Edited version of your private ruling

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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 have incorrectly overpaid GST?

Answer

Yes

Question 2

Is your proposed method of quantification fair and reasonable?

Answers

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 a company registered for GST.

You are the representative member of a GST Group.

You recently conducted a review of your retail operations.

The review specifically related to any possible GST issues at the Point of Sale ('POS') across your organisation. It was noted that the procedures and hardware to process cash sales and EFT transactions were markedly similar.

Based on this historical review and with the information provided, you identified several instances in which you had overpaid GST. These overpayments can be classified in two key categories:

· Fraud through EFT contributing to overpayments of GST; and

· Duplicate transactions causing overpayments of GST.

A 'Notification of entitlement to GST refund" form was lodged with the Australian Taxation Office (ATO).

As a result of your review, a number of circumstances were identified where chargebacks have been raised as a result of fraudulent transactions taking place.

Applicable situations noted in the review included:

· Situations whereby an individual has acquired another individual's credit or debit card and signature or PIN through fraudulent means, and has used this card to purchase goods or services;

· Cards with 'microchip" technology have been fraudulently used due to misuse of "pay wave" systems (i.e. touch technology which does not require signatures or PINs below certain thresholds); and

· Transactions that are processed "offline" (i.e. when computer systems are not operational) have later been rejected due to fraud. In these cases the fraud would not have been detected at the time of the payment being processed even if the relevant systems were 'online" at the time of purchase.

You have excluded from this private binding ruling request instances where you have not followed the relevant processes of verification. For example, where the sales voucher was not presented by you to the financial institution on request, or where illegible sales vouchers were produced.

EFT chargebacks are also raised by financial institutions in respect of duplicated transactions. These occur where, due to electronic failures or handling errors, a card payment has been processed erroneously multiple times in respect of a supply. It is also a common feature of these transactions that there is an absence of authorisation in respect of the duplicate transaction. In these instances, you will have initially received payment in respect of the multiple transactions and automatically remitted the relevant GST on the value of each of the (multiple) transactions processed.

Where the financial institution then raises a chargeback in respect of the duplicated transaction, and you return the duplicated amount to the financial institution, you will have made an overpayment in respect of GST, as the automatic remission of GST on the duplicated portion of the transaction has not been reversed.

In respect of the your POS, GST is calculated automatically in relation to both the original and the duplicate payment

You propose to calculate the total amount of overpaid GST arising from EFT chargeback errors from data obtained from your businesses where detailed breakdowns of EFT chargebacks were available.

Your have proposed a methodology for quantification of GST overpaid by you.

Relevant legislative provisions

Taxation Administration Act 1953,

Section 105-65 Schedule 1

A New Tax System (Goods and Services Tax) Act 1999

Subsection 19-10(1).

Section 19-40.

Section 19-55.

Section 21-5.

Section 195-1.

Reasons for decision

Question 1

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 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.

Chargebacks

When chargebacks are made, the effect is that the retailer receives no consideration for the supply. Therefore the supply has now been shown not to be a taxable supply. An adjustment event occurs under paragraph (c) of subsection 19-10(1) A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which enables the retailer to make a decreasing adjustment in the tax period in which it became aware of the event.

It could also be argued that the retailer has received no consideration for the supply. In terms of paragraph 19-10(1)(b) of the GST Act, a change in consideration is also an adjustment event. The effect of changing the consideration to zero is also that the supply is not a taxable supply.

Subsection 19-10(1) of the GST Act states:

An adjustment event is any event which has the effect of:

(a) cancelling a supply or acquisition; or

(b) changing the *consideration for a supply or acquisition; or

(c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition.

(* denotes a term that is defined in section 195-1 of the GST Act).

The relationship between the customer, merchant and financial institution is governed by three separate bilateral contracts.

There is clear judicial authority (Re Charge Card Services Ltd [1988] 3 WLR 764, Customs and Excise Commissioners v Diners Club Ltd; Customer Services Ltd (1989) 4 BVC 74 that the acceptance of a credit card by a merchant represents an unconditional payment by the customer. Accordingly, the customer's liability to the merchant is extinguished at the point the credit card is accepted. This is confirmed in Goods and Services Tax Ruling GSTR 2000/23: when consideration is provided and received for various payment instruments at paragraphs 24-25:

Credit card

24. When a payment is made by credit card in person, consideration is provided and received when the recipient of the supply signs the docket to authorise the transaction. When a payment is made remotely (e.g., by telephone or through the Internet), the consideration is provided and received when the cardholder gives the card number and other required details.

