Edited version of private advice

Authorisation Number: 1052317264810

Date of advice: 6 December 2024

Ruling

Subject: GST - passing on and refunding the amount of excess

Question

Have you not passed on excess GST and therefore entitled to a refund for excess GST you have paid incorrectly in accordance with Section 142-10.?

Answer

Division 142 of the GST Act applies to prevent a refund of the excess GST where it is identified that the GST was passed on and the supplier has not reimbursed the recipient of the supply.

This ruling applies for the following periods:

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 195-1

The scheme commences on:

The date this Ruling is issued.

Relevant facts and circumstances

You have an Australian Business Number (ABN) and are registered for GST.

You operate a chai tea business, selling chai tea and other associated goods.

Your chai products are tax free in accordance with Schedule 2, item 5 of theA New Tax System (Goods and Services Tax) ACT 1999.

Your product consists of the raw tea, spices and other ingredients, and is not a powdered/processed chai and the raw ingredients themselves are GST-free and in accordance with Schedule 2, Item 5 of the GST Act you did not include GST when establishing the price of your chai tea goods.

Your pricing of chai tea has been established based on the costs of the raw ingredients included in your product and the size of the bag and GST was not a relevant factor in determining costs nor in setting the price as both raw materials and the chai tea are GST-free.

Business and wholesale customers (B2B)

You excluded GST from pricing considerations is evidenced in your sales to B2B as you have never included GST in the cost of chai tea since the inception of your business.

The sales to B2B customers were not sold through your Shopify website and the tax invoices issued did not include a GST component.

Individual customers

In xxxx, you commenced operating you're Shopify backed website and were charging GST on the sale of the original blend to individual customers.

You charged GST as that was your understanding of the GST legislation, and that the sales were subject to GST if made to the end user.

On xxxx, you obtained a new tax agent, who identified when preparing your income tax return for the year ending xxxx that you had been charging GST on sales of chai tea to individual customers through the website incorrectly.

You subsequently updated your website not to include GST on the sales of chai tea and stopped issuing tax invoices as of xxxx.

During the period of xxxx until xxxx, GST was subsequently included on the tax invoices issued to individual customers for the sale of the certain blends of chai tea.

During the period of xxxx and xxxx, GST was not included on the tax invoices issued to Individual customers for the sale of the certain blends of chai tea.

You have since changed the GST codes for your online tea sales to individual customers in Shopify to be GST-free from xxxx.

The error was identified in xxxx when your tax agent was logging into the Shopify to address the Xero to Shopify integration matters with various clearing account (not related to GST).

The error occurred when you rebranded and changed the images on your products but not the product itself. Therefore, they didn't feel they needed to check the coding and data when the product was updated on the Shopify website. The same applies when a price is updated.

As this error had been rectified in xxxx there was no reason to suspect is would change back inadvertently a couple of years later.

You stated that crating a product in Shopify is complex and the date fields are numerous. When the products were updated following your tax agent's advice, you did not navigate consciously to the tax codes for products in Shopify.

Your tax agent relies on your account software, Xero and they do not review the Shopify account when reviewing BAS.

Your tax agent has access to the Shopify account which was established when Xero to Shopify integration was established which at that time there was no such error.

At times, up to 15 individuals have access to Shopify and can tick the box to change a product to include GST. You do not believe they were responsible for changing it back once it was corrected based on previous advice provided by your tax agent.

There is no audit log in Shopify to identify which user updated the tax treatment from GST-free to taxable.

You have provided a sample of tax invoices issued to individual customers and B2B customers s for sales of chai tea., during the periods of xxxx to xxxx which shows the treatment of these supplies as GST-free.

You provided a sample of tax invoices issued to individual customers for sales made via the Shopify during the periods of xxxxx to xxxx & xxxx to xxxx which shows the treatment of these sales were taxable as the prices was inclusive of GST. You also provided a sample of tax invoices issued during the period of xxxx and xxxx which shows the treatment of these sales were GST-free as the price was exclusive of GST.

According to the tax invoices issued, the sale price of a 1kg bag chai tea supplied to individual customers was either $xx, $xx or $xx which remained the same whether the supply was treated as taxable or GST-free and the to the business or wholesale customer was either $xx or $xx.

You provided the GST detailed reported which identified each supply and showing whether GST was included.

You have calculated the GST remitted to the ATO on these sales of individual customers.

You are requesting confirmation that excess GST has not been passed on to individual customers for the sale of chai tea during the periods of xxxx to xxxx and request confirmation of your entitlement to receive a refund of GST incorrectly paid by amending the BAS throughout the period of error.

Relevant legislative provisions

Financial year ending 30 June 2021

Financial year ending 30 June 2022

Financial year ending 30 June 2023

Financial year ending 30 June 2024

Financial year ending 30 June 2025

Reasons for decision

Have you not passed on excess GST and is therefore entitled to a refund for excess GST you have paid GST incorrectly paid in accordance with Section 142-10 of the A New Tax System (Goods and Services Tax) Act 1999?

