Edited version of private advice

Authorisation Number: 1052316280607

Date of advice: 17 October 2024

Ruling

Subject: GST - supply of goods

Question 1

Was the excess goods and services tax (GST) in relation to your supplies of the Products to online clients and wholesale clients in the tax periods from the 1 January 20YY to 1 December 20YY (the relevant period) 'passed on' within the meaning of section 142-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the excess GST in relation to supplies of the Products made by you in the relevant period was 'passed on' for the purposes of section 142-10 of the GST Act.

Question 2

If the answer to Question 1 is No, are you entitled to a refund under Division 142 of the GST Act for the excess GST you have reported in relation to the supply of the Products during the relevant period?

Answer 2

As the answer to Question 1 is Yes, this question is not relevant.

This ruling applies for the following period:

1 January 20YY to 1 December 20YY

Relevant facts and circumstances

You are registered for GST.

In 20YY the Commissioner issued a private binding ruling (20YY PBR) to you concluding three of your products were subject to GST.

Based on the outcome of the 20YY PBR, you changed the three products to different packaging and marketing, additionally you added two new products with the same packaging and marketing (the five collectively referred to as the Products) and commenced treating them as GST-free.

In early 20YY, you sought advice from your tax agents and instructed them to consider and draft an application for a PBR to be lodged seeking confirmation the Products, sold since 20YY, were treated correctly as GST-free supplies.

You determined as a preliminary measure in early 20YY, to take a conservative approach to your GST obligations, that from DD January 20YY you would treat the supplies of the Products to online customers through your website (online sales) as taxable supplies.

You did not increase the price of the Products for your online sales and you have provided examples of tax invoices issued to online consumers for online sales prior and during the relevant period, illustrating GST was included on the Products from DD January 20YY. You also confirmed that no online sales were made to GST registered entities.

In mid-20YY, you engaged a different agent, whom you instructed to liaise with the Australian Taxation Office (ATO) on your behalf, to ascertain the ATO's view as to whether it was appropriate to finalise and proceed with the draft PBR application or to prepare a submission to the ATO explaining why the Products should be GST-free.

You had a conference call with the ATO on the DD August 20YY. As a result of the conference call, you instructed your agent to postpone the finalisation of the draft PBR application and instead prepare a submission to the ATO. The submission aimed to demonstrate the Products met the requirements of GST-free supplies.

On DD September 20YY, you made a submission with respect to the GST-free status of the Products; you have provided a copy of this submission.

In addition to the submission and further communications between the ATO and your agent, you remained uncertain to the GST status of the Products. Pending the outcome of the submission, you decided, as a conservative measure, to commence treating the supplies of the Products to your wholesale customers as taxable supplies from or around DD March 20YY. You advised that you did not increase the price of the products to remain competitive in the market where your competitors did not charge GST on similar products.

You advised that while you were uncertain of the GST treatment of the Products, you did not believe the Products were taxable. However, while awaiting the Commissioner's response to your submission, you intentionally adopted a conservative approach to your GST obligations, to avoid any future disputes with the ATO to your GST liability and to ensure compliance with your GST obligations.

During February 20YY, you notified all of your wholesale customers that from DD March 20YY the supply of the Products would be treated as taxable. You further advised your wholesale customers that to remain competitive in the market, you would not increase the RRP nor the wholesale price of the Products but the wholesale price will include GST from this date. You have provided a copy of the communication.

You have provided examples of tax invoices (redacted client information) you provided to wholesale customers during the DD March 20YY to DD December 20YY period that illustrate the Products were treated as taxable supplies during this period.

On the YY November 20YY, the Commissioner provided a response to your submission. The response confirmed the Products meet the requirements to be treated as GST-free supplies.

On the DD November 20YY, you notified your wholesale customers, via email, that from DD December 20YY the Products will be treated as GST-free supplies. You also confirmed that from the DD December 20YY you ceased treating online sales of the Products as taxable.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 142-5

A New Tax System (Goods and Services Tax) Act 1999 section 142-10

A New Tax System (Goods and Services Tax) Act 1999 section 142-15

A New Tax System (Goods and Services Tax) Act 1999 section 142-25

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1

The object of Division 142 is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Generally, the Division operates so that the supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on GST to another entity (the recipient) and has not reimbursed that other entity for the passed on GST.

Under section 142-5(1) 'excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142.

In relation to refunding excess GST, section 142-10 provides that the excess GST that has been passed on to a recipient is taken to have always been payable and payable on a taxable supply, until the recipient has been reimbursed for the passed-on excess GST.

This means that an amount of excess GST will generally only be refundable if:

•                     it has not been passed on to the recipient, or

•                     it has been passed on to the recipient and the recipient has been reimbursed.

