Time period for refunds under the Income Tax Act 2007

(Clauses 6, 7, 41 to 44, 46 to 56 and 67)

Summary of proposed amendment

An amendment is being made to reduce the time period when refunds can be claimed under the Income Tax Act 2007 to four years from the year of assessment.

Application date

The amendment will apply from the 2013–14 income year.

Key features

The Income Tax Act 2007 is being amended to reduce the time period for refunds under the Act to four years from the year of assessment. This time period would be applied consistently to all refunds. In the case of the donations tax credit which is cashed out separately from the income tax process, the time period for taxpayers requesting refunds will become four years from the end of the tax year in which the donation was made.

Background

If too much tax has been paid, the excess amount is refundable to the taxpayer. Over the years, the time periods for requesting refunds under the Income Tax Act have varied from between three and eight years.

The refund period was aligned with the time bar (four years) in 1944. At the time, it was considered that the time period for a taxpayer to claim a refund should be aligned with the time period for the Commissioner to amend an assessment. With the introduction of PAYE in 1957, the refund period was increased to six years in recognition of the possibility that employers could make mistakes in their calculations. It was increased to eight years in 1968. In 2004, the refund period was amended. The current period is four years from the date of assessment, with an eight-year period applying when the overpayment results from a clear mistake or simple oversight.

The longer periods for refunds were established in an era when the administrative environment was based on assessments carried out by the Commissioner. Departing from four years for a refund was aimed at ensuring taxpayers were not unduly prejudiced by any errors made by employers or the Commissioner when the PAYE scheme was introduced (as systems were not computerised).

The time limits on refunds of tax paid in excess, and on the Commissioner amending assessments when insufficient tax has been paid, represent a trade-off between achieving finality and ensuring the correct amount of tax has been paid.

In today’s modern tax administration environment, there is some question whether an eight-year refund period is consistent with the policy objective of reaching a balance between the finalising of a taxpayer’s tax position at the earliest practicable stage and the accuracy of that position.

The time limit on the Commissioner to increase an assessment of tax is generally four years from the year of assessment. The Commissioner requires a period in which to determine the accuracy of taxpayer assessments. Setting the time period for refunds at four years aligns the time period for taxpayers requesting refunds with the time period for the Commissioner increasing an assessment.

This approach will also mean that taxpayers requesting refunds will be treated similarly. The refund period for taxpayers who are personal tax summary taxpayers is currently four years. Under the proposed amendment all taxpayers will have a refund period of four years from the year of assessment.

The proposed new refund period is similar to that in other jurisdictions – for example, the time period in the United States is three years, and in the United Kingdom, Ireland and Australia it is generally four years.