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Ruling

Subject: Refund of GST

Question 1

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to allow you a refund of the goods and services tax (GST) when you incorrectly included GST in the price of a mixed supply?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a division of a company which is registered for GST.

The nature of the offering is explained on your website.

You adopt a price leadership policy in your stores.

You sell quality products at discounted prices compared to your competitors.

The standard pricing approach in respect of all your products on display is on the following terms:

· "Price includes Part A + Part B + Part C"

· This pricing is displayed at all your stores and also in pamphlets available for customers to take with them and in the various pricing manuals that your staff refer to for pricing. In addition, this pricing approach is set out on your website.

· All your Part A products on display has a ticket with a price on it. That price is the single, inclusive price for that product plus Part B plus Part C so that a customer is aware of the total cost, inclusive of GST, for those products when fitted with Part B and Part C.

· The business model is premised on selling a complete product at a discounted price. Where a customer chooses different options, these are priced at an additional cost so that the customer must pay an extra dollar amount. This is expressly stated in the advertising brochure that is provided to customers.

· All pricing is set at a fixed minimum amount for the particular Part A product on the basis that the customer chooses the standard Part B product. It is the standard minimum price for the full product.

· All promotions, in relation to the product also proceed on the same basis, so that the single inclusive price for the product is also advertised.

· Apart from offering low prices for your product, you also engage in numerous promotions from time to time, consistent with your policy of advertising your stores as well as meeting your competitors in similar marketing strategies.

You have provided copies of the marketing materials in respect of the various promotions in your Ruling application

Consistent with the pricing policy discussed above, these promotions work in a similar way.

Besides the special offers and promotions that you undertake from time to time, you also offer additional discounts to customers, over and above both the standard and promotional prices. These discounts are given to customers for a variety of reasons. The discount reasons include X% discounts for health care cardholders and X% discount for senior's cardholders as well as discounts for "price match" and "manager's specials".

Following the Luxottica case, you have undertaken a review of the GST treatment of your product sold through your stores and have determined that you have overpaid GST on your sales of your products.

This error has due to a systems upgrade that was implemented to the software utilised by your stores.

You advise that the mistakes made by you impact both the standard pricing of your products including under promotional offers, as well as the manner in which the additional discounts (eg X% senior's discount) are calculated.

You have mistakenly paid GST on that entire price as if it were all for a taxable supply, without taking into account the appropriate value to be allocated to the GST-free component of your product.

Where you have offered additional discounts to customers, for example, for senior's cardholders and manager's specials, you have applied that discount to the total price and accordingly to both the component and the GST-free component of the mixed supply of your product.

You have determined that the proper allocation to be made to the GST-free portion included in your product is to allocate a value of $x to the GST-free component.

You have determined that this is the appropriate amount allocated for Part B of your product in both standard and promotional sales based on the following factors:

· Prior to the system changes, you allocated $x to Part B of your product in the sale of the full product.

· $x is the price that is and that has, at all relevant times, been charged by you to customers for Part B of your product, in circumstances where a customer chooses to purchase only Part B of your product from your store.

· The value of $x allocated to Part B of your product is in part based on the additional costs involved with Part B of your product that are ordered and brought in for customers to meet their special needs as Part B of your product are customised and, therefore, involve significantly more supply chain and labour costs because of individual ordering and processing; on the other hand, Part A of your product are ordered in bulk and the stock is displayed in stores.

· Competitors charge between $xx and $xxx for similar products.

Discounts are not required to be applied by you to Part B of your product as there is no commercial imperative for the discounting of Part B of your product; as noted above, they are custom made items in that they are made to order for customers; on the other hand, there are sound commercial reasons for the discounts offered by you to be applied to Part A of your product - those reasons are to do with clearing inventory.

As a retailer you adopt a discount policy for moving "old lines".

There is nothing contrived or artificial about the pricing methodology adopted in the promotional arrangements having regard to all the facts and circumstances, particularly as you sell Part B of your product for $x and communicate this pricing approach to your customers.

You have determined that the same analysis relevantly applies to all the promotions that you have undertaken in the Relevant Period.

In the case of certain promotions, including the "product from as low as $y", you note that this is a "loss leading" example, because it is so heavily discounted that you make a small profit on these items.

You do these kinds of promotions to move excess stock which it would otherwise not be in a position to sell in the ordinary course, so Part A of your product are, for practical purposes, effectively given away with the purchase of Part B of your product. In these circumstances, which are exceptional in that these promotions account for only very small percentage of sales in your stores, you allocate a value for both Part A of your product and Part B of your product in proportion to value for both items.

With respect to the additional discounts provided by you to customers, for example, the x% seniors cardholders discount and discounts for "manager's special", you have continued to pro-rate this discount across the taxable and GST-free components of the full product, consistent with the manner in which you also previously applied this discount on the total purchase price for your product.