The Commissioner's view on the meaning of the terms 'passed on' and 'reimburse' for determining whether section 142-10 applies to an amount of excess GST is explained in Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1).

Is there an amount of excess GST?

Paragraph 12 of GSTR 2015/1 states:

12. 'Excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142.

On the facts provided, you took into account an amount of GST in your assessed net amount for each of the quarterly tax periods in the relevant period which exceeded that which was payable by incorrectly treating your supplies of the Products as taxable supplies when those supplies were determined to be GST-free supplies by the Commissioner on DD November 20YY.

Accordingly, that amount of GST incorrectly included in your assessed net amount which exceeded the amount of GST payable constitutes excess GST.

Was the excess GST passed on?

Section 142-10 provides that so much of the excess GST under subsection 142-5(1) as you have passed on to another entity (the recipient of the Products) is taken to have always been:

•                     payable; and

•                     on a taxable supply;

until you reimburse the other entity for the passed on GST.

If a refund arises because you reimbursed the passed on excess GST, there is an adjustment event under subsection 19-10(1). The reimbursement has the effect of changing the consideration for a supply and you will have a decreasing adjustment. The other entity may have an increasing adjustment (Note 1 of section 142-10).

If a refund arises because excess GST has not been passed on, you may seek a refund from the Commissioner by applying for an amendment to the relevant assessment subject to applicable time limits (Note 2 of section 142-10).

The term 'passed on' is defined in section 195-1 as having the meaning affected by section 142-25.

Subsection 142-25(2) provides that if:

•                     you issue a tax invoice or a notice under section 84-89...; and

•                     the invoice or notice contains enough information to enable some or all of an amount of GST to be clearly ascertained; and

•                     in a case where you must pay the assessed net amount for a tax period to which the invoice or notice relates - you have paid that assessed net amount to the Commissioner;

the invoice or notice is prima facie evidence of that part of that GST having passed on to that other entity.

You have provided examples of tax invoices issued to your online and wholesale customers during the relevant period which contain enough information to ascertain the amount of GST. You have included this amount of GST in your assessed net amounts for a tax period to which the tax invoice relates and you have paid the assessed net amount to the Commissioner.

Section 142-25 and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases (paragraph 23 of GSTR 2015/1) which is consistent with the High Court's comments in Avon Products Pty Ltd and Commissioner of Taxation [2006] HCA 29 (Avon).

While there is a general expectation that, in ordinary circumstances excess GST has been passed on, the particular facts and circumstances of an individual case may demonstrate that excess GST has not in fact been passed on (paragraph 26 of GSTR 2015/1).

Paragraph 27 of GSTR 2015/1:

27. A supplier claiming a refund, because it considers that the excess GST has not been passed on, will need to clearly substantiate the grounds on which it claims the refund. In any dispute, the taxpayer would have the onus of proving that its circumstances are outside the ordinary and that it did not pass on the excess GST.

Paragraph 29 of GSTR 2015/1, states that the question of passing on is one of fact and not of fairness - considerations of fairness may be relevant in deciding whether the Commissioner is satisfied to treat 142-10 as never having applied under subsection 142-15(1) but are not relevant to whether excess GST has been passed on.

Consideration of whether the facts and circumstances are outside the ordinary

GSTR 2015/1 sets out the matters a supplier should have regard to when determining whether or not the supplier has passed on the excess GST, including whether or not the supplier's circumstances are outside the ordinary;

(i)            the manner in which the excess GST arose

(ii)            the supplier's pricing policy and practice

(iii)            the documentary evidence surrounding the transaction and

(iv)            any other relevant circumstances

These four matters have been considered in Domestic Property Developments Pty Ltd as trustee for the Dals Property Trust and Commissioner of Taxation [2022] AATA 4436 (DPT), M3K Services Pty Ltd and Commissioner of Taxation [2021] AATA 4416 (MK3) and WYPF and Commissioner of Taxation [2021] AATA 3050 (WYPF), when determining whether the supplier had passed on excess GST.

The following will consider these four matters in relation to your circumstances to determine whether the excess GST has been passed on and if your circumstances are outside the ordinary.

(i)            the manner in which the excess GST arose

Consideration of the manner in which an amount of excess GST arose will involve having regard to when, how and why the error resulting in the excess GST occurred (paragraph 107 of GSTR 2015/1).

The manner in which the excess GST arose is relevant in determining whether or not the excess GST has been passed on. Paragraph 30 of GSTR 2015/1 provides that an amount of excess GST may arise in a variety of fact situations and paragraph 31 of GSTR 2015/1 details some common circumstances where excess GST may arise such as;

•                     incorrectly treating something which is not a supply as a taxable supply

•                     miscalculating a GST liability under the GST law

•                     incorrectly reporting an amount of GST on a GST return

•                     incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).

