Administrative treatment of retrospective legislation
Retrospective tax law changes have effect for a period before the date of enactment once the legislation is passed.
The announcement of proposed retrospective legislation poses a dilemma for affected taxpayers. Should they follow the existing law or anticipate the proposed change?
We provide practical guidance for taxpayers faced with this question, stating our administrative approach to particular retrospective law change proposals. Our advice covers the options available to taxpayers and the consequences of choosing particular options. It also covers how we will administer the law during the period until the final outcome of a proposed law change is known.
In determining what you should do when faced with proposed retrospective legislation, you will need to consider whether the proposed law may:
Changes that increase taxpayers' liabilities
If a proposed law change would increase your liabilities, we have no authority to collect the new, or higher, liabilities until the relevant law is enacted or the legislative instrument is made.
You can self-assess your tax liability under the existing law, but if the law is ultimately changed retrospectively, you'll need to seek an amendment and pay the increased liability. So you may choose to make provision for these expected liabilities in the interim.
Our advice must always be that taxpayers can self-assess under the existing law. But, in these circumstances, we'll also point out the consequences if the law is ultimately changed retrospectively and taxpayers have previously self-assessed under the existing law.
We won't advise taxpayers to self-assess by anticipating the announced change will become law, but if taxpayers choose to do so, we won't apply our resources to checking whether these self-assessments are correct (in accordance with the existing law). This would be an inefficient use of resources.
Our advice will also deal with the interest and penalty consequences for taxpayers who have to amend or vary liabilities following a retrospective law change.
Changes that reduce taxpayers' liabilities
If a proposed law change would reduce your liabilities, you should self-assess under the existing law. If you choose to self-assess by anticipating an announced law change, we may not enforce compliance with the existing law. However, we will act to prevent incorrect refunds.
We advise taxpayers faced with self-assessing a liability that may eventually be affected by an announced, retrospective, law change to apply the existing law when self-assessing. This is because we can't tell people to ignore the existing law. However, the tax laws generally allow us to accept taxpayers' self-assessments.
We have the power to decide whether or not it would be an efficient, effective and ethical use of the ATO's resources to enforce compliance with the existing law where a taxpayer chooses to self-assess by anticipating an announced law change.
The one exception to this general rule applies if both the following conditions are met:
- Allowing taxpayers to anticipate an announced law change would be likely, in some cases at least, to result in a refund of tax.
- The Commissioner can, before a payment is made, reasonably identify particular taxpayers to whom a payment would be made who have applied the law incorrectly.
In these circumstances we are required to do whatever is reasonably possible to stop payment of the incorrect refunds.
Identifying taxpayers who have applied the law incorrectly
The most obvious cases where taxpayers can be identified as having potentially applied the law incorrectly is where a tax return or activity statement has a specific label for a new deduction that will become available when an announced law change is enacted.
We have other ways of identifying affected taxpayers, especially if the class of affected taxpayers is small (tens or hundreds rather than thousands), or data matching can be done with third party information.
In considering action to prevent incorrect refunds from being made in such circumstances, we take into account whether:
- there are likely to be long delays in passing the relevant legislation, which, for instance, might mean that if the legislation is ultimately not passed it would become difficult to recover any incorrect refunds that are made
- there is known opposition to the proposal in the Parliament, especially if the makeup of the Senate could allow the proposal to be defeated
- the announced change is not clear, which may lead to incorrect assessments that need to be amended
- current taxpayer behaviour is consistent with the proposed change
- delays in assessments could have adverse effects on business activities, including cash flow.
If we can't reasonably identify affected taxpayers even with significant effort, the Commissioner will not apply resources to enforce the existing law.
If we can identify affected taxpayers, we take whatever steps are reasonable to ensure that their assessments comply with the existing law, including:
- asking taxpayers to defer lodgment of affected returns or activity statements in some cases
- holding up returns or statements that have been lodged pending passage of the proposed law change
- stopping self-assessments and adjusting them before they are issued.
The actual steps taken will depend on the particular circumstances of the case.
Changes requiring taxpayers to act
If a proposed law change requires taxpayers to do something that they don't have to do under the existing law, we will publicly advise of what action they might need to take.
For instance, a proposed concession may require taxpayers to keep certain records, such as receipts, for expenditure that will attract the concession. Under the existing law, taxpayers may not keep such records, or be indifferent to whether they do. Or taxpayers may have to do something, like enter into a formal agreement, to either benefit from a proposed concession or avoid a potential liability under an announced change.
In cases like these, we publicly advise that the government has announced a proposed change to the law and inform taxpayers of any action they might need to take to ensure they will be able to meet any obligations or claim any entitlements that will retrospectively arise if the proposal is enacted.
For instance, we might explain that receipts for particular expenditure will need to be kept in order to claim a proposed new deduction or rebate.
A law change was announced that had the effect of treating certain loans by companies to their shareholders as dividends if they weren't properly documented, including the terms for repayment, before the end of the financial year in which the loan was made. The proposed law change was to apply to the current income year, even though the legislation to give effect to the change was not likely to be enacted before the end of the income year.
We published advice on our website to the effect that companies and relevant shareholders should consider documenting any loans made in the current income year even though there was no legal requirement to do so, so that such loans were not retrospectively treated as dividends when the law change was eventually enacted.
End of example
Proposed retrospective legislation poses a dilemma for affected taxpayers. Should they follow the existing law or anticipate the proposed change? We provide practical guidance for taxpayers faced with this question.