Tax experts say new draft legislation allows ATO to withhold refunds unfairly

Accountants and finance experts have expressed concerns a new piece of draft legislation that gives the ATO power to withhold tax returns from small businesses is much too powerful.


The new legislation would allow the ATO to withhold returns for up to 60 days without challenge if it believes that refund requires further verification.

The design of the legislation is so the ATO can hold on to funds if it believes the business due to receive them is engaging in fraudulent activities. But BDO tax partner Mark Molesworth told SmartCompany this morning the draft legislation gives the commissioner far too much power.

“The draft legislation essentially gives the Commissioner the ability to withhold refunds without being able to be challenged. And any time he requests more information from the business, the clock stops until that taxpayer or business gets back to him.”

“After that, the Commissioner can hold onto the refund as long as he thinks is necessary.”

While the legislation mandates the commissioner take certain things into account, such as the potential impact on the financial situation of the taxpayer, Molesworth says the entire situation is set up so “the commissioner holds all the cards”.

For example, after that initial 60 day period, the taxpayer can challenge the commissioner’s right to withhold those funds, but they need to apply for an internal review at the Tax Office.

That process can take a further 50 days, and then if that doesn’t work, Molesworth says the taxpayer has to challenge the commissioner into the tribunal to get the money back.

While Molesworth says there is no problem with the ATO needing to verify refunds it believes are fraudulent, he says this particular draft gives the Tax Office too much power.

“What I don’t think is appropriate is giving the commissioner all the advantages, which is what this draft legislation does.”

“In my view, it would be far more in keeping with the accountability that we expect from public officials if we give the commissioner a period of 60 or 90 days within which he can verify all those refunds.”

After that period, Molesworth says the commissioner should have a positive obligation to refund the money or go to a tribunal, at which the ATO would need to justify why he should be allowed to hold on to that refund for longer.

“In cases where the taxpayer is not being cooperative, the ATO would get that consent. But for honest taxpayers, it can’t be at their expense their money is held onto.”

This draft legislation comes after a case in the Federal Court ordered the ATO pay a refund to a company, even though it was investigating whether the company was engaged in fraudulent activity. Multiflex, a distributor of electronic goods, was found to be in the right and the ATO was forced to pay back the refund.

“We were never particularly happy with the commissioner’s assumption that he could withhold refunds completely in his discretion – it took a court case to prove that.”

Submissions have now closed, although Molesworth says the seven days’ notice should have been longer, and now a new draft should be in the works. Molesworth says he hopes there are changes made, for the sake of small business.

“We completely support the need to hold refunds, but there has to be a limit, and it shouldn’t be up to the taxpayer to challenge that.”


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