Experts warn Government on retrospective tax rules in Federal Budget after four changes in a year catch unwary taxpayers out

The Tax Institute has called on the Government to stop retrospective legislation that puts previously compliant taxpayers and business on the wrong side of the law, after the introduction of four retrospective tax rules in the last year.

The Institute represents 13,000 tax practitioners and has issued a budget submission which criticises the Government for announcing the retrospective application of some legislation and calls on the Government to put an end to the practice.

The submission flags the changes to reverse consolidation tax laws which were backdated to 2001, amendments to the Petroleum Resource Rent Tax backdated to 1990, an overhaul of transfer pricing laws with retrospective affect from 2004 and amendments to the general anti-avoidance law in Part IVA, announced to apply from the date of announcement in March 2012, despite the community not knowing the details of those changes.

“There are too often unknowns in tax law changes and how they affect business,” said the Tax Institute’s President Ken Schurgott in the submission.

“There has been an extremely concerning trend in recent months of the Government announcing retrospective changes to the tax law.”

“Taxpayers enter into transactions on the basis of the law as it is, not the law as it is rewritten after transactions have occurred.”

“Retrospective changes in tax law are likely to interfere with bargains struck between taxpayers who have made every effort to comply with the prevailing law at the time of their agreement.”

Senior tax counsel Robert Jeremenko told SmartCompany there was a “concerning trend” of the Federal Government announcing changes and then saying that the changes applied at some date in the past.

“That is completely against the grain of businesses and tax payers trying to do the right thing,  people make decisions on the law as it stands today,” says Jeremenko.

“There is no particular rationale for backdating except for the assumption that the Government is trying to garner as much revenue as possible and doing it in a way that is abhorrent to the tax paying community.”

“In particular business cannot be expected to predict what the Government is going to do if it backdates legislation and if that happens businesses can find themselves in situations where they have breached the tax law and are subject to penalties when at the time they were hand on heart complying with legislation.”

Jeremenko says the retrospective legislation of consolidation tax laws has been particularly relevant to SMEs.

“Certainly for a small- to medium-sized business, if it is involved in some sort of merger with another organisation or some sort of takeover these consolidation rules come into play,” he says.

“They are designed to make it easier for these groups to consolidate their tax and the Government backdated this and so a lot of companies who received the right advice at the time are now in a position where that is going to cost them.”

Jeremenko says he “certainly hopes” the Government does not make any further retrospective legislation in the upcoming 2012-2013 Federal Budget.

“We are in continued discussion with the Treasury asking it to make policy changes in an open and consultative way and you can’t get any less consultative than retrospective legislation,” says Jeremenko.

“Once you start doing something it is easy to get addicted; we are certainly calling on the Government not to continue that trend.”

 A spokesperson for the Treasurer told SmartCompany “There’ll be plenty of stories between now and the Budget – many of which will be wrong.”

“The government doesn’t intend to comment on Budget speculation except to say that the Budget will continue our strong record of managing the economy in the interests of working Australians.”