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Ruling

Subject: GST and refund of overpaid GST

Question 1

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to give you a refund of the overpaid GST?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

The other party is the owner of a product brand.

The other party was incorporated in Australia but has no operational presence in Australia.

The other party entered into an Agreement (Agreement) with you. The term of the Agreement is for a fixed period and is an arrangement for the purposes of Subdivision 153-B of the GST Act under which intermediary is treated as separate supplier or acquirer.

Under the Agreement, you agreed to act as other party's agent for the acquisition and sale of relevant branded goods to third parties until such time as the other party had the appropriate infrastructure in place to operate the business itself. You also undertook to perform administrative and accounting functions for the other party.

Under the Agreement, you would deduct the costs it incurred in acquiring stock and other things necessary for the carrying on of the other party's business and a fee for its services from the revenue collected on behalf of the other party. The net amount due to the other party was to be settled at the completion of the arrangement.

The settlement has not occurred as there are issues to be resolved between the parties.

The other party (as the principal in the 153-B arrangement) is yet to raise an invoice to you for its deemed supply of goods for the purposes of subsection 153-55(2) of the GST Act.

You (as the intermediary in the 153-B arrangement) is yet to raise an invoice to the other party for its deemed supply of goods for the purposes of subsection 153-60(2) of the GST Act.

Notwithstanding that the settlement has not yet occurred, at the end of the term of the Agreement you raised a tax invoice to the other party for its fees inclusive of GST. The GST was remitted to the ATO in one of your Business activity statement (BAS).

Based on the tax invoice received from you, the other party claimed the input tax credits (ITCs) for the GST included in the tax invoice.

As a result of a refund review, the ITCs claimed were denied due to the operation of paragraph 153-55(3)(b) of the GST Act. Consequently, the other party's relevant BAS was amended to disallow the ITCs claimed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 11

Subdivision 153-B

Section 153-55

Section 153-60

Taxation Administration Act 1953

Section 8AAZLF

Division 3 and 3A of Part IIIB

Section 105-65 of Schedule 1

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 (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

Miscellaneous Tax Ruling MT 2010/1 (MT 2010/1), which was issued on 15 December 2010, provides the ATO view on how section 105-65 applies.

Whether subsection 105-65(1) applies to your circumstances

Section 105-65 applies to restrict refunds of overpaid GST 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

§ 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.

Meaning of overpaid

In the context of section 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.

It is considered that under a 153-B arrangement:

§ you cannot issue a tax invoice to the other party for the supply of agency services by you to the other party to which the other party's payment or liabilities related because it is not a taxable supply for GST purposes - paragraph 155-3(3)(c) of the GST Act,

§ rather, the commission should reduce the other party's liability on the deemed supply to you - section 155-2 and paragraph 153-3(3)(a) of the GST Act.

In your relevant BAS a GST amount of $XXX (the Amount) was remitted to the ATO that represented the GST included in the tax invoice issued to the other party for the agency services under the 153-B arrangement.

As discussed above, there should be no GST component in the payment for the agency services and therefore you are not required to remit the Amount. The Amount remitted was in excess of the GST legally payable for the agency services supply.

It follows that there has been an overpayment of GST in relation to the supply of agency services from you to the other party.

A supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent

Broadly, in the context of section 105-65 a supply would be treated as a taxable supply where the supplier mischaracterises a supply as taxable, either in whole or in part.

Under Subdivision 153-B of the GST Act, you and the other party are required to treat a taxable supply of goods and services that the other party makes to the third parties through you as two separate supplies. You and the other party are treated as acting between themselves as principal to principal for GST purposes. Under a 153-B arrangement:

§ A taxable supply made to a third party is taken to be a taxable supply made by you - subsection 153-55(1) of the GST Act. The other party is taken to have made a taxable supply to you the same thing that you are taken to supply - subsection 153-55(2) of the GST Act.

§ The value of the second supply (supply from the other party to you) is determined by reference to the amount you are required to pay the other party under the 153-B arrangement - paragraph 153-55(2)(b) of the GST Act. This amount is the price charged and paid by the third party for the supply, less the amount you are permitted to retain as a commission (or similar remuneration for the agency services). In these circumstances, your supply of agency services is not a taxable supply - paragraph 153-55(3)(b), and the other party is not entitled to claim ITCs relating to the commission or similar payment.

It should be noted that the treatments above under Subdivision 153-B of the GST Act only apply to the taxable supplies covered by the arrangement. The supply of administrative and accounting functions for the other party do not to fall within the 153-B arrangement and therefore should be treated under the general provision of the GST Act in relation to supplies /acquisitions under Division 9, 11 and 29 of the GST Act.

