The GST system
2.1. The GST was introduced on 1 July 2000 to replace the Sales Tax and certain State taxes.4 The Sales Tax had commenced in 1930 and was imposed on the last wholesale sale of goods for consumption in Australia.5 The manner in which this was achieved was by way of an exemption system, such that the tax was only applied at the final point of consumer sale. As a result, there was no need for a credit and refund process as is the case in GST or Value Added Tax (VAT). When Sales Tax was introduced, goods accounted for the bulk of Australia’s economic activity, which is reflective of the more limited nature of services available for consumption at that time.6
2.2. In the early 1970s, the McMahon Government announced a review into the existing Australian tax system. On 31 January 1975, the report of the review, known as the Asprey Report, was released.7 One of the recommendations contained in the Asprey Report was to introduce a broad-based GST or VAT which had been adopted by countries in Europe and South America. Despite discussions that followed, this recommendation was not implemented at the time.
2.3. Decades later, the Howard Government, as part of its election campaign, proposed the introduction of a GST to replace the Sales Tax. It argued that by the late 1990s, the production of goods constituted less than one-third of the national economy. As a result, the Sales Tax base was declining and it impacted the revenue to fund government services.8 Additionally, the Sales Tax system penalised Australian producers who were exporters or who otherwise competed with importers.9
2.4. The GST was enacted as part of the A New Tax System10 suite of reforms. The tax is levied at 10 per cent on most goods and services consumed in Australia. Under the GST system, the tax is economically borne by the final consumer but is collected and paid by other entities in the supply chain. ‘Entity’ is a term used in the relevant legislation in an important collective sense. It encompasses a broad range of businesses, not-for-profit organisations, government agencies and legal persons including bodies corporate, but for ease of reference and reader familiarity, this report makes reference to ‘taxpayers’ throughout instead of ‘entity’ unless context requires otherwise.
2.5. Goods and services are classified as taxable, GST-free or input taxed.11 Where goods and services are GST-free or input taxed, GST is not charged on the supply of those goods or services12 although in the latter case no refund or ITCs are allowed.
2.6. The manner in which GST is collected and remitted to the ATO is via a registration system using the Australian Business Number (ABN). Registered taxpayers include GST in the price charged for the goods and services and remit these amounts to the ATO. Registered taxpayers are entitled to claim ITCs for the GST paid for goods and services. For example, this may include taxpayers such as retailers who purchase goods which will subsequently be on-sold to the final consumer. Therefore the final ‘consumer’ effectively pays for the GST included in the final sale price as they are not able to register to claim ITCs.
2.7. The ATO’s illustration of how GST works is shown in Figure 1 below.
Figure 1: How GST works
2.8. As set out in the diagram above, the GST system operates at each step of the manufacturing, wholesale and retail process, with each participant ultimately collecting a portion of the total GST during their specific transaction and remitting it to the ATO. Total GST collected is made available to the Federal Government to apportion amongst the States and Territories in line with specific agreements (net of any ITCs which are not illustrated in the diagram). A simplified numerical illustration of the GST flows through the different manufacturing and sale stages to the final consumer and net GST payments to the ATO is depicted in Figure 2.
Figure 2: A GST example
2.9. The Australian GST system is similar to other comparable jurisdictions, namely, the United Kingdom (UK), Canada and New Zealand. In these jurisdictions, GST or VAT is also charged on most goods and services with entities, such as businesses, collecting and paying the tax to the relevant revenue authority. In comparison to these jurisdictions, Australia has one of the lowest GST rates. The UK’s VAT rate is 20 per cent.13 In Canada, the GST rate varies from 5 per cent to 15 per cent between different provinces14 and in New Zealand, the GST rate is 15 per cent.15
2.10. Once GST is collected, the Commonwealth Grants Commission recommends how the GST should be distributed to each State and Territory to achieve ‘horizontal fiscal equalisation’ as per the intergovernmental agreement reached between the Commonwealth, States and Territories.16
The role of refunds in the GST system
2.11. Registered taxpayers are generally responsible for collecting and remitting GST and the ATO is responsible for the administration of the GST, as illustrated in Figures 1 and 2 above. If the GST collected within a reporting period exceeds the ITCs, taxpayers are required to pay the net GST amount to the ATO. These amounts are reported on a taxpayer’s Business Activity Statement (BAS)17 and forwarded to the ATO. Depending on the taxpayer’s circumstances, such reporting takes place monthly, quarterly or annually.18
2.12. Where a taxpayer’s ITCs exceed the total GST charged within a reporting period, they are entitled to a refund. The amount of GST refunds issued each year is significant. For example, in the 2015-16 financial year, the ATO issued BAS refunds totalling $54.2 billion (of which, a very large proportion is GST).19 By way of completeness, it should be noted that the reason total BAS refunds may be higher than GST refunds is that the BAS also includes other kinds of tax refunds such as those associated with Luxury Car Tax and Wine Equalisation Tax.
