Explanatory MemorandumCirculated by authority of the Treasurer, the Hon Wayne Swan MP
Chapter 2 - Restriction on GST refunds and time limits for recovery and refund of indirect tax
Outline of chapter
2.1 Schedule 2 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) to correct a deficiency in the tax law to ensure that the restriction on refunds applies whether or not a transaction in respect of which goods and services tax (GST) has been paid is in fact a supply. It also ensures that the four-year time limit on recovery applies where a refund is overpaid to a taxpayer. In addition it ensures that the four-year time limit applies where a refund is payable by the Commissioner of Taxation (Commissioner) due to a reduction in the liability of a taxpayer.
Context of amendments
2.2 Under section 105-65 of Schedule 1 to the TAA 1953 (restriction on refund provisions), if a business overpays GST on a sale to a customer then the GST may be refunded to the business only if the business has first refunded the overpaid amount to the affected customer. This is because it is the customer who is intended to bear the cost of the GST. Without the restriction on refund requirement, there is a potential for a windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of the tax.
2.3 In the case of business-to-business transactions, the Commissioner is not required to refund overpaid GST because the purchasing business is potentially entitled to input tax credits to offset the GST included in the price of its acquisition.
2.4 A discretion exists so that, for example, in business-to-business transactions, the Commissioner may refund overpaid amounts if the supplier can demonstrate that they have first reimbursed the registered recipient of a supply for the amount of GST included in the price and the Commissioner considers it reasonable in the circumstances.
The Federal Court of Australia in
KAP Motors Pty Ltd v Commissioner of Taxation
 FCA 159 (KAP Motors) held that a taxpayer that had overpaid GST on a motor vehicle holdback payment need not first reimburse their customer for this amount before seeking a refund from the Commissioner because the transaction resulting in the overpayment was not a 'supply' for GST purposes. The Commissioner issued Goods and Services Tax Determination GSTD 2005/4 in June 2005 which provided that motor vehicle holdback amounts are not generally consideration for a supply and thus the transactions relating to holdback payments are 'out of scope' for GST.
2.6 The decision in KAP Motors has also highlighted a deficiency in the operation of the rule imposing a four-year time limit on indirect tax liabilities and entitlements to refunds. While generally refunds can only be claimed and tax recovered within four years, the relevant provisions may not apply in all circumstances as intended.
2.7 Under the current provisions, the four-year time limit on recovery of liabilities by the Commissioner may not apply in situations in which a taxpayer received a refund in relation to GST and it is later determined that the taxpayer was entitled to a lesser refund in relation to GST for the relevant tax period. Similarly, the four-year time limit on refunds, may not apply in situations where a taxpayer has overstated their tax liability for the relevant tax period to which the refund relates.
Summary of new law
2.8 These amendments ensure that the restriction on providing refunds of GST applies to situations in which transactions have been treated incorrectly as taxable supplies to any extent. This includes where a taxpayer has remitted GST on transactions for which there was no supply. This is achieved by amending the provisions in the TAA 1953 dealing with restrictions on refunds so they also apply to amounts that have been overpaid or not refunded because any supply or arrangement was treated as a taxable supply whether the transaction or arrangement was in fact a supply. This reinstates the approach taken by the Commissioner prior to the decision in KAP Motors and overcomes the identified deficiency in the law on or after 1 July 2008.
2.9 These amendments also ensure that the four-year time limit on recovery of liabilities applies in situations in which taxpayers were entitled to a refund in relation to GST, wine equalisation tax, luxury car tax or net fuel amounts for the relevant tax period to which the liability relates. In relation to the four-year time limit on refunds, these amendments ensure that the time limit applies in situations where taxpayers have overpaid an amount of GST, wine equalisation tax, luxury car tax or net fuel amounts for the relevant tax period to which the refund relates.
2.10 These amendments restore the intended operation of the four-year time limit and ensure that the law provides certainty for taxpayers, allowing them a reasonable period to finalise their affairs knowing that, other than in cases of fraud or evasion, their tax position will not change after that time.
Comparison of key features of new law and current law
|New law||Current law|
|Restriction on refunds - section 105-65 of Schedule 1 to the TAA 1953|
|The restriction on refunds of overpaid GST applies whether or not a transaction is subsequently held to be a supply.
The restriction also applies where:
|The restriction on refunds does not apply to the overpaid GST if the transaction is later held not to be a supply.
