When a tax refund is not a refund

A recent case before the Federal Court provided a reminder to SMEs and all businesses that expected tax refunds don’t always turn out as expected.

In its decision, the Federal Court dismissed a company’s application for a review of a decision by a Deputy Commissioner of Taxation to withhold GST refunds that were payable under the GST Act. The Court considered that the company had no reasonable prospect of obtaining the relief it sought. But it is the background to the case that is of interest.

The company lodged its Business Activity Statement (BAS) for the tax period May 1 to May 31, 2009 which showed a refund of $9,837. In June and July 2009, the Tax Office contacted the company requesting documents in order to verify the information contained in its May BAS.

Notwithstanding that the company furnished the requested documents, the Tax Office decided to conduct a desk audit in respect of some aspects of the affairs of the company and its related entities.

In October 2009, the ATO said it was finalising the audit of the May BAS and that the refund amount had been reduced, by reason of different treatment of a motor vehicle purchased by the company. The ATO said that the amount of the refund in respect of the May BAS had been reduced to $4,450.

The Commissioner wrote to the company enclosing an interim report relating to the matter and invited the company to comment and provide any additional information or evidence that would support its position. The letter went on to say that once the Commissioner had finalised the audit, a notice of assessment for any adjustments made would be sent to the company. The interim report referred to the Commissioner’s treatment of the purchase of the motor vehicle and said the GST claimed by the company would be amended.

In October 2009, the Commissioner issued a Notice of Assessment of GST Net Amount for the period May 1, 2009 to May 31, 2009, stating that the company’s GST net amount had changed from $9,837 credit to $3,854 credit.

Correspondence from the ATO also said that it would pay the refund and interest if applicable to the company’s nominated account.

However, it noted that, if the company had other outstanding tax liabilities, the ATO would offset the refund against those amounts.

This is where some SMEs might not appreciate the power the ATO has to offset refunds otherwise due against any other tax debts a taxpayer may have. In this situation, those debts could be PAYG for employees, super guarantee, FBT, withholding tax, general interest charge, etc.

In early November 2009, the company received notification the audit was completed.

However, in late November 2009, the company had not received the refund and contacted the Tax Office to enquire about the status of it.

In February 2010, the Commissioner sent a letter to the company stating that he was considering a more comprehensive audit of the company in relation to the refund and that subsequent refunds lodged by the taxpayer were held up.

The taxpayer then commenced proceedings for a review of the Deputy Commissioner’s decision to “withhold” the refunds. The Federal Court found in favour of the Commissioner.

Whether the refunds were eventually paid is not known, but the case serves to remind SMEs that they need to have a clear understanding of their tax position.

If a tax return, BAS, etc is lodged and a refund is expected, businesses must be aware that there is a possibility the refund could be applied (or offset) by the ATO against other outstanding tax debts of the business. This can also apply where, for example, a taxpayer is the director of several companies. If one of the companies owes money to the ATO, the taxpayer’s own tax refund can potentially be offset against that debt.

A refund is not always a refund – at least not immediately!

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.