Edited version of private ruling

Authorisation Number: 1011597266435

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Ruling

Subject: Refund of GST

Question

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund any incorrectly remitted GST from your supplies?

Answer: No.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST from your supplies.

Detailed reasoning

Sub-section 105-65(1) of Schedule 1 to the TAA states:

The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply, to any extent; and

(b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

* denotes defined terms under section 195-1 of the GST Act.

The purpose of this provision is to prevent suppliers from receiving windfall gains in the context of a GST Act that presumes the burden of the GST will be ultimately borne by the recipient of the supply.

This purpose is supported in the Explanatory Memorandum to A New Tax System (Goods and Services Tax Administration) Bill 1998 which says:

3.40 However, if GST is overpaid in a situation where supplies were incorrectly treated as taxable supplies in a GST return or assessment, a refund will have to be paid only if the Commissioner is satisfied that the recipients of the supplies on which the GST was overpaid have been reimbursed. The recipients of the supplies must not be registered or required to be registered for GST purposes. [New subsection 39(3)]

3.41 Because GST is payable by suppliers but is ultimately borne by the consumers of goods and services, a refund of overpaid GST would ordinarily result in a windfall gain to the supplier. A supplier will need to satisfy the Commissioner that an amount corresponding to the refund will be passed on to the persons who ultimately bore the cost of the overpaid GST.

The Commissioner is satisfied that you have overpaid an amount of GST and that you have done so because you treated supplies as a taxable supplies when they were not taxable supplies because they were GST-free.

The Commissioner is not satisfied that you reimbursed a corresponding amount to the recipients of the supplies. As a result section 105-65 of Schedule 1 to the TAA applies to the amount overpaid and the Commissioner need not give you a refund.

Section 105-65 of Schedule 1 to the TAA does however, give the Commissioner a residual discretion to refund in certain limited circumstances.

Paragraph 106 of Draft Miscellaneous Taxation Ruling MT 2009/D1 (MT 2009/D1) provides some guiding principles to consider when exercising the residual discretion. It states:

Section 105-65 does not specify what factors are relevant to the exercise of this residual discretion. In exercising the residual discretion, the Commissioner will have regard to the following guiding principles:

(a) The Commissioner must consider each case based on all the relevant facts and circumstances.

(b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations.

(c) 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.

(d) 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, but are not limited to, the following:

(i) 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.

(ii) The overpayment of GST arises as a direct result of the actions of the Commissioner.

For instance, an entity had treated its supply as GST-free and the Commissioner subsequently treats that supply as taxable but later reverses that decision.

(iii) Where a registered recipient has not yet on-supplied the thing to its customers.

Where a registered recipient has not yet on-supplied the thing to its customers, the revised GST treatment may be able to be taken into account in making the supply. Accordingly, if the supplier reimburses the registered recipient, the registered recipient can effectively reduce the GST charged to its customers. This might be the case where a supply incorrectly treated as taxable is of a significant identifiable asset, such as real property. It is unlikely to be the case where the supplies are of financial services.

(iv) Where a registered recipient acquired the supply for a private purpose.

If a registered recipient acquired the supply for a private purpose then they should be treated like an end-consumer because they would not be in a position to pass on the GST to their customers.

It follows from the above that it is important when exercising the residual discretion to determine who has borne the burden of the GST.

The High Court considered how to determine who bears the burden of sales tax in Avon Products Pty Ltd v FCT [2006] HCA 29 (Avon).

It is considered that the guidance provided by Avon about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect.

The Court in Avon said:

10. As has been explained, it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment of sales tax has not been passed on. Where the whole or part of the economic burden of sales tax may have been passed on indirectly through prices, the inquiry in this regard is likely to be complex. The complexity arises because prices may be set with reference to a wide range of factors (including considerations of cost of production, competitive advantage, operational cash flow and customer goodwill). However the starting point must be the seller's pricing policy and practice.

