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Ruling

Subject: Refund of GST

Question 1

Does your Notification of entitlement to GST refund satisfy the notification requirements under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer:

Yes.

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?

Answer:

Yes, in accordance with Options B agreed upon by the ATO and the client industry.

Relevant facts and circumstances

You are the responsible entity for the managed investment timeshare scheme and are a member of the Industry Council (Council).

You previously treated levies as consideration for taxable supplies. This treatment was consistent with the ATO ID and the industry practice until the ATO ID was withdrawn.

The ATO released a new ATO ID which confirmed that certain fees paid to operators, are consideration for an input taxed financial supply of an interest in a scheme.

You have charged GST to members on levies and claimed ITCs on purchases related to the supply of interests in your scheme. Consequently, you have over-remitted GST and over-claimed input tax credits (ITCs) in relation to levies charged to members.

You lodged a Notification of entitlement to a GST refund.

The delay in finalising the claim arose due to the complexity of the issue and the time required to determine your position under your Constitution. The delay has not arisen due to the original notification being speculative.

The ATO issued its guidance in relation to the GST treatment of certain fees for scheme operators in a letter to the industry, which outlined the options available to timeshare operators in claiming a refund of overpaid GST on annual maintenance fees.

The two options developed by the ATO in consultation with ATHOC are:

· Option A "moving forward" - under this option the scheme operator will not seek a refund of the over-remitted GST and the ATO will not seek repayment of the over-claimed ITCs; and

· Option B "refund" - under this option scheme operators can seek a refund in accordance with the requirements of section 105-65, and must repay the over-claimed ITCs.

You have chosen to pursue and apply a modified Option B to current members who are not registered for GST purposes and accept to be involved in the refund arrangement, applying this option to the notification period.

You will not be refunding overpaid GST on supplies previously made to:

· non-current members (i.e. both registered and non-registered members who were members of the scheme during the notification period but who are not currently members of the scheme); and

· current registered members (in accordance with the ATO letter dated ).

You will repay to the ATO all of the ITCs relating to the supply of interests in the scheme during the notification period (i.e. the amount relating to supplies previously made to both Eligible Members and members that will not be receiving a refund of the overpaid GST).

You have received legal advice that your constitution does not enable the ITC amount to be repaid by you to be allocated to particular members, because the obligation to pay this amount to the ATO rests with you and is not referrable to particular members. Therefore, the following proposed arrangement has been formulated:

· You will appoint another entity within the your group, to manage the process of refunding GST to Eligible Members;

· This entity will pay you a fee for the right to process the GST refund, with such fee being equal to the value of the ITCs to be repaid by you to the ATO.

· This entity will facilitate the payment of the GST refund to Eligible Members which, for each Eligible Member, will be equal to the actual amount of GST previously charged to that member; and

· This entity will charge a reasonable "Administration Fee" inclusive of GST to Eligible Members for facilitating the GST refund. The Administration Fee will be made up of:

o This entity costs e.g. internal administrative costs and costs for external legal, tax and accounting advice in facilitating the arrangement,

o the fee paid by this entity to the you; and

o the GST payable in respect of this entity's facilitation services.

In relation to the payment of the annual membership fee, Eligible Members have the option of either making:

· a full payment due of the annual membership fee; or

· four instalment payments of the annual membership fee.

In either case, the Eligible Member will be reimbursed the overpaid GST by the reduction/offset of the Net GST Refund from the annual membership fee when the Eligible Member's account is credited for the total GST overpaid.

In principal approval was given to your proposal subject to certain conditions:

· Receipt of the final notice about annual club membership fee and explanatory letter and such other information as may be required.

· The Commissioner being satisfied that an amount corresponding to the overpaid GST has been reimbursed to members.

· All over-claimed ITCs being repaid to the ATO as required by the adoption of Option B, including those relating to members who do not accept the proposed arrangement (paragraph 9 of the draft explanatory letter may require some clarification in this regard).

· Clarification of the situation where a member elects to pay by instalments, ie when does the reimbursement of the GST occur?

Not all conditions of the in principal approval were fulfilled prior to you completing your mail out to members.

Taxpayer's Contentions

If you had adopted Option A of the Industry Agreement, then you would not have had to repay the over claimed ITCs but past and current members would be out of pocket.

