Edited version of your private ruling

Authorisation Number: 1012556224181

Ruling

Subject: Entitlement to refund of overpaid GST

Question 1

In light of the new facts and information provided, will the Commissioner now exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65) to allow you a refund of the goods and services tax (GST) you incorrectly included in the price of a non-taxable supplies in the relevant period?

Answer

Yes.

Relevant facts and circumstances

· You have provided a notification of entitlement to claim a GST refund for the relevant periods. We confirmed that your notification was received within time to preserve any refund that you are entitled to under the normal GST rules for the relevant period.

· We then received a request for a private ruling (the first ruling) regarding courses provided at the Centre.

· This asked whether the courses provided were GST-free and, if so, whether you were entitled to a refund as a result of incorrectly paying GST on those fees.

· You own the Centre but it is managed by another entity. The other entity owns or manages a number of other similar centres.

· The courses are taught by persons employed by the manager and who hold relevant training qualifications.

· You set the fees for lessons (based on your manager's advice) and the fees (and other revenue from the Centre) are deposited directly in your account by the manager's staff. You paid GST on the fees collected for the courses to the ATO.

· When asked during the course of preparing your first ruling, you advised that the price of the course included GST and was charged as a retail price to the consumer based on competitive market forces.

· The receipt issued to the customer does not show an amount of GST.

· You advised that due to a misunderstanding between you and the manager you have been accounting for courses that should have been GST-free as fully taxable supplies.

· This error stopped occurring under new arrangements whereby instead of receiving sales proceeds you instead received a share of the overall profits.

· We issued our first private ruling which found that the supply of courses were supplies of GST-free education courses. However, it advised that the Commissioner would not exercise his discretion under section 105-65 to allow you a refund for the relevant period.

· The reasons for decision (although not part of the private ruling) explained that this was essentially because it was considered that you passed on the cost of the GST to your consumers and therefore a refund of the GST to you would be a windfall gain.

Current request

· You have provided further materially different information regarding your arrangements in your current request for a refund.

· You have advised that you adopted the pricing structure used by another centre that was also managed by your manager.

· You have provided a table that shows the prices used by the other centre and the prices used by your centre. The prices are the same.

· Under this pricing structure all fees were listed as being inclusive of any GST payable, and no distinction was made between fees which were taxable and those which were GST-free.

· The other centre treated the fees as GST-free and the invoices issued for lessons did not include GST. It did not pay GST amounts for the lessons to the ATO.

· For the lessons at your Centre the receipt issued to the customer also does not show an amount of GST.

· You have provided a copy of receipts given to your customers. One is for a lesson and all that is given is the total price, there is no reference to GST in the document. The other tax invoice is for a different type of supply (not a GST-free course). The tax invoice shows the total price and the amount of GST.

· While the Centre was managed by your manager all of the fees were received by you. You were not aware that the fees for lessons were GST-free and for the purposes of preparing activity statements you simply treated all the fees as taxable and entered all of the fee revenue into activity statement label G1.

· You consider that you have borne the burden of the overpaid GST and that no part of that overpaid GST was passed on to your customers.

· You have provided information on the management arrangements, including the agreement, tender documentation and your submissions.

· Relevant clauses of these documents include those that relate to the payment of monies and the nature of the arrangement between the parties not being an agency or employment relationship.

· While not extracted or summarised in further detail in these facts, the request for tender, the management agreement and general requirements for Centre documents form part of the facts of this ruling and are retained as electronic records in our client relationship management system.

Relevant legislative provisions

Section 105-65 of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision

Summary

The information provided by you with your current request for a refund confirms that you make a supply of GST-free courses. As you have paid GST in respect of these GST-free supplies it follows that you have made an overpayment of GST.

Based on the further information you have provided since your first unfavourable ruling, we now accept that you have not passed on an amount of GST in your prices. We accept that you have borne the cost of your GST mistake and would not receive a windfall gain if this amount was refunded to you.

Therefore, even though section 105-65 of Schedule 1 to the Taxation Administration Act 1953 applies to restrict this refund, we consider it appropriate that the Commissioner exercises his discretion under this section to allow a refund to you of the overpaid GST amounts for the relevant period.

Detailed reasoning

Supplies made under the agreements

As this is a multi-party arrangement it is necessary to closely analyse all the supplies that are made by the parties.

First, it is clear that the manager makes a supply to you of management services for which the management fee is consideration. This is a taxable supply, and you have advised that the manager charged GST in respect of the management fee and that you claimed an input tax credit for the GST in this fee. Included within this supply is the supply they make to you of providing services to customers of the Centre. This includes providing the GST-free courses.

Perhaps somewhat less clear is who has made the supply to customers of the Centre.

In the submissions for your first ruling you indicated that you believed that the entity providing the Courses is either or both of the manager or you. While a supply cannot be made by more than one entity (see proposition 8 of GSTR 2006/9), we accept that there is a distinction between 'made' and 'provided' in the context of supplies. GSTR 2006/9 accepts that a supply can be made to one entity and provided to another. It therefore follows that the converse can also be true, that is that a supply can be made by one entity and provided by another.

The Agreement states that the manager acknowledges and agrees that it has no authority to bind you. The parties also acknowledge that at all times when performing services or any other act or work under the Agreement the manager is neither an employee nor an agent of you.

