Time limits on claiming input tax credits:  Punitive outcomes for taxpayers

A taxpayer can amend its BAS only during the four-year “period of review”, which starts when a BAS is lodged and ends four years later (BAS review period), noting various exceptions exist. Division 93 imposes a separate four-year time limit on claiming ITCs.

A taxpayer’s entitlement to an ITC ceases four years after the lodgement due date of the BAS for the relevant tax period (the four-year ITC period). Once this period has passed, the taxpayer is no longer entitled to claim the ITC in respect of the purchase.

The ruling concludes that the only way for a taxpayer to protect its ITC entitlement is to lodge a valid and correct objection with respect to the credits within the four-year ITC period.

An example

Many accountants have been involved in a situation where they take over a client’s tax affairs from another accountant and discover that the client has not lodged tax returns or a BAS for many years. They of course then prepare and lodge the outstanding returns and BASs.

If the client has been registered for GST and has merely failed to lodge the BASs, no time limit applies to lodging the BASs. The BAS review period does not commence until the BAS is lodged.

These BASs invariably contain GST liabilities and ITCs. If the due date for any of the BASs is more than four years ago, the ATO includes the GST liabilities on such BASs, but amends the BASs to remove any ITCs claimed. This often results in much larger tax liabilities than expected, including higher penalties and interest charges. Such an outcome is extremely unfair to taxpayers and entirely contrary to the policy underpinning the GST system where businesses are allowed to offset their GST credits against their GST liabilities.

If the four-year ITC period has passed, the accountant cannot protect the client. The client’s only recourse may be to sue their previous accountant. The current accountant may also need to act quickly after being appointed to lodge formal objections to protect ITCs for any BASs that are still within the four-year ITC period.

Closing comments

This and other scenarios clearly illustrate how Division 93 can operate unfairly for taxpayers. The fundamental problem is the lack of alignment between the four-year ITC period and the four-year BAS review period. Legislative amendments are required to align the time limits for claiming ITCs within the BAS review period. Until then, businesses and tax practitioners should be vigilant to the issue and ensure they lodge objections as required to protect their own or their clients’ entitlements.

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Tony has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations.

Jonathan provides specialist GST and other indirect tax consulting services. He has been named on the list of leading indirect tax advisors in the world by the International Tax Review for the last several years, is a regular commentator and presenter on GST issues and has published numerous papers.