Income tax and GST refunds: How delays cause problems

Delays in tax refunds, including GST refunds, are causing consternation for some taxpayers and their tax agents.

While as at October 12, 2011, the ATO says it had issued just over six million tax refunds to taxpayers, between July 1, 2011 and October 12, 2011, it had held for review (ie. delayed) around 90,000 returns with total refunds of over $372 million the ATO believes included overstated claims or could be potentially fraudulent.

Now, the ATO has every right to carefully check refund claims to ensure they are correct. The problem that has surfaced for some taxpayers is that the delay of their refund has caused them cashflow difficulties. They were relying on the refund to help fund their business.

The ATO’s review may show the refund claim is correct and legitimate but the complaint is that it is taking the ATO too long to determine the correctness of claims.

By coincidence, a recent case before the Federal Court resulted in the ATO being ordered to immediately pay a GST refund. The ATO has appealed the decision, but it serves to illustrate what the Court believes is the basic premise under which the ATO is required to issue GST refunds.

The taxpayer company was in the business of purchasing mobile phones and similar goods from suppliers in Australia (creditable acquisitions) and making GST-free exports of the goods to customers overseas, resulting in an excess of input tax credits. The returns (ie. the Business Activity Statements) lodged by the company in respect of the months January to May 2011 disclosed that it had made creditable acquisitions when it purchased those goods locally, and that it had collected no GST upon the sale of the goods overseas, since exports are GST-free. The resulting excess of input tax credits over GST gave rise to refund entitlements under the GST law.

The Tax Commissioner contended that input tax credits claimed by the company were unsubstantiated and allegedly fraudulent. It presented evidence that it was currently conducting an investigation into the company’s compliance with the GST Act.

The Commissioner claimed that the relevant provisions of the law, under which the company was prima facie entitled to refunds, were subject to an implied proviso that the obligation to make those refunds need not be complied with instantly, but must be complied with within a reasonable period of the Commissioner having received the company’s returns.

The Court was told that “in the period leading up to 2009, [three companies in the same group as the taxpayer had] been involved in ‘sham transactions through a supply chain’”. The ATO therefore refused to pay the refunds in this case until an audit had concluded.

The Commissioner indicated he was in the course of undertaking a complex investigation into the justification for the company’s assertion that input tax credits arose. The Commissioner argued that the reasonable period within which he must comply with his statutory obligation to make the refunds claimed is one which would take into account the conduct of that investigation, assuming it was expeditiously progressed.

The Commissioner essentially argued that the relevant law allowed him a longer period within which to make the required refund. The Court however disagreed.

The Court also rejected the Commissioner’s contention that the “proper construction” of the relevant provisions would allow withholding of a payment under the GST Act pending an investigation by the Commissioner. Therefore, the Court held that once a net amount had been calculated under the GST Act, the refund must be made by the Commissioner regardless of the underlying correctness of the calculation.

The Court observed that scheme of the relevant law contemplated the making of refunds by reference to the calculations set out in the company’s GST return and within a reasonable time, and not by reference to the time that would be taken by the ATO to undertake an investigation of the accuracy of the returns themselves.

Further, the Court held that a reasonable period would only include a period which “may be required to enable the necessary administrative steps to be taken within the [ATO] to process the taxpayer’s GST return”.

The Federal Court therefore directed the Commissioner to immediately pay the GST refunds to the company. Perhaps not surprisingly, the Commissioner has appealed the decision to the Full Federal Court, so this story is not quite over yet.

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