5.1. This chapter examines the impacts that the ATO’s retention of GST refunds, and associated verification activities, may have on affected taxpayers and the options available to mitigate them.
5.2. The impacts of the GST refund retention on taxpayers are generally financial in nature. Delays with obtaining refunds, which are due and payable, affect taxpayers’ cash flows, operations and profitability, particularly where they are in low margin industries. This concern is a common thread that runs through most of the GST refunds complaints and stakeholder submissions that the IGT has received. Additional compliance costs, such as providing further information to the ATO or disputing its actions or decisions, may impose further financial burdens.
5.3. Stakeholders recognise that interest is payable to taxpayers after the statutory period to process a refund expires.199 However, concerns have been raised that these amounts are trivial compared to the costs to taxpayers of having their refunds withheld. In the absence of refunds, taxpayers may incur financing costs if funds have to be borrowed to fulfil their obligations of paying other creditors. In some cases, they may face difficulties borrowing funds from financial institutions due to disclosures having to be made about any relevant ATO audit activity. In these circumstances, affected taxpayers may have to resort to personally injecting additional capital or rely on family and friends where this is an option.
5.4. Stakeholders have cited certain examples of refunds having a direct impact on the profit margins of taxpayers working in the property development industry, where transactions are often highly geared, and more reliant on external finance. Similarly, the delayed release of refunds can also lead to lost opportunities where those funds are required to carry out planned business transactions. One taxpayer indicated that his business was forced to delay $20 million in exports due to the ATO’s retention of refunds, amended assessments and audit actions.
5.5. Stakeholders have also raised a range of concerns regarding the ATO’s consideration of the 10 statutory factors discussed in the previous chapter. This chapter explores in further detail one of these 10, namely, the requirement for ATO officers to consider ‘the impact of retaining the amount on the entity's financial position’.200
5.6. The following examples, drawn from complaints received by the IGT, illustrate how the above concerns arise:
- one taxpayer reported incurring over $100,000 in legal fees disputing ITCs amounting to $200,000 through a lengthy objection process;
- another taxpayer also incurred significant professional fees over an 18 month period in which the ATO undertook a GST refund audit; and
- within the agribusiness industry some concern was raised that refund verification delays were affecting farmers’ ability to feed their livestock.
5.7. The financial impacts of the refund retention may also affect taxpayers’ emotional and mental health. For example, a director of a business taxpayer has described to the IGT how the retention of refunds and ensuing audit had caused her depression and given rise to suicidal thoughts for which she is taking ongoing medication. Another taxpayer had been affected by fire destroying his farmland, assets and tax records while also dealing with a marriage breakdown. As a result, he had lodged multiple income tax returns and BASs late. Although he had received some assistance from the ATO with the lodgment of these returns, he had experienced significant delay in obtaining his GST refunds. This delay had severely impacted his already fragile emotional and mental health.
5.8. Stakeholders have noted that personal impacts are not specifically included within any of the 10 statutory factors. However, some stakeholders have suggested these personal factors should be taken into account under paragraph s8AAZLGA(2)(j) of the TAA 1953 as ‘any other relevant matters’.
5.9. Lastly, there were certain concerns raised regarding taxpayers’ access to compensation under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA). The ATO’s administration of the CDDA Scheme and broader related concerns were previously considered in an earlier IGT review, the Review into Taxpayers’ Charter and Taxpayer Protections.201
Serious financial hardship
5.10. Taxpayers who are experiencing serious financial hardship may apply in writing to have their circumstances considered by the ATO and to request the expedited release of their GST or other refunds.
5.11. For business taxpayers the ATO defines serious financial hardship as:
… when an entity that requires their refund to continue their business for example pay staff wages, purchase essential supplies etc.
Factors contributing to serious hardship generally include family tragedy, financial misfortune, impacts of natural disaster and other serious or difficult circumstances. Other factors, for example: serious illness may be taken into consideration.202
5.12. Furthermore, the ATO’s website includes the following information regarding businesses experiencing serious financial hardship:
Serious financial hardship can also apply to businesses that need their refund to continue business. Serious hardship means financial difficulty associated with:
- business closure
- disconnection of an essential service
- repossession of a vehicle used for business purposes
- imminent legal action pending for non-payment of debts
- period of review limitations
- court orders
- other necessities for the business or people you are responsible for.
