Administration Practice Statement PS LA 2011/22 Commissioner's discretion to retain a refund.

2. Authority to exercise the discretion to retain the refund

Only Executive Level 2 (EL2) officers or Senior Executive Service officers in Client Engagement Group are to exercise the discretion to retain the refund. Other staff should refer recommendations to exercise the discretion to an appropriate EL2 in their business line, in the first instance.

3. How the Commissioner applies the discretion

Having regard to the nature of the legislative change and the context in which it was introduced, the Commissioner will only consider applying this discretion to taxpayers identified as engaging in high-risk behaviour (including those engaging in what is considered to be phoenix-type activity).^[6]

4. When you should consider exercising the discretion

You should consider exercising the discretion to retain a refund where there are reasonable grounds to believe that the:

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taxpayer has an RBA surplus or other credit that has not been applied against a tax debt of the taxpayer

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taxpayer has an outstanding notification that they are required to give under a taxation law (other than the BAS or PRRT provisions)

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outstanding notification affects or may affect the amount of the refund, and

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taxpayer (including associates or controllers) is engaged in

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phoenix behaviour (during the first year after commencement of the Amending Act), or

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high-risk (including phoenix) behaviour (after the first year following commencement of the Amending Act).

5. Phoenix or high-risk behaviour

When deciding whether a refund should be retained, you need to weigh the seriousness of the behaviour demonstrated by the taxpayer (or its associates or controllers) against the potentially adverse consequences for the taxpayer.

Indicators of phoenix behaviour

Indicators of phoenix behaviour by the taxpayer, its associates or controllers include (but are not limited to):

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cyclically establishing, abandoning or deregistering companies to avoid paying taxes, creditors or employee entitlements

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assets being dissipated with the intention to defeat creditors or other action being taken to defeat creditors (which may be a precursor to phoenixing)

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a director associated with prior liquidations or deregistrations

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a director associated with prior instances of insolvency

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stripping or transfer of assets from a company, ahead of its abandonment, winding-up or deregistration

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transfer of company assets at an undervaluation (often to a related party) to defeat creditors

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the transfer of employees to a new company under the same effective control as the previous company to defeat tax obligations and employee entitlements

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backdating of the resignation of a director, appointment of 'straw' directors or abandonment of a company without a resident director

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the concealment of the role of a shadow or de facto director

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the concealment or destruction of company records.

These factors, either alone or in combination, may not point to phoenix behaviour. It is the totality of the circumstances that must be considered in deciding whether to exercise the discretion to retain a refund.

Indicators of high-risk behaviour

Indicators of high-risk behaviour by the taxpayer, its associates or controllers include (but are not limited to):

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poor past and current compliance with taxation and superannuation obligations, including

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registration

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lodgment

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accuracy of reporting

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record keeping, and

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making on-time payments.

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poor behaviours and governance in managing tax and superannuation risks

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the number of, and the circumstances around, any bankruptcies or insolvencies

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tax-related penalties and sanctions imposed, such as a taxpayer being subject to director penalty notices or having committed an offence in failing to give security as required by us

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connection with advisers who are subject to disciplinary actions or sanctions relating to taxation and superannuation laws, such as penalties relating to promoting or implementing schemes

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past information provided which reasonably indicated

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fraud or evasion

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intentional disregard of a taxation law

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recklessness as to the operation of a taxation law

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the likelihood of participation in or promotion of

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aggressive tax planning arrangements

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schemes to obtain a tax benefit (tax avoidance schemes)

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fraud or evasion

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criminal activity.

6. Length of time we can retain a refund

The refund can be retained under this discretion until the taxpayer has given the outstanding notification or an assessment of the amount is made, whichever happens first.

Where a new tax liability arises before the outstanding notification is provided or an assessment of an amount is made, the amount that would otherwise have been refunded can be applied against the new liability. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

Delayed refund interest will not apply on any RBA surplus or credit retained under this measure.^[7] Once the notification has been provided, delayed refund interest will be payable on the RBA surplus if more than 14 days is taken to refund the amount.

However, interest on overpayments is payable where an income tax credit is retained^[8] under this discretion and we take 30 days or more to refund an amount of that credit.^[9]

7. Advising the taxpayer that their refund is retained for an outstanding notification

Although not required by law, it is expected that you will send written communication to the taxpayer explaining:

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that the refund has been retained

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the amount retained

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why the refund was retained

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the outstanding notification or notifications required to be lodged, and

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how the taxpayer can prevent refunds being retained in the future.

8. Refunding an amount

Where a notification is outstanding, you may refund an amount if the taxpayer can demonstrate (or you can confirm based on available information):

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for an individual – that the retention of the refund will cause serious financial hardship, that is, the individual will not be able to afford the basic necessities of life

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for non-individuals – the inability to give the outstanding notification by the original due date is directly caused by circumstances beyond the taxpayer's control.