25. Under the usual arrangement for credit cards, once the cardholder signs the credit card voucher or provides the card number and other details, the liability to pay the supplier is unconditionally discharged.

The cases of Charge Card Services and Diners Club have established the legal principles governing the operation of credit cards. Browne-Wilkinson V.C. in Charge Card Services said at 774-775:

I would reach the conclusion that payment by credit card is normally taken to be an absolute, not a conditional, discharge of the buyer's liability and that the particular features of the present case support this conclusion.

In the case of credit card sales, the seller does not even know the address of the purchaser, which makes it hard to infer an intention that he will have the right of recourse against the purchaser.

The cardholder's obligations to the garages were absolutely, not conditionally discharged by the [merchant] accepting the voucher signed by the cardholder.

It was part of the ratio in Charge Card Services that there was no general principle of law that a method of payment involving risk of non-payment by a third party creates a presumption that acceptance of that method constituted conditional payment only. In other words, just because the financial institution has the ability to charge back an amount under the merchant agreement, this does not mean that the payment by the customer under the contract for sale is conditional.

It is noted that the UK VAT Tribunal decision of Thayers Ltd applied the decision in Charge Card Services in a chargeback context. The Tribunal stated that the ability of the bank to chargeback under its merchant agreement did not mean that the customer's debt to the merchant continued to exist.

On the basis of the above authority, payment by use of a credit card unconditionally discharges the customer from any liability owed to the merchant in respect of the transaction. For GST purposes, it is the presentation of the card details and/or the signing of the authorisation by the customer that represents the consideration provided for the supply. Therefore, a subsequent chargeback by the financial institution cannot alter the consideration provided to the merchant for that supply.

Accordingly, there is no adjustment event under paragraph 19-10(1)(b) of the GST Act. An adjustment event under this provision is 'an event which has the effect of changing the consideration for a supply'. There is no change in the consideration for a supply to a customer that is the subject of a chargeback.

Section 21-5 of the GST Act requires that in order for a decreasing adjustment to arise in respect of a bad debt you must 'write off as bad the whole or a part of the debt'. There must therefore be a debt in existence that is capable of being written off in order for this provision to have application. The customer has been unconditionally discharged from any liability owed towards the merchant as a result of their credit card use. There is thus no debt between the customer and the merchant and Division 21 of the GST Act cannot apply.

The application of the above principles to various chargeback circumstances are discussed below. The view expressed on each type of chargeback is subject to the particular terms of the agreement between the merchant and customer. Whether the customer's liability has in fact been unconditionally discharged upon acceptance of the credit card depends on the terms of that contract.

Application of view to specific chargeback circumstances

Duplicated transaction A duplicate transaction may be processed where, for example, the merchant's employees erroneously believe that the first transaction was not completed, so a second transaction is performed. Where the second transaction cannot be substantiated by an authorisation slip, the financial institution will raise a chargeback.

In respect of your POS, GST is calculated automatically in relation to both the original and the duplicate payment. In these instances, the Commissioner accepts that this gives rise to an adjustment, stating in GSTA TPP 017 that:

"If for some reason GST has been attributed on the duplicate transaction, it should be treated as any other "error" and corrected in a revised BAS for that period or via an adjustment in a subsequent BAS"

Fraudulent Transaction (eg. use of a stolen card) The financial institution is entitled to raise a chargeback where a credit card has been used fraudulently. The merchant's employees may not have taken due care when processing the transaction by either accepting a defaced card or not checking the signature or expiry date on the card.

The usual contractual analysis needs to be modified in this instance. The conventional analysis contemplates separate bilateral arrangements. In the case of a fraudulent transaction, the 'customer' is not a party to the normal consensual arrangement. Credit card fraud resulting in a chargeback can be distinguished from the other chargeback scenarios as there is no arrangement between the parties governing payment in place. This means the receipt of consideration has not been unconditionally discharged.

Accordingly, the effect of the fraudulent use of a credit card and the subsequent chargeback, is that the supply to the customer is no longer for consideration. This is contrary to what the merchant had understood when the sale transaction was executed. The chargeback therefore gives rise to an adjustment event under paragraph 19-10(1)(b) of the GST Act.

