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Ruling

Subject: GST - Supplies of online content and GST refund

Question 1:

Are the supplies of online content by an overseas company (OSCo) to Australian consumers subject to goods and services tax (GST)?

Advice/Answer 1:

No, the supplies of online content by OSCo to Australian consumers are not subject to GST.

Question 2:

Will the Commissioner of Taxation (Commissioner) exercise the discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to give a refund in relation to the supplies of the online content to Australian consumers for the periods XXX?

Advice/Answer 2:

No, the Commissioner will not exercise the discretion under section 105-65 of Schedule 1 to the TAA to give a refund.

Relevant facts and circumstances

An overseas company ('OSCo') is operating overseas and is registered for Australian GST purposes.

OSCo made a written request to the Australian Taxation Office (ATO) to confirm that OSCo had overpaid GST in respect of supplies of online content to Australian consumers during the period XXX, and for the overpaid GST to be refunded.

OSCo supplies electronic online product(s) to consumers located in Australia. These supplies are made via a network. The network is an online platform which is accessible by users (consumers) via certain equipment and a broadband connection.

The online store is hosted overseas. The electronic online content is distributed from overseas to all locations, including Australia. There are no servers present in Australia.

To access the electronic online content, consumers will need to set up or hold an existing account.

From XXX, consumers were only able to add funds to their account using a credit card. This credit on the account then enable a consumer to download the electronic online content available on the network (or via the online store)). The nature of these offerings includes games and other electronic content.

At the time the consumer creates an account, the consumer enters into a contract with OSCo and agrees to the respective terms and conditions regarding future access and use of the network.

When an Australian consumer purchases an electronic online content, the files are downloaded via the internet to the Australian consumer's equipment after making payment. OSCo's equipment (servers etc) is/are located outside Australia. OSCo does not have any physical presence in Australia and no employees of OSCo are located in Australia.

In relation to OSCo's supplies of electronic online content to Australian consumers, OSCo historically remitted GST (that is, 1/11 of the price) to the ATO on its quarterly activity statements. This GST was attributed at the time the consumers used the funds in their account to download the electronic online content.

OSCo advises that the pricing of its supplies is not amended as a result of any taxation implications. In determining the prices, OSCo starts with the gross recommended retail price (RRP) overseas and works backwards. GST or other Value Added Tax (VAT) is not a factor in determining pricing. Should GST/VAT apply to a supply in any relevant territory, OSCo's pricing model dictates that GST/VAT is absorbed as a cost to the business.

Additional information:

An Australian company (AusCo) has no involvement with the supplies of the online content to Australian customers. AusCo does not have any direct interactions with Australian consumers.

AusCo makes a separate supply from that of the online content and accordingly is not the subject of this private ruling request.

OSCo advises that there are no other entities involved in the process of supplying the online content to the Australian consumers. OSCo is the entity solely responsible for supplying the online content to Australian consumers.

AusCo (and other entities) do not receive any consideration in relation to OSCo's supplies of the online content to Australian consumers.

The locations of the servers that are used to deliver the electronic online content to the Australian consumers are located in overseas.

Regarding the GST treatment(s) of the supplies of the online content, the supplies were treated as taxable supplies prior to XXX, and treated as not taxable (and not connected with Australia) since XXX.

You advised that prices have changed on the Australian online store during the above time periods. However the changes have not occurred as a result of indirect taxes. Price changes were driven by commercial decisions, such as:

· Price drop to extend the life of a product where sales at a higher price have slowed;

· Price drop to reflect a change in pricing of an equivalent product in retail stores;

· Promotional activities (temporary price change).

Information on the network:

· The network is a free to access interactive environment, where a consumer can play online games and surf the web.

· The network allows consumers to play online games for free, and access to other items from the online store.

· An account is required to download content from the online store.

· Consumers must agree to the certain agreements, terms and conditions.

Information on the online store:

· The online store features a selection of items, including games, demos, videos, and updates.