If none of these factors apply to your circumstances, you are unlikely to qualify for priority processing under serious financial hardship.203
5.13. The ATO requires taxpayers to provide evidence of their hardship, which demonstrates their serious and immediate financial need.
5.14. In a GST refund verification context, the ATO provides a range of guidance to its officers as discussed in Chapter 4. Whilst circumstances such as insolvency, bankruptcy and ‘other ATO work is in progress’ are listed as scenarios where release of refunds should be considered, financial hardship is not mentioned.204
5.15. However, taxpayers who are facing serious financial hardship may request for priority processing of their BAS.205 Such requests are referred to the Client Account Services (CAS) business line. The ATO does not provide timeframes for the consideration of hardship applications nor does it provide an estimate as to when taxpayers can expect their GST refunds if their application is successful. It simply states that ‘the ATO will endeavour to release the refund as soon as possible’.206
5.16. The ATO has not reported on taxpayer hardship applications since the 2013-14 financial year at which time, of the 2,400 hardship applications that had been received, 1,170 were found to be eligible for urgent processing.207 No further breakdown is provided as to the number or proportions that relate to business or GST refunds. Accordingly, it is impossible to determine how many such applications have been lodged and how many have been successful in the GST refund context.
5.17. The ATO’s consideration of hardship in GST refund cases is further complicated by the overarching need to consider the 10 statutory factors mentioned earlier. Specifically, the ATO has advised that:
If a refund verification case work has been generated, a finding of financial hardship does not guarantee the refund will be released. The taxpayer’s financial hardship is one of the factors the case officer will have regard when making a decision whether or not the refund is retained for verification.208
5.18. Consistent with this approach, the ATO’s general call centre scripting also advises that an active audit will have an impact on the request for urgent processing of the refund.209
5.19. In relation to the potential personal impacts, the ATO has published a list of health and wellbeing support organisations on its website.210 However, it does not go further in detailing if and how these impacts would be considered within a hardship context. Furthermore, the ATO also publicly advises that these impacts are generally excluded from compensation, when considering claims of legal liability or applications under the CDDA scheme.211
PSLA 2012/6 and paragraph 8AAZLGA(2)(c) of the TAA 1953
5.20. PSLA 2012/6 provides guidance on how ATO officers should consider the impact of retaining the refund on a taxpayer’s financial position212 as required by paragraph 8AAZLGA(2)(c) of the TAA 1953. PSLA 2012/6 only requires the consideration of this factor if financial hardship is specifically raised by taxpayers.213 It also states:
Information relevant to this factor may include evidence of financial hardship suffered by the taxpayer (whether an individual or corporate), such that it would compromise the taxpayer's business viability. Relevant evidence may include material provided by the taxpayer and relevant information otherwise available. [ATO officers] should evaluate the taxpayer's financial position and the impact of a retention decision on their immediate cash flow, solvency and borrowing needs. The size of the amount claimed may also be a relevant consideration in the context of particular taxpayer circumstances. However, the mere fact that a taxpayer will be deprived of a refund will not be a determinative factor against it being reasonable to retain an amount for verification.214
5.21. As noted in Chapter 4, ATO officers may document their consideration of the 10 statutory factors in three ways. Where the Word template is used, the checkboxes available in respect of financial impact are:
- this has not been discussed with the taxpayer or their representative;
- the taxpayer or their agent has not indicated that retaining the refund will impact on their financial position; and
- taxpayer has indicated that retaining their refund will impact on their financial position.215
5.22. Although there is room for free text on the template, it is not mandatory for the officer to provide any further comment. The officer’s ultimate decision as to whether the refund will be released, after considering the relevant factors, is simply recorded against one of the two checkboxes below:
- based on the above information it has been decided to retain the RBA Surplus; and
- RBA Surplus not retained, escalate to post issue.216
5.23. In the Excel spreadsheet template, free text fields are available with the following guidance provided for all 10 factors:
Based on a collective consideration of the 10 factors, assess the risk to revenue versus the client’s entitlement to the refund. Where the risk to revenue is considered to outweigh the client’s refund entitlement, the decision is made to retain the refund. Conversely, where the risk to revenue is not considered to be significant when assessed against other factors in favour of the client’s entitlement to the refund, the decision must be made to release the refund. This assessment must be recorded in the ATO Position cell below the 10 factors for each Case Review and 60-day Case Callover held.217
5.24. There are no separate instructions or guidance in respect of the financial impact on taxpayers. Two options are provided for the final ATO decision, both of which appear to favour retention of refunds:
These factors indicate that the refund should be retained while further verification activities are conducted.
