Edited version of private ruling

Authorisation Number: 1011513317788

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Ruling

Subject: GST and refund of overpaid GST

Question 1

Will the Commissioner exercise the residual discretion in section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) and refund the amount of overpaid goods and services tax (GST)?

Answer

Yes.

You are registered for GST.

You issued interest-bearing debt instruments (Notes) in order to fund your business activities.

These notes were issued to a number of GST registered organisations (Noteholders).

As a result of a recent review you have determined that your GST liability was overstated and remitted for some tax periods.

As a consequence, GST of $X was incorrectly accounted for on supplies of your Notes.

You engage a third party to prepare your activity statements.

The overpayment of GST occurred as a result of a miscommunication between the preparers and yourself on narrations issued in your cashbooks which showed the inflow of funds of the Notes.

Specifically the relevant cashbook notations were as follows:

Proceeds from Issue of Note - Equipment <Amount>

Proceeds from Issue of Note - GST Amount <Amount>

As a result of the miscommunication the activity statement preparers inadvertently took the narration at 2. above to mean that the Notes were subject to GST.

At all times, you and the Noteholders regarded the supplies of the Notes as input taxed financial supplies which did not attract a GST liability.

No tax invoices were generated or requested in respect of the issue of the Notes.

You are not intending to reimburse the Noteholders for the GST incorrectly disclosed in the AS.

The Noteholders (as recipients of the supply of the Notes) are registered for GST.

You taxation advisor, advised by telephone that you did not claim any GST credits in relation to the costs associated with the incorrect entry in the relevant activity statements.
Summary

The Commissioner will exercise the residual discretion and refund the amount of GST you overpaid as the amount refunded will not result in a windfall gain to either yourself or another party to the transaction.

Detailed reasoning

In your case, we need to consider the exercising of the Commissioner's residual discretion under section 105-65 of Schedule 1 to the TAA.

Either of the following two conditions not being satisfied would lead to that consideration.

· you have not and are not intending to reimburse the recipient of the supply, and

· the recipient is registered for GST.

There are two important policy reasons behind the operation of section 105-65 of Schedule 1 to the TAA, namely:

GST charged on a taxable supply is meant to be borne by the unregistered end consumer, and

there should not be a refund of overpaid GST to a supplier where it may result in a windfall gain to the supplier.

It is clear that the scope and purpose of section 105-65 of Schedule 1 to the TAA is designed to prevent windfall gains to suppliers. The potential or otherwise for a windfall gain in relation to a refund of overpaid GST is therefore something that must be taken into account in relation to the exercise of the residual discretion.

In exercising the residual discretion the Commissioner will have regard to the following guiding principles:

· the Commissioner must consider each case based on all the relevant facts and circumstances

· the Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations

· the Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 105 of this draft Ruling, the scope and purpose of section 105-65 is designed to prevent windfall gains to suppliers, and

The residual discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily.

The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the residual discretion include where the overpayment of GST occurs as a result of an arithmetic error made by the supplier.

For instance, an entity had treated its supply as GST-free when making the supply to the customer but when filling out its activity statement the entity incorrectly includes the supply as a taxable supply in the calculation of the net amount returned on the activity statement.

In your situation you have treated the supply as input taxed but in the preparation of the activity statements for the relevant monthly tax periods, you have incorrectly included the supply as taxable and have remitted the corresponding amount of GST.

As there is no likelihood of a windfall gain in this case, we consider that given the above it is appropriate to exercise the Commissioner's discretion and refund the amount of overpaid GST to you.

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