2.13. The ATO has committed to finalising 94 per cent of BASs lodged electronically within 12 business days and 80 per cent of paper lodgments within 50 business days.20 In the 2016-17 financial year, the ATO reported that it had met these performance targets in 100 per cent of cases.21
2.14. Due to the periodic nature of the reporting of GST, a timing difference may arise between the GST paid for purchases and the lodgment of the BAS and the related refund issuing. For example, generally for an entity that reports on a quarterly basis, purchases made in early April would not be reported until July. Similarly, those reporting on a monthly cycle would not be able to report and claim any refunds until the following month.
2.15. As a result of the timing difference and the accounting or attribution method used, a taxpayer’s cash flows may be affected positively or negatively.22 The prompt processing and issuing of net GST refunds is critical in alleviating cash flow pressures, particularly for small businesses or those businesses operating in industries with low margins. However, the ATO is also tasked with responsibility of upholding the integrity of the GST system which it may carry out by verification processes prior to paying GST refunds (sometimes called pre-issue verification). Once verification checks are satisfactorily reviewed by ATO officers, GST refunds are paid to taxpayers.
2.16. Similar to Australia, taxpayers in the UK, Canada and New Zealand lodge returns with their revenue agency to claim refunds. In the UK, HM Revenue and Customs (HMRC) usually pays VAT refunds within 10 working days of receiving the return.23 In New Zealand, the Inland Revenue Department is required to issue GST refunds no later than 15 working days after the return is received.24 Similarly in Canada, GST refunds are issued generally within two weeks if the return is lodged electronically.25
The ATO’s historical approach to GST refund verification
2.17. Prior to 2011, the ATO had relied on its general powers of tax administration, and the implied time afforded to it under section 35-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to retain GST refunds for verification purposes prior to payment of the refund. Effectively, the ATO was of the view that it had the right to retain the refunds until it had established the accuracy of the claim.26 It also believed that such an approach was consistent with the Financial Management and Accountability Act 1997 and the Taxation (Interest on Overpayments and Early Payments) Act 1983, which requires the ATO to pay interest to the taxpayer for processing payments and credits after the periods specified.27
2.18. Up until 2011, the legal basis for the above approach was not challenged through the courts or examined by any scrutineers of ATO activities.28
The Multiflex decision
2.19. The ATO’s ability to retain GST refunds for verification was considered by the Federal Court of Australia in the case of Multiflex Pty Ltd v Commissioner of Taxation29 (Multiflex) and subsequently upheld on appeal by the Full Federal Court.30 The Commissioner had retained Mutliflex’s GST refunds while conducting an audit into the legitimacy of the claims that were suspected to be part of a fraudulent scheme.
