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Ruling

Subject: GST and refund of overpaid GST

Question

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 overpaid goods and services tax (GST) in your activity statements?

Answer

No.

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 company registered for GST.

· You provide call centre services to Company A for their customers located in Australia, and other countries. These services have previously been classified as a taxable supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Invoices issued by you to Company A during the relevant period have contained a GST amount, which has been paid by Company A. These output GST amounts have been remitted by you to the Australian Taxation Office (ATO).

· Company A is not registered for GST in Australia, nor is it required to be registered for GST.

· Recently, you began classifying the supply of services to Company A as GST-free.

· You applied for a GST Private Ruling (PBR) seeking clarification as to the correct treatment of your supplies.

· A favourable ruling was issued by the ATO to you advising that the services supplied by you to Company A were GST-free pursuant to item 2 in subsection 38-190(1) of the GST Act.

· You have not refunded the recipient of the supply, however, you contend that given the circumstances relating to the GST amount to be refunded, that the Commissioner should be satisfied that you will reimburse Company A with the overpaid GST amount pursuant to the contractual undertaking between the parties.

· You further advise that you will issue a credit note to Company A to evidence that the GST refund amount is due to Company A. The issuance of this credit note will essentially create a liability for you to make the payment to Company A.

· You refer to GST Determination (GSTD) 2004/4 that states that a liability can be discharged by means other than by transferring money or providing non-monetary consideration and you submit that a similar approach can be followed in relation to the application of subsection 105-65(1)(c)(i), in that although the actual physical payment will not be made until after the ATO has paid the refund to you, a reimbursement will have occurred due to the issuance of the credit note that will create a liability for you to make the payment to Company A.

· You request that the ATO confirms that subsection l05-65(1)(c)(i) will not apply and that the Commissioner will refund the overpaid GST amount to you upon you evidencing that you have issued a credit note to Company A for the overpaid GST amount.

· You have provided a different option that you may consider in providing the reimbursement to Company A if the issuing of a credit note is not acceptable to the ATO.

1. Direct Transfer through the ATO accounts

o The Commissioner will agree to transferring the refund amount from your ATO account to Company A's ATO account and then exercising the discretion to refund the overpayment amount to your ATO account,

o Once the ATO confirms that this approach is acceptable you will provide an authorisation for the ATO to transfer from their ATO account the amount of the overpaid GST refund to Company A's ATO account.

2. Reimbursement to Company A

o You will reimburse Company A directly and have the ATO confirm through the PBR that a refund will be made to you after you make the actual reimbursement of the overpaid GST to Company A.

Relevant legislative provisions

Taxation Administration Act 1953, Section 105-65 Schedule 1

Reasons for decision

Issue 1

Question 1

Summary

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.

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

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 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.

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 price of your services when these services were in fact not taxable. It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

You have advised that the recipient of your supply is not 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 exercise his discretion and 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.

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.…[Emphasis added].

Paragraphs 126 and 127 explain further:

126. The discretion contained in section 105-65 must be exercised within a framework that the GST Act is structured on a basis that GST is passed on when a supply is treated as a taxable supply. As such, factors outlined in Avon at paragraphs 9 to 12, albeit in a sales tax context, would equally apply in a GST context:

…

127. It is clear from the scope and purpose of section 105-65 that 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.

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 the GST was in fact passed on to the recipients of the supply. Therefore, the cost has been passed on to and borne by the recipients and has not been borne by you.

You further advise that you will issue a credit note to Company A to evidence that the GST refund amount is due to Company A. The issuance of this credit note will essentially create a liability for you to make the payment to Company A. You refer to GST Determination (GSTD) 2004/4 that states that a liability can be discharged by means other than by transferring money or providing non-monetary consideration and you submit that a similar approach can be followed in relation to the application of subsection 105-65(1)(c)(i), in that although the actual physical payment will not be made until after the ATO has paid the refund to you, a reimbursement will have occurred due to the issuance of the credit note that will create a liability for you to make the payment to Company A.

Whether this action constitutes reimbursement requires further discussion.

The term reimburse is not defined in the GST Act and is therefore defined by its ordinary meaning.

The word 'reimburse' is defined in the Macquarie Dictionary Version 5.0 as follows:

reimburse

1. to make repayment to for expense or loss incurred.

2. to pay back; refund; repay.

Paragraph 18 of Frequently used terms for the purposes of this Ruling in MT 2010/1 states the following:

18. The term 'reimburse' encompasses not only an actual monetary payment but also crediting of the recipient's account such that it reduces the debt owed or offsetting the credit against liabilities..

From the above it is clear that the reimbursement of the overpaid GST must either be of a monetary payment or a crediting of a customer's account that reduces a debt owed to you by the customer.

From the stated facts this option does not constitute reimbursement.

Alternatively, you have stated that if this arrangement is not satisfactory to the ATO then you seek that The Commissioner will agree to transferring the refund amount from your ATO account to Company A's ATO account and then exercising the discretion to refund the overpayment amount to your ATO account. You advise that once the ATO confirms that this approach is acceptable you will provide an authorisation for the ATO to transfer from their ATO account the amount of the overpaid GST refund to Company A's ATO account.

We advise that although this may have been suggested as an option within another specific ruling (although we cannot comment on advice given to other taxpayers due to privacy considerations) our current systems and policies do not allow this type of arrangement to occur.

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. However, the Commissioner is not satisfied that the arrangements that you propose would constitute you reimbursing a corresponding amount to the recipient of the supply Accordingly section 105-65 applies and the Commissioner need not give you a refund.

The Commissioner will not 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 services.

Further issues for you to consider

Where reimbursement has occurred, then section 105-65 will not apply where the recipients are not registered or required to be registered. At this point you are entitled to a refund of that amount of overpaid GST. For this to occur you would need to revise each affected Activity Statement (AS) which will create a credit on your ATO account.

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