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Ruling

Subject: GST and refunds of overpayments

Question

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

Answer

No.

Relevant facts and circumstances

Entity A is a resident company that is incorporated in Australia and registered for GST.

Entity A is the legal and beneficial owner of the particular land.

Entity A entered into the contract with Entity B, being the buyer, for the sale of the land and the purchase price was provided by instalments over a period of time.

GST was remitted by Entity A on the instalment payments.

Last year, Entity A entered into the agreement titled 'Agreement to Terminate Sale Contract' with Entity B (the termination agreement) (copy provided).

Under a clause of the termination agreement, Entity A must repay the instalments of the purchase price to Entity B.

Entity B has claimed the input tax credit on the instalments paid.

Entity B is registered for GST.

Relevant legislative provisions

Taxation Administration Act 1953 section 105-65 of Schedule 1.

Reasons for decision

An adjustment event includes the cancelling of a supply (section 19-10(1)(a) of the GST Act. You have a decreasing adjustment where the correct GST amount is less then the previously attributable GST amount (19-55 of the GST Act). Furthermore, as the instalment payments were required for the supply of the land prior to settlement it is as you rightly point out not under a standard land contract and therefore attribution is not at settlement (GSTR 2000/28).

As in this situation the supply of the land has been cancelled resulting in a decreasing adjustment. Generally you include the adjustment in the activity statement for the reporting period in which you become aware of the adjustment. If you do not have a required adjustment note when you lodge an activity statement in which the adjustment would otherwise be reported, you report the adjustment in the first activity statement that you lodge after you have received the adjustment note.

However, subsection 105-65(1) of Schedule 1 of the TAA provides that the Commissioner need not give you a refund of an amount to which this section applies if you overpaid an amount and because you treated an arrangement as giving rise to a taxable supply, and the arrangement does not give rise to a taxable supply and one of the following applies:

o the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of an arrangement,

o the recipient is registered for GST.

Where the conditions in section 105-65 apply, the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. Where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions. However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(1)(a), 105-65(1)(b) and 105-65(1)(c) are satisfied. It is to that limited extent that the Commissioner has a discretion.

The scheme of the GST Act, on which the section 105-65 policy is based, is premised on the following principles:

· it is the supplier that determines if the supply it makes is taxable in the first instance. By determining that its supply is a taxable supply, an amount for GST is included in the price.

· double taxation is avoided by the registered recipient being entitled to claim an input tax credit for that taxable supply where it is acquired for a creditable purpose and the supplier, in the relevant circumstances, provided a tax invoice. In this way the Act envisages symmetry between the GST payable and the input tax credit which may be claimed.

· it is the unregistered end consumer that bears the cost of the GST(paragraph 38 MT 2010/1).

Given the context in which section 105-65 appears, the provision will apply unless the Commissioner is satisfied that the taxpayer has reimbursed the recipient of the supply and the recipient is unregistered.

As this is not the case, in this circumstance, the Commissioner is under no obligation to refund the overpayment. Reason being that Entity A has not reimbursed the recipient and the recipient is registered for GST and has claimed the corresponding input tax credit (representing a business to business transaction). Therefore, the Commissioner will not exercise his discretion and refund the overpaid amount.

Further information

Under ATO Practice Statement Law Administration (PS LA 2002/12) even though it is withdrawn the Commissioner continues to abide by the approach that is not to require reversal of transactions where an arrangement occurs between registered entities that has resulted in incorrectly treating an arrangement as taxable, provided certain conditions are met.

This is due to the ATO recognising that reversal of transactions and revising BAS' to make corrections of this type amount to a round robin among the registered recipient, the supplier and the ATO. Significant compliance costs can be incurred with no change to the financial result.

The thrust of the policy is that if both of the registered parties meet the criteria and do nothing to disturb the situation, then neither will the ATO if there is no compromise to revenue or the integrity of the tax system by doing so.

Conditions for a Registered Supplier

· The conditions for a registered supplier are:

· non-taxable supply has been treated as a taxable supply;

· the supplier issued to the recipient an invoice that would be a valid tax invoice if the supply had been a taxable supply;

· The supply did not occur in the current tax period. The amount incorrectly included as GST in the price has been included in the supplier's activity statement for a previous tax period and the amount remitted to the ATO;

· The supplier has not reimbursed the registered recipient for the amount incorrectly included as GST in the price;

· The supplier has not cancelled the tax invoice by issuing any later document that indicates the correct non-taxable status of the supply; and

· The supplier began to treat current and future supplies of the same type as non-taxable as soon as it became aware of the error.

Conditions for a Registered Recipient

The conditions for a registered recipient are:

· The recipient is in possession of a document that would be a valid tax invoice if the supply had been a taxable supply;

· The invoice indicates that a supply is a taxable supply and includes an amount represented as GST in the price;

· The supply is non-taxable;

· The recipient relied on the tax invoice to claim the input tax credit;

· If the supply had been a taxable supply the recipient would have been entitled to claim full or partial input tax credits;

· The ATO has already refunded or credited the amount included as GST in the price to the recipient;

· The recipient has not been reimbursed by the supplier;

· The tax invoice has not been cancelled by the supplier and superseded by a later document that indicates the true status of the supply as non-taxable; and

· The registered recipient ceased to claim input tax credits for current and future acquisitions of the same type as soon as it became aware of the error.

The Policy

The following policy will apply to an entity only if the conditions for the supplier and the recipient are met. The conditions are self-regulating, and if one of the entities to a supply fails to meet all of its conditions, the other party would also fail to meet its conditions.

The ATO will not require the supplier to retrospectively amend its activity statements in relation to non-taxable supplies that have been incorrectly treated as taxable;

The ATO will not credit or refund to a supplier the amount of GST incorrectly included in the price;

If the supplies were non-taxable because they were input-taxed, and the supplier has claimed input tax credits on acquisitions in relation to those supplies because it incorrectly treated those input-taxed supplies as taxable, the supplier must repay those input tax credits. If the supplier had treated the supplies as taxable supplies in reliance on an earlier ruling issued to it by the ATO, it may ask the Commissioner to decide whether subsection 105-60(2) of Schedule 1 to the TAA requires the credits to be repaid; and

The ATO will not require the registered recipient to retrospectively revise its activity statements and repay the input tax credits it claimed in reliance on incorrect tax invoices.

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