· The online store allows consumers to download new online content.

· A consumer must sign up for an account in order to actually download content from the online store.

The agreements, terms and conditions were provided (which will be referred to as 'Network Agreements'. The Network Agreements provide (amongst other things):

Introduction:

· The conditions govern the provision and use of network and all the services, software and content provided through or in connection with the network.

· The network is provided to you (for the purposes of these agreements, 'you' prefers to the user/consumer) by OSCo (referred to as 'us' in these agreements).

· You must agree to the conditions, by clicking the 'Accept' button. You are only able to access the network if you accept the conditions.

· Accepting these conditions forms a legally binding contract between 'you' (user/consumer) and 'us' (OSCo).

· You must create an account to participate in the network. You will not be charged for creating an account but may be charged for online content or services that you choose to access through the network.

· The account registration and code of conduct are outlined.

Content on network:

· All content and services available on network are provided by us.

Account:

· A user can only access chargeable content and services via the network using funds from the account. You can buy 'funds' (credits) for your account using a credit or debit card or other payment methods approved by us.

· You can check the funds on your account at any time.

· The funds have no value outside the network and are not redeemable for cash. The funds are not your personal property and can not be transferred to any other person. The funds can only be used to access content or services from us via the network. The account is not a bank account, and we are not operating as a bank. If your account is cancelled, you will not be entitled to a refund for any unused funds. The funds will expire.

Purchases:

· When you choose to fund your account or select content or services which you want to buy using your account, you place an order with us. We reserve the right to reject your order for any reason. If we accept your order, a contract is formed between you and us on the terms set out in these conditions. You expressly agree that we may make the funds, content and services available to you immediately after we have accepted your order. As a result, you have no right to cancel your purchase of the funds, content or services.

· All purchases are made in the currency displayed. Prices shown are inclusive of all applicable indirect taxes. This does not include import VAT and duties.

· In some circumstances, no indirect taxes will apply. Where indirect taxes do not apply, no indirect taxes will be charged. Where indirect taxes do apply, the prices shown will be inclusive of indirect taxes.

· You can place orders with us only if you are a resident of certain countries.

We will send an email confirmation for each transaction.

General License:

· All content and software provided through network is licensed non-exclusively to you solely for personal, non-commercial use on your equipment. All intellectual property rights in the content and software provided by or through the network belongs to us and/or our licensors. Restriction on use is outlined.

Subscriptions:

· You can buy a subscription for a period of online game play or for other activities. Subscriptions last for a fixed period of time specified on purchase.

Video content:

· We licence video content. You may not be able to download your video content if you are not located in your country of registration.

Termination/Cancellation:

· We will not refund the cost of any purchased content or services, or redeem any unused network wallet funds, on termination or suspension of your account for these reasons (such as when there is a breach of any of the conditions or other terms of services or agreements connected with the network).

If the network is permanently discontinued, account holders will be able to obtain a refund on request for unused funds/portions of subscription.

Governing Laws:

· The contract between you and us shall be deemed to have been formed and performed in an overseas country.

The subscription includes premium gaming features and also includes online store special offers.

Sample copies of the funds top up confirmation and online purchase confirmations were provided.

Additional facts in relation to - Request for refund

OSCo requests the Commissioner to exercise his discretion to refund the overpaid GST (if any).

OSCo informs that the Australian consumers are not registered for GST purposes. The Australian customers have not been reimbursed for any amount corresponding to the GST remitted (overpaid, if any) in respect of the supplies of the online content.

OSCo provides the following information and arguments in relation to the reimbursement of the refund (overpaid GST) to the Australian consumers:

· OSCo does not set prices for its electronic (products) by setting prices to cover foreseeable costs. OSCo will assess the market overseas and set a RRP (in an overseas currency) for each product that is competitive and in line with similar products offered on the market. The RRPs for electronic online content (products) sold in territories outside of the overseas zone are calculated through application of the effective exchange rate at the time (with a slight adjustment to take into account price points).

