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Ruling

Subject: GST and refunds of overpayments

Question 1

Does Entity A have to repay the input tax credits (ITCs) claimed on purchases?

Answer

Yes. Entity A is required to repay the amounts claimed as ITCs relating to the acquisition.

Question 2

If Entity A has to repay the ITCs claimed on the purchased, would the Commissioner allow Entity A to either:

· provide a written determination in accordance with section 11-30 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), that Entity A only has to adjust the ITCs on these acquisitions to the extent that suppliers are not claiming the refunds of overpaid amounts themselves, or

· in the alternative, exercise his discretion under section 105-65 of Schedule 1 of the Taxation Administration Act 1953 (TAA) to allow the suppliers to refund to Entity A the GST paid in acquisition by Entity A?

Answer

Please refer to reason for decision.

Relevant facts and circumstances

Entity A on sells supplies.

Entity A has reviewed its recipients of their supplies and determined that they are individuals, and not companies or trusts.

Entity A is not aware of any of the recipients of their supplies being registered for GST.

In 2010 the ATO issued an ATO Interpretative Decision (ATO ID) advising a charge in the ATO view of a supply from being taxable to input taxed.

Entity A has previously claimed the ITCs on the purchases supplied to them and remitted it to the ATO.

Entity A is registered for GST.   

Relevant legislative provisions

Taxation Administration Act 1953 section 105-65.

A New Tax System (Goods and Services Tax) Act 1999 section 11-30

Reasons for decision

Question 1

Where taxpayers rely on an ATO ID they are still required to pay any underpaid primary tax or repay any overpaid ITCs (ATO Practice Statement Law Administration PS LA 2003/3 provides guidance on this issue).

Where a supplier has overpaid GST on a non-taxable supply, section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the ATO is not obliged to refund or credit the overpaid GST to the supplier where either of the following conditions apply:

· the ATO is not satisfied that the supplier has reimbursed the GST incorrectly included in the price to the recipient; or

· the recipient is registered or required to be registered for GST.

In recognition of the significant compliance costs associated with reversing transactions that occur between registered parties the ATO has adopted a policy of not requiring the reversal of these transactions where the parties to the transaction meet the conditions to be eligible to adopt the policy and to choose to adopt the policy...

Where parties to a transaction are both registered for GST and choose not to reverse a transaction and revise their activity statements there is no need to disturb the situation where there is no compromise to revenue or the integrity of the tax system.

The ATO policy where GST is incorrectly included in the price of non-taxable supplies made to registered recipients who have claimed ITCs and the entities to the transaction meet all of the criteria of the policy, is to not disturb the situation. This is the case provided all the requirements of paragraphs 22 and 23 of PS LA 2002/12 are satisfied.

Paragraph 22 of PS LA 2002/12 provides guidance on the conditions that must be satisfied by a registered supplier. These are:

· a non-taxable supply has been treated as a taxable supply,

· the supplier issued to the recipient an invoice that would be a valid tax invoice if the supply had been a taxable supply,

· the supply did not occur in the current tax period. The amount incorrectly included as GST in the price has been included in the supplier's AS for a previous tax period and the amount remitted to the ATO.

· the supplier has not reimbursed the registered recipient for the amount incorrectly included as GST in the price,

· the supplier has not cancelled the tax invoice by issuing any later document that indicates the correct non-taxable status of the supply, and

· the supplier began to treat current and future supplies of the same type as non-taxable as soon as it became aware of the error.

 Paragraph 23 of PS LA 2002/12 provides the conditions that must be satisfied by a registered recipient. These are:

· the recipient is in possession of a document that would be a valid tax invoice if the supply had been a taxable supply,

· the invoice indicates that a supply is a taxable supply and includes an amount represented as GST in the price,

· the supply is non-taxable,

· the recipient relied on the tax invoice to claim the ITC,

· if the supply had been a taxable supply the recipient would have been entitled to claim full or partial ITCs,

· the ATO has already refunded or credited the amount included as GST in the price to the recipient,

· the recipient has not been reimbursed by the supplier,

· the tax invoice has not been cancelled by the supplier and superseded by a later document that indicates the true status of the supply as non-taxable, and

· the registered recipient ceased to claim ITC's for current and future acquisitions of the same type as soon as it became aware of the error.

Entity A will not satisfy all the conditions for a registered recipient in paragraph 23 in this situation as there is a requirement that if the supply to Entity A had been a taxable supply that Entity A would have been entitled to claim ITCs. However, Entity A's supplies to its recipients are input taxed and as such Entity A would not be entitled to claim ITCs due to the acquisitions relating to making input taxed supplies.

Entity A is therefore required to repay the over claimed ITCs relating to the purchases.

Please note time and correction limits can apply in this situation. For further information please refer to 'Correcting GST mistakes' and 'Time Limits and Refunds'. These documents can be accessed on the ATO website at www.ato.gov.au

Question 2

As we have concluded that the acquisition is not a creditable acquisition, section 11-30 of the GST Act will not apply. 

Entity A's alternative proposition is that the Commissioner should exercise his discretion under section 105-65 of Schedule 1 of the TAA to refund the overpaid GST.

For the ATO to consider this, such a request must be made by the supplier. This is clear in how the legislation is framed. Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states:

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 does not give 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.

Therefore, for the ATO to consider a request it must come from the supplier. This is because the ATO is only obliged to refund where the supplier has reimbursed the recipient of the supply and the recipient is not registered or required to be registered for GST purposes. Where a request such as this was to be made by a supplier where the conditions under section 105-65 of Schedule 1 of the TAA are not satisfied, the ATO is not under an obligation to refund, but has the discretion to do so. In considering whether it is appropriate to exercise the discretion to refund the overpaid GST to a supplier a factor which may taken into account is whether the supplier has reimbursed the overpaid amounts to the recipient of the supply.

For instance paragraph 115 of Miscellaneous Taxation Ruling MT 2010/1 provides …if the supplier satisfies the Commissioner that it has reimbursed the recipient of the supply and the recipient of the supply is not registered or required to be registered the Commissioner has a prima facie obligation to pay the refund of overpaid GST under section 8AAZLF provided the supplier satisfies any other legislative conditions (for instance, the time limits contained in section 105-55). In all other cases section 105-65 of Schedule 1 of the TAA provides that the Commissioner 'need not' give a refund.

In considering the exercise of the Commissioners discretion regard must be given to the guiding principles under paragraph 128 of MT 2010/1. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include for example where 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.  A supplier must be able to provide that an unregistered end consumer is the one ultimately compensated.