Edited version of private advice

Authorisation Number: 1012653467506

Ruling

Subject: Refund of GST

Question 1

Was the supply of a property (Property) by the Bank as mortgagee in possession of a secured property to the Purchaser a supply which was wholly input taxed rather than a mixed supply?

Answer

Yes, the supply of the Property by the Bank as mortgagee in possession to the Purchaser was a wholly input taxed supply.

Question 2

If so, does section 105-65 in Schedule 1 to the Taxation Administration Act 1953 (section 105-65) apply and restrict the Commissioner from refunding to the Bank $$$ of overpaid GST paid in respect of the supply of the Property to the Purchaser where the Bank reimburses the overpaid GST to the registered Purchaser?

Answer

Yes, section 105-65 applies and restricts the Commissioner from refunding to the Bank $$$ of overpaid GST in respect of the supply of the Property to the registered Purchaser. However the Commissioner will allow the GST refund in these circumstances provided the Bank reimburses the $$$ of overpaid GST to the registered Purchaser.

Relevant facts and circumstances

Background:

The Debtor purchased the Property in 19XX. The Property comprised over 30 hectares.

The Debtor was registered for GST.

The Property was subject to a mortgage in favour of the Bank. The Debtor defaulted under the mortgage and the Bank entered into a Sale Contract to sell the Property to the Purchaser. The Sale Contract was completed in 20XX.

Request for information:

In 20YY (i.e. a year prior to the sale of the Property by the Bank) X (a representative for the Debtor) completed and signed a Request for Information and provided it to the Bank's lawyers. In that Request for Information X confirmed that the Property was used as a home/residence and as part of a business activity but stated that the sale of the Property would not be a taxable supply if the Debtor sold the Property for the following reason:

Residence and it has also been used as grazing property along with other properties and is exempt from land tax.

X stated in the Request for Information that the Debtor purchased the Property in approximately 19XX, ceased operating a grazing business in 20YY, and that the Debtor was registered for GST but had an annual turnover of less than $75,000. In response to a question as to whether the Property was used as part of the Debtor's business and, if so, whether the Property is entirely a business asset or used partly for business and partly for residential purposes X stated:

Residence and grazing use being over 30 hectares.

Sale Contract:

The Sale Contract stated that the Bank was the vendor, exercising power of sale under a mortgage.

The Sale Contract also stated that the Property was sold with vacant possession, with improvements which included a house, garage and swimming pool, that the sale of the Property was a taxable supply in full, that the margin scheme did not apply. The Sale Contract did not indicate that the sale was not a taxable supply because the sale was either GST-free because the sale is subdivided farm land or farm land supplied for farming under subdivision 38-O of the GST Act or input taxed as a sales of eligible residential premises under sections 40-65 or 40-75(2) of the GST Act.

The Further Clauses in the Sale Contract stated that if GST is payable by the vendor on any supply made under or in relation to the Sale Contract the purchaser must pay to the vendor an amount (GST Amount) equal to the GST payable on the supply.

E-mail from Bank to Purchaser prior to completion:

An e-mail dated 20XX from the Bank's lawyer to the Purchaser's lawyer stated:

Further to our telephone discussions:

The Mortgagor (registered proprietor) is registered for GST and has advised that the property was used, together with other properties, as part of a farming enterprise. If the registered proprietor had sold the property, the sale by the registered proprietor would have been a taxable supply.

On this basis the Bank is also liable for GST on the sale of the property as mortgagee exercising power of sale.

The contract states that the GST will be calculated on the ordinary method so that the vendor will hand over a tax invoice and the purchaser will be able to claim the GST as an input tax credit, if the purchaser is registered for GST.

The vendor is not able to apply the farm land exemption in these circumstances.

Completion of Sale Contract:

The Sale Contract was completed in 20XX.

It was stated in the ruling request that when the Sale Contract was completed the Property was zoned for primary production, that the improvements to the Property comprised a residential dwelling, swimming pool, covered patio, gravel driveway, dam, rural fencing and an area of turf surrounding the dwelling that was presented in a predominantly natural or timbered state.

The settlement statement and the tax invoice issued by the Bank to the Purchaser indicate that Property was sold by the Bank for $$$ plus $$$ GST. The tax invoice included the following statement:

Important Notice: - If you are registered for GST and have purchased this property as part of your enterprise you may be entitled to use this invoice to claim an input tax credit for a sum equal to the GST disclosed in this invoice.

It was stated in the ruling request that the Bank treated the supply of the Property as a taxable supply and accounted for GST in respect of that taxable supply.