As discussed above, the supply of the agency services to the other party is not a taxable supply under paragraph 153-55(3)(b) of the GST Act. However, you mischaracterised the supply as taxable as you believed the supply to be taxable, has dealt with the other party as if the supply was taxable and has remitted GST to the ATO on that supply in the calculation of your net amount.

This is the mischaracterisation of the out of scope supply that led to the overpaid GST.

In this case, due to the inclusion of the supply of agency services in the calculation of the GST amount, the supply was treated as fully taxable when in fact it was out of scope (that is, GST is not applicable).

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.

The other party is registered for GST. The third condition is met.

As the three conditions are satisfied, section 105-65 applies. Accordingly the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

Will the Commissioner exercise the discretion to refund you the 'overpaid' amount?

However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even the conditions in paragraph 105-65(1)(a), (b) and (c) are satisfied. It is to a limited extent that the Commissioner has discretion.

Paragraphs 128 to 132 of MT 2010/1 provide the guiding principles to consider in exercising the discretion. Paragraph 128 provides 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:

(d)…

(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 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.

(e)

The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the over-claimed input tax credit from the recipient.

The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 3) Bill 2008 provides further support for the proposition that reimbursement on its own does not necessary lead to a refund. At paragraph 2.4 it states that 'A discretion exists so that, for example, in business-to-business transactions, the Commissioner may refund overpaid amounts if the supplier can demonstrate that they have first reimbursed the registered recipient…and the Commissioner considers it reasonable in the circumstances'.

In this case:

§ In a correspondence to the ATO, you have provided that you will refund the other party the overpaid GST. It should be noted that the payment for the agency services supply (and the incorrectly overpaid GST) was offset against cash generated under the Agreement that was owed by you to the other party.

§ As a result of a refund review, the ITCs claimed by the other party was denied due to the operation of paragraph 153-55(3)(b) of the GST Act. Consequently, the other party's relevant BAS was amended to disallow the ITCs claimed.

As the other party (a registered recipient) is unable to claim the relevant ITC, the Commissioner would pay a refund to you provided that you have first reimbursed the other party. The mechanism of how to reimburse the other party (cash remittance, book entries etc.) can be arranged between you and the other party as long the reimbursement is to be completed prior to the refund claim as required under paragraph 105-65(1)(c) and paragraph 115 of MT 2010/1.

Your proposal

In an email to the ATO, you proposed that:

§ Your GST calculations are driven through your sales system to ensure a high level of accuracy and audit trail. Rather than making manual adjustments to our returns, you are proposing to raise a credit note reversing the original invoice, and then re-invoice for the service but without any GST, during the nearest BAS, generating a refund for you on the nearest BAS.

§ The difference that arises will be remitted to the other party in order to clear the credit balance that will be created in your Debtors Sub-ledger. This will make the transaction easily traced in the case of any future GST audits. The other party Australia have this amount sitting in their general ledger as an outstanding receivable, as they are unable to pass the cost on to anyone else.

In order to claim the refund of the overpaid GST, you need to revise your relevant BAS to exclude the incorrectly GST paid. There are two exceptions as to an entity can correct an error other than the original BAS:

§ Correcting GST mistakes rule.

§ Adjustments under Division 19 of the GST Act.

Under the 'Correcting GST mistake' rule an entity can make a correction on a later BAS subject to the correction limits. For an entity whose turnover:

§ less than $20m: the correction limit is less than $5,000.

§ $20m to less than $100m: the correction limit is less than $10,000.

§ $100m to less than $500m: the correction limit is less than $25,000

§ $500m to less than $1b: the correction limit is less than $50,000.

As the correction amount of $XXX is greater than the correction limit, you cannot apply the 'Correction GST mistake' rule.

Under subsection 29-20(1) of the GST Act, an adjustment is attributable to the tax period in which the entity becomes aware of the adjustment. However, for this section to apply there must be an adjustment event for the purposes of section 19-10(1) of the GST Act.

An adjustment event is defined in subsection 19-10(1) to mean any event which has the effect of:

§ cancelling a supply or acquisition, or

§ changing the consideration for a supply or acquisition, or

§ causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

The circumstances that you remitted GST incorrectly in relation to the commission do not fall into any of the requirements above.

Therefore, you cannot revise the error in any BAS other than the original BAS.

It should also be noted that the original tax invoice must be cancelled and be replaced with an invoice without the GST component. The mechanism how to correct the error in the parties' accounting record is the matter to be arranged between the parties.