Summary

Division 142 of the GST Act applies to prevent a refund of the excess GST where it is identified that the GST was passed on and the supplier has not reimbursed the recipient of the supply.

Detailed reasoning

Refunding the amount of excess GST and Division 142

Division 142 generally restricts refunds when you make an overpayment of GST to the Australian Taxation Office (ATO) where a refund may result in a windfall gain.

Excess GST is defined in subsection 142-5(1) as an amount that has been taken into account in an assessed net amount but in fact is not payable. Under section 142-10, if the excess GST has been passed on to another entity, that excess GST is taken to have always been payable until the passed-on GST is reimbursed to the other entity.

However, if the excess GST has not been passed on, section 142-10 does not apply, and the supplier may request an amendment to their assessment for the relevant tax period to reduce the amount of GST attributable to that tax period. Any resulting refunds are then to be paid or applied in accordance with Division 3 and 3A of Part IIB of the TAA.

Goods and Services Tax Ruling 2015/1 Goods and services tax: 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) notes that whether the excess GST has been passed on is a question of fact and must be determined on a case-by-case basis taking into account the particular circumstances of each case.

Paragraphs 24-27 of GSTR 2015/1 state:

24. The Explanatory Memorandum to the Tax Laws Amendment (2014 Measures No 1) Bill 2014 states that the GST envisages that the supplier 'passes on' the GST to the recipient of the supply. This simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is made as a taxable supply.

25. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on.

26. However, while there is a general expectation that, in ordinary circumstances, excess GST has been passed on, particular facts and circumstances of an individual case may demonstrate that excess GST has not been passed on.

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.

As outlined in paragraph 24 of GSTR 2015/1, the GST Act envisages that the supplier 'passes on' the GST to the recipient.

The Commissioner provides, in paragraph 28 of GSTR 2015/1 a list of factors that should be considered in determining whether the excess GST has been passed on to recipients. This includes:

•         the manner in which the excess GST arose

•         the supplier's pricing policy and practice

•         the documentary evidence surrounding the overpayment, and

•         any other relevant circumstances

The question of passing on is one of fact and not of fairness - considerations of fairness may be relevant in deciding whether the Commissioner exercises the discretion under subsection 142-15(1) but are not relevant to whether excess GST has been passed on.

The manner in which the excess GST arose

The manner in which an amount of excess GST arises is relevant in considering whether or not the excess GST was passed on. GSTR 2015/1 at paragraph 31 considers four common circumstances:

•         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, and

•         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).

The suppliers pricing policy

Paragraph 40 of GSTR 2015/1 states the supplier's pricing policy and practice involves considering your conduct and knowledge at the relevant time of setting the price of a supply and whether there have been any changes in the price to account for GST.

Paragraphs 41-42 and 45-46 of GSTR 2015/1 states:

41. 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.

42. This may be demonstrated where the price charged is calculated so as to exceed costs (including GST) by a profit margin. Even if there is very little or no profit margin, this will not necessarily mean that the GST was not taken into account as a cost.

45. A supplier may seek to demonstrate that GST was not considered when setting the price, it charged its customers. This is not, of itself, sufficient to establish that the excess GST has not been passed on. For example, where a supplier is a 'price taker' in a market that primarily makes taxable supplies, this usually indicates that the supplier has passed on the excess GST. The fact that the supplier may not have been aware of the GST cost when setting its prices is not enough by itself to demonstrate that GST has not been passed on.

46. On the other hand, where a supplier sets its prices to a market that primarily makes non-taxable supplies, this may tend to support a conclusion that the supplier has not passes on the excess GST.

In your case, the excess GST arose because of a coding error in your Shopify website, where certain blends of chai tea sold to individual customers from xxxx to xxxx were incorrectly treated as a taxable supply. As a result, tax invoices were issued in relation to those supplies that were inclusive of GST. You reported the GST payable on lodged activity statements and remitted GST to the ATO in relation to those supplies. This by itself is evidence that GST has been passed on.

You claim that GST was not a relevant factor in determining costs nor in setting the price as both raw materials and the chai tea are GST-free. When you set up the Shopify website in xxxx to supply chai tea to individual customers, you set the price to include GST during the periods xxxx to xxxx as you thought the correct treatment of these supplies was taxable. However, it was only once you were made aware that the supplies should have been treated as GST-free that you reset the price to be GST-exclusive.

As there is a difference price point between the sales of chai tea to B2B customers and individual customers, there is not enough evidence that you didn't take GST into consideration when setting your prices for the Shopify website.

Conclusion

As outlined above, there is a general expectation that excess GST will have been passed on and a supplier will need to clearly substantiate the grounds on which it claims a refund of excess GST and that their circumstances are outside the ordinary. Overall, the Commissioner is not satisfied that you have not passed on the excess GST in respect of your sale of chai tea.

Therefore, under section 142-10, any excess GST that you have passed on to your clients is taken to be payable and on a taxable supply until you reimburse those clients.

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