11. In this way, the question is to be approached with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. That knowledge includes the belief that the component of sales tax which later proves to have been an overpayment is a real cost of doing business. Accordingly, it is unsurprising that a seller's intention, whether subjective or objectively ascertained, will generally be to pass the burden of the impost on to the purchaser. Since the onus of proof lies upon the taxpayer, it will be for it to establish that a price which is set so as to ensure that it recovers its cost does not include the economic burden of the sales tax.

12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom.

While there may not be a general presumption that certain entities will set prices so as to recover costs, each case must be assessed on its merits to determine if the GST has been passed on to the recipients. It is still appropriate to approach the question with reference to the conduct of the seller in setting prices based upon its knowledge at the relevant time, including a belief that the GST which later proves to have been an overpayment is a real cost.

You remitted GST on all of your supplies of memberships. You reduced your prices for market reasons.

You subsequently determined that your sales may have been GST-free. You wrote to us advising of your possible entitlement to a GST refund, and asking whether a supply is GST-free.

We have ruled that the supply is GST-free.

You have determined that you have incorrectly remitted GST on your supplies that should have been GST-free. You contend that the Commissioner should exercise his discretion under section 105-65 of Schedule 1 of the TAA because you have absorbed the economic burden of the incorrectly remitted GST and not passed it on to the recipients.

You have not provided any information on how you set your prices however the history of your prices shows an increase.

You contend you absorbed the economic burden of GST because you had to reduce your prices to maintain sales. This was below the commercial cost of providing the supplies therefore you "could not pass on the cost of GST."

However you have also advised that in 2007 you reduced your prices for market reasons.

You also contend the Commissioner should refund you the incorrectly remitted GST because the administrative costs of reimbursing small amounts of GST to a large number of recipients would consume most of the refunded GST.

You state that you "will return the benefit to recipients in the future by maintaining the price of your supplies at a non-commercial level and / or by providing additional services."

While the Commissioner has accepted that your supplies have been sold at less than cost, it does not follow that the price that was charged did not include GST.

The Commissioner is of the view that the price charged for your supplies included a GST component and that therefore the GST was passed on to recipients.

You treated the price for which you provided supplies as including GST, remitting the GST to the ATO.

You have not provided any information on how you set your prices. In the absence of evidence to the contrary, the Commissioner considers that the basis used to arrive at the sale price would have taken into account the fact that it was believed that GST was payable and that therefore, the GST has been included in the price and accordingly has been borne by the recipient (as intended by the GST regime).

To provide a refund to you would therefore result in a windfall gain to you and defeat one of the fundamental purposes of section 105-65 of Schedule 1 to the TAA. Under paragraph 105 of MT 2009/D1 the Commissioner must take this into account in relation to the exercise of the residual discretion.

In addition to the reasoning above, it is noted that there were price increases for your supplies, increases that indicate in the absence of other evidence that GST was likely a factor in setting prices at the time of its introduction.

That you will bear an administrative cost of reimbursing recipients is not a reason for the Commissioner to effectively ignore the reimbursement requirement by exercising the discretion to allow the refund.

Neither is the fact that you will return the benefit to your clients in the future by maintaining the price at a non-commercial level and / or by providing additional services. The Commissioner has no legislative basis for exercising the discretion in the circumstances described in Appendix 2 of the now withdrawn Practice Statement Law Administration 2002/12 where it refers to compliance with an Australian Competition and Consumer Commission directive.

You argue that the decision in Luxottica Retail Australia Pty Ltd v Commissioner of Taxation 75 ATR 169 (Luxottica) applies to this case to warrant exercise of the residual discretion.

The Commissioner will set out his final views regarding section 105-65, taking into account the reasoning in Luxottica, in the final version of draft ruling MT 2009/D1. In the meantime, the Commissioner has made preliminary comments in the Decision Impact Statement (DIS) issued in respect of Luxottica.

In the DIS, the Commissioner has accepted that the decision of the Tribunal was open to it on the facts as found by the Tribunal, and expressed the view that the exercise of the discretion based on the facts as found by the Tribunal is consistent with examples of arithmetic errors made in the preparation of the BAS contained in MT 2009/D1.

As the overpayment of GST on your sales was not due to arithmetic error, the decision in Luxottica does not have application to the facts of this case.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST from your supply of member services since 1 July 2006.

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