ATO’s Discretion to Retain Refunds Extends to Income Tax

As a part of a suite of measures introduced by the government to combat phoenixing activities, the ATO now has the power to retain an income tax refund where a taxpayer (including both businesses and individuals) has outstanding notifications. The discretion to retain refunds previously only applied in relation to notifications under the business activity statement (BAS) or petroleum resources rent tax (PRRT) but has now been expanded.

This new extension of powers applies to all notifications that must be given to the Commissioner of Taxation under Australian tax law (eg income tax returns) but does not include outstanding single touch payroll (STP) or instances where the Commissioner requires verification of information contained in a notification.

The ATO notes that its new powers to retain refunds will not be taken lightly and will only be exercised where the taxpayer has been identified as engaged in “high-risk” behaviour and/or phoenixing activities.

Examples of high-risk behaviours include (but are not limited to):

• poor past and/or current compliance with tax and superannuation obligations (registration, lodgment, reporting, recordkeeping and on-time payments);
• poor behaviours and governance in managing tax and super risks;
• the number of, and the circumstances around, any bankruptcies or insolvencies;
• tax-related penalties and sanctions imposed including director penalty notices;
• connection with advisers who are subject to disciplinary actions or sanctions relating to tax and super laws;
• past information provided which reasonably indicated fraud or evasion, intentional disregard or recklessness; and
• the likelihood of participation in or promotion of aggressive tax planning arrangements, tax avoidance schemes, fraud or evasion or criminal activity.

Illegal phoenix activity is when a company shuts down to avoid paying its debts. A new company is then started to continue the same business activities, without the debt.

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

• cyclically establishing, abandoning or deregistering companies to avoid paying taxes, creditors or employee entitlements;
• assets being dissipated, stripped, transferred and/or other actions with the intention to defeat creditors ahead of abandonment, winding-up or deregistration;
• a director associated with prior liquidations and/or deregistrations or prior instances of insolvency;
• transfer of employees to a new company under the same effective control as the previous company to defeat tax obligations and employee entitlements;
• backdating of the resignation of a director, appointment of “straw” directors, or abandonment of a company without a resident director;
• the concealment of the role of a shadow or de facto director; and
• the concealment or destruction of company records.

The ATO will consider the totality of the circumstances when it exercises the discretion to retain a refund. It will also weigh the seriousness of the behaviour identified against any potential adverse consequences for the taxpayer.

In general, the ATO advises its officers to consider exercising the discretion to retain a refund where there are reasonable grounds to believe that a taxpayer:

• has a running balance account (RBA) surplus or other credit that has not been applied against a tax debt of the taxpayer;
• has an outstanding notification that they are required to give under a tax law (other than the BAS or PRRT provisions) and the outstanding notification affects or may affect the amount of the refund; and/or
• is engaged in high-risk and/or phoenix behaviour.

Once the ATO decides to use its discretion to retain a refund, it will be retained until either the taxpayer has given the outstanding notification or an assessment of the amount is made, whichever event happens first. There are also circumstances where the taxpayer can apply to have the retained amount refunded and/or apply to have the decision reviewed.

Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.