Edited version of private ruling

Authorisation Number: 1011759786207

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Ruling

Subject: GST and restriction on GST refund

Question

Will the Commissioner refund the incorrectly remitted GST by the Club for its supply of membership services for the calendar years in question, under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes

Relevant facts and circumstances

· The Club is endorsed as a charitable institution.

· The Club is registered for GST and is entitled to access the GST concessions for charities.

· The Club runs a membership program to members of the public who pay the prescribed annual fee to it.

· Members are required to pay a membership fee to the Club. The prescribed annual membership fee for the calendar years in question was $X.

· Members are not registered or required to be registered for GST.

· The Club remitted 1/11^th of the membership fees as GST to the Australian Tax Office (ATO) in the quarter it received the payments.

· The Club received cash funding for each calendar year in question from another organisation to subsidise its operating costs.

· The Club has requested a private binding ruling on whether its supply of membership services in the calendar years in question is GST-free under subparagraph

38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The ATO issued a private ruling confirming that the supply of membership services in the calendar years in question is GST-free under the subparagraph mentioned above.

· In the application for a private binding ruling and the additional submission, the Club has provided the following:

· Due to administrative difficulties and the impracticability of paying refunds the Club has not and will not be able to reimburse the GST component to its members in the event it receives a refund.

· It acknowledges that to achieve its objectives and attract students the Club has to conduct its enterprise in a business like manner. However, the business is not commercially driven and the usual commercial trading assumptions that would apply to a commercial profit driven enterprise do not fully apply to not for profit organisations.

· The membership fee was determined purely based on affordability and to maintain a certain level of membership irrespective of the GST treatment of the supply. The fee is set at an insufficient level to recover even the direct costs of providing the membership services.

· The Club budgets were set with the objective of 'breaking even' or achieving a very small surplus. Accordingly, as the fee does not cover the costs of supplying the services the Club considers that no part of the fee can be properly characterised as a recovery or pass on of the GST. While failure to secure budgeted membership numbers was the primary reason for the Club suffering net financial losses for calendar years in question, the GST remitted contributed to/increased the net loss. Accordingly, when assessing the Club's actual financial performance (both on a net revenue basis and against budget) the Club has effectively borne the cost of GST of the GST remitted in error.

· Any net financial loss was funded out of its own financial reserves, thereby reducing its ability to provide future services to members. Any refund received by the Club will effectively be treated as a return of these depleted capital reserves.

· The annual member price has remained unchanged for some time. While there is no legal impediment on the Club to increase the membership fee, due to prices sensitivity, any increase in price could have a significant impact on the viability of the program.

· When marketing and advertising the membership program, there is no reference to whether the annual membership fee is GST-inclusive or not. The price stated on the marketing materials and website is simply a contractual price agreed to be paid by the members to the Club. Even if GST is payable on the fees, the Club has no recourse to recover a GST component from the members. Effectively, the Club has to absorb the GST cost rather than passing it onto its members under this contractual arrangement.

· For all budgeting purposes, the Club projected its membership income based on gross receipts, without any consideration of the GST costs. This is supported by the fact that at the time of preparing the budgets for the relevant calendar years, the Club's budgeted income from membership was determined as follows:

'Estimated number of members X $X per member'

· There was never an intention to pass on GST to members. When the GST-free status was confirmed by the ATO, the fee was not reduced to reflect that the GST component was not required.

· In the present facts and circumstances, the refund of incorrectly remitted GST on membership fees by the Club for the calendar years in question would not result in the Club having a windfall gain. Specifically, this is because, contrary to ordinary or common practice the Club, a not for profit charitable institution, did not 'pass on' the GST component. Rather, the Club ultimately bore the cost of GST, by absorbing the cost of the GST remitted in error.

· The Club refers to case 54884 that allows that the supplier who cannot directly refund the recipients as they cannot be traced, may reimburse its clients by some other means. For example a supplier may reduce or refrain from increasing its admission price for a future event.

· The Club also refers to case 75596 where it was accepted that there were unique factors outside of the usual commercial trading assumptions which justified a less stringent application of the reimbursement rule.

Reasons for decision

Summary

The Commissioner is satisfied that the Club has overpaid an amount because the Club treated a supply as a taxable supply when the supply was not a taxable supply because it was GST-free under section 38-250 of the GST Act.

However, the Commissioner is not satisfied that the Club reimbursed a corresponding amount to the recipient of the supply and so need not give the Club a refund.

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. In the circumstances of this case it is accepted that the GST component was absorbed by the Club and so to provide a refund to them would not result in a windfall gain. It is reasonable to exercise the Commissioner's discretion to allow the refund requested.

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 (section 105-65) 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.

Subsection 105-65(1) states:

(1) 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 was treated as giving 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.

Note: * asterisk denotes a defined term in the Act

Whether subsection 105-65(1) applies to the Club's circumstances

Section 105-65 only applies to a miscalculation of a net amount that arises as a result of GST payable being overstated. The restriction of refunds of overpaid GST under section 105-65 will apply if all three of the following conditions are present:

· there was an overpayment of GST

· a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

· 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 (MT 2010/1), which was issued on 15 December 2010, provides the view of the Commissioner on section 105-65.