ATO audit of Purchaser:

The Purchaser claimed an input tax credit of $$$ in respect of the acquisition of the Property in the Purchaser's Activity Statement for the quarterly tax period ended 30 June 20XX.

The ATO undertook an audit of the Purchaser in respect of that tax period and denied the Purchaser that input tax credit.

Objection by Purchaser:

The Purchaser objected to the ATO's assessment disallowing the Purchaser an input tax credit in respect of the purchase of the Property.

Objection decision:

In an objection decision issued in 20XX the ATO disallowed the Purchaser's objection in full.

R.P Data and real estate agent's advertisement in respect of the Property:

Details from R.P. Data in respect of the Property at the time of sale are as follows:

Property type: house

Land Use: General rural

Zoning: Non-urban

The advertisement of the sale of the Property on the real estate agent's website was as follows:

Acreage/Semi-rural

Featuring a X bedroom brick home, entrance foyer, master with en-suite and walk-in wardrobe, Y living areas with ducted air, renovated kitchen with pantry, double lock up garage.

General features:

Property type: Acreage, semi-rural

Bedrooms: X

Bathrooms: Y

Indoor features: En-suite (1)

Outdoor features: Garage spaces (2)

Submissions made in the ruling request:

The submissions referred to section 105 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Subsection 105(1) states that an entity makes a taxable supply if that entity supplies the property of a debtor to a third party in or towards satisfaction of a debt that the debtor owes to that entity and had the debtor made that supply, the supply would have been a taxable supply. Subsection 105(3) states:

However, the supply is not a taxable supply if:

(a) The debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b) If you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

It was submitted that, notwithstanding that X signed a Request for Information which stated that a sale of the Property would not be a taxable supply if sold by the Debtor, the Bank took the view that the Request for Information did not meet the requirement in paragraph 105(3)(a) of the GST Act to state fully the reasons why X considered that to be the case. Nor, for the purposes of paragraph 105(3)(b), did the Bank believe on the basis of reasonable information that a supply would not be taxable if made by the Debtor because the reasons given by X (i.e. that the Property contained a residence, was used for grazing together with other properties, and had an exemption from land tax) were inconsistent and may have been incorrect.

Given that subsection 105(3) did not apply, the Bank submitted that, for the purposes of paragraph 105(1)(b), if the Debtor had made the supply made pursuant to the Sale Contract, that supply would satisfy the requirements for a taxable supply in section 9-5 of the GST Act, i.e.

• the supply would be made for consideration (the Purchase Price);

• the supply be made in the course or furtherance of an enterprise carried on by the Debtor (because the Debtor carried on a grazing business on the Property until late 20YY and section 195-1 of the GST Act states that 'carrying on' an enterprise includes doing anything in the course of termination of the enterprise);

• the supply would be connected with Australia (as the Property is located in Australia); and

• the Debtor is registered for GST.

The submissions then considered whether the hypothetical supply made by the Debtor would be input taxed under subsection 40-65(1) of the GST Act as being a sale of residential premises used predominantly for residential accommodation. It was submitted that, to some extent, the Property was a dwelling that was 'residential premises', that the use of 'to the extent' in subsection 40-65(1) indicated that a supply may be partly input taxed unless all of the Property can be characterised as 'residential premises'. The submissions referred to paragraph 46 of Goods and Services Tax Ruling GSTR 2012/5 which states:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

It was submitted that if the physical characteristics of the land surrounding the dwelling on the Property indicated that that land is to be enjoyed with the dwelling then that surrounding land may be characterised as residential premises to be used predominantly for residential accommodation and that the actual use of that surrounding land for grazing was not determinative.

In relation to the request for a ruling as to whether the Bank is entitled to a refund of the GST overpaid by the Bank as a result of treating the sale of the Property as a taxable supply prior to the Bank reimbursing a corresponding amount to the Purchaser, it was submitted that section 105-65 in Schedule 1 to the Taxation Administration Act 1953 (section 105-65) did not deny a refund of overpaid GST to the Bank because:

Although the Purchaser was registered for GST the Objection Decision determined that the Purchaser was not entitled to an input tax credit for the acquisition of the Property. Consequently the mischief sought to be prevented by section 105-65 cannot arise.

The discretion in section 105-65 should not be applied to deny a GST refund in circumstances that would be unjust.

It was stated in the ruling request that if the ATO confirms that a GST refund will be allowed, the Bank will reimburse a corresponding amount to the Purchaser.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 40-65.