This decision must be approved by the EL2 officer (or higher) who approved the decision to retain the refund.^[10]

9. Review rights available to the taxpayer

A decision to exercise this discretion to retain a refund is externally reviewable.^[11]

If we make an assessment of the underlying amount, the taxpayer may object to the assessment.^[12]

10. Examples

Example 1 – high-risk behaviour and phoenix behaviour indicated; refund retained

Michelle is a director of a construction company that employs 15 individuals.

This company does not lodge their 2021–22 and 2022–23 tax returns. The company also does not comply with its superannuation obligations.

The company has also recently transferred assets to another entity, indicating a reduction in available assets to meet liabilities.

Michelle was a director of 3 other construction companies, each of which employed some of the same staff as her current company and were liquidated with unpaid tax liabilities.

The company lodges their 2023–24 tax return, which results in a $120,000 refund while their other lodgments remain outstanding.

The Commissioner exercises the discretion to retain the $120,000 refund because Michelle is in control of the company and is engaged in high-risk behaviours that present a phoenix risk.

The refund will be retained until the company lodges the remaining outstanding tax returns or an assessment of an amount in relation to the outstanding returns is made.

Example 2 – high-risk behaviour indicated; refund retained

Daniel is the sole director of Daily Dollars, a financial services company. As a result of Daniel's actions, Daily Dollars has poor past and current compliance with its taxation and superannuation obligations. This has resulted in multiple penalties for false and misleading statements and director penalties for both pay as you go withholding and superannuation guarantee charge.

Daily Dollars has an outstanding tax return that is anticipated to result in an income tax liability of $250,000.

Daniel lodges Daily Dollars' BAS for the June 2023 quarter, which results in an $80,000 credit. Daniel does not lodge Daily Dollars' outstanding tax return.

Rather than refunding the credit, the Commissioner exercises the discretion to retain the $80,000.

The refund will be retained until Daniel lodges Daily Dollars' outstanding tax return or an assessment of an amount in relation to the outstanding tax return is made.

Example 3 – no high-risk or phoenix indicators; refund not retained

Carl is a sole trader carpenter who self-prepares his BAS but has a tax agent prepare his tax return. He has a good compliance history, generally lodging on time and paying any tax-related liabilities as they are due.

As Carl has not visited his tax agent recently, his tax return has not been lodged and is now overdue. Carl lodges a BAS resulting in a $10,000 credit. Despite the outstanding tax return, there are no indicators of phoenix or high-risk behaviour and therefore the discretion to retain the $10,000 refund is not exercised.

Example 4 – no high-risk or phoenix indicators; refund not retained

Angus and his wife Cherie have been running a successful specialty coffee shop for the last 6 years. They decide to incorporate their business in 2016 and become directors. Their company has no employees until late 2023, when a new tram stop built near their shop causes their business to thrive. The company employs 2 people on a casual basis as a result. Until 2023, the company never misses a BAS lodgment or a tax return lodgment.

In 2023, Angus suffers a long-term illness and can no longer be involved in the business. Cherie continues to operate the business but struggles to keep on top of the company's records. As a result, the company's quarterly BAS for the 2022–23 financial year is outstanding. Cherie engages a BAS agent to complete the outstanding BAS, which results in a $55,000 refund. In focusing on keeping the business operating, Cherie forgets to lodge the company's tax return.

Despite having previously missed BAS lodgments (which were eventually lodged), there is no indication of high-risk or phoenix behaviour from Cherie and Angus or of assets being dissipated with the intention to defeat creditors. Therefore, the discretion to retain the $55,000 refund is not exercised despite the company having an outstanding tax return.

11. More information

For more information, see:

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Law Administration Practice Statement PS LA 2011/16 Insolvency – collection, recovery and enforcement issues for entities under external administration

•

Law Administration Practice Statement PS LA 2011/22 Commissioner's discretion to retain a refund.

Amendment history

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Date of Issue: 22 April 2021

Date of Effect: 22 April 2021

File 1-MN40UPS; 1-14E5UUA8

Related Practice Statements:
PS LA 2011/16
PS LA 2011/22

Other References:
Explanatory Memorandum to the Treasury Law Amendment (Combating Illegal Phoenixing) Bill 2019

Legislative References:
ITAA 1997 995-1(1)
TAA 1953 Pt IVC
TAA 1953 8AAZLG
TAA 1953 8AAZLGA
TAA 1953 8AAZLGB
ADJR Act 1977
Judiciary Act 1903
T(IOEP)A 1983 Pt IIB
T(IOEP)A 1983 12AF
Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020

Business Line:  Frontline Compliance

ISSN: 2651-9526