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Ruling

Subject: GST and refund of overpayment

Question 1

Will the Commissioner of Taxation (Commissioner) exercise his discretion and refund an overpayment of GST made by Entity A pursuant to section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65)?

Answer

Yes.

Relevant facts and circumstances

Entity A conducts a business which commenced in July 2006.

Entity A is accredited with the relevant entity as a supplier of a particular product to eligible Government funded patients. Entity A derives revenue from selling the product to Government funded patients. Entity A also receives a small amount of revenue from the provision of initial and follow up consultations to Government funded patients.

Entity A became registered for GST effective from a certain date and accounts on a quarterly basis.

Over the past 5 years of operations, Entity A has engaged a series of external accountants and tax agents. A series of difficulties have led to GST mistakes as follows:

· Entity A was instructed that the accounting software used by Entity A treated supplies of the product as taxable supplies. This resulted in the transactions being documented as taxable supplies even though no GST had been included in the price.

· Entity A was also instructed to prepare GST returns on the basis of cash movements through Entity A's accounts, on the erroneous assumption that the supplies and acquisitions being made where of taxable supplies,

· The GST mistakes were not detected by the accounting/tax agents but were having an adverse affect on the profitability of the business. The directors of Entity A commenced a review of the business and engaged another firm to do the review.

The treatment of supplies with the accounting software led to the invoices automatically prepared and issued to clients being printed in the form of tax invoices and erroneously showing 1/11^th of the total amount payable as GST. The prices were set by Entity A in the knowledge that the supplies to client would be GST-free.

The overpayment relate to the Business Activity Statements (BAS') for the quarterly tax periods from XXXX to XXXX.

An amount of $XXXX was erroneously remitted as GST by Entity A in connection with its GST-free supplies of its product.

Furthermore, Entity A previous accountants/tax agents claimed input tax credits based on the expenses incurred by Entity A in particular tax periods. This system has been unsatisfactory as it failed to ensure that Entity A held valid tax invoices for each acquisition. These acquisitions included the acquiring of the product. As a result of this coding error, Entity A over claimed input tax credits for acquisitions of hearing aids from suppliers in the following periods:

· from XXXX to XXXX,

· from XXXX to XXXX.

The total amount over claimed by Entity A as input tax credits in respect of its acquisitions of the product was $XXXX.

In light of the above, Entity A has overpaid GST of $XXXX from the quarterly tax period ending XXXX of XXXX. However, taking into account the limitation of applying for a refund more than 4 years after the end of the tax period in which the GST is overpaid, Entity A would be precluded from recovering an amount of $XXXX attributable to the quarterly tax period ending XXXX. As such, the net overpayment of GST by Entity A is $XXXX (ie. $XXXX less $XXXX).

Entity A accounting system has now been rectified.

The product is specifically listed in an item of Schedule 3 to the GST Act where they are specifically designed for use with the product. As these items are covered by Schedule 3 they are GST-free pursuant to subsection 38-45 of the GST Act.

There is no agreement with Entity A where supplies of the product to be treated as taxable.

Relevant legislative provisions

Taxation Administration Act 1953 Section 105-65 of Schedule 1

Reasons for decision

Summary

The Commissioner will act on his discretion to allow Entity A to claim a refund pursuant to section 105-65.

Detailed reasoning

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 may be registered (and you have not reimbursed a corresponding amount to the recipient of the supply).

Entity A has requested that the Commissioner exercise the discretion to refund to them the overpayment.

Entity A has not reimbursed the recipients of the supplies of the product as such the Commissioner need not give you a refund.

However, 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 discretion to pay a refund in appropriate circumstances.

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:

(i) The overpayment of GST occurs as a result of 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.

In Entity A's situation the Commissioner considers it is fair and reasonable to exercise the discretion under section 105-65 to refund the overpaid amount of GST. This is due to a mistake of an accounting software program being incorrectly coded resulting in GST-free sales being treated as taxable, the fact that the recipients of your supplies would not be registered for GST, as they are Government funded patients, and Entity A did not allow for GST in the price of their supplies which resulted in less expected profit.

As section 105-65 is concerned with the GST payable on the supply any input tax credits claimed by the supplier in respect of acquisitions that relate to the making of that supply are not taken into account in calculating the amount of the refund (paragraph 31 MT 2010/1). Paragraphs 139 and 140 of MT 2010/1 confirm that input tax credits are not included when considering the operation of section 105-65.

Therefore, the overpayment Entity A can claim is $XXXX ($XXXX (overpaid GST) less $XXXX (amount not allowed due to time limit being exceeded)).

Regarding the input tax credits of $XXXX that Entity A states that they have over claimed, these mistakes can be corrected on your next BAS if the errors fall within the time and correction limits. The time and correction limits correspond to the size of your business. Where the mistakes from your previous BAS occur outside the time and correction limits, you must revise each of your original BAS' that the mistake occurred in. Please refer to the enclosed fact sheet on correcting GST mistakes for further guidance.