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

Reasons for decision - Question 1

Summary

The supply of the Property by the Bank as mortgagee in possession to the Purchaser was wholly input taxed under subsection 40-65(1) of the GST Act.

Detailed reasoning

It was stated in the ruling request that the relevant supply was made by the Bank as mortgagee in possession of secured property. As the Bank made a supply of the property of another entity (i.e. the Debtor) to a third entity (the Purchaser) in or towards satisfaction of a debt owed by the Debtor to the Bank, subsection 105(1) of the GST Act applies and has effect despite section 9-5 of the GST Act.

Subsection 105(1) states that the Bank (you) make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b) had the debtor made the supply, the supply would have been a taxable supply.

'Taxable supply' is defined in section 195-1 of the GST Act as having the meaning given by a number of provisions of the GST Act, including section 9-5. Section 9-5 states that a supply that satisfies paragraphs 9-5(a) to (d) is nevertheless not a taxable supply to the extent that it is GST-free or input taxed. Subsection 9-30(2) of the GST Act states that a supply is input taxed if it is input taxed under Division 40 of the GST Act or under a provision of another Act. Division 40 of the GST Act includes subdivision 40-C which, in turn, includes section 40-65:

(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Section 195-1 of the GST Act defines 'residential premises' to mean land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied as a residence or for residential accommodation

(regardless of the term of that occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 explains the two limbs of the 'residential premises' definition as follows:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

(A footnote to paragraph 6 states that in GSTR 2012/5 the 'premises' are whatever is supplied, whether this is the whole or any part of land or a building.)

GSTR 2012/5 also explains the meaning of the words 'to be used predominantly for residential accommodation (regardless of the term of occupation)' in subsection 40-65(1):

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

GSTR 2012/5 also states that, in order to satisfy the definition of 'residential premises', premises must provide shelter and basic living facilities (Para 15) and, in order to be 'capable of being occupied as a residence or for residential accommodation' (per paragraph (b) of the 'residential premises' definition) premises must be fit for human habitation.

The Explanation section of GSTR 2012/5 indicates that it is the state of the Property as at May 2012 (when it was supplied to the Purchaser) that is relevant when determining whether the supply of the Property would have been input taxed if made by the Debtor:

72. The reference in Marana to premises being 'modified' recognises that the physical characteristics of premises may be altered after the premises are first designed and built. In each case, it is necessary to determine the suitability of the premises by reference to their physical characteristics at the time when the relevant supply is made.

Residential premises:

In the present case the Sale Contract indicates that, as at 20XX, the Property comprised a dwelling, a garage, and a swimming pool situated on X hectares of land. It was stated in the ruling request that the improvements to the surrounding land included a gravel driveway, dam, rural fencing and an area of turf surrounding the dwelling that was in a predominantly natural or timbered state.

It is unclear whether, in terms of paragraph (a) of the 'residential premises' definition, those premises were occupied as a residence at that time. In the Request for Information dated 20YY X referred to the Property as a residence, but the Bank may have taken possession of the Property prior to the sale to the Purchaser in 20XX.

Paragraph (b) of the 'residential premises' definition refers to land or a building that is intended to be occupied and is capable of being occupied as a residence or for residential accommodation. Paragraph 7 of GSTR 2012/5 states that this refers to premises built so as to be suitable and capable of being occupied as a residence as demonstrated by the physical characteristics of the premises. The description of the Property and photographs attached to the advertisement on the real estate agent's website indicate a dwelling constructed in the 19YYs comprising X bedrooms, Y bathrooms, Y living areas with air conditioning, a renovated kitchen. We therefore consider that the Property satisfies paragraph (b) of the 'residential premises' definition.

Paragraph 15 of GSTR 2012/5 states that to satisfy the 'residential premises' definition premises must have the physical characteristics to provide shelter and basic living facilities. We consider that this requirement is satisfied.

To be used predominantly for residential accommodation:

Subsection 40-65(1) of the GST Act requires a supply of residential premises to be used predominantly for residential accommodation and paragraph 10 of GSTR 2012/5 states that this requires the premises to display physical characteristics which demonstrate that they are suitable for and capable of being occupied as a residence. Based on the particulars in the Sale Contract, the R. P. Data, and the real estate agent's advertisement, we consider that as at 20XX the Property was residential premises 'to be used predominantly for residential accommodation'.