Paragraph 20 of MT 2010/1 explains the meaning of 'overpaid'. It states:

In the context of 105-65 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. It states:

In the context of section 105-65 a supply would be treated as a taxable supply where the supplier has mischaracterised a supply as taxable because they believed the supply to be a taxable supply, has dealt with the recipient of the supply as if the supply was a taxable supply and has remitted an amount as GST to the Commissioner on that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as GST-free or input taxed but mistakenly includes GST for that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as taxable but miscalculates the GST for that supply in the calculation of their net amount.

In the Club's circumstances subsection 105-65 would apply because:

Following the issue of the Private ruling the supplies of membership services by the Club in the calendar years in question were considered to be GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act.

It follows that as no GST was payable on the supplies, the amount legally payable was nil and the Club has overpaid a GST amount in relation to the supply of membership services.

· The Club has mischaracterised the supplies of membership services in the calendar years in question as taxable supplies and has dealt with the recipients of the supply as if the supply was a taxable supply and has remitted an amount of GST to the Commissioner on that supply in the calculation of the Club's net amount.

· The Club has provided that due to the administrative difficulties and the impracticability of paying refunds it has not and will not refund the recipients of the overpaid GST amounts.

· The recipients are not registered or required to be registered for GST.

As section 105-65 applies, 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 that the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied:

Paragraphs 116 and 117 of MT 2010/1 provide that:

116. The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary … The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions.

…

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 T

2010 ATC 10-119 at 57 where the AAT referred to 'residual discretion':

As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should. [Emphasis added].

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

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) The overpayment of GST occurs as a result of an arithmetic or recording error made by the supplier.

For instance, an entity correctly treated its supply as GST-free when making the supply to the customer. However, when filling out its activity statement the entity incorrectly included the supply as a taxable supply in the calculation of the net amount returned on the activity statement. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(ii) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause.

For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(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.

Of relevance to the Club's circumstances is that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65 which is explained in paragraph 127 of MT 2010/1. It states:

… 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.

The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) Bill 2008 (which introduced the current version of section 105-65) adds further:

2.2 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.

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.

In answering this question, the Commissioner takes into consideration the factors outlined in Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by Avon about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect. In that case the High Court stated, at paragraphs 9 and 12:

9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit … In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered ... it forms part of the cost structure of doing business...There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on …

12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequences that proof to the contrary will occur comparatively seldom …

This means that the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier. It is for the supplier to prove that the GST has not been passed on.

In the Club's circumstances:

The Club has not been able to provide a complete explanation of the process by which the $X price for memberships was set, but for the following reasons the Commissioner accepts that for the relevant years the price charged for memberships did not include a GST component, and that GST was not passed on to recipients, but was absorbed by the Club.

The Club is an endorsed charitable institution that provides services to students and staff including offering union membership. While the Club has to operate in a business like manner, it is not commercially driven and there is not a general presumption that it will set prices so as to recover costs.

The Commissioner has already accepted that the memberships were supplied for a nominal consideration as part of his consideration of section 38-250 of the GST Act, the price being less than 75% of cost. While this doesn't necessarily mean that the price does not include a GST component, it does mean that not all costs are recovered in the price.

This reflects the underlying purpose of the Club which is to provide services to students including maintaining a viable student union presence, not to necessarily cover costs in the prices charged. This can be distinguished from an enterprise where goods or services may be provided at below cost for commercial reasons.

The price was determined without consideration of the cost of GST, but based on student affordability and to maintain membership with the introduction of voluntary student unionism. The relevant budget papers indicate that the intention at the time of setting the price was that income from the memberships was a GST exclusive figure of $X.

The fact that the price remained at $X after the ruling confirming that it is a GST-free supply is consistent with a finding that there was no GST component in the price.

Similarly, a finding that the $X price did not 'recover' the GST thought by the Club to be payable is consistent with the Club's need to cover a significant portion of its costs from grants and similar income rather than in the prices charged for goods and services.

As the GST component was absorbed by the Club, to provide a refund to them would not result in a windfall gain. In the circumstances of this case it is reasonable to exercise the Commissioner's discretion to allow the refund requested.

Other private rulings:

The Club have submitted that the principles in private rulings 54884 and 75596 are relevant to the Club's circumstances. For the following reasons they do not lead to the conclusion that the reimbursement requirement is satisfied or that the discretion should be exercised (although the discretion is exercised for the reasons given above).

Case 54884 was finalised in August 2005. The decision relied on section 39 of the TAA (repealed) and ATO Practice Statement Law Administration PS LA 2002/12 (which was withdrawn in September 2008). In case 54884 the decision that 'you may reimburse your recipients by another means that does not result in a windfall to your organisation for tickets sales after 30 June 2002' followed the approach of the Australian Competition and Consumer Commission (ACCC) in monitoring price exploitation issues. Although the role of the ACCC ended after 30 June 2002, the approach was followed beyond 30 June 2002 as explained in the case.

MT 2010/1, which applies to years of income commencing both before and after its date of issue, does not endorse that approach. It requires that the person or entity that ultimately bore the GST is compensated. To meet the reimbursement requirement a supplier must reimburse the actual person or entity that bore the GST.

Case 75596 was finalised in August 2008 and followed section 105-65 and guidance in PSLA 2002/12 (withdrawn). In that case a less stringent application of the reimbursement rule was the reason the refund was allowed. MT 2010/1 simply does not support that approach.