Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)Chapter 3: Extending ATO notification period for retaining refunds
Outline of chapter
3.1 Schedule 3 to the Bill amends the TAA 1953 to extend from 14 to 30 days the period within which the Commissioner must notify a taxpayer of their decision to retain a refund amount arising from a BAS or another notification under the BAS provisions for verification of information. A reference to 'days' in this Chapter means 'calendar days'. The extension of this mandatory notification period aims to strengthen the ATO's ability to combat fraud during periods of increased risk of fraudulent activity.
Context of amendments
3.2 The TAA 1953 provides the circumstances in which a refund relating to a credit arising under the BAS provisions (as defined by subsection 995-1(1) of the ITAA 1997) may be retained by the Commissioner for verification of information contained in the notification giving rise to the refund. The TAA 1953 also provides the mandatory timeframes for notifying the taxpayer that the refund is being retained. In this Chapter, a 'BAS credit' means a credit arising under the BAS provisions and a 'non-BAS credit' means any other credit.
3.3 Under the current law, the Commissioner must notify a taxpayer by the end of the RBA interest day of their decision to retain a refund of an RBA surplus for verification of information. The Taxation (Interest on Overpayments and Early Payments) Act 1983 provides that the RBA interest day for refunds relating to a BAS credit is the 14th day after the latest of the following days:
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- the day the notification giving rise to the refund is lodged by the taxpayer;
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- the day the taxpayer lodges any outstanding or revised notifications; and
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- the day the taxpayer nominates a relevant financial institution account.
3.4 If the taxpayer is not notified within the mandatory notification period that the Commissioner has decided to retain an RBA surplus for verification of information, the refund must be released to the taxpayer at the end of 14 days.
3.5 An RBA is used by the Commissioner to record the tax liabilities and payments of taxpayers on a single account for businesses, including those that report on the BAS (GST, WET, LCT, PAYGW, PAYGI, FBT, fuel tax credits and deferred company instalments), or other entities that are not registered for GST, including individuals and trustees, with investment income to report via an IAS.
3.6 Operation Protego, an ATO-led investigation into high-volume, large-scale GST fraud, identified the limitations of the current 14-day mandatory notification period. With the assistance of social media, fraudulent schemes are more unpredictable, can be proliferated faster, and to a broader population, than may have been anticipated when the current legislative provisions were drafted.
3.7 During periods of increased risk of fraudulent activity, 14 days is insufficient for the ATO to assess each BAS or other notification under the BAS provisions lodged that has been identified as potentially high-risk to determine if it is necessary to retain the refund for verification of information, and also notify taxpayers. In periods of large-scale fraud events, this can result in the risk that a significant number of high-risk refunds are released to taxpayers without appropriate scrutiny by the ATO.
3.8 The amendments in this Schedule to the Bill aim to combat fraud and reduce the number of fraudulent refunds issued by giving the ATO more time to assess potentially fraudulent statements that support BASs or other notifications under the BAS provisions.
Detailed explanation of new law
3.9 Schedule 3 to the Bill requires the Commissioner to notify the taxpayer before the end of the 16th day after the RBA interest day of their decision to retain a refund of an RBA surplus relating to a BAS credit for verification of information. This means the mandatory notification period for retention of a refund relating to a BAS credit is 30 days, instead of the previous mandatory notification period of 14 days. This amendment aligns the notification period for refunds relating to a BAS credit with the notification period for refunds arising from an income tax return.
[Schedule 3, item 1, subparagraph 8AAZLGA(3)(a)(i) of the TAA 1953]
3.10 The 30-day mandatory notification period applies to any RBA surplus on an RBA that contains a credit arising directly under the BAS provisions. This includes an RBA surplus that comprises both a BAS credit and another non-BAS amount allocated to the same RBA. Accordingly, where there are credits on the RBA relating to a BAS credit and a non-BAS credit then the 30-day mandatory notification period applies to the sum of the credits. Where there is a BAS credit and a non-BAS debit, the 30-day mandatory notification period applies to the BAS credit as reduced by the debit. Non-BAS amounts allocated to an RBA are taken into account even where they arise prior to allocation of a BAS credit to that RBA, provided they exist at the time the BAS credit arises. [Schedule 3, item 2, subsection 8AAZLGA(3A) of the TAA 1953]
3.11 The Commissioner can retain a refund relating to a BAS credit for up to 30 days whilst determining whether further verification of information is necessary. If the Commissioner does not notify the taxpayer that the refund is being retained before the end of 30 days, the refund must be released to the taxpayer.
3.12 The mandatory notification period of 30 days provides the ATO with additional time to assess BASs and other notifications under the BAS provisions that give rise to a refund to determine whether it is necessary to retain the refund to verify information contained in the statement.
3.13 A refund that is not reduced relating to a BAS credit retained for over 14 days to verify information accrues interest from the day after day 14 until the end of the day the refund is paid (see section 12AA of the Taxation (Interest on Overpayments and Early Payments) Act 1983). This limits the potential impact on compliant taxpayers affected by the extension of the mandatory notification period. A refund may be reduced due to fraud or evasion or if it has otherwise been incorrectly claimed.
Example 3.1 Refund notification period
Harvey is registered for GST as a convenience store owner and lodged a BAS on 28 October (day 0) claiming an unusually high amount of input tax credits of $100,000. This results in an RBA surplus of $100,000 that the ATO must refund to Harvey, unless the ATO notifies Harvey that they are retaining the refund for verification. The ATO is experiencing a period of increased high-risk BAS lodgments. The amount claimed by Harvey is flagged as a high-risk refund requiring review by the ATO.
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- Existing law
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- Since the ATO has detected a significant increase in high-risk BAS lodgments, they have not completed making its decision regarding Harvey's $100,000 refund by 11 November (day 14). On 12 November (day 15), Harvey's $100,000 refund is released to him by the ATO.
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- New law
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- With the extended time for the ATO to notify taxpayers of a decision to retain refunds for further investigation and verification, the ATO is able to make a decision about Harvey's refund. The ATO contacts and informs Harvey that his refund will be retained for verification on 14 November (day 17). Harvey's refund will accrue interest from the end of 11 November (day 14) until his refund is released, unless the amount is reduced for any reason, including that the BAS was affected by fraud or evasion.
3.14 Consistent with the requirement prior to the amendments, the Commissioner must notify the taxpayer within 14 days of their decision to retain an RBA surplus that does not include a BAS credit for verification of information. If the taxpayer is not notified before the end of 14 days, the non-BAS refund must be released to the taxpayer. [Schedule 3, item 1, subparagraph 8AAZLGA(3)(a)(ii) of the TAA 1953]
Commencement, application, and transitional provisions
3.15 Schedule 3 to the Bill commences on the first 1 July to occur after the day the Bill receives Royal Assent. [Clause 2]
3.16 The amendments apply to amounts due to be refunded on or after the commencement of Schedule 3 to the Bill. [Schedule 3, item 3]