There is no arrangement between the parties to the transaction governing payment in place. This view is supported by the Commissioner in GSTA TPP 017, stating:

"Credit card fraud resulting in a chargeback can be distinguished from the other charge back scenarios as there is no arrangement between the parties governing payment in place. This means that receipt of consideration has not been unconditionally discharged"

Due to the payment being provided fraudulently, consideration has not been discharged, the requirements of section 9-5 of the GST Act are not satisfied and no taxable supply subsequently takes place. Accordingly, such a supply should not be subject to GST.

In this case you remitted GST of 1/11 of the price of the supplies (either duplicated or fraudulent transactions) when these payments are not consideration for any supply. 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 (either duplicated or fraudulent transactions) 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:……

Paragraphs 126 and 127 explain further:

126. The discretion contained in section 105-65 must be exercised within a framework that the GST Act is structured on a basis that GST is passed on when a supply is treated as a taxable supply. As such, factors outlined in Avon at paragraphs 9 to 12, albeit in a sales tax context, would equally apply in a GST context:…..

127. It is clear from the scope and purpose of section 105-65 that 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.

In this case you have advised that you have paid chargebacks to the financial institutions relating to duplicated and fraudulent transactions and as a result you have borne the economic burden of the GST as the requirements of section 9-5 of the GST Act have not been satisfied and no taxable supply has been made.

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 mischaracterisation of the supply as discussed above.

The refund of the overpaid GST is fair and reasonable in the circumstances.

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 duplicated and fraudulent transactions.

Question 2

Summary

Based on the guidance provided by paragraphs 88-90 of GSTR 2000/19, we consider that the methodology that you have provided is a reasonable method of calculating the adjustment arising from the relevant chargebacks.

Detailed reasoning

Where it is not possible for you to determine if the original supply to which the chargeback relates was a taxable supply or a GST-free supply, GSTR 2000/19: making adjustments under Division 19 for adjustment events, provides guidance on calculating adjustments for suppliers in similar circumstances:

Working out the amount of an adjustment for an adjustment event in respect of mixed supplies you make:

88. As a supplier, you may have an adjustment event that relates to both taxable supplies and other supplies you have made. An example of this is when you give a volume rebate or settlement discount to a customer in respect of all supplies made over a certain period. If the adjustment event relates to both taxable supplies and supplies that were either GST-free or input taxed, in order to work out the exact amount of the adjustment you will need to work out the proportion of the discount or rebate that relates to taxable supplies. One way to do this is to link the discount or rebate to the invoices for those particular supplies. By establishing that link, you may be able to access the information necessary to work out the correct adjustment.

89. However, it may be difficult and/or costly to establish the proportion of the discount or rebate that relates to the taxable supplies and that proportion that relates to other supplies. For example, if your accounting or computer system is not able to readily retrieve this information, you may need to undertake an expensive manual exercise. If this is the case, you may make a reasonable estimate of the proportion of the discount or rebate that relates to the taxable supplies. We anticipate that, over time, computer and accounting systems will improve in relation to recording the information necessary to support the calculation of these types of adjustments.

Although paragraphs 88 and 89 of GSTR 2000/19 refer to the calculation of adjustments arising from discounts or rebates, we consider that the rationale applies equally to the calculation of adjustments arising from chargebacks. Therefore, if you have an adjustment event arising from a chargeback and your accounting system does not allow the chargeback to be linked to the original transaction, you may make a reasonable estimate of the proportion of taxable supplies to GST-free supplies for the purpose of calculating the amount of the adjustment.

An example of a reasonable method of calculating an adjustment in similar circumstances is given in paragraph 90 of GSTR 2000/19:

XYZ Pty Ltd gives a 2% volume rebate in respect of both taxable supplies and GST free supplies that it makes to Henry. The amount of the rebate is $1,100 and some of the supplies it relates to are GST free. XYZ's computerised accounting system is unable to link the rebate to the relevant invoices to work out the proportion of the rebate that relates to the taxable supplies. However, in the tax periods over which XYZ made those supplies to Henry, XYZ has ascertained that approximately 40% of them were taxable supplies and 60% of them were GST free supplies. Using this data, XYZ estimates that 40% of the rebate relates to taxable supplies. The amount of the adjustment is then:

40% X $1,100 X 1/11 = $40

Based on the guidance provided by paragraphs 88-90 of GSTR 2000/19, we consider that the methodology that you have provided is a reasonable method of calculating the adjustment arising from the relevant chargebacks.