On 22 April 2021, the Australian Taxation Office (ATO) released Practice Statement 2021/2. This statement, entitled "The ATO's administrative approach to the extension of the Commissioner's discretion to retain tax refunds" (Practice Statement), provided an explanation of when the Commissioner of Taxation (Commissioner) can retain taxpayer refunds.
The Practice Statement was made as a reflection of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020. The amendments introduced under that Act provided for an extension in the Commissioner's discretion to retain a refund where a taxpayer has an outstanding notification. It is important to note however that the discretion does not apply to taxpayers with outstanding notifications under the business activity statement (BAS) or petroleum resource rent tax (PRRT) provisions; withholding tax refunds in those circumstances falls under the purview of a different practice statement.
Circumstances in which taxpayer refunds can be withheld
The Commissioner will only consider exercising the discretion in circumstances where taxpayers are identified as engaged in high-risk behaviour. This includes engagement in illegal phoenix activity.
"Phoenix activity" involves a new company being created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes.
Indicators of phoenix behaviour by a taxpayer include (but are not limited to) the following:
- cyclically establishing, abandoning or deregistering companies to avoid paying taxes, creditors or employee entitlements;
- assets being dissipated with the intention to defeat creditors, or other action being taken to defeat creditors (which may be a precursor to phoenixing);
- a director associated with prior liquidations and/or deregistrations;
- a director associated with prior instances of insolvency;
- stripping or transfer of assets from a company, ahead of its abandonment, winding-up or deregistration;
- transfer of company assets at an undervaluation (often to a related party) to defeat creditors;
- the transfer of employees to a new company under the same effective control as the previous company to defeat tax obligations and employee entitlements;
- backdating of the resignation of a director, appointment of 'straw' directors, or abandonment of a company without a resident director;
- the concealment of the role of a shadow or de facto director; or
- the concealment or destruction of company records.
When the discretion to withhold refunds was first introduced on 4 April 2020, the Commissioner considered exercising the discretion to retain refunds where there were reasonable grounds to believe the taxpayer is, or the controller or associates of the taxpayer were, engaged in phoenix behaviour.
However, during this initial period, the Commissioner did not dedicate resources to investigating whether there were other high-risk behaviours that justified the exercise of the discretion.
In the current version of the discretion discussed in the Practice Paper, the Commissioner will consider exercising the discretion to retain a taxpayer's refund where there are reasonable grounds to believe that
- the taxpayer has an RBA surplus or other credit card that has not been applied against a tax debt of the taxpayer;
- the taxpayer has an outstanding notification that they are required to give under a taxation law (other than the BAS or PRRT provisions);
- the outstanding notification affects or may affect the amount of the refund; and
- the taxpayer (including associates or controllers such as directors) is engaged in:
(a) phoenix behaviour between 18 February 2020 and 22 April 2021
(b) phoenix behaviour or high-risk behaviour after 22 April 2021.
What taxpayers can do to avoid having refunds withheld
In order to avoid the Commissioner exercising the discretion to withhold your refund, you should make sure to avoid any of the phoenix behaviours described above at paragraph 1(b) of this article.
Taxpayers should also seek to avoid high-risk behaviours. The ATO uses the following as indicators of high-risk behaviours, although this is not an exhaustive list:
- poor past and current compliance with taxation and superannuation obligations, including registration, lodgement, accuracy of reporting, record keeping and making on-time payments
- poor behaviours and governance in managing tax and superannuation risks
- the number of, and the circumstances around, any bankruptcies or insolvencies
- tax-related penalties and sanctions imposed, such as a taxpayer being subject to director penalty notices or having committed an offence in failing to give security as required by us
- connection with advisers who are subject to disciplinary actions or sanctions relating to taxation and superannuation laws, such as penalties relating to promoting or implementing schemes
- past information provided which reasonably indicated
(a) fraud or evasion
(b) intentional disregard of a taxation law
(c) recklessness as to the operation of a taxation law
- the likelihood of participation in or promotion of
(a) aggressive tax planning arrangements
(b) schemes to obtain a tax benefit (tax avoidance schemes)
(c) fraud or evasion
(d) criminal activity.
(e) If a taxpayer's refund is retained by the Commissioner, the taxpayer has the right to have the Commissioner's decision externally reviewed. Additionally, if the Commissioner makes an assessment of the underlying amount, the taxpayer may object to the assessment.
Recommendation
If you have been involved in any of the above behaviours or indicators or have received notice that your tax refund will be withheld by the Commissioner, we recommend that you seek advice on the best approach for your review or objection. The Practice Statement and its narrow approach to the discretion to withhold provides an indication of greater stringency in the Commissioner's approach to taxation issues post-COVID.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
