Edited version of your private ruling

Authorisation Number: 1012134085120

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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 and have not reimbursed the recipients of the supply?

Answer

No

Question 2

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 for the quarterly tax periods July 2007 to September 2011 enter into an agreed arrangement with the Australian Taxation Office involving reasonable practical activities to refund to unregistered recipients the respective corresponding amounts of the overpaid GST?

Answer

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 a company currently registered for GST and report to the ATO monthly using the cash accounting method.

You sold a number items between 2007 and 2011 and remitted GST on the supplies.

You sought a private ruling on the classification of the supply and in a reply, it was confirmed that the supply was GST-free.

You have incorrectly calculated the net amount in accordance with section 17-5 of the GST Act. In particular, specific supplies were treated as taxable supplies when in fact the supplies were GST-free (as per the private ruling).

You lodged a section 105-55 notification for the quarterly tax periods, which the ATO acknowledged as valid.

You subsequently revised the relevant BAS to claim the overpaid GST, but the refund was stopped by the ATO and due to the application of section 105-65 of the TAA, the revisions for all relevant tax periods were ATO-revised.

Your agent enquired re the process to apply for the exercising of the Commissioner's discretion under section 105-65.

You have advised that you do not have any competitors for your supply.

You have advised that the recipients would by and large not be registered for GST.

You advise that the nature of your business is retail sales and having regard to a thorough analysis of the data undertaken for the purposes of calculating the potential claim, you confirm that the GST cost was almost entirely borne by unregistered end consumers.

You have requested the Commissioner exercise his discretion and refund the GST overpayment WITHOUT the requirement to reimburse the recipients.

You are not in a position to reimburse the amounts to recipients prior to making the claim, due to cash flow implications. As a result, you are looking to a more flexible alternative (ideally getting the refund first, then reimbursing the recipient).

You have advised that if the Commissioner determines not to exercise his discretion as you haven't reimbursed the recipients of the supply then the Commissioner to exercise his discretion subject to the taxpayer making reasonable endeavours to reimburse the recipients. By way of example, a requirement to individually circulate its customers, notifying them of the potential refund and to place an advertisement in a widely circulated newspaper outlining the same.

Taxpayer's Contentions

You submit that the resulting GST refund or credit should not be regarded as a windfall gain. Your business has suffered financially because of the GST matter and the refund would merely restore your business into an economically sustainable position.

In particular, you contend that you have suffered financially because the imposition of the GST has resulted in the goods being at a competitive disadvantage such you have borne the impact through the adverse impact on sales volume.

You further contend that restricting a payment of a GST refund in the context of a windfall gain is based on the premise that the GST cost is simply a cost passed on to the recipient and is not borne by you. This is true in a direct sense. However if the sale fails to occur because the resulting price is too high, you bear an indirect cost because requisite sale volumes that are required to cover fixed costs are not achieved. This is critical for retail businesses having significant overheads due to factors such as requisite floor space. In other words, in this instance, you have predominantly borne the GST impact.

Additionally, in respect of factors outlined in Avon's case at paragraphs 9 to 12 (which the Commissioner believes would equally apply in a GST context), there are particular circumstances at play which undermine key assumptions in respect of the operation of GST relied upon to deny a GST refund. For example:

It is assumed that businesses set prices to cover foreseeable costs. However on establishment of this business, the impact of GST could not be clearly foreseen as evidenced by the PBRs which ultimately conclude that only certain goods (depending on their precise composition) are GST-free.

It is also assumed that as businesses are geared to making a profit, GST is expected to be passed on and would be reflected in the pricing structure of doing business.

In this particular case, as only certain are GST-free supplies, all of the goods are assumed to include and quoted as inclusive of GST.

Once the composition the product is established, discounts against the headline price are considered "to close" the sale. Invariably, in doing so, you have borne the GST cost through absorbing this in the margin as evidenced by your financial performance.

