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Ruling

Subject: GST and refund of overpaid 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 input taxed supplies of residential accommodation?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You lodge your activity statements (ASs) on a monthly basis.

You have constructed a number of apartments for sale.

Some of the apartments constructed remain unsold.

You have made the apartments available for rental accommodation through a letting agent.

Your supply of the apartments for rental is a supply of residential premises which is input taxed.

You did not issue a tax invoice to the tenants.

When completing your monthly ASs you reported the rentals received as a taxable supply and remitted GST of 1/11^th of the consideration received and claimed input tax credits on the acquisitions you made in relation to the supply of residential premises.

You are seeking a refund of the overpaid GST less the input tax credits incorrectly claimed.

The recipients are not registered for GST.

You have not reimbursed the recipients.

GST understanding and BAS reporting

During the relevant period, you believed that the supply of residential accommodation was a taxable supply.

The rental statements received from the letting agent did not mention that GST was included in the rentals.

You have been remitting GST in respect of the rental proceeds and claimed input tax credits via your ASs for the relevant periods.

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

Relevant legislative provisions

Schedule 1 to the Taxation Administration Act 1953

Section 105-65

Subsection 105-65(1)

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

Division 129

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 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 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

Miscellaneous Tax Ruling MT 2010/1, which was issued on 15 December 2010, explains the general ATO view on how section 105-65 of Schedule 1 to the TAA applies.

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 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.

Paragraph 20 of MT 2010/1 explains the meaning of "overpaid". In the context of section 105-65 "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 of Schedule 1 to the TAA.

During the relevant monthly tax periods, you remitted GST of 1/11 of the consideration received for the provision of residential accommodation, when the supply was in fact input taxed and no GST was payable on the supply. It follows that you remitted more GST than was legally payable. Therefore there has been an overpayment of GST.

MT 2010/1 expresses the view that the phrase 'to any extent' should be interpreted widely and that section 105-65 of Schedule 1 to the TAA covers overpaid amounts arising from miscalculations.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. You treated the supplies of your residential accommodation 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 your case you have advised that the supply of the residential accommodation during the relevant periods was made as an input taxed supply and you have provided rental statements which clearly provide that there was no GST included in the rental income received. However due to an administrative error in completing your AS's, you incorrectly treated those supplies as taxable supplies and also claimed input tax credits on the acquisitions made in relation to the supply. As a result you have been remitting GST of 1/11^th of the rental proceeds received less input tax credits claimed to the Australian Taxation Office (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 but was an input taxed 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 residential premises.

However, you have also claimed GST credits on acquisitions relating to the making of the supply of residential accommodation which is an input taxed supply. Consequently you are not entitled to input tax credits in relation your acquisitions that relate to your supply of residential premises. You will need to correct the errors in your previous BAS in regards to the input taxed credits which you have over claimed. The amount of input tax credits which you have over claimed in your case would include the GST included in the price of goods and services you acquired for the purpose of making the supply of residential premises and you have claimed in your AS's.

Refund Process

As a result of this Ruling I have escalated this matter to the relevant area of the ATO to enable the refund to be processed.

Further Information

Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is the provision that provides for the making of an adjustment where there is a change in the extent of creditable purpose in respect of an acquisition. You may need to make an adjustment in relation to GST credits you have previously claimed if you use your property differently from the way you originally planned. For example if you rented out new residential premises that you originally planned to sell for which you had claimed GST credits you would need to make an adjustment. Goods and Services Tax Ruling GSTR 2009/4 explains the Commissioner's view of when an adjustment for a change in extent of creditable purpose arises under Division 129 of the GST Act in relation to acquisitions made in constructing new residential premises. A link to this ruling has been provided to your accountant for your reference.