How long can the ATO hold on to your GST refund?

Have you ever been under pressure with cash flow problems and wondered how long the ATO is able to hold on to your goods and services tax (GST) dollars?

Up until relatively recently, the common practice with regard to GST credit refunds, should something about the return seem to the ATO to be untoward or downright suspicious, was to hold on to that refund pending further investigation. If the ATO had reasonable grounds to suspect that, for example, input tax credits claimed in a business’s business activity statement (BAS) were not entirely legitimate, or should be further investigated, the claimed amounts could be held back while verified.

Retaining a refund, as practiced up until now, was undertaken after the ATO considered the impact such an action would have on the taxpaying entity’s financial position. And it was generally held that any such retention of refunds, and related investigations, would not go beyond timeframes that would be considered “reasonable”.

However new draft legislation was issued early in 2012 which seemed to stretch the definition of “reasonable” to its limits — some would say to breaking point. This proposed change to the law, in its draft form, would have allowed the ATO to withhold a GST refund for up to 60 days (after being required to notify the taxpayer, often within 30 days). A request for further information from the ATO could result in that refund being held beyond this 60 days, and should yet further verification be warranted in the opinion of the ATO, the holding period could also be extended.

The negative impact on the cash flow position of a small business in this situation may be obvious to many readers, however (and this was a sticking point for many) the only factor in the proposed new process that considered the circumstances of the taxpayer was for the ATO to consider “the impact of retaining the amount on the entity’s financial position”. And the proposed legislation only required the ATO to consider this when looking to extend the holding period beyond 60 days — no doubt terminally late for some businesses.

The law that has now passed has taken what many would deem to be a more realistic stance on the retention of GST refunds.

The relevant case

The proposed changes had their genesis in a reaction from the ATO (some would say an overreaction) after it lost an appeal in relation to a particular case involving GST refunds. The business involved, a buyer and seller of mobile phones and other such equipment called Multiflex, had claimed net GST refunds due to

acquisitions of electronic goods in Australia which were then exported as GST-free supplies. The ATO decided that any refunds, which were sizeable, should be withheld as it had reasonable grounds to suspect that the input credits claimed were not legitimate. It was also of the view that any “reasonable” period (which, remember, it was required to consider) would take into account the time taken for investigations.

The Federal Court found that any reasonable period should generally only involve the time taken for administrative processes, and should not encompass the time that investigations require — and therefore the ATO was directed by the court to pay the GST refunds to Multiflex. The court found that the continuing delay in relation to paying out the company’s GST refunds was likely to have a significant impact on its ability to continue trading.

The decision was appealed unsuccessfully to higher courts, and in the end the ATO was obliged to pay a GST refund within the time it takes to undertake the necessary administrative processes for a taxpayer’s return and to make the payment, despite concerns the ATO may hold over the veracity of facts or the validity of a refund claimed. This was in no small part due as a consequence of the relatively recent introduction of a self-assessment system for indirect taxes (again which need not be covered in too much detail here, however ask this office if you’re interested).

The consequences

So the ATO was faced with an obligation to pay out GST refunds claimed once a business’s return had been processed, and then seek to recover any payouts if subsequent checks found these amounts claimed to be in error, overstated, or outright fraudulent. As with many such circumstances of course, there is risk in paying first and verifying later, and so the ATO maintained the view that whatever the reasons for incorrect GST refund claims — whether carelessness, recklessness or fraud — it would be necessary regardless for there to be an integrity requirement to enable the ATO to delay some refunds in certain circumstances.

In short, there are now new provisions and amendments, which interestingly considered New Zealand legislative provisions and a British judicial approach in developing the new GST refund laws.

The provisions continue to allow for the previous practice of retaining a refund should circumstances dictate that the ATO may be best served by doing so, however there are now important statutory conditions imposed. If the ATO has reasonable grounds to require verification of information provided relating to a GST refund (and/or the taxpaying entity requests verification), the ATO must have regard to certain factors. These are:

  • the impact on the taxpayer’s financial position
  • the impact on its revenue
  • the likelihood there is fraud or evasion, intentional disregard or recklessness with regard to tax law.

If the ATO considers that an amount should be retained after an initial period (14 or 30 days, depending if the amount relates to a “running balance account” surplus or a credit in the taxpayer’s favour), the taxpayer must be informed before that time is up. The same tests of reasonableness apply if more time is subsequently required. Objections can be lodged after the designated period of retention is expired.

Timeframes written into the law as it stands provides that the ATO can only retain a refund until the time it would no longer seem to be reasonable to ask for verification of information. It also cannot hold on to a refund (beyond the notification period) if it fails to actually notify the taxpayer that this is a possibility, nor if the relevant tax assessment has been amended (an amendment ends the retention period allowed).

So while there is an upfront obligation on the ATO to refund GST credits upon an assessment being issued, there are also provisions to retain refunds in particular circumstances. One requirement that must be met however is that the ATO must be able to show reasonable grounds for it to request verification of information that relates to a refund. Ask this office for more guidance and advice.

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