Having considered all factors, it has been decided to retain the refund for verification.218
5.25. The relevant Explanatory Memorandum for section 8AAZLGA of the TAA 1953, states that ‘the amount the Commissioner may decide to retain could be part of the refund rather than the whole amount’.219
5.26. The RI Auditor Guide makes no direct reference to partial refund release but does refer to the internal FAQs220 which state:
[T]here are no automated business systems to enable the release of a partial refund and releasing a partial refund involves issuing a manual refund cheque. The processing and issuing of a manual cheque is labour intensive and involves an accounting integrity risk. Currently, manual refund cheques are only processed and issued in exceptional circumstances.221
5.27. The ATO had recognised the above systems limitations in 2012, shortly after section 8AAZLGA of the TAA 1953 had come into force. Internal advice from its Tax Counsel Network (TCN) noted:
We understand that there are currently system limitations which would prevent, or at least make it very cumbersome, to release part of a refund claimed by an entity. These limitations may be regulated to some extent once a credit from a notification is posted to an account.
We consider that section 8AAZLGA will in most cases still support the retention of the full amount of the refund if the conditions that allow retention are satisfied. However, the balance of factors may more readily support the release of the remainder of the amount of the refund once the Commissioner becomes satisfied that the application of the law to the entity’s circumstances would partly support the amount claimed by the entity. This is particularly so as the proportion of the amount that is considered properly payable increases.
While understanding the difficulties presented by the system limitations, we think it would be desirable for us in the longer term to prioritise system changes that would allow for greater flexibility in this regard. Allowing for partial release of refunds would provide benefits for the community in terms of accommodating cash flow. It would also assist in protecting the refund integrity system, as courts and tribunals may well be unsympathetic to the current limitations, and require us to release the full amount of a refund when it is still reasonable to verify information in relation to part of the claim.222
5.28. Aside from the materials noted above there are no specific instructions for partial refund release and no further guidance on what ATO officers should consider to be an ‘exceptional circumstance’ warranting partial release.
Interest on delayed refunds
5.29. The entitlement of taxpayers to interest for delayed refunds is established by section 12AA of the Taxation (Interest on Overpayments and Early Payments) Act 1983.
5.30. Interest is calculated and paid by reference to the Running Balance Account223 and no discretion is applied in determining the amount.224 The rate at which the delayed interest is payable is drawn directly from the base interest rate, as determined each quarter from the Reserve Bank of Australia published rates for the average yield for 90 day Bank Accepted Bills.225 By comparison, the general interest charge on unpaid tax debts is seven percentage points higher than the base interest rate.226
5.31. The ATO reports interest paid on delayed refunds in its GST Administration Performance Annual Report 2015-16. For the three financial years between 2013-14, 2014-15 and 2015-16, the amount of interest paid had risen consistently from $2.6 million to $3.8 million.227 The ATO attributes such increase to ‘paying additional interest on settlements’.228
5.32. It should be noted that where taxpayer information contained in the BAS is incorrect or further information is required to process the BAS or the refund, the ATO is not required to pay interest on the delayed refund.229 Examples of this would be where bank account details have not been provided to the ATO or where the taxpayer has outstanding BASs.
5.33. The ATO’s retention of taxpayer refunds, even for short periods, may have a significant financial impact on taxpayers with follow on emotional and mental consequences. Conversely, early release of refunds adversely impacts government revenue where it is subsequently found that they should not have been paid and by that stage are not easily recoverable. The tension between these competing interests led Multiflex230 to take legal action for the release of its refund and the Government to subsequently enact specific power for the Commissioner in the form of section 8AAZLGA of the TAA 1953. However, the latter contains safeguards for taxpayers such as requiring the Commissioner to consider the impact of retaining refunds on their financial position.