Although X stated in the Request for Information that the Property had been used as a dwelling and for grazing, paragraph 10 of GSTR 2012/5 states that the 'to be used predominantly for residential accommodation' requirement does not require examination of the use of the premises by any particular person. In any event, X also stated in the Request for Information that the grazing activity ceased in 20YY, a year prior to the sale of the Property by the Bank. We also note that the real estate agent's advertisement did not refer to any grazing activity or suggest that the Property was suitable for any particular activity but instead referred to 'acreage/semi-rural' and 'approximately 32 acres of high ground with country views'.

Other premises:

As noted above, paragraph 15 of GSTR 2012/5 states that 'residential premises' must have the physical characteristics to provide shelter and basic living facilities. Paragraph 25 of GSTR 2012/5 qualifies this by stating that if the physical characteristics of premises indicate that suitability for living accommodation is ancillary to the prevailing function of the premises, the premises are not residential premises to be used predominantly for residential accommodation. GSTR 2012/5 gives the example of an office building which provides basic living facilities (kitchen, toilets and showers) on each floor and paragraph 87 in the Explanation section of GSTR 2012/5 refers to the legislative intention:

There is nothing to suggest that the legislative intention is that a supply of non-residential structures (such as a factory, warehouse or office) should be input taxed simply because someone occupies the premises when they are supplied, even if that person could be said to be living there.

We do not consider that the physical characteristics of the Property as at 20XX indicated that the suitability of the Property for living accommodation was ancillary to some other prevailing function (e.g. grazing). The R. P. Data described the 'property type' as 'house' and the real estate agent's advertisement stated:

Approximately 32 acres of high ground with country views. Featuring a X bedroom brick home, entrance foyer, master with en-suite and walk-in wardrobe, Y living areas with ducted air, renovated kitchen with pantry, double lock up garage.

which suggests that the dwelling providing shelter and living facilities is the feature to which any other function would be ancillary.

Land supplied with a building:

The R. P. Data details referred to the area of the Property (X hectares), described the land use as 'general rural', and stated that the zoning was 'non-urban'. The ruling request referred to paragraph 46 of GSTR 2012/5:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

It was submitted in the ruling request that if the physical characteristics of all of the X hectares indicates that that land was to be enjoyed in conjunction with the dwelling, that land may also be characterised as residential premises and that the Debtor's use of that land for grazing was irrelevant.

The ruling request described the physical characteristics of the X hectares as comprising an area surrounding the dwelling (an area of turf presented in a predominantly natural or timbered state) and the rest of the land (which contained a gravel driveway, rural fencing and a dam). That description does not suggest a difference between the physical characteristics of the turf area and the rest of the land to such a degree that indicated that the latter was not to be enjoyed in conjunction with the dwelling. In addition, the description in the real estate agent's advertisement, i.e.

Approximately 32 acres of high ground with country views. Featuring a X bedroom brick home…

made no distinction between the turf area and the rest of the land and suggested that the physical characteristics of all of the land surrounding the dwelling was such that a person could enjoy views of the surrounding countryside.

Applying the test in paragraph 46 of GSTR 2012/5 set out above, we consider that the physical characteristics of the land and the dwelling as a whole indicate that the entire X hectares was to be enjoyed in conjunction with the dwelling and that the supply of the Property by the Bank to the Purchaser was wholly input taxed under subsection 40-65(1) of the GST Act.

Reasons for decision - Question 2

Summary

Given the nature of the supply (i.e. the Property) and the Objection Decision we accept that the Purchaser is the entity that ultimately bore the cost of the denied input tax credits and did not pass the cost of the denied input tax credits on to any other entity. On that basis, it would be appropriate for the Commissioner pursuant to section 105-65 in Schedule 1 to the Taxation Administration Act 1953 (section 105-65) to refund the $$$ overpaid GST to the Bank where the Bank reimburses the $$$ of overpaid GST to the Purchaser.

Detailed reasoning

It was stated in the ruling request that the Bank accounted for $$$ GST in respect of the supply of the Property to the Purchaser.

As the decision in relation to Question 1 is that the supply of the Property was wholly input taxed, the Bank has overpaid GST and is entitled to a refund of that overpaid GST pursuant to section 8AAZLF of the TAA if the Bank provides a notification to the ATO in accordance with subsection 105-55(1) in Schedule 1 to the TAA within four years after the end of the relevant tax period (20XX).

The general rules requiring the ATO 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 are subject to section 105-65 which states:

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 does not give 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.

In the present case paragraph 105-65(1)(a) is satisfied as the Bank overpaid GST on the supply of the Property to the Purchaser because the Bank treated the input taxed supply of the Property to the Purchaser as a taxable supply.