We consider that you have engaged the manager to make supplies to customers that you would otherwise be responsible for. However, we consider that the level of control that you exercise over the manager indicates that you are still ultimately responsible for the activities at the Centre. We therefore accept that it is appropriate in these circumstances that we interpret the arrangement as one where you are the ultimate supplier to the customers. You make the supply to the customers even though the supply is provided by the manager. We consider that this interpretation of the arrangement gives effect to what the parties intended.

Under the management agreement the manager directly deposit funds received from customers in your account. These funds received by you are in connection with your overall responsibility for the Centre, and in particular are for the supplies that you make through your contractor. There is a sufficient nexus between the supplies you make to patrons at the Centre and the funds that you receive for making those supplies. You therefore make supplies for consideration. As you have made supplies for consideration you have therefore made taxable supplies to the extent that those supplies are not GST-free or input taxed.

We confirm our previous advice that, because the courses are provided by an entity (the manager) that uses qualified instructors, the supplies of the courses are GST-free.

As you have made a supply (provided by the manager) that is GST-free but you have remitted GST on that supply it follows that you have overpaid GST.

You have requested a refund of the overpaid GST amounts. The Commissioner must consider whether there are impediments to issuing this refund.

Application of section 105-65

Section 105-65 applies to restrict certain refunds of overpaid GST. It applies where you have overpaid amounts because a supply was treated as a taxable supply when the supply was not a taxable supply and the recipients have not been reimbursed an amount corresponding to the overpaid GST.

You have treated supplies as taxable because you believed them to be taxable and you remitted an amount as GST to the Commissioner on the supplies. You have not reimbursed a corresponding amount to the recipients of the supplies and do not intend to do so.

Therefore section 105-65 applies to restrict the refund in these circumstances.

Exercise of the discretion available under section 105-65

Section 105-65 applies such that the Commissioner need not give a refund of the overpaid amount, but has discretion to do so in appropriate circumstances. This discretion is explained, and guidance given as to its use, in Miscellaneous Taxation Ruling MT 2010/1.

There are two important policy reasons behind the operation of section 105-65. These are that the GST on a taxable supply is intended to be borne by the end consumer, and that there should not be a refund of overpaid GST to a supplier where it may result in a windfall gain to the supplier. Potential exercise of the discretion must be considered with this policy in mind.

Any refund must compensate the person or entity that ultimately bore the cost of the GST. If you have passed on the cost of the GST to your customers, and therefore cannot be said to have borne the cost of your overpayment yourself, it is not appropriate to refund the overpaid amount of GST to you.

There are many situations where GST may not consciously be factored into a price, but failure to consider the GST is not normally sufficient to show that the GST has not been passed on. For example, the ATO does not generally accept that pricing to a market price (or using other pricing mechanisms such as fixed prices, price points, legislated prices) means that the supplier has necessarily borne the cost of the GST at the time of pricing (or thereafter).

Despite this, we accept that the unique facts of this case provide sufficient indicators to conclude that you have borne the cost of the error. In these particular circumstances the market price that you were competing with was a GST-free price. The information you have provided shows that the other centre and the manager were aware of this, but that you were not. The reason for your error was lack of knowledge (or miscommunication between you and the manager) that some of the supplies you were making were GST-free supplies. The market price did not factor in GST because it did not need to (because it was not meant to be paid).

You, via the manager, essentially matched the GST-free prices and therefore correctly priced these supplies as GST-free. However you incorrectly reported them as taxable supplies on your activity statements and remitted GST. This demonstrates, albeit indirectly, that GST was not factored into your price because you have replicated the price of products that have not factored in GST. So in pricing to the market you did not factor in a GST amount. As GST was not factored into your price you therefore did not pass the GST on to your customers.

You were not aware that your decision to remit GST was incorrect. You therefore unwittingly placed yourselves at a competitive disadvantage by incorrectly remitting GST on the supplies. Excess tax has been paid, and it is you that is out of pocket rather than your customers.

We also consider it relevant that customers do not receive documentation by way of a tax invoice that indicates that the supply has been treated as a taxable supply.

In normal circumstances the absence of a tax invoice is not evidence that the supplier bore the cost of the GST, nor is it evidence that the recipient did not bear the cost of the GST. However, in this case a tax invoice is given which does not show an amount of GST. The fact that GST is not shown on the invoice means that there is no evidence to suggest that customers may think that they were charged or bore the cost of GST, nor that they would expect that these transactions have been treated as taxable. In contrast, you have shown that tax invoices given to customers for taxable supplies show the amount of GST paid by the customer.

Therefore, the facts in this case show that you bore the cost of the GST rather than the customer. The customer paid market price and would not be able to demonstrate that they are out of pocket because you thought you had to (and did) remit GST. We accept that customers have not been misled regarding the GST classification of supplies made, and that the cost of the GST has not been passed on to them but has instead been borne by you.

We therefore accept that it is appropriate in these circumstances to exercise our discretion to allow the refunds of the overpaid GST to issue to you.

How to claim your refund

You have made a GST error in working out your net amount for the relevant reporting periods that has resulted in you paying too much GST in the relevant periods. As we agree to refund the overpaid GST, this can be treated as a GST error (a credit error). The credit error is within the credit error time limit as you have notified us of your entitlement to the refund during the four year period. Therefore you can correct this error in a later activity statement.

Please refer to the fact sheet 'Correcting GST errors' that is available on our website for further information, or contact us if necessary.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).