· Where products are sold to customers in a territory that treats supplies of electronic online content as subject to VAT or GST, OSCo effectively absorbs the amount to be remitted to the relevant tax authority. Similarly, when products are sold to customers located in a territory that does not treat the supplies as subject to VAT or GST, the RRP does not change (in comparison to the RRP for a product sold into a territory that levies VAT/GST).

· When VAT or GST rates change for electronic online content in a particular territory, the RRP remains constant. OSCo argues that the 'cost' of VAT or GST is not factored into setting the RRP when products are sold into new markets, such as Australia. The RRP is determined in that overseas region (commercial drivers in the overseas region's operations and markets) and then applied to the new markets, using the relevant exchange rate. OSCo's business decision/model is to absorb any VAT or GST payable in that market.

· The commercial reality for OSCo is distinct to that stated in Miscellaneous Taxation Ruling MT 2010/1.

· OSCo provides an example of the pricing process and a VAT rate change.

· OSCo advises that it sets its RRP and then recognises its revenue after any applicable VAT or GST is deducted. The specific nature of the industry and OSCo's business model dictates that OSCo set its prices without consideration of other matters.

· OSCo also noted that across the industry, development costs and inputs into the creation of digital products can be low and consequently, the proposition that a vendor would work up its costs to arrive at a RRP (and expected profit margin) are invalid. OSCo's margins are already significant due to relevantly low values of development costs. The absorption of the VAT or GST in the relevant territories does not impact whether OSCo makes a profit or loss, merely the level of profit margin. OSCo advises that it decides its RRP before making relevant deductions for developer costs (agreed at a wholesale price (WSP) and VAT/GST where applicable). OSCo provided an example (a table) to illustrate. The WSP is shown as a percentage of the RRP excluding GST/VAT (if any).

· OSCo advises that the consumer pays the RRP, whether or not GST applies to the transaction. OSCo argues that the end consumer does not bear the costs of the GST for their supplies.

· For completeness, OSCo advised that there has been one isolated instance in which it did need to look at pricing in light of VAT/GST due to commercial pressures.

· OSCo argues that to refund to its customers (users/consumers) the GST incorrectly remitted to the ATO for the supplies of electronic online content, before granting a refund of the overpaid GST, would mean that the effective RRP of its products sold would be reduced and the customers would pay less for the product in net terms. There would then be a windfall gain to an 'undeserving consumer and reduces the consideration that the supplier receives for their products'. OSCo makes reference to the Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22 case.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, Section 9-5

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999, Section 9-25

Taxation Administration Act 1953, Section 105-65 of Schedule 1

Reasons for decisions

Issue 1

Summary

The supplies of online content by OSCo to Australian consumers are not connected with Australia and therefore not subject to GST.

Detailed reasoning

GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states: 

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered or *required to be registered.

However, the supply is not a * taxable supply to the extent that it is *GST-free or *input taxed.

(*denotes a defined term in section 195-1 of the GST Act)

All the requirements of section 9-5 of the GST Act must be satisfied for there to be a taxable supply.

Paragraph 9-5(a) - Supply for consideration

Paragraph 9-5(a) of the GST Act requires that 'you' make a supply for consideration. We consider who is the supplier, and if there is a supply for consideration.

Who is the supplier?

From the facts provided, OSCo advises that it supplies the online content to the Australian consumers. An Australian consumer needs to create an account and agree to the terms and conditions (that is, relevant Network Agreements) to obtain access and use the network (including the funds and online store). The Network Agreements state that the network is provided to the user (consumer) by OSCo that is located overseas. When a user (consumer) 'accepts' the conditions, this forms a legally binding agreement between the user (consumer) and OSCo.

Further, OSCo have advised that it does not have any physical presence in Australia and no employees of OSCo are located in Australia. AusCo has no involvement with the supplies of the online content to Australian customers (other than making a separate supply). There are no other entities in Australia involved in the process of supplying the online content to the Australian consumers. OSCo advises that it is the entity solely responsible for supplying the online content to Australian consumers. The locations of the servers that are used to deliver the electronic online content to the Australian consumers are located overseas.

