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Ruling

Subject: Refund of GST

The Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply.

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

Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Your circumstances do not warrant the exercise of the discretion.

Question 1

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to allow you a refund of the goods and services tax (GST) when you incorrectly included GST in the price of a non-taxable supply to a recipient that is not registered for GST; and you have not reimbursed the recipient for the amount of GST incorrectly included?

Answer

No

This ruling applies for the following periods:

N/A

The scheme commences on:

N/A

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You are an Australian-based boutique, corporate advisory firm.

· You provide various services, including advising in relation to capital raisings, mergers, acquisitions and project financing.

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

· Your client conducted an initial public offering (IPO) and a listing on the ASX in 2011.

· You acted as lead manager and corporate adviser in relation to the IPO.

· Subsequently, your client paid you a management and placing fee for your services.

· You remitted this GST in your relevant GST return.

· Your client is not and has never been registered for GST and hence has not claimed back any of the GST.

· You have previously sought a private ruling from the ATO as to whether your services were GST-free. The ATO issued a private ruling to both yourself and your client that stipulated that your services were GST-free.

· You had previously treated this service as taxable.

Your Contentions

You contend the following:

· You should be refunded the GST before you pass the refund on to your client because you believe there is a real risk that you could be left out of pocket for the GST.

· Should you reimburse your client for the GST, there is a real risk that the ATO may not pay the refund. This risk primarily arises from the two preconditions to section 105-65 contains, namely:

o the Commissioner is not satisfied that you have reimbursed the GST refund to the recipient of the supply; or

o the recipient of the supply is registered or required to be registered.

· In these circumstances, where you reimbursed your client for the GST and your client subsequently registered for GST before the GST refund was paid, the ATO could (and likely would) refuse to pay the GST refund. In this context, one of the preconditions for section 105-65 to operate and hence whether the ATO has a discretion not to pay the refund is to some extent therefore outside of your control. 

· It is also possible (although less likely) that the ATO could refuse to pay the refund for other reasons, for example, if the ATO decides to review the private ruling after you have reimbursed your client, but before the GST refund is paid.

· Where you reimbursed your client for the GST and the ATO did not pay the GST refund to you, it is highly likely that you would not be able to recover the reimbursed GST from your client.

· You originally recovered GST from your client under the GST clause in the your Agreement with your client on the basis that parties treated your services as taxable.

· Where you are now required to reimbursed your client for the GST, it is highly likely that you have no legal entitlement to recover the GST from your client (either under the GST clause or on any other basis), given that your services are GST-free. 

· your client is a non-resident with little presence in Australia.  Even where you had a legal entitlement to recover the GST from your client, as a practical matter, recovery of the funds from your client would be difficult, since any action to recover the funds would ultimately need to take place in overseas (where your client is based).  Accordingly, for both legal and practical reasons, it is highly likely that you would not be able to recover the reimbursed GST from your client.

You submit that the ATO should be satisfied that you will reimburse the GST refund to your client once it is received the ATO for the following reasons:

· A clause of the Agreement between the parties requires you to pass on the GST refund to your client within 10 days of you receiving the refund from the Commissioner.

· You have provided a written undertaking that, as soon as you receive the refund, you will pass it on to your client without delay.

Relevant legislative provisions

Taxation Administration Act 1953, Section 105-65

Reasons for decision

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 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) of Schedule 1 to the TAA 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) of Schedule 1 to the TAA applies to your circumstances

The restriction on refunds of overpaid GST under section 105-65 of Schedule 1 to the TAA will apply if all three of the following conditions are satisfied:

· 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

· either 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 provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA.

Paragraph 20 of MT 2010/1 explains the meaning of "overpaid". In the context of section 105-65 of Schedule 1 to the TAA, "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.

In this case you remitted GST of 1/11 of the price of their services to GID when these services were in fact not taxable. It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. You treated the supplies of your services to GID as taxable supplies and remitted GST to the Commissioner when the supplies were not taxable supplies.

You have advised that the recipient of their supply is not registered for GST purposes and that they have not been reimbursed for any amount corresponding to the GST overpaid.

As the three conditions are satisfied, section 105-65 of Schedule 1 to the TAA applies and 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 in paragraph 27 of MT 2010/1 that the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied.

Paragraphs 116 and 117 of MT 2010/1 state:

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 when the AAT referred to "residual discretion":

The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised.

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

128. 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.

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 your circumstances is the guiding principle that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65 of Schedule 1 to the TAA which is explained in paragraph 127 of MT 2010/1 as follows:

…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.

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 this case you have advised that the GST was in fact passed on to the recipient of the under the GST clause in your Agreement with the recipient on the basis that parties treated your services as taxable. Therefore, the cost has been passed on to the supplier and has not been borne by you.

You further argue that should you reimburse the recipient for the GST, there is a real risk that the ATO may not pay the refund. This risk primarily arises from the two preconditions to section 105-65 contains, namely:

· the Commissioner is not satisfied that you have reimbursed the GST refund to the recipient of the supply; or

· the recipient of the supply is registered or required to be registered.

In these circumstances, you contend that where you reimbursed the recipient for the GST and the recipient subsequently registered for GST before the GST refund was paid, the ATO could (and likely would) refuse to pay the GST refund. In this context, one of the preconditions for section
105-65 to operate and hence whether the ATO has a discretion not to pay the refund is to some extent therefore outside of your control. 

This position you have taken appears contrary to the arrangement between the parties to the contract, which provides that you must refund to the recipient of the supply the difference between the amount paid by the recipient of the supply on account of GST and the GST determined by the Commissioner, court or tribunal notwithstanding the fact that the clause continues to provide that you must pay the refund to the recipient of the supply within 10 days of you receiving the benefit of that refund.

The Tax Office view on the discretion afforded to the Commissioner to choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied is that the discretion is only to be used in extraordinary circumstances or where there is a risk to the taxpayer in receiving the reimbursement of the GST.

In this case we do not see a risk to the taxpayer as there are no underlying impediments that would prohibit you from receiving the refund of the GST from the ATO when you have firstly reimbursed the recipient of your supply that would warrant the exercise of the discretion.

In conclusion, the Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply. However, the Commissioner is not satisfied that you reimbursed a corresponding amount to the recipient of the supply and so need not give you 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. However, your circumstances do not warrant the exercise of the discretion.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for the supply of their services to the recipient.