You have advised that pricing of your product was and is on the basis of the complete product being a single total price inclusive of GST as it advertises a total retail price. That total sale price does not vary on account of the GST cost i.e. the advertised price is fixed as a minimum price for the term of the promotion or, in the case of standard pricing on your products, by reference to the ticket price and that this still remains the case.

You have provided a summary spreadsheet showing the monthly overpayments of GST. On the basis of these submissions, you claim a GST refund.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

Section 9-80

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

Reasons for decision

Summary

The Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was a mixed supply.

The incorrect payment satisfies paragraphs 105-65(1)(a) and (b) of Schedule 1 to the TAA (because the supplies were treated as taxable when in fact they were a mixed supply). However, since the recipient has not been charged any extra GST, reimbursement is not required and you, the supplier, will not obtain a windfall gain by being refunded the overpaid GST.

Section 105-65 of Schedule 1 of the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Your circumstances warrant the exercise of the discretion.

Detailed reasoning

Apportionment

Section 9-80 of the GST Act deals with supplies that are partly taxable and partly GST-free or input taxed. Where there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion the consideration to the parts of the mixed supply. However, the apportionment must be justifiable in terms of reasonableness.

Goods and Services Tax Ruling GSTR 2001/8 provides methods and examples to assist in working out how to apportion the consideration for a mixed supply.

Paragraphs 93 to 96 of GSTR 2001/8 explain that where there is no legislative provision specifying the basis for apportionment, you may use any reasonable method to apportion the consideration for a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and produce a result that is fair and reasonable.

Direct and indirect methods are further described in GSTR 2001/8. One of the direct methods mentioned as appropriate in GSTR 2001/8 is the comparative price of each part as if it were supplied on its own, relative to the whole payment received.

Paragraphs 98 and 99 of GSTR 2001/8 respectively state:

Where it is possible to determine the price for which each part would have been supplied if it was supplied separately (for example, the general retail market price for which the goods are sold), then an apportionment on this basis may be reasonable. If you use this method, the GST you pay is the same as if you supplied the taxable parts separately in the same market.

Where you cannot establish an appropriate market price for which particular goods are sold, then it may be reasonable for you to use a relevant market price for a similar supply (or an industry standard), to determine the appropriate price of the particular goods.

Examples of direct and indirect methods of apportionment are found on paragraphs 97 to 111 of GSTR 2001/8.

From the facts and information supplied by you, we consider that the proposed methodology that you have used for the apportionment of Part A of your product and Part B of your product is one of the methods that the Commissioner has identified that may be used to apportion the consideration for a mixed supply. Accordingly, we consider that the apportionment is fair and reasonable.

Decision Impact Statement

The Commissioner released a Decision Impact Statement following a full Federal Court decision which provided advice on GST refund requests.

The Decision Impact Statement further stated:

The apportionment must be undertaken as a matter of practical, commonsense having regard to the circumstances of the particular case. In doing so, a conclusion must be reached as to value of each component and the relationship it has to the price of the supply

The Decision Impact Statement also provided the circumstances in the full Federal Court decision that supported the allocation of the discount to the taxable supply only:

In your case you have advised that

The standard pricing approach in respect of all your products on display at a your stores:

"Price includes Part A + Part B + Part C"

All your Part A products on display at your stores has a ticket with a price on it. That price is the single, inclusive price for that product plus Part B plus Part C so that a customer is aware of the total cost, inclusive of GST, for those products when fitted with Part B and Part C.

There are sound commercial reasons for the discounts offered by you to be applied to your Part A products - those reasons are to do with clearing inventory.

There is nothing contrived or artificial about the pricing methodology adopted in the promotional arrangements having regard to all the facts and circumstances, particularly as you sell Part B products for $x and communicate this pricing approach to your customers.

Your circumstances warrant the investigation as to whether the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA

105-65 of Schedule 1 to the TAA

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.

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

The restriction on refunds of overpaid GST under subsection 105-65 (1) 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.

In this case you remitted GST of 1/11 of the full price of your supply of your product when these services were in fact a mixed supply. It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

You have advised that the recipients of your supply would not be registered for GST purposes. You have also advised 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 CoT 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.

Of relevance to your 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.

Paragraph 128 of MT 2010/1 also 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.

Guiding principle (d)(i) provides that the discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily and provides an example which the Commissioner considers it may be fair and reasonable to exercise the discretion where 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.

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 this case you have advised that you have unintentionally overpaid an amount of GST, but did so as a result of making an arithmetic or recording error. Your clients agreed to pay a single inclusive price for your product. You have merely made a mistake as to the GST calculation and overpaid the GST to the ATO.

You further advise that given that this was an arithmetic/calculation error the price to the customer remains the same therefore, there would not be a windfall gain to you.

In conclusion, the Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply. The overpayment of GST occurred as a result of an arithmetic or recording error made by you.

Consequently the Commissioner will exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for the supply of your product.

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