Edited version of your written advice

Authorisation Number: 1012700603785

Ruling

Subject: GST and entitlement to refund for GST overpaid

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 non-taxable supplies, where you will refund any overpaid GST to unregistered recipients under the following proposals:

Preferred Proposal

By applying part of the GST refund against the an amount owed by those recipients plus provide additional services to active clients across your client base up to the value of the total adjusted overpaid GST?

Alternative Proposal

Identify and contact both active and inactive recipients in order to pass on the overpaid GST amount less any amount owed by providing additional services to each client?

Answer

No. The Commissioner will only exercise his discretion to allow a refund of overpaid GST to the extent that you reimburse your unregistered recipients for the total amount they paid in respect of GST.

This ruling applies for the following periods:

1 January 20XX to 31 March 2014.

The scheme commences on:

1 January 20XX.

Relevant facts and circumstances

•You are registered for GST and report to the Australian Taxation Office (ATO) quarterly using the non-cash accounting method.

•You are a not-for-profit organisation that provides services to clients.

• Historically you have mischaracterised the supply of certain services as subject to GST under the mistaken belief that the supplies were taxable supplies rather than GST-free.

• You have issued tax invoices to the clients including a GST amount for the services provided.

• You engaged an accountant to provide you with GST advice in relation to your supplies. Subsequently, you have determined that an amount of GST has been incorrectly taken into account in your assessed GST net amounts during the Refund Period.

• You intend to pass on the refunded GST amounts to selected clients on the basis that they were effectively overcharged for the services (on account of GST) and were at a disadvantage when compared to individuals that have been able to acquire equivalent services from your competitors on a GST-free basis. The refund will be restricted to those clients that receive services from you.

Circumstances which caused the incorrect GST treatment to be applied

• You have identified that you have treated the supply of services incorrectly from a GST perspective after discovering that your competitors in the sector were treating the relevant services as GST-free. A detailed review of the nature of the services and external tax advice has confirmed that the relevant services provided by you which are the subject of this refund request are GST-free, in accordance with the provisions in the GST Act.

Your refund entitlement for overpaid GST

• You propose to apply a portion of the GST refund amount against amounts owed to you by clients. These amounts relate to an increase in service fee rates that you have not passed on to certain clients.

• However, the higher rates were not actually applied by you for services provided to clients for a period. Therefore, you consider that you are entitled to recover the undercharged amounts from relevant clients in relation to this period.

• However, from a practical perspective, it is difficult for you to charge the clients retrospectively. You recognise the likelihood that the clients will not understand and appreciate that the increased labour costs mean that you are entitled to recover the increased amounts from the clients for past services. If you were to propose charging an unexpected amount in addition to the usual service component that has already been collected it would cause confusion for affected clients. On this basis, you propose to apply part of the GST refund applicable to clients against the amount owed by those clients to you.

• As set out below, if the Commissioner considers it is inappropriate for a portion of the GST refund to be applied against the amount owing by the clients, you propose to proceed to recover the amounts owed by clients outside of the GST refund process. However, you emphasise that you wish to minimise any concern and distress that may result from the increased charge to clients and, therefore, your preference would be that the GST refund be applied against the amount owed by clients in the first instance.

Proposal to pass on refunded GST amounts to clients

Preferred Proposal

• You contend that it is not practical to pass on the GST refund by simply paying an amount of money to each client due to the nature of the various arrangements and on the basis that it is difficult to ensure that the money will be used appropriately by the individuals. The reimbursement of the amount is further complicated by the fact that part of the payment relates to supplies made to clients who are now 'inactive' clients of yours (i.e. individuals that no longer receive supplies from you or are now deceased).

• In order to overcome this difficulty and to take into account the amount owing by clients to you as described above, you propose to reimburse the overpaid GST amount in the following manner ("Preferred Proposal"):

a. Apply the total amount to be reimbursed to all clients against the total amount owed by clients to you (see above); and

b. You will reimburse the total overpaid GST amount (less any amount owing) to 'active' clients across your entire client base by providing additional services to 'active' clients indiscriminately up to the value of the total adjusted overpaid GST amount.

• The Preferred Proposal is your preferred approach in reimbursing the relevant overpaid GST amounts. In this respect, and subject to the Commissioner's approval, you provide an undertaking that you will reimburse the overpaid GST amounts as set out in the Preferred Proposal. This approach will ensure that the entire overpaid GST amount will be applied towards the social and community purpose for which the funding provided to individuals was intended.

Alternative Proposal

• As an alternative to (b) above, and a less preferred approach due to the practical difficulties particularly in relation to 'inactive clients' (see above), You propose to identify and contact both active clients and inactive clients (to the extent possible) in order to reimburse the overpaid GST amount (less any amount owing) by providing additional services to each client up to the value of the adjusted GST amount attributable to each client.

• You intend to provide the Commissioner with evidence that the overpaid GST amount can be reimbursed in the manner set out in the Alternative Proposal.

• As you propose to reimburse the overpaid GST in accordance with the proposals outlined above, you state that you will not receive a windfall gain when you receive a refund of the overpaid GST from the ATO.