These facts indicate that OSCo, who is a non-resident entity located outside Australia, is the supplier of the online content to the Australian consumers.

Is there a supply for consideration?

There is a distinction between access to the network for which is free, and the relevant chargeable online content which is accessed via the network (including the online store). The network is a free to access interactive environment where a consumer can play online games and surf the web. Access to the network allows consumers to download games and other items from the online store. The online store allows consumers to download content to their equipment. The online contents include software games and updates, videos and other media.

For the supplies in relation to the free sign up, access, and use of the network and any free online content, there is no consideration paid by the consumers. Hence, paragraph 9-5(a) of the GST Act is not satisfied, and these supplies are not taxable.

For the chargeable online content accessed via the network and the online store (including subscription), OSCo is making supplies of the online content to the Australian consumers for consideration. Hence, these supplies satisfy paragraph 9-5(a) of the GST Act.

In relation to the chargeable online content accessed via the network and the online store (including the subscription), we need to consider the other requirements of section 9-5 of the GST Act.

Paragraphs 9-5(b) and 9-5(d) - Carries on an enterprise and GST registration

OSCo supplies the online content to the Australian consumers (users) in the course or further of an enterprise (business) that it carries on, and OSCo is registered for GST in Australia. Accordingly, the requirements of paragraphs 9-5(b) and 9-5(d) of the GST Act are satisfied.

Paragraph 9-5(c) - Connected with Australia

What needs to be determined is whether the supplies of the online content are connected with Australia. Subsection 9-25(5) of the GST Act states:

A supply of anything other than goods or *real property is connected with Australia if:

(a) the thing is done in Australia (paragraph 9-25(5)(a));

(b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia (paragraph 9-25(5)(b)); or

(c) all of the following apply:

(i) neither paragraph 9-25(5)(a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing; and

(iii) the supply of the other thing would be connected with Australia (paragraph

9-25(5)(c)).

OSCo only needs to satisfy one of the paragraphs in subsection 9-25(5) of the GST Act for a supply to be connected with Australia.

Goods and Services Tax Ruling GSTR 2000/31: connected with Australia discusses when a supply is connected with Australia.

Paragraph 9-25(5)(a) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia. Thing is defined to mean anything that can be supplied or imported such as a service, advice, information or a right. It is the subject of the supply. Under paragraph 9-25(5)(a) of the GST Act the connection with Australia requires that the 'thing' being supplied is 'done' in Australia. The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed or finished depending on what is supplied. A thing can be done where it is provided, prepared, or where an agreement is made, as the case may be.

Paragraph 9-25(5)(b) of the GST Act also provides that a supply of a thing other than goods or real property is connected with Australia if the supplier carries on an enterprise through a permanent establishment in Australia, and the supply is made through that permanent establishment. A connection is established between the Australian permanent establishment and the supply.

Further, paragraph 9-25(5)(c) of the GST Act provides that a supply of a thing other than goods or real property is connected with Australia if the supply is of a right or option to acquire something that would be connected with Australia.

From the facts provided, OSCo is a non-resident company located overseas. OSCo supplies online content to the Australian consumers. The online content includes software games and updates, videos and other media. OSCo advises that the electronic online content is distributed from overseas via the network to all locations, including Australia. The location of the servers that are used to deliver the electronic online content to the Australian consumers (that is, to the consumers' equipments) are located overseas. There are no servers located in Australia.

Australian consumers who wish to purchase the online content must agree to the terms and conditions of the Network Agreement(s) which also governs the online store (including subscription). The Australian consumers are advised that by accepting the conditions that this forms a legally binding agreement between the users (consumers) and OSCo. The Network Agreements also provide that the contract between the users and OSCo shall be deemed to have been formed and performed overseas [We note that this term is not necessarily consistent with Australian contract law - Cheshire and Fifoot's Law of Contract at paragraph 3.44, footnote 352 refers to eBay International AG v Creative Festival Entertainment Pty Ltd [2006] FCA 1768, where, without close analysis (which was not required), it was assumed that the last act made the contract].

