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Ruling

Subject: Entitlement to refund of overpaid goods and services tax (GST)

Question 1

Will the Commissioner exercise the discretion under section 105-65 of the Taxation Administration Act 1953 (TAA) to refund to you the goods and services tax (GST) overpaid in relation to supplies of certain products for the relevant period?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You sell various products. You supply the products wholly within Australia.

We have provided previous advice, by private ruling, that certain products that you supply are GST-free.

However, for the relevant period you treated supplies of these GST-free products to your customers as taxable supplies.

You have advised that the recipients of these supplies are not registered or required to be registered based on your usual customer base and the nature of the products being for private or domestic purposes.

You have calculated the total amount of GST overpaid in this period.

You have advised that you do not have the commercial ability to refund the recipients of these supplies without first receiving a GST refund from the Commissioner.

You have not yet contacted your customers regarding a refund of the GST amount. You wish to first receive confirmation that the Commissioner will exercise the discretion under section 105-65 of the TAA to allow a refund to you on the basis that you intend to refund your customers.

You have proposed the following arrangements should the Commissioner exercise the discretion to allow a refund of the overpaid GST to you:

You will send a letter to each recipient (example provided) to notify them of an entitlement to a GST refund for their supply.

Customers must respond (within the specified time frame) confirming that they wish to be reimbursed and confirming their preferred payment method.

Customers must also agree to being charged an administration fee by you. You will offset the administration fee against the refund entitlement.

Based on the responses from customers, you will confirm the exact quantum of the GST refund with the Commissioner.

Any refund paid by the Commissioner will be held in an audited trust account for the benefit of the customers. You have advised that this will be a separately established bank account, and that you will provide the Commissioner with appropriate reporting. The funds are to be solely used to refund customers (subject only to the administrative fees).

The administration fee you intend to impose must be agreed to by each recipient before you will pay any refund. The administration fee will then be offset against the amount of the refund the customer is entitled to and the balance will be paid to the customer.

Customers will provide payment details, and you will pay money to the customers pursuant to this by way of bank cheque or electronic funds transfer.

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 TAA applies to restrict the refund of this overpaid GST.

After considering all your circumstances and the intention of section 105-65, the Commissioner will not exercise the discretion available under section 105-65 to allow the refund to you.

However, if you reimburse your customers an amount corresponding to the GST overpaid section 105-65 will not apply to restrict a corresponding refund to you.

Detailed reasoning

Overpayment of GST

We have previously advised that certain products that you supply are in fact GST-free.

Where you have remitted GST on these products that are GST-free, the amounts that were remitted for these supplies 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 the overpaid GST 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. It applies where you overpaid amounts because a supply was treated as a taxable supply when the supply was not a taxable supply, and the recipients have not been reimbursed an amount corresponding to the overpaid GST.

We consider that you have treated supplies as taxable because you believed them to be taxable (until notified otherwise by our private ruling), you dealt with the recipients of the supplies (customers) as if the supplies were taxable supplies, and you remitted an amount as GST to the Commissioner on those supplies. Currently you have not reimbursed a corresponding amount to the recipients of the supplies.

Therefore section 105-65 applies to restrict the refund in these circumstances.

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 has the discretion to do so in appropriate circumstances. This discretion is explained, and guidance given as to its use, in Miscellaneous Taxation Ruling MT 2010/1.

There are two important policy reasons behind the operation of section 105-65 TAA. These are that the GST on a taxable supply is intended to be borne by the end consumer, and that there should not be a refund of overpaid GST to a supplier where it may result in a windfall gain to the supplier. Potential exercise of the discretion must be considered with this policy in mind.

Any refund must compensate the person or entity that ultimately bore the cost of the GST. Where you have passed on the cost of the GST to your customers, and therefore cannot be said to have borne the cost of your overpayment yourself, it is not appropriate to refund the overpaid amount of GST to you. Whilst the overpayment is as a result of your error and you have remitted the amount to the ATO, it is your customers that have borne the cost of this error.

In your circumstances you accept that the amount of GST has been passed on to your customers and section 105-65 of the TAA applies. Your request relates to whether the Commissioner will exercise the discretion in section 105-65 TAA to refund the amounts to you before you reimburse the relevant customers.

No exceptional circumstances

We acknowledge and affirm that the discretion should be exercised where it is fair and reasonable to do so. Circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include 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.

However, the Commissioner will generally not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are other countervailing reasons for doing so

It is for the supplier to demonstrate that its circumstances make it appropriate for the Commissioner to give a refund.

We consider that you have not presented any countervailing reasons why the Commissioner should exercise the discretion in these circumstances. You have cited cash flow reasons for not arranging the return of funds. However, you have not demonstrated that your circumstances are exceptional or different to any other entity that may prefer to receive a refund in advance from the ATO in order to reimburse their customers. If the Commissioner were to exercise the discretion in your circumstances, then all future requests for similar arrangements would have to be considered accordingly. The wording of the legislation, and the public ruling, indicate that this is not the scope or intention of the legislation.

Even if the Commissioner were to consider that there was sufficient reason to consider exercising the discretion in these (or similar) circumstances this would result in increased costs of administration for the Commissioner. The Commissioner would need to take appropriate measures to ensure that all the terms of the arrangement were complied with both before and after any refund was paid, otherwise there is a risk that the refund may not be passed on to end consumers and would result in a windfall gain to you. It is not fair and reasonable for the Commissioner to assume this burden in these circumstances as a result of your error and overpayment.

Paragraph 128(e) of MT 2010/1 indicates that when considering whether to exercise the discretion revenue outcomes must be considered. The example given to demonstrate this is where a supplier reimburses a registered recipient for the overpaid GST, but the Commissioner is unable to reclaim the over claimed input tax credit from the recipient. Where there is a risk of detriment to the Commissioner this would mean that the discretion would generally not be exercised. While the overpaid GST was not properly the revenue of the Commissioner, the Commissioner should not bear the administrative burden of ensuring that any refund is given to the appropriate persons, nor the revenue risk if it is not.

The legislation provides that should you make your own arrangements to enable you to reimburse the full amount to your customers, and you hold evidence of full reimbursement having taken place, section 105-65 will no longer apply to restrict a refund of any such amount reimbursed to your customer and you may amend your Business Activity statements to reflect the amended situation (and thereby claim a refund).

If you satisfy the Commissioner that you have reimbursed the unregistered recipients the Commissioner will have an obligation to pay the refund of overpaid GST under section 8AAZLF provided you satisfy any other legislative conditions (for instance the time limits in section 105-55 of the TAA.)

Amount corresponding to the refund

If you choose to reimburse your customers, an amount corresponding to the overpaid amount must be returned to your customers. Broadly, this means that your customers must understand that they are entitled to be refunded an amount equivalent to the GST they overpaid, and you must demonstrate to our satisfaction that this has occurred. Section 105-65 would continue to restrict any refund of an amount that was not reimbursed in this manner.

Any arrangement you and your customers may choose to enter into regarding an administration fee constitutes a separate (taxable) supply of administrative services by you. For GST purposes this supply must be accounted for separately by you.

Conclusion

For the reasons given above it is not appropriate for the Commissioner to exercise the discretion to allow a refund to you of the overpaid GST.

However, where you can substantiate that an amount equivalent to the overpaid GST has been refunded to your customers section 105-65 will no longer apply to any such amount. You will then be entitled to a refund. The refund can be obtained by making the appropriate amendments to your business activity statements.