• You have confirmed that you do not require a private ruling on whether your supplies are GST-free. You have determined that your supplies for the refund period are GST-free but you have incorrectly treated the supplies as taxable supplies and remitted an amount of GST to the ATO.

• You have determined that you have overpaid a GST amount. This amount is made up of an amount of GST overpaid in respect of still active client and an amount for inactive clients.

• You have made a written request to the ATO to confirm that you have overpaid GST in respect of supplies of services to clients and for the overpaid GST to be refunded.

• You have informed the ATO that the clients are not registered for GST purposes. The clients have not been reimbursed for any amount corresponding to the GST remitted (overpaid, if any) in respect of the supplies of the services.

• There are no accounts outstanding to you from clients other than the amount of $xxxx. You have not as yet issued accounts for this amount.

• You propose to issue tax invoices for the amount owing to the clients and recover the amount through your standard billing process.

• You have accounted for the amount owing as an accrual.

• You plan to verbally communicate to the clients that you will provide additional services. This will also be communicated in writing to ensure documentation is in place. These letters providing the details of the additional services to be provided will be signed by either the CFO or CEO.

• Where your systems indicate that a client does not need additional services or where a client advises you that they do not need or want additional services, you propose to apply the additional services to individuals who you have identified are in need of additional services. You state that there are individuals who have very complex needs and are in desperate need of additional services to those individuals would reflect the social and community purpose for which the funding is provided.

• There are no outstanding amounts owing to you by clients.

• You have included an amount in respect of GST in the prices charged to clients.

• Your preferred proposal is to reimburse the amount of overpaid GST by providing additional services to your active clients indiscriminately.

• Your alternative proposal is to identify the clients and provide additional services to each of the active and inactive clients.

• You have reconciled the overpaid GST amount by each client and by the type of service provided

Relevant legislative provisions

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

All references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

Section 38-25

Section 38-30

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 not a taxable supply.

However, the supply was to non- registered recipients and paragraph 105-65(1)(c) of Schedule 1 to the Taxation Administration Act 1953 (TAA) expressly contemplates that refunds need not be given in these circumstances.

Section 105-65 of Schedule 1 to 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 as the recipients will not be reimbursed a corresponding amount of the overpaid GST. Your proposals to provide additional services as refund of the overpaid GST to the recipients or to other individuals who you have identified are in need of additional services, are not considered to be a reimbursement of the overpaid GST and the recipients (end consumers) have borne the cost of the GST and you would have a windfall gain if the Commissioner allows the refund to you.

Where you have issued an invoice to recipients for the amount owing and an amount is outstanding by these recipients. The Commissioner will exercise the discretion where the recipients are reimbursed the amount outstanding on their accounts by you crediting the amount outstanding equal to the GST refund due to the recipients. The Commissioner will only exercise his discretion to allow a refund of overpaid GST to the extent that you will reimburse the recipients for the total amount they paid in respect of GST.

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 the arrangement does not give rise to a taxable supply to that 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 the application of section 105-65 of Schedule 1 to the TAA.

In your case, you remitted GST of 1/11 of the price of your services to recipients when these services were in fact not a taxable supply. It follows that you remitted more GST than was legally payable and that there has been an overpayment of GST.

You have advised that the recipients of your supply are not registered for GST purposes and have not claimed any part of the GST included in the acquisition of your services as an input tax credit. You have also advised that the recipients have not been reimbursed for any amount corresponding to the GST overpaid.

As the three conditions of section 105-65 of Schedule 1 to the TAA are satisfied, the section 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 a 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.… 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.

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 you should be exercised.

Paragraphs 122 to 127 explain further:

122. The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 3) Bill 2008 (which amended section 105-65 in 2008) at paragraph 2.2 states:

Without the restriction on refund requirement, there is a potential for a windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of the tax.

123. The GST Act presumes GST is ultimately borne by end consumers. A key design feature of the GST system to ensure this occurs and to avoid double taxation is to generally allow a corresponding input tax credit to a recipient of a supply in business to business transactions. The GST Act envisages a degree of symmetry between the GST payable and the input tax credit which may be claimed in business to business transactions.

124. Further, where a business cannot fully claim an input tax credit this cost will ultimately be covered as a foreseeable cost of business and borne by the end consumer in the price paid for the good or service. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states at paragraph 5.4

You do not charge GST on supplies that are input taxed. However, you are not entitled to input tax credits on acquisitions relating to the supplies. The effect is that you have borne GST on those acquisitions and will pass on that cost in the price of the supply.

125. It is these factors that underlie the position that the Commissioner need not, that is, is under no obligation to, pay a refund where the condition in subparagraph 105-65(c)(ii) is satisfied. That condition is satisfied when the recipient of the supply is registered or required to be registered or, in other words, broadly, in business to business transactions.

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.

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. 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) ….

(ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, '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'.

(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.

Application to the present case

It is important in the present case to determine who has borne the burden of the GST in relation to the supply of services by you.