5.34. Interestingly, the use of refund retention as a fraud prevention measure has not been well received by the community. In 2011, the ATO commissioned TNS Social Research to conduct independent research over a 5 year period to gauge community perceptions regarding GST voluntary compliance. One of the matters explored was the community’s views on delaying refunds as a fraud prevention measure. The report of that study, released in 2015, stated:
Strategies suggested to aid in fraud prevention, such as delaying refunds and supplying additional information were not considered viable options for fraud prevention. It was thought that the amount of information provided to the ATO was sufficiently comprehensive and detailed and that further information would be unlikely to aid in fraud prevention. Delaying refunds to allow more time for the ATO to detect fraud received mixed reviews. For some, if the timeframe was communicated it would be acceptable, but for many, it was seen as an unnecessary threat to cash flow.231
5.35. As stated earlier, taxpayers who experience serious financial hardship, as a result of the GST refund verification being carried out, do have the option of lodging a hardship application and/or seeking partial release. However, it is difficult to gauge their awareness of these options as the ATO does not have any tracking or reporting mechanism in this regard.232
5.36. The IGT believes that the ATO should reinstate its reporting of hardship cases and expand it to provide more specific information that reveals the impact of some of its actions, such as retaining of refunds, as well as how it affects different types of taxpayers, particularly micro and small businesses.
5.37. The IGT is also of the view that more should be done to raise taxpayers’ awareness that financial hardship applications may be, or indeed should be, lodged in appropriate cases. As business tax debts are not generally able to be released,233 these taxpayers may not be aware that hardship needs to be proactively raised with ATO officers to ensure it is considered. As part of this review, the IGT examined 40 randomly selected GST verification cases to consider whether financial impacts had been considered by the ATO officers. None of these cases demonstrated such consideration being undertaken. This further highlights the need for greater awareness on the part of taxpayers and tax practitioners to proactively raise issues of financial hardship with ATO officers.
5.38. The ATO’s template notification letters to taxpayers, currently, do not raise financial hardship at all. The IGT believes that these letters should inform taxpayers of options available to them if they are experiencing financial hardship. Where no letter is required to be issued, call centre scripting as well as website materials should similarly inform taxpayers.
5.39. As mentioned earlier, the IGT also considers that ATO officers should improve the documentation of their consideration of the 10 statutory factors contained in section 8AAZLGA of the TAA 1953. This is particularly important given that ATO officers have to exercise a degree of judgment and be mindful of the competing impacts on government revenue and taxpayers’ cash flow. This is particularly so in the case of the paragraph 8AAZLGA(2)(c) of the TAA 1953, being the main factor which favours the taxpayer.234
5.40. Partial release of refunds also requires greater attention and improvement in order to alleviate any adverse financial impact on taxpayers. Although not generally promoted or actioned by the ATO, it does appear in the relevant legislative materials and the ATO’s own advice and guidance. The only reason cited by the ATO for not making greater use of it is the administrative difficulties in doing so without the support of automated business systems.
5.41. The IGT considers that the administrative difficulties cited are insufficient to reject requests for partial release of refunds. The manual processing of partial refunds may be difficult but it is also necessary to support the community and, as flagged by the ATO’s own Tax Counsel Network, address the risk of adverse judicial findings against the ATO if these matters are challenged.235 The IGT acknowledges that an automated system for partial release of refunds would be more desirable than a manual approach.
5.42. In addition, there would be benefits in the ATO raising awareness and providing further guidance in relation to the partial release of refunds to taxpayers as well as its own officers. This is especially important for taxpayers experiencing financial hardship or where the risks identified by the ATO only apply to a portion of the refund claimed.
5.43. In relation to interest on delayed refunds, the concerns related to the sufficiency of these interest payments as a form of compensation for the delay. The IGT has previously considered similar concerns in other reviews and, where appropriate, made recommendations for improvement.236
The IGT recommends that the ATO:
- improve access to and raise awareness of taxpayers, tax practitioners and its own officers about assistance available in serious financial hardship cases including full or partial release of GST refunds;
- ensure that the appropriate consideration of the financial impact on taxpayers, as required by paragraph 8AAZLGA(2)(c) of the TAA 1953, and serious financial hardship claims are carefully documented; and
- develop an automated system for the partial release of GST refunds.