In your circumstances, you incorrectly treated a GST-free supply of the Products as a taxable supply.

You contend that you determined as a preliminary measure in early 20YY, to take a conservative approach to your GST obligations regarding the GST-status of the Products and that from DD January 20YY you would treat the supplies of the Products to online customers as taxable supplies. You issued tax invoices to your online customers during the relevant period indicating the amount of GST included in the supply of the products.

In WYPF, the taxpayer also chose to implement a conservative approach to their GST obligations and the Tribunal considered the passing on issue based on their facts and circumstances. The tribunal concluded that in their particular circumstances, this was one of the 'rare instances' where the taxpayer had not passed on the excess GST (at [74]).

Similar to WYPF, you intentionally chose to take a conservative approach to your GST obligations pending clarification from the Commissioner of the GST status of the Products. However, unlike WYPF, you issued tax invoices to both your online and wholesale customers during the relevant period showing an amount of GST was included in the price and these amounts were included your assessed net amount for the tax periods to which the invoices pertain (the relevant period).

You further contend it was not your mistaken belief that GST was applicable on the Products but you adopted the conservative approach whilst awaiting the Commissioners response to ensure compliance and that there would be no future dispute with the ATO as to the amount of GST payable if the Products were determined to be taxable. You contend that this distinguishes your circumstances to be determined as out of the ordinary when considering whether the excess GST has been passed on.

Of note, is the timing of your choice to treat the Products as taxable supplies. You explain that it was contact with the ATO (DD August 20YY) that spurred your choice to treat the Products as taxable and you reasoned that you were awaiting the Commissioners advice of the GST status of the Products in reply to your submission in September 20YY. This does not align with the fact that you had been treating your online sales of the Products as taxable from DD January 20YY and issuing tax invoices showing the GST amount included in the supply to your online customers, which was approximately seven months prior to the contact with the ATO.

(ii)          the supplier's pricing policy and practice

The supplier's pricing policy and practice involves considering your conduct and knowledge at the relevant time of setting the price of a supply (paragraph 40 of GSTR 2015/1).

Where a supplier sets a price with the knowledge or belief that the transaction is subject to GST, including a belief that the GST which later proves to be an overpayment is a real cost of doing business, that will point towards a finding that the excess GST has been passed on (paragraph 41 GSTR 2015/1). On the other hand, where a supplier sets a price on the basis that no GST is payable on the transaction and subsequently pays the GST liability without seeking (or being able to seek) recovery from the recipient, this may point towards a finding that the entity has absorbed and not passed on the cost of the excess GST (paragraph 46 GSTR 2015/1).

You advised that from 20YY you treated the Products as GST-free supplies. However, from DD January 20YY and DD March 20YY (DD January 20YY for XXXXXXX), you decided to treat the supply of the Products as taxable, to your online and wholesale clients respectively. You advised that you did not increase the recommend retail price (RRP) of the Products to your online and wholesale customers during the relevant period to remain competitive in the market where your competitors did not charge GST on similar products.

Based on the circumstances, you did not set a price on the basis that GST was payable on the Products.

You contend, that you have economically borne the cost of the GST during the relevant period. The excess GST is a part of the margin on the supply that you would have been entitled to retain had you correctly classified your supplies as GST-free. Until the relevant period you treated the supplies of the Products as GST-free supplies. You advised the excess GST arose as a result of you adopting a conservative approach to your GST obligations and that this is a signal that the excess GST was not passed on.

In MK3 and also referenced in DPT, Olding SM highlighted:

23. In other words, XXXX did not set out to prove, and did not prove, that its prices did not recover costs in particular tax periods. I therefore approach the matter on the basis that, while XXXX has established that it did not set prices by reference to costs, it has not proved that its prices did not recover all costs, including the excess GST. That XX XXXX was able to confirm that the product generated commercially acceptable returns at least in the later periods under review indicates he was aware during the relevant periods that this was so. It follows that he was aware that the pricing strategy was covering all costs in those periods.

The tribunal was not persuaded by the argument that the taxpayer in MK3 (nor in DPT) did not pass on the excess GST as its pricing policy was not based on recovering costs. Nor did the fact that the prices did not change when the correct amount of GST commenced being paid, support the taxpayer's assertion that the excess (incorrect) amount of GST has not been passed on. As such, the taxpayer's application for a refund of overpaid GST was unsuccessful. The decision highlights that when seeking a refund of overpaid GST, the onus is on the taxpayer to demonstrate sufficient circumstances to conclude that it had not passed on excess GST.