It should be noted that a "windfall gain" would suggest that the income was unexpected and perhaps also sudden. In this particular circumstance, you were confident that you would ultimately be able to convince the Commissioner that certain supplies would be GST-free. You could not clarify the extent precisely until PBRs were issued and for the reasons set out below, could not commercially afford the risk of treating all of the supplies as GST-free in the event that the Commissioner formed a different view.

On a separate note, it should be recognised that any GST refund will be brought to account as assessable income. Accordingly, it is envisaged that approximately one third of any GST refund would, in fact, not be retained by you. Furthermore, you have incurred substantial costs in determining the potential GST refund and therefore, any "net benefit" is appreciably less than what may be apparent at face value.

Other countervailing reasons

Complexity of supply

The issue of whether the supplies were taxable supplies or GST-free was quite unclear and you would have been subjected to significant commercial risk to treat supplies as GST-free supplies in the absence of PBRs from the Commissioner. It should be noted that only some supplies were agreed by the Commissioner as being GST-free. It should also be noted that a secondary more detailed PBR application was necessary in order to properly convey the technical aspects of the submission.

The alternative faced by you would have been to treat the supplies as GST-free at the time and potentially subject yourself to a significant unfunded liability if the Commissioner adopted a contrary view to the nature of the supplies. This would, in fact, have occurred given that only certain types of supplies were deemed to be GST-free.

Cost and cost benefit

You have incurred substantially cost in calculating the potential claim and at a transactional level, the additional costs in locating, communicating and distributing the overpaid GST to individual customers may exceed the overpaid GST for that customer.

Summary

Taking all of the above into consideration and other matters which you may raise on further enquiry, you request that the Commissioner exercise the discretion irrespective of whether the unregistered recipients receive a corresponding amount of the overpaid GST.

Relevant legislative provisions

Taxation Administration Act 1953, 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 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 supplies 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.

You have advised that the majority of the recipients of your supply would not be registered for GST purposes. 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.

However, contrary to this statement you have also advised that you have indirectly borne the cost of the GST by way of discounts against the headline price which are considered "to close" the sale through absorbing this in the margin as evidenced by your financial performance. You further advise that any GST refund you receive will be brought to account as assessable income. Accordingly, you contend it is envisaged that approximately one third of any GST refund would, in fact, not be retained by you. Furthermore, you have incurred substantial costs in determining the potential GST refund and therefore, any "net benefit" is appreciably less than what may be apparent at face value.

Whilst the above factors may be true in your case they are not factors that the Commissioner can take into consideration when deciding who actually has borne the cost of the GST. In this case whilst there have been discount and cost factors involved in both the sale of the orthopaedic beds and also costs involved in calculating the potential claim it is invariably the end-user that (that is the purchasers of the orthopaedic beds) 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 orthopaedic beds.

Question 2

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.

There is no scope within the TAA or any other Act to enter into an agreement that would depart from the requirements of Section 105-65 of Schedule 1 of the TAA that would stipulate a number of requisite steps the Commissioner demands in order for the discretion to be exercised in this context such as a requirement to individually circulate its customers, notifying them of the potential refund and to place an advertisement in a widely circulated Melbourne newspaper outlining the same.

Detailed reasoning

As per the reasoning in Question 1 above 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.

Miscellaneous Tax Ruling MT 2010/1 provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA.

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.

You have requested that if the Commissioner is unwilling to exercise his discretion in the absence of the end-consumers being reimbursed, the Commissioner exercise the discretion on the basis that the taxpayer will undertake agreed practical activities to refund the monies to unregistered end consumers. By way of example you have suggested that an agreement could be entered into whereby the agreement could stipulate a number of requisite steps the Commissioner demands in order for the discretion to be exercised in this context such as a requirement to individually circulate its customers, notifying them of the potential refund and to place an advertisement in a widely circulated newspaper outlining the same.

There are not any provisions within the TAA or any other Act that would allow departure from the provisions of Section 105-65 of Schedule 1 of the TAA nor do the guiding principals of MT 2010/1 allow such an agreement to be entered into.

Accordingly, your circumstances do not warrant the exercise of the discretion.