Further, it is advised that OSCo does not have any physical presence in Australia and no employees of OSCo are located in Australia. OSCo advises that it is the entity solely responsible for supplying the online content to Australian consumers. Neither AusCo nor any other entity in Australia are involved in the process of supplying the online content to the Australian consumers (other than making a separate supply which is not the subject of this private ruling).

These facts indicate that the supplies of the online content are not done in Australia and OSCo does not make the supplies through an enterprise in Australia. Further, the supplies are not of a right or option to acquire something that would be connected with Australia. Accordingly, the supplies of the chargeable online content by OSCo to the Australian consumers are not connected with Australia and paragraphs 9-5(c) of the GST Act is not satisfied.

The supplies of the online content by OSCo to the Australian consumers do not satisfy all the requirements of a taxable supply under section 9-5 of the GST Act, and therefore are not subject to GST.

Issue 2

Summary

The Commissioner is satisfied that OSCo have overpaid an amount because OSCo treated a supply as a taxable supply when the supply was not a taxable supply as paragraph 9-5(c) of the GST Act is not satisfied and the supply is not connected with Australia.

However, the Commissioner is not satisfied that OSCo reimbursed a corresponding amount to the recipient of the supply and so need not give OSCo a refund.

Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. OSCo circumstances do not warrant the exercise of the discretion.

Detailed reasoning

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the TAA.

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

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

(1) 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 was treated as giving 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.

Note: * asterisk denotes a defined term in the Act

Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances

The restriction on refunds of overpaid GST under section 105-65 of Schedule 1 to the TAA will apply if all three of the following conditions are satisfied:

· there was an overpayment of GST,

· a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

· either the recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST.

Miscellaneous Tax Ruling MT 2010/1 provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA.

Paragraph 20 of MT 2010/1 explains the meaning of "overpaid". In the context of section 105-65 of Schedule 1 to the TAA, "overpaid" means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65.

Between XXX, OSCo remitted GST of 1/11 of the price of the online content sales when these were in fact not taxable. It follows that OSCo remitted more than was legally payable and that there has been an overpayment of GST.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. OSCo treated the supplies of online content as taxable supplies when they mischaracterised the supply of online content as taxable supplies and remitted GST to the Commissioner when the supplies were not taxable supplies.

OSCo has advised that the Australian consumers are not registered for GST purposes and that they have not been reimbursed for any amount corresponding to the GST overpaid.

As the three conditions are satisfied, section 105-65 of Schedule 1 to the TAA applies and the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

However, it is the view of the ATO in paragraph 27 of MT 2010/1 that the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied.

Paragraphs 116 and 117 of MT 2010/1 state:

116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions….

117. The Commissioner considers that the words "need not", in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances….

This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T

2010 ATC 10-119 at 57 when the AAT referred to "residual discretion":

The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised.

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the 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 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non registered end consumer.

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

(i) The overpayment of GST occurs as a result of an arithmetic or recording error made by the supplier.

For instance, an entity correctly treated its supply as GST-free when making the supply to the customer. However, when filling out its activity statement the entity incorrectly included the supply as a taxable supply in the calculation of the net amount returned on the activity statement. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(ii) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause.

For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST.

In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated.

Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated.

Of relevance to OSCo's circumstances is the guiding principle that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65 of Schedule 1 to the TAA which is explained in paragraph 127 of MT 2010/1 as follows:

…the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion.

The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) (which introduced the current version of section 105-65) adds further:

2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax.

It follows from the above that it is important when exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipients.

In answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 9-12 of Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by the Avon case 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. Those paragraphs are reproduced as follows:

9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit. It is the profit-making motive of business which, in the nature of things, generally results in sales tax being passed on. This is because, leaving aside rare cases where sales tax is separately identified and superadded to the invoice price after sale, sales tax can only be passed on indirectly through the price mechanism. In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered, anything above this being conceptualised as a margin of profit. Because sales tax is levied upon the vendor prior to the ultimate sale by retail in the manner explained by Dixon J in Ellis & Clark, it forms part of the cost structure of doing business. There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on.

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. …. But, given what has been said above, realism requires a recognition that in the ordinary course sales tax will have been passed on.

This means that the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier. It is for the supplier to prove that the GST has not been passed on. The case must be assessed on its merits to determine if the GST has been passed on to the recipients.

OSCo argues that the RRP set in another currency for each product is competitive, in line with similar products in the market, that the cost of GST is not factored into the RRP and the price is not set to cover foreseeable costs.

OSCo has been carrying on an enterprise of providing electronic online content in the overseas region, Australia and other countries in the world. In order to be viable, OSCo must conduct its enterprise in a business like manner. It is appropriate to approach the question with reference to the conduct of the supplier in setting prices based upon its knowledge at the relevant time, including a belief that the indirect tax which later proves to have been an overpayment is a real cost.

OSCo sets its RRP for its electronic online content with the knowledge that the supplies are subject to indirect tax in most countries.

As outlined in the example provided by OSCo, the WSP is shown as a percentage of the RRP net of the GST/VAT, if any. This demonstrates that tax is a factor in OSCo's business thinking because, if any tax were to be paid after the WSP has been paid, then this would have a significant effect on OSCo's share of the gross revenue.

The Network Agreements state, under purchases, that the 'prices shown are inclusive of all applicable indirect taxes.' The agreements further provide that, 'Where indirect taxes do apply, the prices shown will be inclusive of indirect taxes.' It is reasonable to conclude based on this alone that when a supply is made in a taxing jurisdiction, that tax is a component of the price paid. It is also reasonable to conclude that this would be OSCo's belief and the belief of its customers at the time the supplies were made.

OSCo argues 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 discretion.

The Commissioner outlined his view in respect of Luxottica in paragraphs 130 and 131 of MT 2010/1 and accepted that on the evidence before the Tribunal the overpaid amount was not borne by the customers. Further, the Commissioner has accepted in the Decision Impact Statement issued in respect of Luxottica 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 business activity statement.

As the overpayment of GST on the supply of electronic online content by OSCo was not due to an arithmetic error, it follows that the decision in Luxottica does not have application to the facts of this case.

OSCo also argues in relation to Luxottica that reimbursing its customers would result in a windfall gain to those 'undeserving' customers. This is not accepted where those customers have been advised that the price they have paid includes the amount of applicable indirect tax.

It is reasonable to conclude that OSCo sets its prices in the belief that there will be an indirect tax component in that price in most jurisdictions.

In the absence of other evidence to the contrary, the Commissioner considers that the basis used to arrive at the RRP would have taken into account the fact that indirect tax was normally payable.

Within Australia, OSCo was registered for and remitted GST. OSCo would have made supplies to Australian customers in the belief (on the basis of the Network Agreements for example) that the price included GST. It is concluded that GST has been included in the price charged to Australian customers and accordingly has been borne by the recipient (as intended by the GST regime).

To provide a refund to OSCo would therefore result in a windfall gain contrary to the underlying purpose of section 105-65 of Schedule 1 to the TAA. Under paragraph 128 of MT 2010/1, the Commissioner must take this into account in relation to the exercise of the discretion.

In conclusion, the Commissioner is satisfied that OSCo has overpaid an amount because OSCo treated a supply as a taxable supply when the supply was not a taxable supply. However, the Commissioner is not satisfied that OSCo reimbursed a corresponding amount to the recipient of the supply and so need not give OSCo a refund. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. However, OSCo's circumstances do not warrant the exercise of the discretion.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by OSCo for the supply of electronic online content from XXX to XXX.

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