This is explained further by Olding SM in M3K:

82. In that regard, I mean no disrespect in observing that XXXX paying more as GST than its competitors, and consequently achieving a lower profit margin than if it had paid the correct amount, is a consequence of XXXX failure to understand the application of the GST law to its supplies. A profit margin that is less than it otherwise would be, and less than that enjoyed by competitors who pay the correct amount, will be a common if not inevitable consequence of paying more as GST than is required. Example 2.13 in the Explanatory Memorandum is consistent with the view that that is not sufficient to take a matter outside the usual case in which refunding an amount that has been passed on is taken to result in a windfall gain. If it were otherwise, s 142-10 would be left with little or no field of operation.

Example 2.13 in the Tax Laws Amendment (2014 Measures No. 1) Act 2014 Explanatory states:

Example 2.13: Commissioner's discretion

Supermarket A introduces a new product which it classifies as subject to GST, but which is correctly GST-free. From the outset, it includes GST in the price of the product, which it sells to a large number of customers. The product is also marketed by other supermarkets that are correctly classifying the product as GST-free and charging a lower price as a result.

After a few months Supermarket A discovers that the product is GST-free and stops including GST in the price, lowering the price to match other supermarkets.

Supermarket A considers that it has passed on the excess GST, but that it is not cost-effective to try to locate customers to provide a reimbursement of the overcharged GST. (If Supermarket A were in doubt as to whether it had passed on the excess GST, it could ask the Commissioner for a private ruling about the matter).

Supermarket A makes a request in the approved form for the Commissioner to exercise the discretion under subsection 142-15(1) to pay a refund of the excess GST, on the grounds that it was disadvantaged in the market place by its mistake, and has lost sales and profitability as a result.

In order to exercise the discretion, the Commissioner needs to be satisfied that applying section 142-10 would be inconsistent with the principle that a refund of excess GST should not give an entity a windfall gain.

The Commissioner forms the view that a windfall gain would result if Supermarket A were paid a refund. Accordingly, the Commissioner decides not to exercise the discretion under subsection 142-15(1).

The principle that a refund of excess GST should not give an entity a windfall gain is further supported by Olding SM in his concluding reasoning in DPT:

97. If excess GST has been passed on by a supplier to the recipient of a supply and not reimbursed, inevitably there will be a windfall to either the supplier or the revenue. Refunding the excess GST to the supplier would result in a windfall to the supplier. If the excess GST is not refunded, the revenue would enjoy the windfall. It is clear from s 142-10 that in such circumstances Parliament has chosen the revenue as the beneficiary of the windfall.

While you have confirmed your online customers are not registered for GST as they are end-consumers, your wholesale customers are GST registered entities. Consequently, a refund of the excess GST pertaining to the Products would create asymmetry in the GST system. That is, the Commissioner will have to bear the cost of any overclaimed input tax credits from your wholesale customers.

(iii)          the documentary evidence surrounding the transaction

Whether GST is included in the price of a supply may be demonstrated by the documentary evidence surrounding that supply. This evidence may be in any form, including a tax invoice, a contract of sale, other correspondence between the parties, or internal pricing policy documents and other relevant manuals. Subsection 142-25(2) provides that a tax invoice, issued to or by another entity, containing enough information to allow the amount of GST payable in relation to the supply to be clearly ascertained, is prima facie evidence of the excess GST having been passed on.

You have provided examples of tax invoices issued to your online and wholesale clients during the relevant period which disclosed a separately identifiable component of GST for in your supply of the Products and included these amounts in your assessed net amounts.

(iv)          any other relevant circumstances

On DD June 20YY the Commissioner issued a private ruling (20YY PBR) to you concluding that three of your products were subject to GST.

Based on the outcome of the 20YY PBR, you changed the three products to different packaging and marketing, additionally you added two new products with the same packaging and marketing (the five collectively referred to as the Products) and commenced treating them as GST-free.

You did not seek the Commissioner's confirmation of your view that the Products were GST-free. You advised that it wasn't until early 20YY you sought advice from your tax agents at the time on your GST obligations on the Products and instructed them to consider and draft an application for a private ruling to be lodged seeking confirmation the Products sold since 20YY were treated correctly as GST-free supplies.

Conclusion

In your case, we consider that the excess GST has been passed on by you during the relevant period. This is evidenced by the manner in which the excess GST arose, your pricing policy, the documentary evidence (tax invoices issued) and that you took GST into account in your assessed net amount for the relevant period and the other relevant circumstances.

While you have provided relevant facts and circumstances as to why you decided to change the GST treatment of the Products during the relevant period, it is not sufficient to show that your circumstances are outside the ordinary and the amount of GST has not been passed on.

As there is excess GST and it has been passed on, under section 142-10 the excess GST is treated as having always been payable on a taxable supply until you reimburse the other party for the passed on GST.

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