Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
CHAPTER 3 - Refunds of tax file number amounts deducted in error
3.1 This measure, which is contained in Part 1 of Schedule 3 of the Bill, will amend the Income Tax Assessment Act 1936 to:
- limit the refunds to be made by investment bodies to requests for refunds received on or before 15 July following the year of income in which an incorrect deduction of tax file number (TFN) amounts occurred;
- enable an investment body to ensure it has correct records concerning an investor's TFN before it refunds an amount which was deducted in error;
- ensure that an investor who does not obtain a refund from an investment body is able to receive either a credit on assessment or a refund from the Commissioner;
- allow investment bodies to offset against later remittances in respect of the same financial year, TFN amounts refunded to investors and recoverable from the Commissioner.
Purpose of the amendments
3.2 The general purpose of these amendments is to institute some new procedures associated with the refund of TFN amounts incorrectly deducted by investment bodies, that is by unit trusts and bodies that pay dividends or interest. The amendments are intended to make it easier and be less costly for investment bodies in their dealing with amounts incorrectly deducted.
3.3 Existing investor rights are being maintained in relation to past errors and also for new errors where investors exercise those rights up until 15 July of the financial year after a new error has occurred. Where an investor does not exercise refund rights by that time, he or she generally will now be required to wait until assessment to obtain a credit for the amount incorrectly deducted. If that is not appropriate, new procedures are to be instituted for investors to obtain refunds from the Commissioner.
Date of effect
3.4 The substantive amendments will apply to deductions of amounts from 1 July 1995. [Item 12]
3.5 Item 5 is a technical amendment and will apply from the date of Royal Assent.
3.6 An investment body must deduct a prescribed amount (TFN amount) from investment income unless the investor has quoted or been taken to have quoted a tax file number. The investment body is then required to remit TFN amounts deducted to the Commissioner (subsections 221YHZC(1A) and 221YHZD(1A) respectively).
3.7 Where a TFN amount has been deducted in error and has been remitted to the Commissioner, the Act provides that the investment body must refund the amount to the investor and can recover that amount from the Commissioner. Investors who are entitled to a refund under this provision are prohibited from obtaining a credit on assessment of their income tax returns (section 221YHZDA).
3.8 These refund procedures are costly to both investment bodies and the Australian Taxation Office, particularly where the TFN amount was deducted in error during a prior financial year.
How will an investor obtain a refund of any TFN amount deducted in error on or after 1 July 1995?
3.9 These amendments will provide that, for financial years commencing on or after 1 July 1995, the refund provisions described in paragraph 3.7 above apply only if the information requested by an investment body under new subsection 221YHZDA(1A) has been supplied and:
- the investor has applied to the investment body for a refund; or
- the investment body has otherwise become aware of the error on or before 15 July following the financial year in which the amount was deducted. Existing subsection 221YHZDA(2), which presently prohibits a credit on assessment being available where subsection 221YHZDA(1) applies, is to be amended to make the operation of that subsection tied to the operation of subsection 221YHZDA(1) as now amended. [Items 6,7, 9 and 10]
3.10 If an investor did not apply for a refund by 15 July following the financial year in which the amount was deducted, and the investment body did not otherwise become aware by that date that a TFN amount was deducted in error, section 221YHZDA will no longer apply. In such a case, the investor will be entitled to claim a credit on assessment for the amount deducted (as is the case for TFN amounts correctly deducted - subsection 221YHZK(1)) or, if that is not appropriate, the investor can apply to the Commissioner for a direct refund of the amount.
3.11 The new provisions dealing with refunds directly from the Commissioner are contained in new section 221YHZDAA . [Item 11]
3.12 New subsection 221YHZDAA(1) provides that where:
- a TFN amount was deducted in error and remitted to the Commissioner; and
- the investor did not apply to obtain a refund from the investment body by 15 July of the following financial year
the investor may request a direct refund of the amount from the Commissioner.
3.13 New subsection 221YHZDAA(2) provides the conditions for a refund to be obtainable from the Commissioner. The conditions are:
- the person provides a TFN or the basis on which he or she has been taken to have quoted it to the investment body;
- the Commissioner is satisfied that the person is entitled to apply for a refund from the Commissioner; and
- the Commissioner considers that one of three requirements is satisfied.