If you had treated your fees as consideration for input tax supplies then the fees would have been set at a higher amount to recover the GST inclusive rather than GST exclusive expenses incurred by you in relation to making those input taxed supplies. In other words you would have offset the anticipated denial of the input tax credits by an increase in the fees.

If you adopt Option B in the manner proposed, you will obtain a smaller net GST benefit for Eligible members which still results, in over paid GST (the same as if you adopted Option A). The only difference is that by adopting Option B, in the way in which the ATO insists it should, you are required to repay all of the ITCs but bear the risk that you will not recover that amount in full via the GST recovery component of the admin fee.

There is no windfall to you in adopting Option B. The admin fee as proposed can at most recover an amount equivalent to the ITCs which are to be repaid and the costs of external advisors. The ATO doesn't bear the risk of any shortfall e.g. if an Eligible member doesn't accept the Net GST Refund being offset against the Fee.

If you were to refund members the overcharged GST without raising the funds via the agreement with the other entity and the other entity's fee to be charged to the members, there would be an operating shortfall, as the very nature of the scheme is that funds are used to provide services to members, not to be retained as profit.  As such, without raising the funds in this way, you would need to increase membership fees to cover the operating shortfall.  For commercial reasons, adopting the proposed approach is a much more favourable way of proceeding.

This position is supported by the Commissioner's view on the issue as expressed in MT 2010/1 at paragraph 124:

Further, where a business cannot fully claim an input tax credit this cost will ultimately be covered as a foreseeable cost of business and borne by the end consumer in the price paid for the good or service.

Your view is also supported by the Explanatory Memorandum to the A new Tax System (Goods and Services Tax) Bill 1998 which states at paragraph 5.4:

You do not charge GST on supplies that are input taxed.  However, you are not entitled to input tax credits on acquisitions relating to the supplies.  The effect is that you have borne GST on those acquisitions and will pass on that cost in the price of the supply.

You also note that all scheme operators would be in this position and that if the Commissioner does not refrain from exercising his discretion to deny the refund it would make Option B, essentially, unavailable not only to the you but all scheme operators.

The fact that the Commissioner exercised his powers of general administration in entering into discussions with the industry in good faith and issued the guidance letter is evidence of itself that Option B should be a genuine option for you to apply.

If the ATO were to maintain its position in relation to this issue, not only would the ATO be acting contrary to its guidance letter, but it would also be acting contrary to the Taxpayers' Charter in that it would not be fair or reasonable for the ATO to agree to one thing with the industry but then act contrary to what was agreed.

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

Your Notification of entitlement to a GST refund meets the requirements of a valid notification by an entity to the Commissioner under paragraphs 105-55(1)(a) and 105-55(3)(a) of Schedule 1 to the TAA.

Detailed reasoning

Time limit on refunds etc from the Commissioner

Section 105-55 of Schedule 1 to the TAA limits claims for certain refunds and credits after four years from the end of the tax period to which the entitlement relates, unless within that four year period the Tax Office is notified of the entitlement to the refund.

Miscellaneous Taxation Ruling MT 2009/1 sets out the Commissioners view on what constitutes notification by an entity to the Commissioner under paragraphs 105-55(1)(a) and 105-55(3)(a) of Schedule 1 to the TAA. The Tax Laws Amendment (2008 Measures No. 3) Act 2008 amended section 105-55 with effect from 1 July 2008.

The application of the amendments to refunds, other payments or credits to which an entity is entitled before 1 July 2008 depends on whether a notification of the entitlement was provided before 1 July 2008. The Commissioners views in this Ruling in relation to the validity of section 105-55 notifications are also applicable to notifications for the purposes of the application of these amendments.

There is no specific form that is required for a notification for the purposes of section 105-55 of Schedule 1 to the TAA. However the notification should be in writing and must be received on or before the fourth anniversary of the end of the relevant tax period.

The Commissioner expresses the view at paragraph 12 of MT 2009/1 that a valid notification for the purposes of section 105-55 of Schedule 1 to the TAA includes:

· an activity statement or revised activity statement which includes the relevant entitlement in the relevant tax period;

· an application for a private indirect ruling, an objection or other correspondence from an entity that asserts the entity has an entitlement and:

o provides a description of the nature of the entitlement to a refund, other payment or credit, which is sufficient to bring to the Commissioner's attention the basic factual and legal basis for the entitlement; and

o specifies the tax period(s) or importation(s) to which the entitlement relates.

