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Ruling

Subject: Entitlement to refund of overpaid Goods and Services Tax (GST)

Question 1

Will the Commissioner refund the GST overpaid in relation to your supplies?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You have remitted GST on two products that you now consider to be GST-free.

You are requesting that the Commissioner confirm that you are entitled to a refund of GST overpaid on the products for a relevant period (the refund period).

You have a pricing policy to determine the retail price of your products. Under this policy the price is determined by reference to normal (non-promotional) prices of like-for-like products sold by your competitors.

You have provided an overview of product pricing, GST classification and control policies and procedures for your enterprise.

The final price of products is set just before the product is launched, and is set by reference to a market analysis of the recommended retail price of like-for-like products sold by your competitors. We consider that it is reasonable to assume that these like-for-like products are correctly being treated as GST-free by your competitors.

GST is not considered in the pricing documents, other than by listing the product classification.

Where the product cannot be classified simply assistance is sought from specialists within your company.

When the price and GST treatment have been signed off, they are entered into your electronic system.

For your first product, the GST treatment was ambiguous (with both the 10% GST rate and GST-free indicated). The product was incorrectly entered as taxable in the buying system.

For the second product, the GST classification was correctly shown as GST-free. However, human error in entering the data in the system resulted in the product being incorrectly flagged as taxable.

You have not been charged any GST or claimed any input tax credits on your wholesale purchases of the products from your suppliers.

Relevant legislative provisions

Taxation Administration Act (1953)

Section 105-65 of Schedule 1

Reasons for decision

Summary

You have overpaid GST, and section 105-65 of Schedule 1 to the Taxation Administration Act (1953) (section 105-65) applies to restrict the refund of this overpaid GST.

In your particular circumstances, it is appropriate to exercise the discretion available under section 105-65 to allow the refund to be issued to you.

Detailed reasoning

Overpayment of GST

We consider that your products are GST-free.

As these products are GST-free, the amounts that were remitted for these products in the relevant period are in excess of what was legally payable. Therefore you have overpaid GST.

Section 105-65 applies

You have requested a refund of these overpaid amounts. The Commissioner must consider whether there are any impediments to issuing this refund.

Section 105-65 applies to restrict certain refunds of overpaid GST. This is because you overpaid the amounts because a supply was treated as a taxable supply, and the supply was not a taxable supply.

You have not reimbursed a corresponding amount to the recipient of the supply, and the recipients of the supply are not registered or required to be registered. Therefore section 105-65 applies.

Exercise of the discretion available under section 105-65

Section 105-65 applies such that the Commissioner need not give a refund of the overpaid amount, but may choose to do so in appropriate circumstances. This discretion is explained, and guidance as to its use is given in Miscellaneous Taxation Ruling MT 2010/1. The scope and purpose of section 105-65 is 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. The discretion must be considered with this in mind.

The underlying premise of the GST is that in normal circumstances the GST is passed on to the end consumer such that the supplier who remits the tax is not bearing the cost of the tax. Therefore suppliers would receive a windfall gain if permitted to automatically receive a refund of an overpaid amount.

Priced to a GST-free market

It is the supplier that determines if the supply it makes is taxable. The presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier. It is for the supplier to prove that the GST has not been passed on before a refund can be allowed using the discretion in section 105-65.

In your circumstances you have advised that the GST is not specifically considered in pricing your products. However, there are many situations where GST may not consciously be factored into a price and failure to consider the GST is not normally sufficient to show that the GST has not been passed on. For example, the ATO does not generally accept that pricing to a market price (or using other pricing mechanisms such as fixed prices, price points etc) means that the supplier has necessarily borne the cost of the GST at the time of pricing or thereafter. Therefore this alone does not mean that you have not passed on the cost of the GST.

You have advised that your products are priced by market analysis. When a supplier and pricing have been agreed, the product's final retail price and GST classification is signed off. This indicates that your pricing is determined before the GST classification is finalised and applied. We accept that you have predominantly relied on factors other than the GST status of the products to determine your pricing. The GST treatment is set after the pricing has already been agreed based on market price.

As you have priced your product in comparison to products that have correctly been treated as GST-free, and have not considered the GST in your pricing yourself, remitting GST on those products means that you have placed yourself at a competitive disadvantage. We consider that you have borne the cost of this error rather than your customers.

Furthermore, if the supply of the products were treated correctly as a GST-free supply, the information provided shows that the price your customers paid for the products would have been the same. Therefore a refund in those circumstances would not result in a windfall gain to you at the expense of the recipient.

Administrative error

We consider that the circumstances that led to the overpayment of GST are in the nature of an administrative or recording error.

This is particularly evident with the supply of the second product. This product was always considered as if it was GST-free on the internal documentation. We therefore consider that they were priced in this manner also. Only a subsequent inadvertent system error (human error) resulted in the product incorrectly being treated as taxable and GST remitted. We consider in those circumstances that the cost of the GST has not been passed on to your customers.

For the first product, the intended GST treatment of the product was ambiguous (with both 10% GST rate and GST-free indicated). The fact that this was not clarified indicates that GST was not a factor in your pricing. As the treatment was ambiguous the product was entered as taxable, and this error was not noticed during the final sign-offs. Again, we accept that it was only the keying in the system that determined the GST treatment and this keying did not have any impact on the prices you had already set. Therefore the cost of the GST was not passed on to your customer in these particular circumstances.

Tax invoices given to customers indicating that supplies are taxable

The dockets provided to your customers would have indicated that GST was to be paid by the supplier.

As previously considered, there was no GST embedded in the price. It is accepted that in the specific circumstances of this case that the dockets were incorrect.

Conclusion

We consider that in all the facts and circumstances it is reasonable to accept that your customers are not out of pocket in relation to these supplies. Therefore, refunding the overpaid GST to you would not result in a windfall gain at the expense of your customers.

For these reasons we consider that it is appropriate in your circumstances to allow the refund to you of the overpaid GST.

In exercising the discretion it is accepted that even though it is possible that there may be recipients who may have claimed an input tax credit due to the misclassification, this is highly unlikely. The number of such recipients would be extremely small such that the risk of incorrectly claimed input tax credits is negligible.

Amendments to your business activity statements to facilitate this refund will be processed based on the amounts you have advised for each of the monthly periods in question.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.