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Serious cash-flow problems for small and medium-sized businesses through GST refunds being withheld by the IRD for extended periods have come under scrutiny.
Deloitte Dunedin tax partner Peter Truman said a recent Supreme Court decision highlighted the need for taxpayers to "drive the process" if they were seeking a GST refund.
"People filing a GST claim need to go on the front foot and provide IRD with all the information to justify the claim."
The Supreme Court held Inland Revenue could retain GST refunds indefinitely provided timely notification of an investigation was given.
The taxpayer in question, Contract Pacific, was an inbound tour operator.
After it filed a GST return claiming a refund, the commissioner of Inland Revenue notified it of his intention to investigate the return.
The notice was given within the 15-working-day limit set out in section 46 of the GST Act, but the commissioner then asked for further information outside of that limit.
The Supreme Court held the commissioner's request for information did not fall outside the requirements of section 46, as an investigation included further requests for information.
The court also held that a GST refund was not required to be paid until the commissioner had determined the refund was payable.
Mr Truman said the reasoning for the 15-working-day policy was to ensure that GST refunds were processed and paid out by IRD in a timely manner, while ensuring the IRD had time to satisfy itself that the return was correct.
In the case of Contract Pacific, the company had sought a $7.5 million refund, the bulk of which related to a reassessment of an earlier period.
The IRD had advised within 15 working days that it intended to investigate the return, but asked for further information well outside that time frame.
Contract Pacific argued that the department could not request the information because it was outside the statutory time frame and the GST was therefore refundable to Contract Pacific, he said.
"It argued IRD had 15 working days to give notice of an investigation or request information, or give notice of investigation and request information."
The Supreme Court noted that once an investigation was notified or information requested within 15 working days, there was no time period in which the department must complete the investigation.
The department must satisfy itself as to the correctness of the return before the refund was payable, Mr Truman said.
"The case is probably correct as to how the statutory provisions apply.
"It means that the IRD can circumvent the two 15-working-day periods for requesting further information by simply notifying an investigation."
However, the case highlighted the issue that once the IRD satisfied the 15-working-day period for notifying an investigation or requesting information, it could effectively hold up a refund indefinitely.
That had always been the case and was not the outcome of the Supreme Court decision, Mr Truman said.
Usually, it was the larger claims that came under scrutiny.
The IRD was not going to release thousands of dollars in claims without satisfying itself of the legitimacy of those claims.