Edited version of your private ruling

Authorisation Number: 1012090469146

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Refund of GST

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?

Advice/Answers

No

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 incorporated company registered for GST.

You provide preschool education services.

You charge an attendance fee to your clients for their children to attend your premises.

You have included GST in the price of your attendance fee.

You have remitted this GST in the relevant GST returns over a period of time.

You have not reimbursed the overcharged GST to the recipients.

You advise that you do not intend to reimburse the recipients instead you will put the overpaid GST towards operating costs for your enterprise.

Relevant legislative provisions

Taxation Administration Act 1953, Section 105-55 of Schedule 1

Taxation Administration Act 1953, Section 105-65 of Schedule 1

Reasons for decision

Summary

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 of the 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.

Detailed reasoning

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.

Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances

The restriction on refunds of overpaid GST under subsection 105-65 (1) 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.

In this case you remitted GST of 1/11 of the price of your services (being the attendance fee to your premises) 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.

You have advised that the recipients of your supply would not be registered for GST purposes and that if they were then these fees would not be claimable as they are private in nature. You have also advised 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 exercise his discretion and 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.

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.

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 recipients of the supply. Therefore, the cost has been passed on to the recipients and has not been borne by you.

You further advise that any refund of the GST you receive would not be reimbursed to the recipients but would be put towards the operating costs of your enterprise.

This would result in you receiving a windfall gain which doesn't accord with the symmetry of the GST Act as it is the recipient of your supplies that have borne the cost of the GST.

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.

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 the attendance fees.

GST and 4 year time limits on recovery by either the Commissioner

Section 105-55 of Schedule 1 of the TAA limits claims for certain refunds, other payments or credits to four years from the end of the tax period to which the entitlement relates, unless within that four year period, you notify the Commissioner of your entitlement to the refund, other payment or credit, or within that period, the Commissioner notifies you (in a notice of assessment or otherwise) that you are entitled to the refund, other payment or credit.

The four year time limit commences after the end of the tax period to which the refund other payment or credit relates.

However, an entitlement does not cease to exist where:

· an entity notifies the Commissioner in writing of its entitlement, or

· the Commissioner notifies an entity that it is entitled to the refund, other payment or credit.

Miscellaneous Taxation Ruling MT 2009/1 explains the Tax Office view on the notification requirements for an entity under section 105-55 of Schedule 1 to the TAA.

It explains that entities should only seek to make section 105-55 notifications in writing.

In your case we have accepted your letter as suitable notification of entitlement for the purposes of section 105-55 of Schedule 1 to the TAA because it:

· is in writing

· it has identified and asserted an entitlement, and

· has identified the tax periods to which the entitlement refers.

However, there are certain tax periods for which we have not received notification within the four year time limit.

Therefore, even should you refund the recipients of your supply you are not entitled to a refund for these tax periods.