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When retrospective legislation bites, what is the ATO’s approach?

It is not uncommon for taxation measures to be enacted with retrospective operation — that is, the tax law changes take affect for a period before the date of enactment, once the legislation is passed.

Indeed, budget measures often commence from the date of the budget announcement, rather than the date of enactment. Retrospective tax legislation refers to past actions, but imposes an obligation to pay tax in the present.

For example, legislation came into law in the last half of 2017 that made a reality of a measure first proposed in the May 2017 Federal Budget. The “housing tax integrity” bill denies all travel deductions relating to inspecting, maintaining, or collecting rent for a residential investment property.

But this measure was introduced retrospectively — it became law at the end of 2017 but applies from July 1, 2017. In other words, this measure affected the entire 2017-18 income year, even though the change was made halfway through that financial year.

Retrospective legislation poses a dilemma for affected taxpayers. Should they follow the existing law or anticipate the proposed change?

The ATO says it will try to provide practical guidance for taxpayers faced with this question, and will usually state its administrative approach to particular retrospective law changes, especially (as much as possible) in the period when the change is no more than a proposal.

ATO guidance covers the options available to taxpayers and the consequences of choosing particular options, but also looks at how the ATO will administer the law during the period until the final outcome of a proposed law change is known. If no guidance is forthcoming, this can certainly be sought.

In determining what you should do when faced with proposed retrospective legislation, you will need to consider whether the proposed law may increase your liabilities or decrease them.

Changes that increase liabilities
If a proposed law change would increase your liabilities, the ATO has no authority to collect the new, or higher, liabilities until the relevant law is enacted or the legislative instrument is made.

You can self-assess your tax liability under the existing law, but if the law is ultimately changed retrospectively, you may need to seek an amendment (we can help you with this) and pay the increased liability. In the interim, it may be wiser (if possible) to make provision for these expected liabilities.

The ATO’s advice has always been that taxpayers should self-assess under the existing law. But, in these circumstances, it is also generally pointed out that there could be consequences if the law is ultimately changed retrospectively and taxpayers have previously self-assessed under the tax law as it existed at that time.

The ATO generally doesn’t advise taxpayers to self-assess by anticipating the announced change will become law, but if taxpayers choose to do so, the ATO has stated that it won’t apply its resources to checking whether these self-assessments are correct (in accordance with the existing law). It says that this would be an inefficient use of its resources.

Generally its advice will also deal with the interest and penalty consequences for taxpayers who have to amend or vary liabilities following a retrospective law change.

Changes that reduce liabilities
If a proposed law change would reduce your liabilities, generally the advice would also be that you should self-assess under the existing law. If the choice is made to self-assess by anticipating an announced law change, the ATO says it may not enforce compliance with the existing law. However, it will act to prevent incorrect refunds.

The ATO advises taxpayers faced with self-assessing a liability that may eventually be affected by an announced, retrospective, law change to apply the existing law when self-assessing. This is because naturally the ATO cannot advice taxpayers to ignore the tax law as it stands. However it does have a little wriggle room in that the rules generally allow it to accept taxpayers’ self-assessments.

The one exception to this general rule applies if both the following conditions are met:

  • allowing taxpayers to anticipate an announced law change would be likely, in some cases at least, to result in a refund of tax

  • the Commissioner can, before a payment is made, reasonably identify particular taxpayers to whom a payment would be made who have applied the law incorrectly.

In these circumstances, the ATO is required to do whatever it can, within reasonable bounds, to stop payment of the incorrect refunds.

Harper Group Pty Ltd – Chartered Accountants Frankston - Ph 9770 1547

Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information. 

Michael Sinclair