3.14 The requirements are:
- it is unlikely that the person will become entitled to a credit on assessment before the end of the financial year following the financial year in which the TFN amount was deducted in error; or
- the person would suffer hardship if the Commissioner did not refund the TFN amount deducted in error; or
- it would otherwise be fair and reasonable to refund the amount.
3.15 The first requirement is intended to deal with situations such as those where a person would not otherwise need to lodge an income tax return (for example a company or individual who has been granted exemption from lodging an income tax return) or is unable to lodge before the end of the financial year (for example because of a delay in receiving information from overseas). An example of the second requirement would be where a person depended on using the full amount of the investment income to pay immediate living expenses.
3.16 The third requirement is designed to cover other cases which do not meet one of the first two requirements and where, based on the facts of those cases, it would be fair and reasonable that a refund be given rather than waiting for an assessment to obtain a credit. It is expected that there will be few cases in this category.
3.17 New subsection 221YHZDAA(3) will ensure that an investor who obtains, under this new provision, a refund of any TFN amounts deducted is not then entitled to claim those amounts as a credit on assessment.
3.18 Item 9 will insert new subsections 221YHZDA(1A) and (1B) to provide that when an investment body refunds a TFN amount deducted in error, it will be authorised to ensure it has a record of the investor's tax file number or the basis on which the tax file number was taken to have been quoted. This will ensure that when a TFN amount was deducted because the investment body had not properly recorded an investor's TFN, that error may be corrected thus preventing any future deduction in error. An investment body's entitlement to request information from the investor is to be limited to 7 working days (of the investment body) to ensure that refunds are not unduly delayed.
How will an investment body recover TFN amounts deducted in error and remitted to the Commissioner, and which are later refunded to the investor?
3.19 Item 4 inserts new subsections 221YHZD(1AB) and 221YHZD(1AC). New subsection 221YHZD(1AB) provides that where an investment body:
- has refunded the whole or part of a TFN amount deducted in error; and
- is required to remit any other TFN amounts deducted in respect of the same financial year to the Commissioner;
it may decide to offset the whole or part of the amount refunded against other amounts to be remitted in respect of the same financial year. Where the investment body makes this decision and makes a record to that effect, the amount to be remitted is so reduced. An investment body that does not decide to offset will still have available the existing avenue of recovery from the Commissioner.
3.20 New subsection 221YHZD(1AC) ensures that an investment body is not entitled to offset any part of an amount refunded if it has previously offset that amount or has applied to recover the amount under subsection 221YHZDA(1). This provision will ensure that an investment body is not entitled to obtain more than one refund from the Commissioner in respect of a TFN amount deducted in error, remitted to the Commissioner and later refunded to the investor.
3.21 Subsection 221YHZDA(1) is amended to provide that an investment body may not recover an 'excess amount' from the Commissioner where it has offset the amount against a remittance under new paragraph 221YHZD(1AB)(c). [Item 8]
3.22 An investment body which has been required to deduct any TFN amounts and remit them to the Commissioner during the financial year is required by paragraph 221YHZC(1A)(f) to give the Commissioner a statement reconciling all amounts deducted in the previous financial year with amounts paid to the Commissioner.
3.23 Item 1 amends paragraph 221YHZC(1A)(f) to link the reconciliation with requirements under new subsection 221YHZC(1AA) . Item 2 inserts new subsection 221YHZC(1AA) to require certain details to be included in the investment body's reconciliation statement to the Commissioner. The statement must reconcile the total of all deductions with the total of amounts remitted to the Commissioner plus the total of amounts offset against remittances. This provision will ensure that the records maintained by the investment body and forwarded to the Commissioner will equate with amounts to be allowed to investors as credits on assessment.
3.24 Item 3 make subsection 221YHZD(1A) subject to new subsection 221YHZD(1AB) . The effect of this is that TFN amounts deducted must be remitted to the Commissioner only to the extent that they are not offset under the new subsection.
3.25 Item 5 contains a technical amendment to clarify the law. Paragraph 221YHZDA(1)(a) refers to a deduction 'under this Division'. The only provision in the Division which requires an investment body to deduct TFN amounts from investment income is subsection 221YHZC(1A). Paragraph 221YHZDA(1)(a) is accordingly proposed to be amended to refer to subsection 221YHZC(1A) rather than the Division.