Paragraph 105-65(1)(b) is satisfied as that supply was not a taxable supply.

Sub-paragraph 105-65(1)(c)(i) applies because the Bank has not reimbursed a corresponding amount to the Purchaser and sub-paragraph 105-65(1)(c)(ii) applies because the Purchaser is registered for GST.

As all three paragraphs of subsection 105-65(1) are satisfied, the ATO has no obligation to pay a refund to the Bank that would otherwise be payable under section 8AAZLF TAA. However paragraph 27 of Miscellaneous Taxation Ruling MT 2010/1 states:

27. The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary. 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.

Paragraph 28 of MT 2010/1 states that the principles guiding exercise of the discretion in subsection 105-65(1) are explained in paragraphs 113 to 132 of MT 2010/1. Paragraphs 113 to 127 of MT 2010/1 discuss the circumstances in which the ATO may exercise the discretion to refund an amount where section 105-65 applies.

Paragraph 115 of MT 2010/1 states that if the supplier satisfies the ATO that the supplier has reimbursed the recipient of the supply and that recipient is not registered for GST or required to be so registered the ATO has a prima facie obligation to pay the refund provided the time limit in section 105-55 in Schedule 1 TAA is satisfied. In the present case the Bank has not reimbursed the Purchaser and the Purchaser is registered for GST, so paragraph 115 of MT 2010/1 does not apply.

Paragraph 115B of MT 2010/1 states that where paragraph 115 does not apply a taxpayer should seek guidance from the ATO (which the Bank has done).

Paragraph 118 of MT 2010/1 states that the starting point is that the ATO is under no obligation to pay a refund and that the supplier needs to demonstrate that its circumstances make it appropriate for the ATO to give a refund. Paragraphs 119 and 120 of MT 2010/1 state that where a statute confers an unconfined discretion the matters that may be taken into account in exercise of that discretion are similarly unconfined except so far as some implied limitation may be found in the subject-matter, scope or purpose of the relevant statute. MT 2010/1 then refers to paragraph 3.41 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax Administration) Bill 1998 which introduced section 39 to the TAA (the predecessor to section 105-65):

3.41 Because GST is payable by suppliers but is ultimately borne by the consumers of goods and services, a refund of overpaid GST would ordinarily result in a windfall gain to the supplier. A supplier will need to satisfy the Commissioner that an amount corresponding to the refund will be passed on to the persons who ultimately bore the cost of the overpaid GST.

After discussing a number of principles, including (Para 126):

It is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment has not been passed on;

MT 2010/1 concludes:

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.

MT 2010/1 then sets out guiding principles to consider in exercising the discretion and states that the circumstances in which the ATO considers that it may be fair to exercise the discretion include where a supplier did not have the opportunity to pass on the cost of GST (sub-paragraph 128(d)(i)), the supplier can demonstrate that, for other reasons, the supplier did not pass on the cost of GST (sub-paragraph 128(d)(ii)), or the supplier satisfies the ATO that an amount corresponding to the refund has been or will be passed on (sub-paragraph 128(d)(iii)). Sub-paragraph 128(d)(iii) states:

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.

In the present case the principles stated in sub-paragraph 128(d)(iii) are relevant as it was stated in the ruling request that if the ATO confirms that a GST refund will be allowed, the Bank will reimburse a corresponding amount to the Purchaser.

In relation to the first paragraph of sub-paragraph 128(d)(iii) set out above, we accept that the Purchaser ultimately bore the cost of the overpaid GST as a result of the ATO's Objection Decision which denied the Purchaser's claim of $$$ input tax credits for the quarterly tax period ended 30 June 20XX.

Consequently there is no need for the Bank to prove that an unregistered end consumer is the one ultimately compensated in terms of the second paragraph in sub-paragraph 128(d)(iii).

In relation to the third paragraph in sub-paragraph 128(d)(iii), the Purchaser is a registered recipient who is unable to claim input tax credits in respect of the acquisition of the Property. Given the nature of the supply (i.e. the Property) and the Objection Decision we accept that the Purchaser is the entity that ultimately bore the cost of the denied input tax credits and did not pass the cost of the denied input tax credits on to any other entity.

Accordingly, pursuant to sub-paragraph 128(d)(iii) of MT 2010/1, the ATO will refund the $$$ overpaid GST to the Bank where the Bank provides the ATO with satisfactory evidence that the Bank has reimbursed the $$$ overpaid GST to the Purchaser.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

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