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.
The above is however merely an example of retrospectivity regarding a deduction — which has an indirect affect on liabilities. But how should your clients approach retrospectivity that will have a likely outcome on their direct tax liabilities?
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.
It should be noted however that the Senate has scrutiny processes intended to minimise periods of retrospectivity. The Australian Law Reform Commission says the Senate has Standing Order number 45, which provides that where taxation legislation has been announced (say, by press release) more than six months before the introduction of the relevant legislation into Parliament (or publication of a draft bill), that legislation will be amended to provide for a commencement date after the date of introduction (or publication).
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 your client should do when faced with proposed retrospective legislation, you will need to consider whether the proposed law may:
- increase the taxpayer’s liabilities, or
- decrease those liabilities.
Changes that increase taxpayers’ liabilities
If a proposed law change would increase your client’s 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.
Your client can self-assess their tax liability under the existing law, but if the law is ultimately changed retrospectively, you may need to seek an amendment for your client 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 taxpayers’ liabilities
If a proposed law change would reduce your client’s liabilities, generally the advice would also be that they 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 ATO has the power to decide whether or not it would be an efficient, effective and ethical use of its resources to enforce compliance with the existing law where a taxpayer chooses to self-assess by anticipating an announced law change.
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.