Edited version of private ruling

Authorisation Number: 1011808225515

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Ruling

Subject: GST and an entitlement to claim input tax credits

Questions

Were you entitled to claim input tax credits (GST credits) for supplies you received from an entity (Entity) for a period of time (Period), some of which transpired more than 4 years ago?

If no to question 1, are you required to refund to the ATO the GST credits you claimed?

Answers

No.

Yes, but the application of section 105-50 of Schedule 1 of the Taxation Administration Act 1953 (TAA) will reduce the amount you will have to pay (refer to reasons for decision).

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You acquired supplies in relation to your enterprise from an Entity during the Period.

The agreement you had with the Entity required them to be registered for GST and to issue you with a tax invoice every tax period for payment.

The Entity supplied you with documents that purportedly had the necessary information required by a tax invoice and which you accepted as being tax invoices. The documents included a charge for GST.

You have discovered that the Entity was not registered for GST at the time of making supplies to you.

Reasons for decision

Summary

You incorrectly claimed GST credits through the Period but are only required to make a refund of the incorrectly claimed GST credits from a specific tax period ending several months after the commencement of the Period.

Detailed reasoning

Were you entitled to claim GST credits for supplies you received from an Entity during the Period?

You are entitled to a GST credit when you make a creditable acquisition under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 11-5 of the GST Act sets out the requirements necessary for an acquisition to be creditable and requires at paragraph 11-5(b) that the supply to you was taxable.

Further to this, section 9-5 of the GST Act provides the requirements necessary for a supply to be taxable and requires at paragraph 9-5(d) that the supplier is registered or required to be registered for GST.

In your case, the Entity was not registered for GST at the time of making their supplies to you. You did act in good faith in accepting that the Entity was registered for GST in accordance with the arrangement you had with them. The Entity also provided you with documents purporting to be tax invoices which showed a GST charge and which again you accepted in good faith. However, there is an onus on the recipient of a supply to ensure that the supplier is registered for GST before claiming any GST credits (for example a simple check using the Australian Business Register website would have shown that the Entity was not registered).

Consequently, as the Entity was not registered for GST at the time they made supplies to you, you did not make creditable acquisitions and consequently are not entitled to claim any GST credits for these supplies.

Please note that whether the Entity has broken his agreement with you by not registering for GST is a contractual matter between you and the Entity and is something which the ATO cannot comment upon. However, if the Entity does decide to register for GST and backdates their registration to cover some or all of the Period (or it is found that they were required to be registered for GST through the Period) then you would be entitled to claim the GST credits taking into account section 105-50 of Schedule 1 of the TAA as discussed in question 2.

Also, the GST legislation doesn't provide any legislative provisions with respect to an entity levying GST when they are not registered for GST. In these circumstances it is a pricing matter and needs to be referred to the Australian Competition and Consumer Commission.

If no to question 1, are you required to refund to the ATO the GST credits you claimed?

You claimed GST credits for which you were not entitled through the Period and consequently there is an outstanding amount of GST which is payable by you to the ATO. However, the amount payable must be calculated with reference to section 105-50 of Schedule 1 of the TAA (herein known as the four year rule).

Four year rule

The four year rule provides that an overpaid amount of GST which has not been repaid (and any possible general interest charge) ceases to be payable four years after it became payable provided the payment of the amount was not avoided by fraud or evasion.

In your case, given the circumstances surrounding your dealings with the Entity, we do not consider that you claimed these GST credits with any intention of being fraudulent or evasive and hence the four year rule can be applied to calculate the amount of outstanding GST. Hence, applying the four year rule to your circumstances requires that you would only be required to pay back the GST credits from a specific tax period ending several months after the commencement of the Period.

Four year rule - refunds

Please note that the four year rule is also applicable in the case where an entity is seeking a refund from the ATO (such as claiming GST credits). In your case, if the Entity were to register for GST and backdate their registration to the start of the Period then you would only be entitled to claim GST credits from the specific tax period ending several months after the commencement of the Period (note that as discussed the four year rule would prevent the ATO from seeking a refund of the GST credits already claimed prior to this date).

Correcting GST mistakes

Mistakes such as incorrectly claiming GST credits can be corrected on the next or subsequent activity statement provided you are within the correction limits (please refer to the enclosed fact sheet Correcting GST mistakes as to these limits). Otherwise you would be required to revise each activity statement where a GST credit has been incorrectly claimed.