5.2.8 Tax refund intercepts
The majority of relevant debtors are also Australian taxpayers. Where tax has been overpaid, the ATO is obliged to refund the excess to the taxpayer (Taxation Administration Act 1953 section 8AAZLF). The ATO will advise the Registrar when a tax refund amount is available and about to be repaid to a taxpayer who owes a relevant debt to the Commonwealth. The Registrar may take the tax refund amount and apply it in satisfaction of that person's relevant debt (CSRC Act section 72).
CSRC Act section 4(1), section 30, section 67, section 69B, section 72
CSA Act section 64AF
Taxation Administration Act 1953 section 8AAZLF
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CSRC Act section 72 applies where:
- the Commissioner of Taxation would otherwise be required to refund an amount to a person under the Taxation Administration Act section 8AAZLF, and
- the person owes a relevant debt to the Commonwealth.
Where section 72 applies, the Registrar can require the Commissioner to pay the tax refund amount or the amount owing as a debt (whichever is the lesser) to the Registrar. The Registrar applies this amount to the person's debt.
- What are relevant debts?
- Which amounts can be applied to debts?
- Which debts will the amounts be applied to?
- When will a tax refund be taken?
- Financial hardship
What are relevant debts?
Tax refund amounts can only be applied against relevant debts. A 'relevant debt' is a child support debt, a child support related debt or a carer debt. A 'relevant debtor' is the person who is liable to pay a relevant debt (CSRC Act section 4(1)).
A child support debt is defined under CSRC Act section 4(1) as a debt due to the Commonwealth under section 30 of the CSRC Act. A child support debt can arise from a child support assessment, court order, court registered maintenance agreement, an amount registered for collection by the Registrar as a recovery order (3.1.2), or an overseas maintenance liability that is registered for collection by the Registrar.
A child support related debt is defined under CSRC Act section 4(1) as:
- the amount of penalty for late payment of child support debts imposed under CSRC Act section 67
- the amount of penalty for underestimating an income amount imposed under CSA Act section 64AF
- any costs ordered by a court to be paid to the Commonwealth in respect of an offence committed by a person against the CSRC Act or CSA Act, or
- any amount ordered by a court, upon conviction of a person for an offence against the CSRC Act or CSA Act, to be paid by the person to the Registrar.
A carer debt is defined under CSRC Act section 4(1) as an amount that is a debt due to the Commonwealth under CSRC Act section 69B (CSRC Act section 4(1)).
Which amounts can be applied to debts?
Amounts that the Commissioner of Taxation would otherwise refund to a taxpayer under the Taxation Administration Act section 8AAZLF can be applied to that person's debt. The Commissioner will notify the Registrar after assessing a taxpayer's income tax return or after a business activity statement has been lodged.
A tax refund amount under section 8AAZLF includes refundable tax offset amounts such as a private health insurance offset. Where a relevant debtor is entitled to a refundable tax offset, it is applied as a tax offset to that person's tax liability. A person's tax liability is the tax payable by that person based upon his or her taxable income. If the refundable tax offset is greater than the tax liability, the excess amount is refunded to the taxpayer.
Example: A taxpayer who has a low taxable income claims the private health insurance offset. The taxpayer has paid premiums of $2,300 for a complying private health insurance policy and has a rebate percentage of 30%. They claim their rebate of $690 through their tax return. If the claim is paid, the Registrar can use CSRC Act section 72 to apply the refunded amount towards a relevant debt owed by the taxpayer.
Other tax rebates that act as tax offsets also operate in this manner including the overseas forces tax offset and the education tax refund (for 2010-2011 and earlier years).
For tax offsets other than refundable tax offsets, the offset can only reduce the person's tax payable to zero. That is, if the person's tax offsets are greater than their tax due, the excess is not refunded. However, applying a tax offset may still result in a tax refund amount if it means the person has paid more tax during the year than required.
Example: A taxpayer who has a relevant debt has a taxable income of $50,000. The ATO assesses that person's tax liability to be $8,600. The person is a salary and wage earner who has had tax deducted and remitted to the ATO every payday and this amount totals $8,600. The person is entitled to a non-refundable tax offset of $3,000. The offset will result in a $3,000 refund of the person's tax instalment deductions. As this tax refund amount is made under section 8AAZLF, the Registrar can use CSRC Act section 72 to intercept it to apply to the person's relevant debt. In this example, the overpaid tax is being refunded, not the tax offset.
Not all amounts that are paid by the Commissioner are refunded under section 8AAZLF.
FTB that was claimed through the tax system was not paid out under section 8AAZLF. From 1 July 2009, claims for FTB, including previous year claims, can no longer be accepted by the ATO. All claims for FTB must be made to Centrelink.
A potential refund to a company associated with a person who owes a debt is not subject to section 72 and will not be reported to the Registrar.
Which debts will the amounts be applied to?
The Registrar cannot obtain and hold a tax refund amount in order to apply it to a debt that may become due and payable in the future. However, section 72 does apply to debts that are due but not yet payable.
If the person's relevant debt equals or exceeds the amount of the tax refund amount owing to the person, the Registrar can apply the full tax refund amount to the debt. Where the relevant debt is less than the tax refund amount, the Registrar can apply an amount of the tax refund equal to the amount of the debt. The Commissioner will refund the balance to the person (CSRC Act section 72(3)).
When will a tax refund be taken?
Generally, the Registrar will automatically obtain and apply a tax refund amount if there is a relevant debt that is due and payable. The Registrar will apply the tax refund amount unless there are reasons not to do so.
The Registrar may decide not to apply the tax refund amount, or part of the tax refund amount, if the relevant debtor would suffer financial hardship. A person who is suffering serious hardship and expecting a tax refund amount should contact Services Australia to discuss their circumstances and to make a payment arrangement before they lodge their tax return.
The Registrar will consider a person is in financial hardship if, at the time that the Registrar is considering taking their tax refund amount, the person can show that:
- their commitments exceed their income, or
- they have specific expenses to pay outside their essential living expenses.
The expenditure is not limited to their basic needs such as food, clothing, accommodation, utilities, and education costs for children, however, the expenses must be necessary and the person must have explored other payment options to address these expenses or debts.
If the person has made, or will enter into, a satisfactory payment arrangement for their relevant debt, the Registrar will not apply their tax refund amount to the debt if doing so would deprive that person of the ability to meet their other commitments.
The Registrar will not consider that a person will suffer financial hardship if applying a tax refund amount merely limits their social activities or entertainment, or limits access to goods or services of a better nature or standard.
The Registrar will also consider:
- the extent to which the person knowingly contributed to the circumstance, and
- the number of times the person has previously claimed financial hardship.
Example: A payer, Michael, has consistently failed to comply with child support obligations. Michael has lodged a tax return and is expecting a tax refund amount of $1,300. Michael's current child support liability is the minimum annual rate. The Registrar is collecting the prescribed amount from Michael's social security benefit in satisfaction of his current liability and arrears of child support.
Michael claims to have no job, money or assets and is about to be evicted unless he pays rent of $850 within the next 2 weeks. Michael also has an overdue electricity account. Michael's next social security payment is not due for 2 weeks.
Michael agrees to pay $10 per week by direct payments to the Registrar, in addition to the prescribed amount deducted from his social security benefit. Michael will make the first payment in 2 weeks' time. It will take Michael 2 years to repay his arrears at this agreed rate. The Registrar decides to release Michael's tax refund amount on the basis that Michael is suffering financial hardship, and that his present circumstances do not allow him to repay the debt more quickly. Michael undertakes to contact Services Australia when his situation improves to make a new arrangement.