The restriction applies where:
|Time limit on recovery of liabilities - section 105-50 of Schedule 1 to the TAA 1953|
|A four-year time limit on recovery of indirect tax or fuel tax credit related liabilities applies irrespective of whether the liabilities result from a reduction in entitlement to a refund to a taxpayer or an increase in their obligation to pay.||A four-year time limit applies on recovery of indirect tax and fuel tax credit related liabilities. However, it may not apply if the liabilities result from the reduction in a taxpayer's entitlement to a refund.|
|Time limit on refunds and credits - section 105-55 of Schedule 1 to the TAA 1953|
|A four-year time limit on refunds relating to indirect tax, input tax credits or fuel tax credits applies irrespective of whether the refund results from a reduction in the amount of a taxpayer's indirect tax liability, or fuel tax credit related liability or an increase in their refund entitlement.||A four-year time limit applies on refunds relating to indirect tax, input tax credits or fuel tax credits. However, the limit may not apply if the refund results from a reduction in the amount of a taxpayer's indirect tax liability or fuel tax credit related liability.|
Detailed explanation of new law
Restriction on refunds
2.11 This measure ensures that the restriction on refunds applies to all amounts of overpaid GST where transactions have been treated as taxable supplies, whether or not the transaction to which the overpayment relates, is in fact a supply. [ Schedule 2, Part 2, item 17, section 105 - 65 ]
2.12 The overpayment of GST can occur if:
- no tax was payable on the supply;
- the amount of GST correctly payable was lower than the amount actually charged and remitted to the Commissioner; or
- a business treats a transaction as a taxable supply to any extent, when in fact there was no supply.
2.13 The refund restrictions apply to all cases where GST has been overpaid to any extent because transactions have been treated as taxable supplies irrespective of whether the transaction on which overpaid tax was collected is determined to be a supply or not.
2.14 No tax may be payable on a supply if, for example, a GST-free supply or input taxed supply is treated as a taxable supply. Alternatively overpayment of GST may occur, for example, if a transaction is treated as a taxable supply when it is a mixed supply that is partly a taxable supply and partly a GST-free supply.
Example 2.1 Phil's Beverages is in the business of supplying apple juice concentrate which is used in making non-alcoholic beverages for sale to customers who are not registered for GST.Phil's Beverages treats this supply of concentrate as a taxable supply and remits the GST to the Commissioner in its business activity statement.However in the next tax period, Phil's Beverages realises that it has overpaid GST as no GST is payable on the transaction as the concentrate is a GST-free beverage in Schedule 2 to the A New Tax System (Goods and Services Tax) Act 1999 .Phil's Beverages is not entitled to the refund of the overpaid GST from the Commissioner unless it reimburses the corresponding amount to its customers.
Example 2.2 Suzanne has a business of selling hampers to customers who are not registered for GST. Each hamper consists of a number of boxes of chocolates and jars of coffee and is sold for $32. The supply is a mixed supply, because the sale of chocolates is a taxable supply, and the sale of coffee is GST-free.Suzanne prepares her business activity statement and pays tax on the basis that the sale of each hamper attracts $2 GST. This is based on an apportionment of $20 (exclusive of GST) to chocolates and $10 to the coffee.Some months later, Suzanne rethinks her approach. She decides that she was apportioning too much of the consideration to the chocolates and not enough to the coffee and that she should only be charging $1 GST on the mixed supply.Suzanne seeks a refund for the GST that she considers has been overpaid ($1 for each hamper).Suzanne is not entitled to a refund in relation to any GST overpaid on the hampers until she has refunded the overpaid amount of $1 per hamper to her customers.
2.15 These amendments ensure the restriction on refund provisions applies where an arrangement has been treated as a taxable supply despite no supply having been made for GST purposes. An 'arrangement' is defined in the Income Tax Assessment Act 1997 and includes any agreement or understanding whether or not legally enforceable.
Example 2.3 Ami Motors operates a motor vehicle dealership. It has an arrangement with a car manufacturer under which it is credited an amount for each vehicle after Ami Motors has reported to the manufacturer that there has been a sale. The manufacturer is registered for GST.Ami Motors treats the amount received under the arrangement as consideration for a supply and remits in its business activity statement 1/11th of this amount as GST payable to the Commissioner.However in the next tax period, Ami Motors gets advice that the payment received is a retail holdback payment and is not consideration for any supply at all. Thus no GST is payable on the transaction as it is out of scope for GST.The restriction on refunds will apply in this case even though the transaction on which the overpaid amount was collected is later determined not to be a supply. Ami Motors is not entitled to get a refund of overpaid GST from the Commissioner as the manufacturer is registered for GST and has not borne the economic cost of GST, as it is entitled to claim input tax credits.
2.16 These amendments are intended to apply broadly and to ensure that it is the actions of an entity in treating an arrangement as a supply that result in the restriction on refund provisions applying rather than any requirement that it must correctly be a supply for GST purposes. Where an arrangement has been treated as a taxable supply but no supply has occurred, reimbursement must generally be made to the entity that has been treated as the recipient of the taxable supply for GST purposes. This provides a mechanism to enable entities that have borne the economic cost of GST to be reimbursed. [ Schedule 2, Part 2, item 17, subsection 105 - 65(1 ) and paragraph 105 - 65(2 )( b )]
Four-year time limit on recovery by the Commissioner
2.17 The tax law sets a four-year time limit on the recovery of net amounts, net fuel amounts and amounts of indirect tax. This includes GST, wine equalisation tax, luxury car tax and fuel tax credits. This provides certainty and finality by limiting to four years the time period in which the Commissioner can require payment of amounts relating to the indirect tax liabilities of taxpayers.