2.20. The Federal Court at first instance decided that the ‘reasonable time’ referred to in section 35-5 of the GST Act is the period that the Commissioner takes to facilitate the payment of the GST refunds and does not include the time taken to conduct an investigation into the accuracy of the claims. The Commissioner was ordered to pay the GST refunds to Multiflex before the audit was finalised.31
2.21. The Commissioner appealed to the Full Federal Court, which handed down its decision on 11 November 2011.32 The Full Federal Court upheld the first instance decision. The Commissioner’s application for special leave to appeal to the High Court was refused on 9 December 2011.33
2.22. The Full Federal Court in dismissing the Commissioner’s appeal determined that the Commissioner did not have any additional time to investigate the accuracy of BASs. The Court noted:
If that be a defect in the scheme of taxation, the defect is one for Parliament to address.34
2.23. The ATO issued a decision impact statement on 12 December 2011 accepting that the Commissioner could raise an assessment if he considered the reported amounts were incorrect.35
Section 8AAZLGA and the ATO’s current GST refunds approach
2.24. Following the Multiflex decision, Parliament took action to ensure that the Commissioner had the ability to delay refunding amounts in certain circumstances36 by enacting section 8AAZLGA of the Taxation Administration Act 1953 (TAA 1953):
- The Commissioner may retain an amount that he or she otherwise would have to refund to an entity under section 8AAZLF, if the entity has given the Commissioner a notification that affects or may affect the amount that the Commissioner refunds to the entity, and:
- it would be reasonable to require verification of information (the notified information) that:
- is contained in the notification; and
- relates to the amount that the Commissioner would have to refund; or
- the entity has requested the Commissioner to retain the amount for verification of the notified information, and the request has not been withdrawn.37
- it would be reasonable to require verification of information (the notified information) that:
2.25. In determining whether a refund should be retained, the Commissioner is required to consider 10 statutory factors:
- In deciding whether to retain the amount under this section, the Commissioner must, as far as the information available to the Commissioner at the time of making the decision reasonably allows, have regard to the following:
- the likely accuracy of the notified information;
- the likelihood that the notified information was affected by:
- fraud or evasion; or
- intentional disregard of a taxation law; or
- recklessness as to the operation of a taxation law;
- the impact of retaining the amount on the entity's financial position;
- whether retaining the amount is necessary for the protection of the revenue, including the likelihood that the Commissioner could recover any of the amount if the notified information were found to be incorrect after the amount had been refunded;
- any complexity that would be involved in verifying the notified information;
- the time for which the Commissioner has already retained the amount;
- what the Commissioner has already done to verify the notified information;
- whether the Commissioner has enough information to make an assessment relating to the amount (including information obtained from making further requests for information);
- the extent to which the notified information is consistent with information that the entity previously provided;
- any other relevant matter.38
2.26. The ATO provides guidance to its officers on the operation of the above legislative provisions in its Law Administration Practice Statement PSLA 2012/6 Exercise of Commissioner’s discretion to retain a refund (PSLA 2012/6). There is also more general information on its refund verification process on its website.39
2.27. PSLA 2012/6 indicates that one of the above 10 factors may be sufficient to support a decision to retain the refund. Specifically, PSLA 2012/6 states:
In some circumstances, and particularly where there is little information available to you, one factor alone might be sufficient to support a decision to retain the amount. However, in all cases you must consider each of the factors, and determine whether there is information available relevant to each one. You should then objectively consider each factor and determine whether it is reasonable in all the circumstances to retain the amount.40
2.28. If the Commissioner decides to exercise his discretion, he must notify the taxpayer within certain prescribed timeframes from the lodgment date of a BAS:
- The Commissioner must inform the entity (by serving a document on the entity or by other means) that he or she has retained the amount under this section. He or she must do so by the end of:
- in a case to which paragraph 8AAZLF(1)(a) applies--the RBA interest day (within the meaning of section 12AF of the Taxation (Interest on Overpayments and Early Payments) Act 1983) for the RBA surplus of the entity; or
- in any other case--the 30th day after the entity gives to the Commissioner the notification mentioned in subsection (1) of this section.41
2.29. The notification period does not commence until BAS lodgements are up to date as well as correct and complete bank details have been provided to the ATO. Where the taxpayer has outstanding BASs or where complete bank account details have not been provided, the Commissioner may retain GST refunds without needing to apply the requirements of section 8AAZLGA of the TAA 1953.
2.30. Failure to notify the taxpayer within the relevant period would require the ATO to pay the refund by the end of that period.42 Once a decision has been made to retain a GST refund, the Commissioner may hold onto it until he considers it would no longer be reasonable to verify the information.43
2.31. PSLA 2012/6 also sets out the obligations of ATO officers under section 8AAZLGA of the TAA 1953 and expands upon certain timeframe requirements, such as when taxpayers are required to be notified of decisions to retain a refund.44 Moreover, the PSLA also elaborates and expands on the matters that ATO officers are required to consider and provides illustrative examples for each of the 10 factors.45
2.32. The statutory factors are required to be reconsidered at appropriate times:
[ATO officers] may only retain an amount until 'it would no longer be reasonable to require verification of the information'. This means that [officers] must reconsider whether the amount should be retained:
• Each time new information becomes available, or
• Circumstances change in a way that is relevant to [the ATO officer’s] consideration of any of the 10 factors.46
2.33. While the duration that the refund has already been retained is a factor to be considered, the guidance directs officers to review each retention decision by reference to the particular circumstances at that time. However, if nothing has changed, officers are not obliged to review the decision. In effect, the discretion to retain an amount is assessed on an ongoing basis.47
2.34. After notifying the taxpayer, the ATO has up to 60 days to retain a refund for verification before the taxpayer’s right to object to the retention is triggered. However, this timeframe is extended where the Commissioner requests further information which was not previously provided to the ATO. Specifically, sub-section 14ZW(4) of the TAA 1953 states that:
The 60 day period mentioned in subparagraph (1)(aad)(i) (including the period as extended by a previous application of this subsection) is extended by the number of days during that period in relation to which the following paragraphs apply:
- on or before the day, but during the period, the Commissioner requests information from the entity for the purposes of verifying the notified information mentioned in section 8AAZLGA;
- the Commissioner does not receive the requested information before the day.
