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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 accounted for GST in your activity statements for GST-free supplies?

Answer

Yes.

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 endorsed charitable institution registered for GST purposes.

Raffles

You raise funds principally through the conduct of "raffles".

All your raffle campaigns are conducted in accordance with relevant gaming legislation provided under the relevant State legislation.

You outsource the day-to-day conduct and management of the raffle campaigns to a third-party supplier, (Supplier) who provides the following services to you in relation to the raffle campaigns: marketing, fulfilment, banking and administration.

The Supplier receives a fee from you as consideration for its services in relation to the raffle campaigns.

The Supplier's marketing for your raffle campaigns is targeted at residential areas of your State and raffle tickets are sold to private individual adults only. Businesses and other entities are not targeted during the course of marketing for your raffle campaigns.

No documentation is issued to the raffle ticket recipients by the Supplier or you, apart from a "pledge of support" letter that indicates the allocation of raffle ticket numbers purchased. There is no mention of GST on the pledge letter.

GST understanding and BAS reporting

During the relevant period, the Supplier understood that your supplies of raffle tickets were GST-free and the Supplier represented it as such to the target individuals during the course of marketing for your raffle campaigns. Accordingly, no GST was actually collected from the recipients of the raffle tickets.

This understanding of the Supplier is reflected in the fact that GST is not mentioned on the pledge letters as described above, and in the following statement contained in the Supplier's internal policy document, "xxxx 51 - xxxx Objections Handling / Q & A's" (xxxx policy document), that is available to the Supplier's staff involved in the raffle campaigns:

§ "Do raffle entries include GST?

§ Raffle entries do not attract GST, so they are GSTfree to the public."

In addition, the understanding of all your relevant senior governance personnel during the relevant period was that your supplies of raffle tickets were GST-free.

You had been remitting GST in respect of the raffle proceeds via your BASs.

Your BASs during the relevant period were not prepared internally. Your BASs were prepared and lodged by an external, third- party, service provider.

You did not have any dedicated finance personnel (with GST knowledge) until recently, when you hired a Finance Manager.

Following his commencement, the Finance Manager undertook a broad review of your finance policies and practices and implemented a change in your accounting system. In the course of this, the Finance Manager undertook a financial forecasting related exercise. From this, it became apparent that the Supplier's reporting and forecasting of the raffle proceeds was higher than the accounting system's (the difference being the GST remitted in respect of the raffle proceeds, as the Supplier's reporting was based on the assumption that the raffle proceeds were GST-free and you therefore retained the full raffle proceeds), and that there was an inconsistency between the Supplier's and your abovementioned understanding and the BAS reporting practice.

Relevant legislative provisions

Taxation Administration Act 1953, Section 105-65 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.

Additionally, the Commissioner is satisfied that the overpayment of GST occurred as a result of an arithmetic or recording error made by the you and that you have borne the cost of the GST

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 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.

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 the raffle tickets when these supplies 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 raffle tickets as taxable supplies and remitted GST to the Commissioner when the supplies were not taxable supplies.

You have advised that the recipients of your supply are unlikely to be 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 CoT 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.

Of relevance to your circumstances is the guiding principle (d)(i) which provides that the discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily and provides an example which the Commissioner considers it may be fair and reasonable to exercise the discretion where 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.

In this case you have advised that the supply of the raffle tickets was made as a GST-free supply and you have provided examples of your marketing documents which clearly provide that the supplies are GST-free. However due to an administrative error your BASs for the periods (which were prepared by an external third party) incorrectly treated those supplies as taxable supplies and you had been remitting GST calculated in accordance to the GST Act to the ATO.

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. The overpayment of GST occurred as a result of an arithmetic or recording error made by you.

Consequently the Commissioner will 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 your raffle tickets.