In some cases an entity may provide correspondence purporting to be a notification for the purposes of paragraph 105-55(1)(a) of Schedule 1 to the TAA, but which is not a valid notification (for example, because it lacks the requisite specificity). If the entity subsequently provides further information the correspondence may then be sufficient to meet the requirements of a valid notification. However, the notification will only be valid from the date the further information is received (paragraph 15 of MT 2009/1).

Section 105-55 of Schedule 1 to the TAA does not expressly state that a notification needs to be in writing in order to be valid. However, it would only be in very rare circumstances that a statement made orally could sufficiently bring to the Commissioner's attention the matters necessary for a valid notification under section 105-55 of Schedule 1 to the TAA (see paragraph 21 and 22 of MT 2009/1).

With regards to your notification it

· is in writing and makes a clear assertion to an entitlement to a GST refund

· provides a description of the circumstances under which the GST refund being requested arises

· sets out the legal basis under which you submit you are entitled to a GST refund, and

· lists the tax periods (however it does not include the amounts of GST involved).

The delay in finalising the claim has arisen due to the complexity of the issue and the time required determining your position under your Constitution. The delay has not arisen due to the original notification being speculative.

Your correspondence constitutes a valid notification to the Commissioner for the purposes of section 105-55 of Schedule 1 to the TAA.

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.

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 provided that all the requirements of the Moving forward Option B proposal have been met.

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 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 (d)(iii) 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 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 this case you have advised that the supply during the period 1 December 2006 and ending on 30 November 2011 was made as a taxable supply in accordance with the ATOID 2001/385 and the industry practice until the ATO ID was withdrawn on 16 December 2005.

You have also advised that you will be refunding the recipients of the supply in accordance with the Options agreed upon by the ATO and the timeshare industry and in particular Option B which states:

Refund (Option B)

operators can seek a refund in accordance with the requirements of section 105-65 of Schedule I to the TAA 195

As outlined in the 'moving forward' option there is a requirement for the relevant GST to be reimbursed to the member before there is an entitlement to the refund of GST from the ATO.

The ATO has worked closely with the industry to reduce the potential administrative and compliance burden and advise that operators will be entitled to a refund of GST if the following conditions are met:

(a) credit each members account, issue a credit note or make a cash payment with the corresponding amount of GST over-remitted for that member

(b) the member is not registered or required to be registered for GST when they paid the fees, and

(c) the operator keeps accurate records to demonstrate the total amount of refunds claimed.

Operators can seek the refund by self amending the relevant Business Activity Statements (BAS) to reduce the amount of GST payable by the amount of over-remitted GST for that tax period. At the same time, the operator must amend the appropriate BAS to reduce the over-claimed input tax credits. The over-remitted GST and over-claimed input tax credits will not necessarily be in the same tax period.

Please note any amendments to BAS are subject to the 4 year restrictions under sections 105-50 and 105-55 of Schedule I to the TAA 1953. The ATO also confirms that general interest charge will not be imposed on relevant BAS amended under this option.

However you have sought approval to modify this option and only apply it to current members who are not registered for GST purposes and accept to be involved in the refund arrangement.

You have stated you will not be refunding overpaid GST on supplies previously made to non-current members (i.e. both registered and non-registered members who were members during the notification period but who are not currently members); and current registered members (in accordance with the ATO letter dated 27 June 2011).

You have also sought and received in principal agreement to your proposed arrangement subject to the following conditions being met:

· Receipt of the final notice about annual club membership fee and explanatory letter and such other information as may be required.

· The Commissioner being satisfied that an amount corresponding to the overpaid GST has been reimbursed to members.

· All over-claimed ITCs being repaid to the ATO as required by the adoption of Option B, including those relating to members who do not accept the proposed arrangement (paragraph 9 of the draft explanatory letter may require some clarification in this regard).

· Clarification of the situation where a member elects to pay by instalments, ie when does the reimbursement of the GST occur?

Accordingly we cannot comment on the administrative arrangements that you have made nor the calculations contained in your Sample Explanatory Letter dated 24 February 2012 and provided as Appendix 8 with your PBR application.

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 the change in treatment of these supplies by the ATO.

Additionally the Commissioner accepts that you have reimbursed your members to the extent of the net refund and for the balance 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 your supply in accordance with Options B agreed upon by the ATO and the industry.