2.35. PSLA 2012/6 provides further guidance on the extension to the 60-day period, including circumstances where the extension mechanism does not apply.48 It states:
The 60-day period can be extended. This occurs when [ATO officers] request further information from the taxpayer. The extension covers the period of time between request and receipt of the requested information. For an extension to apply, the request for information must be made during the 60-day period (or the 60-day period as extended).
Any request for further information made within the initial statutory 14 or 30 day notification period does not extend the time after which an objection can be lodged.
The extension mechanism does not apply where it is necessary for [the ATO officer] to make requests of third parties (defined in footnote 11) for verification purposes.
If [ATO officers] make or amend an assessment that changes the entitlement to the amount, the taxpayer may object against the assessment or amended assessment under Part IVC.
4 - Explanatory Memorandum, House of Representatives, A New Tax System (Goods and Services Tax) Bill 1998.
5 - Peter Costello M.P., Tax Reform: Not a New Tax, A New Tax System, (Treasurer of the Commonwealth of Australia, 1998).
6 - Ibid.
7 - Taxation Review Committee, Parliament of Australia, Full Report, (1975) p 523.
8 - Costello, above n 5.
9 - Ibid.
10 - A New Tax System (Goods and Services Tax) Act 1999.
11 - In VAT systems, the corresponding expressions used are Standard Rated for taxable supplies, Zero-Rated for GST Free and Exempt for Input-Taxed supplies.
12 - A New Tax System (Goods and Services Tax) Act 1999 s 9-30.
17 - Certain legislative and explanatory documents, as well as court decisions, refer to ‘GST returns’. The GST return forms a part of an entity’s Business Activity Statement (BAS) and it is the BAS that is retained for verification. For consistency, this report will use the term BAS rather than GST return.
19 - Commissioner of Taxation, Annual Report 2015-16 (2016) p 40.
21 - Commissioner of Taxation, above n 19, p 225.
22 - A New Tax System (Goods and Services Tax) Act 1999, pt 2-6 div 29.
24 - Goods and Services Tax Act 1985 (NZ).
26 - Multiflex Pty Ltd v Commissioner of Taxation (2011) 81 ATR 347, 349 at para 3.
27 - Explanatory Memorandum, House of Representative, Tax and Superannuation Laws Amendment
(2012 Measures No. 1) Bill 2012, p 71.
28 - House Standing Committee on Economics, Parliament of Australia, Advisory Report on the Tax Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 (2012) pp 14-15.
29 - Multiflex Pty Ltd v Commissioner of Taxation (2011) 81 ATR 347.
30 - Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580.
31 - Multiflex Pty Ltd v Commissioner of Taxation (2011) 81 ATR 347.
32 - Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580.
33 - ATO, Decision Impact Statement - Commissioner of Taxation v Multiflex Pty Ltd, 12 December 2011.
34 - Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580, 581 at para 1.
35 - ATO, above n 33.
36 - Explanatory Memorandum, House of Representatives, Tax and Superannuation Laws Amendment
(2012 Measures No. 1) Bill, 2012, p 2.
37 - Taxation Administration Act 1953 s 8AAZLGA(1).
38 - Taxation Administration Act 1953 s 8AAZLGA(2).
40 - ATO, Exercise of Commissioner’s discretion to retain a refund, PSLA 2012/6, 9 July 2016, appendix.
41 - Taxation Administration Act 1953 s 8AAZLGA(3).
42 - Taxation Administration Act 1953 s 8AAZLGA(5)(b).
43 - Taxation Administration Act 1953 s 8AAZLGA(5)(a).
44 - ATO, Commissioner’s discretion to retain a refund, above n 40, para 3.
45 - ATO, Commissioner’s discretion to retain a refund, above n 40, para 6 and appendix.
46 - Ibid, para 9.
47 - Ibid.
48 - Ibid, para 15.