The ATO is committed to ensure taxpayers, their agents and staff, have access to and are aware of, the assistance that can be provided in situations where a taxpayer is suffering from serious financial hardship.
The ATO currently provides guidance in PSLA 2012/6 Exercise of Commissioner’s discretion to retain a refund to taxpayers, their representatives and ATO staff in considering the impact of retaining a refund on the taxpayer’s financial position. However, the impact on the taxpayer’s financial position is one of 10 factors that need to be considered when making a decision to retain a refund.
The ATO website also has information on ‘serious financial hardship’ which includes what is considered to be serious hardship. Further information on serious financial hardship can also be found in PS LA 2011/17 Debt relief, waiver and write off.
ATO case officers are required to document their decision to retain a refund after consideration of all 10 statutory factors in s8AAZLGA(2)(c) of the TAA 1953. We are currently developing additional training for staff to reinforce that all factors are considered and carefully documented, particularly in relation to the impact of retaining the refund on the client’s financial position.
Due to system limitations, it is not possible to automate partial release of refunds. The ATO has the ability to partially release refunds via a manual process which is considered adequate considering the very limited situations where a partial release of refund is required.
The ATO can only retain a refund until it would be no longer reasonable to verify the information or has sufficient information to make an assessment.
200 - Taxation Administration Act 1953, s 8AAZLGA(2)(c).
201 - IGT, Taxpayer Charter and Taxpayer Protections (2016).
202 - ATO, ‘Hardship actioning guidelines’, 12 May 2016, internal ATO document.
203 - ATO, Businesses with Serious Financial Hardship (6 April 2017) <https://www.ato.gov.au/general/
204 - ATO, ‘Early Exit Decision’ (18 May 2017) internal ATO document.
205 - ATO, Requesting Priority Processing (6 April 2017) <https://www.ato.gov.au/general/financial-hardship/requesting-priority-processing/>.
206 - ATO, ‘HRDSHP0208I Requesting priority processing’, 31 August 2017, internal ATO document.
207 - Commissioner of Taxation, Annual Report 2013-14 (2014) p 41.
208 - ATO, Commissioner’s discretion to retain a refund, above n 40, para 7; ATO, Communication with the IGT (8 August 2017).
209 - ATO, ‘HRDSHP0208I Requesting priority processing’, above n 206.
212 - ATO, Commissioner’s discretion to retain a refund, above n 40.
213 - Ibid, para 8, example 9.
214 - Ibid, appendix.
215 - ATO, ’10 Factors Worksheet’, above n 130.
216 - Ibid.
217 - ATO, ‘Instructions on how to complete the 10 factors worksheet’ (26 October 2016), internal ATO document.
218 - ATO, ’10 Factors Worksheet’, above n 130.
219 - Explanatory Memorandum, House of Representative, Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012, p 76 para 7.30.
220 - ATO, Commissioner’s discretion to retain a refund – FAQ, above n 107, p 10.
221 - Ibid.
222 - ATO, TCN Law Design Team Advice, 6 July 2012, internal ATO document, p 16-17.
223 - Used by the ATO to record liabilities and payments made on a single account for each taxpayer.
224 - Taxation (Interest on Overpayments and Early Payments) Act 1983.
225 - Taxation Administration Act 1953 s 8AAD(2).
226 - Taxation Administration Act 1953 s 8AAD(1).
227 - ATO, GST administration performance annual report 2015–16, above n 52, p 2.
228 - Ibid.
229 - ATO, Law Administration Practice Statement PSLA 2011/23 Credit interest, para 64.
230 - Commissioner of Taxation v Multiflex Pty Ltd  FCAFC 142.
231 - TNS Social Research, GST Compliance Research Program – Phase 5 (2015) pp 8-9.
232 - ATO, Communication with the IGT (8 August 2017).
233 - ATO, Debt relief, waiver and write off, PSLA 2011/17, 29 August 2016, para 2.
234 - Taxation Administration Act 1953 s 8AAZLGA(2)(f),(j); ATO, Commissioner’s discretion to retain a refund, above n 40.
235 - ATO, TCN advice, 22 November 2012, internal ATO document, p 5.
236 - See for example: IGT, Review into improving the self-assessment system (2012) pp 118-121; IGT, Review into the Australian Taxation Office’s administration of penalties (2014), p 41.