In your case we have established that the GST was passed onto the recipients in your tax invoices for your supply of services to the recipients who are not registered for GST and are not entitled to an input tax credit on the acquisition. Therefore the recipients have borne the cost of the GST. In considering your preferred proposed method of reimbursement of the overpaid GST to the recipients, before the Commissioner refunds the GST to you, you have to reimburse the recipients so that the entity that has ultimately borne the cost of the GST is compensated.

You propose to reimburse the total overpaid GST amount (less any amount owing) to 'active' recipients across your entire client base by providing additional services to 'active' recipients indiscriminately up to the value of the total adjusted overpaid GST amount. As outlined above before the Commissioner refunds the GST to you, you have to reimburse the entity that ultimately has borne the cost of the GST. Under your preferred reimbursement proposal you will be allocating the total amount to a global account without identifying and refunding directly the recipients that bore the cost of the GST in the first instance. Your proposal of providing extra services across your entire client base is not an acceptable method of reimbursement and this method has the potential to provide services to clients that did not incur the additional cost of the GST while other clients who did incur the cost of the GST would get no compensation. Some of the overpaid GST relates to inactive clients who have either died or are no longer receiving support services from you and under your proposal it is not intended to reimburse an amount to them.

The amount of any refund that the Commissioner would make to you for any overpaid GST would have to equate to the amount of an actual reimbursement made to the recipients who bore the cost of the GST overpaid in the first instance. The reimbursement may be a cash payment for the amount corresponding to the amount of the overpaid GST. If you refund by way of payment of an amount to the recipients for the GST overpaid by them and later supply services to your clients this is not a matter that the Commissioner has any control over or involvement in. It is a separate arrangement between the parties to any agreement. Any subsequent arrangement you and your clients may choose to enter into regarding the supply of any services to them would constitute a separate supply. For GST purposes this supply must be accounted for separately by you.

Further to the extent that the amount owing is withheld, it is not considered that this amount has been reimbursed to the recipients who bore the cost of the GST in the first instance. Any amount withheld by you to cover other previously absorbed costs and not previously invoiced to your clients could not be refunded to you as overpaid GST as that amount is not being reimbursed to the clients who bore the cost of the GST but applied against other service costs. The amount of any refund that the Commissioner would make to you for any overpaid GST would have to equate to the amount of an actual reimbursement made to the recipients who bore the cost of the GST overpaid in the first instance. Should the client later agree to pay an amount to you, to cover those additional costs once the amount of GST has been reimbursed to them, that transaction would likely be outside of the Commissioners consideration.

Under your alternative proposal you have identified the recipients both active and inactive who have paid the amount of GST and have borne the cost of the GST. However, your proposal to provide additional services as a form of reimbursement of the overpaid GST is not considered an acceptable way of reimbursing an overpaid amount. Your proposal does not provide a choice to the recipients of whether they want to apply the refund due to them in acquiring additional services. Where a recipient has overpaid an amount on account of services provided to them, they should be provided with an unencumbered right to receive an actual refund amount of the GST they have overpaid.

MT 2010/1, at paragraph 115A states:

In cases where the recipient is not registered or required to be registered, taxpayers can consider (that is self-assess) that the Commissioner will be satisfied that the recipient has been appropriately reimbursed (and that therefore section 105-65 will not apply) where:

the recipient can be specifically identified;

the amount of the reimbursement corresponds exactly to the amount of the GST overcharged to the recipient and the method of reimbursement ensures this is achieved;

the reimbursement is in money; and

the reimbursement has actually been made, and is not merely planned to be made.

In considering whether the reimbursement has actually been made we need to consider what is meant by reimbursement. The term 'reimburse' is not defined in the TAA. Therefore it takes on its ordinary meaning. The Macquarie dictionary defines 'reimburse' as:

to make repayment to for expense or loss incurred.

to pay back; refund; repay.

A journal entry in the supplier's accounts which acknowledges a debt owed to the recipient is, at best, a promise to pay. However, it does not mean that the supplier has actually repaid, paid back or refunded an overpaid amount of GST to the recipient.

Accordingly, in these circumstances, the Commissioner is not satisfied that the reimbursement has actually been made pursuant to subparagraph 105-65(1)(c)(i) of Schedule 1 to the TAA and therefore need not give the entity a refund of the overpaid GST.

However, where the recipient has a pre-existing liability owed to the supplier, the Commissioner will be satisfied that an overpaid amount of GST is reimbursed to the extent that the journal entry in the supplier's accounts offsets the recipient's pre-existing liability.

If the recipients later elects to have an offset against future services then until such time as there is a cost and an account raised in relation to the provision of those services and that account has been offset by an amount of the GST refund due to the recipients, then the Commissioner would not exercise the discretion under section 105-65 of Schedule 1 to the TAA to refund any overpaid GST.

In conclusion, the Commissioner is satisfied that you have overpaid an amount of GST because you treated a supply as a taxable supply when the supply was not a taxable supply. Further, you have passed on the GST amount to the recipients of your supply. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Based on your proposals of reimbursement and the facts provided, your circumstances do not warrant the exercise of the discretion.

The Commissioner will not exercise the discretion under section 105-65 of Schedule 1 to the TAA to refund the amount of GST incorrectly remitted by you for the supply of services.

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