2.18 Examples where a liability may arise for a taxpayer include where:
- the net amount relating to indirect taxes or the net fuel amount for a tax period is greater than zero (eg, where GST payable for a tax period exceeds input tax credits for that period);
- the net amount relating to indirect taxes or the net fuel amount for a tax period as disclosed in a business activity statement is greater than zero and that net amount is increased by a subsequent amendment to the business activity statement;
- the original net amount relating to indirect taxes or the fuel tax credits for a tax period was less than zero which resulted in the taxpayer being paid a refund and that refund is reduced by a subsequent amendment to a business activity statement; and
- GST is payable on taxable importations.
2.19 A taxpayer's liability in respect of net amounts, net fuel amounts and amounts of indirect tax ceases being payable four years after it became payable unless the taxpayer avoided the payment by fraud or evasion or the Commissioner has required payment of the amount by giving a notice to the taxpayer within four years. [ Schedule 2, Part 1, item 5, subsection 105 - 50(3 )]
2.20 These amendments ensure that the four-year time limit on recovery of a taxpayer's liabilities applies irrespective of how the liabilities arise. Thus the four-year time limit on the recovery of liabilities also applies where liabilities arise from overpaid refunds or amounts incorrectly paid to taxpayers. These overpaid refunds and incorrectly paid amounts are referred to as the amount of excess in the amendments. [ Schedule 2, Part 1, item 5, subsections 105 - 50(2 ) and ( 3 )]
Example 2.4 Trusty Enterprises lodged its June 2008 quarterly business activity statement reporting GST of $50,000 on its sales and input tax credits on creditable acquisitions of $80,000. It was issued a refund of $30,000 on 20 July 2008.On 15 November 2012, the Commissioner found that that Trusty Enterprises' correct amount of GST payable on sales for the June 2008 business activity statement was $55,000 and it should only have received a refund of $25,000.Under the four-year time limit, Trusty Enterprises is not required to repay, and the Commissioner can not recover, the excess amount which was incorrectly refunded because it is more than four years since the amount of overpaid refund was due and payable.
Four-year time limit on refunds due to taxpayers
2.21 Under the indirect tax law there is also a four-year time limit, starting from the end of the relevant period, on the entitlement of taxpayers to refunds and credits, unless before the end of the four-year time limit the taxpayer notifies the Commissioner of their entitlement to a refund or credit or the Commissioner notifies taxpayers of their entitlement.
2.22 The time limit does not apply to claims for input tax credits or fuel tax credits if the credits are taken into account in working out the net amount or net fuel amount or overpaid refund, which the Commissioner can recover from the taxpayer because the payment of the liabilities was avoided by fraud or evasion. [ Schedule 2, Part 1, item 9, paragraph 105 - 55(1 )( c )]
2.23 Examples where a refund or credit may arise for a taxpayer include:
- where the net amount relating to indirect taxes or net fuel amount for a tax period is less than zero;
- additional claims for input tax credits;
- where the original net amount relating to indirect taxes or net fuel amount for a tax period is more than zero which resulted in the taxpayer having a liability but the liability is reduced by one or more later amendments to their business activity statement;
- where the net amount relating to indirect taxes or net fuel amount for a tax period is less than zero and the refund amount is increased;
- overpaid GST on taxable importations.
2.24 The four-year time limit on the payment of refunds to taxpayers applies irrespective of how the entitlement to the refund arises. Therefore the four-year time limit on refunds applies, for example, where there is a reduction in a taxpayer's liability. These amendments achieve this by ensuring that the time limit applies to any refund of a net amount or net fuel amount or other amount or payment that was overpaid as indirect tax. [ Schedule 2, Part 1, items 7 and 8, 10 to 12 and 15, paragraphs 105 - 55(2 )( a ), ( 2 )( aa ) and ( 3 )( c )]
Example 2.5 Mark Enterprises lodged its June 2008 quarterly business activity statement reporting GST of $50,000 on sales and input tax credits of $30,000 on creditable acquisitions and remitted $20,000 to the Commissioner on 28 July 2008.On 15 November 2012, Mark Enterprises realised that it made an arithmetic error and the correct amount of GST payable on its sales was $45,000 and the net amount payable was $15,000. Mark Enterprises seeks to claim a refund of $5,000 for the amount of overpaid GST.Mark Enterprises is not entitled to a refund because four years have elapsed since the end of the June 2008 tax period.
Application and transitional provisions
2.25 The amendment made to the restriction on GST refunds applies for tax periods starting on or after 1 July 2008. Therefore to the extent that an overpayment of GST is related to a tax period commencing on or after 1 July 2008, these amendments apply. [ Schedule 2, Part 2, item 18 ]
2.26 The amendment to the four-year time limits for liability and refunds applies on and after 1 July 2008. Accordingly, a four-year time limit applies in all cases (except fraud or evasion) where on and after 1 July 2008:
- the Commissioner notifies a taxpayer of a liability; or
- a taxpayer notifies the Commissioner or the Commissioner notifies the taxpayer, of an entitlement to a refund or credits.
[ Schedule 2, Part 1, item 16 ]
2.27 These amendments apply from 1 July 2008 to ensure that the deficiencies in the law are addressed as soon as possible. Applying these amendments from the start of the monthly, quarterly and annual tax periods also minimises any taxpayer compliance impacts from these amendments.