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Ruling

Subject: GST and refund of overpayment

Question

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65) and refund to Entity A an overpayment prior to Entity A reimbursing the overpayment to Entity B?

Answer

No, however, the Commissioner will agree to transferring the amount from Entity A's ATO account to Entity B's ATO account and then exercising the discretion to refund the overpayment amount to Entity A's ATO account.

Relevant facts and circumstances

In 2005 Entity A and Entity B entered into an agreement for a supply.

Under the agreement Entity B agreed to pay quarterly amounts to Entity A. Entity A has been charging GST and remitting it to the ATO from January 2006 to 30 June 2010. Entity A has issued tax invoices to Entity B.

In 2005 Entity A and Entity B also entered into an other agreement for another supply under which Entity B agreed to make quarterly payments to Entity A. Entity A from and including 1 January 2008 to 31 March 2010 has treated this supply as a taxable supply and remitted GST to the ATO. However, it is input taxed.

Entity A applied for a GST private ruling dated 4 March 2010. The ruling found the supply under the lease was a mixed supply of taxable and input taxed components. The GST private ruling was confirmed by an application for a review by Entity A dated 25 October 2010.

Entity A in a letter dated 31 March 2010 notified the Commissioner of a possible entitlement to a refund. It was noted that the ATO received the application from Entity A for the review of the GST private ruling dated 26 October 2010. Notification was accepted for the tax periods from 1 October 2006 to 30 April 2010.

Entity B has confirmed (letter provided) that they have not claimed input tax credits for the input taxed portion of the mixed acquisition provided under the lease from January 2006 to June 2010 and neither have they claimed input tax credits on the acquisition of the other supply from 1 January 2008 to 31 March 2010.

Entity A has provided an authorisation by letter for the ATO to transfer from their ATO account the amount of XXXXXX to Entity B's ATO account.

Entity A operates on a monthly basis for GST.

Relevant legislative provisions

Taxation Administration Act 1953 105-55.

Taxation Administration Act 1953 105-65.

Reasons for decision

GST and refunds of an overpayment

Section 105-65 operates to restrict certain refunds. It provides that the Commissioner need not give you a refund of an overpayment where you treated a supply as taxable and the supply was not taxable to any extent, and either the Commissioner is not satisfied you have reimbursed a corresponding amount to the recipient of the supply or the recipient of the supply is registered for GST.

Section 105-65 applies to restrict the refund to Entity A because you treated supplies as being taxable supplies when they were not taxable supplies and because the recipient is registered (and you have not reimbursed a corresponding amount to the recipient of the supply).

Miscellaneous Taxation Ruling MT 2010/1 (MT 2010/1) provides the ATO view on the operation of section 105-65. Paragraph 117 outlines the view that the words 'need not' in the section indicate that when the section applies to restrict a refund, the Commissioner nonetheless has a discretion to pay a refund in appropriate circumstances.

Entity A has requested that the Commissioner exercise the discretion to refund to them the overpayment amount prior to Entity A refunding Entity B.

Paragraph 128 of MT 2010/1 discusses the guiding principles to consider in exercising the discretion and provides in part:

(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:

…

(iii) … 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

The Commissioner does not consider that exercise of the discretion is warranted if you are entitled to input tax credits for your creditable acquisitions. Under section 11-5 of the GST Act you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose,

· the supply of the thing to you is a taxable supply,

· you provide, or are liable to provide, consideration for the supply, and

· you are registered for GST.

Furthermore, under subsection 11-15 of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Entity A has not already reimbursed Entity B.

However, as Entity B has confirmed they have not claimed input tax credits on the input taxed supplies they acquired from Entity A, the Commissioner considers it is fair and reasonable to exercise the discretion under section 105-65 to refund the amount to Entity A where the ATO has first transferred the amount to be reimbursed, as authorised by Entity A, from Entity A's ATO account to Entity B's ATO account.

Notification of entitlement to a GST refund or credit

Entity A notified the Commissioner of a possible entitlement to a refund. It was noted that the ATO received the application from Entity A for the review of the GST private ruling application on 26 October 2010. However, there was an oversight as the original GST private ruling was received by the ATO on 10 March 2010. Hence, notification for a possible entitlement to a refund or credit was effective from the tax period the application for the original GST private rulings was made. Therefore, as Entity A lodges monthly for GST, notification will include the tax periods from 1 March 2006 to 30 September 2006.

Conclusion

Following the issue of this ruling, the ATO will transfer the amount of XXXXX from Entity A's ATO account to Entity B's ATO account. This will result in Entity A reimbursing Entity B. The Commissioner will then exercise the discretion and refund Entity A by crediting XXXXX to Entity A's ATO account.