The ATO now has broader powers to retain refunds in instances where taxpayers have outstanding notifications. While the exercise of this discretion will not be taken lightly, the Commissioner indicates that it will be used in circumstances where the taxpayers are identified as engaged in high-risk behaviour or those engaging in illegal phoenix activity. For taxpayers whose refunds are retained, the ATO will communicate to them the reasons why it was necessary and also outline the actions that can be taken to avoid it in the future.
A new administrative approach has been released by the ATO in relation to the exercise of the Commissioner’s discretion to retain tax refunds where a taxpayer has an outstanding notification. Previously, the ATO was able to retain refunds where a taxpayer has an outstanding notification in relation to BASs or PRRT (petroleum resource rent tax), but this power has been extended to encompass all outstanding notifications in an effort by the government to combat illegal phoenixing.
“[The ATO] 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).”
According to the ATO, in deciding whether a refund should be retained, consideration of seriousness of the taxpayer’s behaviour ought to be weighed against potentially adverse consequences for the taxpayer. It notes some of the indicators of high-risk behaviour by taxpayers include the following:
- poor past and current compliance with tax and super obligations (ie registration, lodgment, accuracy of reporting, record keeping, and making on-time payments);
- poor behaviours and governance in managing tax and super risks;
- the number of and the circumstances surrounding any bankruptcies or insolvencies;
- tax-related penalties and sanctions imposed (ie director penalty notices or having committed an offence in failing to give security);
- connection with advisers who are subject to disciplinary actions or sanctions relating to taxation of super laws (ie promotion of schemes);
- past information which reasonably indicates fraud or evasion, intentional disregard of a tax law, or recklessness as to the operation of a tax law; or
- the likelihood of participation in or promotion of aggressive tax planning arrangements, schemes, fraud or evasion and criminal activity.
Other circumstances where the Commissioner may consider retaining a refund include instances where phoenix behaviour has been displayed by the taxpayer, its associates or controllers. The ATO outlines features of phoenixing as involving cyclically establishing, abandoning or deregistering companies to avoid legal and financial obligations, insolvencies, stripping assets from a company and transfer of assets at an undervaluation.
If the ATO suspects phoenixing or where a taxpayer has been identified as high risk, the Commissioner has the power to retain the refund until the taxpayer has given the outstanding notification or an assessment of the amount is made, whichever happens first. The ATO notes that while it is not required by law, it will send written communication explaining that the refund has been retained, the amount retained, and the outstanding notifications required to be lodged.
The ATO notes the communication will also explain to the taxpayer why retaining the refund was considered necessary and the reasons why the decision has been made. Additionally, the actions that the taxpayer can take to prevent their refunds from being retained in the future will be outlined. If you’re affected by the Commissioner retaining your refund, remember the decision is externally reviewable, and where the Commissioner makes an assessment of the underlying amount, you are able to object to the assessment.
Individuals that can demonstrate that the retention of the refund will cause serious financial hardship (ie being unable to afford the basic necessities of life), may be refunded the retained amount. Non-individuals may also apply for the retained amount to be refunded if they can show that the inability to give the outstanding notification by the original due date was directly caused by circumstances beyond their control.
Make sure it doesn’t happen to you!
The easiest way to ensure that your refund isn’t retained under these new broader powers is to make sure all your outstanding notifications are lodged and you’re compliant with your tax and super obligations. If you need a helping hand with bringing lodgments up to date, contact us today