We were recently made aware of a process that the ATO adopts to assist some taxpayers in obtaining refunds of franking credits on a timely basis – that is, soon after the end of the income year.
If a taxpayer fits a certain profile (see below), the ATO takes it upon itself to, in effect, lodge a tax return on behalf of a taxpayer so that refundable franking credits can be paid to the taxpayer on a timely basis.
Firstly, the process applies to a limited cohort of taxpayers that broadly meet the following criteria:
- Over 60 years old at the end of the relevant income year;
- ATO has the current postal address for the taxpayer;
- Is not on a tax agent client list;
- Has held the same parcel of shares for the past 2 years;
- Was an Australian tax resident for the whole year;
- Has a total franking credit refund of less than $5,460;
- Is not required to lodge an income tax return due to other income received e.g., rental income, personal services income, primary production or business income;
- Has total dividend income of less than $18,200;
- Hasn’t lodged an employment declaration during the last 2 income years;
- Has a total superannuation income stream (taxed and untaxed) of less than $100,000; and
- Does not have any capital gains tax (also see comments below).
Secondly, the ATO indicates that it bases eligibility for this process on prior year information and other information received by the ATO from banks, employers, etc. It also notes that the taxpayer may not be eligible if their circumstances change or the ATO receives information indicating the taxpayer is no longer eligible. Other triggers for ineligibility are:
- If the taxpayer lodges an income tax return for the year (i.e., 30 June 2025);
- If the taxpayer submits an application or a refund of franking credits; or
- If the taxpayer becomes a tax agent client.
See this link for the ATO website page that refers to this process in more detail.
That page also contains a ‘How it works’ section that indicates:
- Each year, the ATO receives information from share registries, managed funds and other third-parties about dividends and investment holdings;
- Once the ATO receives the information, the ATO calculates the taxpayer’s refund and issues a notice of assessment (see comments below) and will deposit the refund directly to the taxpayer’s account;
- If the ATO does not receive the information from the relevant institutions, they cannot process the refund;
- If the ATO receives some information ‘but not the information we expect’, the ATO will process the refund amounts and issue a notice of assessment, and if they receive further information later, they will refund the subsequent amounts via issuing an amended assessment; and
- Refunds will be issued from mid-July, with most finalised by August; and
- The ATO will issue a letter or SMS in mid-June detailing the process and when to expect the refund.
Broadly, based on the eligibility criteria, eligible taxpayers will be retired with income below relevant thresholds to be required to lodge a tax return, passively holding parcels of shares that derive relatively low dividend income.
Issues
The process appears admirable and would be beneficial to many of those that are eligible. However, the process also raises a number of interesting questions.
Assumptions and Timing
It assumes that the prior year investment and income profile of a taxpayer will continue in the current year. However, what if the taxpayer’s circumstances have changed during the year, such as:
- If the taxpayer has started earning income as a sole trader during the income year. This would not require them to complete a TFN declaration as they are not employed. Technically, however, they would be required to apply for an ABN, and maybe this would render them ineligible (but this does not appear to be included in the list of criteria).
- If the taxpayer receives a distribution from a trust during the year.
The above amounts may not take the taxpayer above the tax-free thresholds, but this would not be known to the ATO in mid-July to August after the end of the income tax year.
Self-assessment and ATO Authority?
We know the Commissioner has broad powers, and while it may be open for the ATO to carry out this process, we could not find any announcements or specific legislation to support this. Of particular note is that the ATO will issue a notice of assessment based on the information it has, as at the time of processing the taxpayer’s ‘return’ and issuing the refund.
This raises a number of questions:
- Is this a default assessment?
- If so, what does a taxpayer do if the assessment is inaccurate or wrong? Is the taxpayer compelled to lodge an amended return, resulting in an amended assessment?
- If so, and if the refund is reduced (or if tax becomes payable), will the taxpayer be subject to interest and/or penalties?
(As far as we are aware, when an amended assessment is raised, the ATO’s systems will automatically trigger interest and/or penalties on any shortfall. Only immaterial interest amounts (below $20?) are automatically adjusted.)
Will the Commissioner know if the taxpayer has made a capital gain during the year?
We know the ATO uses data matching systems to identify capital gains from commonly reported assets such as shares and real estate. However, gains from assets like private collectables, cash-based transactions, off-market share transfers, and foreign disposals may not be captured by these systems. Also, the data matching information from property sales may depend on the timing of settlement. For example, a real property sale contracted late in one income year and settling in the following income year would only be notified to the ATO after settlement has taken place, and this may occur after the ATO has generated the assessment.
Comments
As noted above, as well-intentioned that this process may be (particularly if it results in some taxpayers receiving a refund where they may not otherwise have – e.g., if they did not make a refund request or lodge a tax return), it raises some interesting issues and questions. But it also contradicts the basis of a self-assessment regime.
At the very least, the ATO should update its webpage to provide taxpayers with some assurance that if the ATO automatically processes such a refund, but the taxpayer’s circumstances have changed, that amendments will not trigger penalties and interest.
Alternatively, would it be better for the ATO to inform eligible taxpayers that, according to information available to it, the taxpayer was eligible for a speedy refund of excess franking credits, but allowing the taxpayer a grace period if circumstances have changed which may impact on the refund amount? If the taxpayer does lodge an updated return (within an agreed timeframe, including if the taxpayer engages a tax agent and has an extended period within which to lodge an updated return) any amended assessment will not trigger penalties or interest.
Such a process would go some way to resolving some of the questions and issues noted above.
