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Ruling

Subject: Restrictions on refunds of overpaid GST

Question 1

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 to refund the incorrectly remitted goods and services tax (GST) by you for your supplies?

Answer

No. The Commissioner will not exercise the discretion pursuant to section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65) to refund you the overpaid GST as you have not provided sufficient evidence to support that you have absorbed the overpaid GST.

Relevant facts and circumstances

You are registered for GST.

You hold an annual event (Event). Your supply of admission (the ticket) to the Event has been treated as a taxable supply for a long period of time.

In determining the GST treatment of the supply of the tickets, you relied on the calculation of the cost of supply (as required under sub paragraph 38-250(2)(b)(ii)) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in a spreadsheet. The calculation indicated that the supply of the tickets was a taxable supply.

Post the Event and upon review of the spreadsheet, you have realised that several large items of Event expenditure have been excluded from the calculation in the spreadsheet of the cost of supply.

Had those expenditures been included in the spreadsheet the calculation would have indicated that the supply would have been GST-free and no GST would have been remitted to the Australian Taxation Office (ATO).

You have incorrectly remitted the overpaid GST to the ATO in your Business activity statement (BAS).

Price setting process

You determine the price of tickets at least several months prior to the Event.

You use the actual data for the previous year's Event as the basis to produce a budget. The actual data for the last event was used to prepare the current budget. Historical data is not subject to material change and can be used as a reliable standard.

You then account for any anomalies that occurred during the prior Event year and adjust for these. Event expenditure is then incorporated into the budget using a pro-forma Profit and Loss statement with a budget net position for the Event determined as a result of the process.

At no point during the budgetary process which leads to ticket prices for an upcoming Event being determined is any analysis of the GST treatment of admissions undertaken. Any analysis of the GST treatment of supplies takes place later in the year.

The Event historically runs at a net loss, you regaining some of this net loss through holding other activities. The Event Executive undertakes analysis of all expenditure and will reduce expenditure to assure that the net loss position of the Event is manageable.

Relevant legislative provisions

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

Division 9

Division 11

Division 38 - Subparagraph 38-250(2)(b)(ii)

Taxation Administration Act 1953

Divisions 3 and 3A of Part IIB

Section 105-65 of Schedule 1

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 provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953.

However, the requirement to give a refund of overpaid GST is subject to section 105-65 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 section 105-65 are satisfied.

Subsection 105-65(1) 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) applies to your circumstances

The restriction of refunds of overpaid GST under section 105-65 will apply if all three of the following conditions are present:

· 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

· the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) of the supply is registered or required to be registered for GST.

Miscellaneous Tax Ruling MT 2010/1, which was issued on 15 December 2010, provides the view of the Commissioner on the application of section 105-65.

Paragraph 20 of MT 2010/1 explains the meaning of 'overpaid'. It states:

In the context of 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.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. It states:

In the context of section 105-65 a supply would be treated as a taxable supply where the supplier has mischaracterised a supply as taxable because they believed the supply to be a taxable supply, has dealt with the recipient of the supply as if the supply was a taxable supply and has remitted an amount as GST to the Commissioner on that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as GST-free or input taxed but mistakenly includes GST for that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as taxable but miscalculates the GST for that supply in the calculation of their net amount. [emphasis added]

In your circumstances section 105-65 applies because:

· You have mischaracterised the supplies of tickets to the Event and treated them as taxable supplies when you should have treated them as GST-free.

· You have dealt with the recipients of the supply as if the supply was a taxable supply and has remitted an amount of GST to the Commissioner on that supply in the calculation of your net amount.

As no GST was payable on those supplies, the amount legally payable was nil and you have overpaid a GST amount in relation to those supplies.

You have provided that you have not and will not reimburse the recipients of the overpaid GST amounts.

Arithmetic error

You have suggested that the error in the spreadsheet was similar to an arithmetic, or reporting error as discussed in the example in paragraph 128(d) of MT 2010/1.

We consider that this is not the case. The error in the example was caused by a miscalculation of the GST payable by the supplier who had dealt correctly with the recipient. The consequence of the error in the example was that the supplier remitted more GST than legally required but the recipient did not pay any excess GST.

In accordance with the decision in International All Sports v Commissioner of Taxation [2011] FCA 824, the Commissioner now administers section 105-65 on the basis that section 105-65 does not apply where the overpayment of GST is caused by a miscalculation of the amount of GST payable rather than a mischaracterisation of a supply as taxable.

In your circumstances, the error resulted in you mischaracterising the supply as taxable and so section 105-65 does apply to restrict the refund.

Exercise of the discretion

As section 105-65 applies, the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

However, it is the ATO view that the Commissioner has a discretion in certain limited circumstances to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied:

Paragraphs 116 and 117 of MT 2010/1 provide that:

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 T 2010 ATC 10-119 at 57 where the AAT referred to 'residual discretion':

As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should.

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

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 that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65. This is explained in paragraph 127 of MT 2010/1 that states:

… 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.

The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) Act (which introduced the current version of section 105-65) adds further:

2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax.

It follows from the above that it is important when exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipients regardless of whether the supply will generate a profit or loss situation. Generally when a price of a taxable supply is set or agreed to, GST is included in the price.

In determining who has borne the burden of the GST, the Commissioner takes into consideration the factors outlined in Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by Avon about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect. In that case the High Court stated, at paragraphs 9 and 12:

9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit … In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered ... it forms part of the cost structure of doing business...There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on …

12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequences that proof to the contrary will occur comparatively seldom …

This means that 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.

While there may not be a general presumption that 'not for profit' entities will set prices so as to recover costs, each case must be assessed on its merits to determine if the GST has been passed on to the recipients. It is still appropriate to approach the question with reference to your conduct in setting prices based upon your knowledge at the relevant time, including a belief that the GST which later proves to have been an overpayment is a real cost.

You are carrying on an enterprise that includes the annual staging of the Event. To maintain viability, you conduct your enterprise in a business like manner and would do so with a view to making a surplus. In the current financial year you made a surplus and also the previous financial year.

At the time of the budget preparation, the budget outcome (in relation to the ticket price) determines the GST status of the supply for the Event later that year. At the budget preparation time, the outcome of the calculation indicated that the supplies of the ticket would be taxable and GST would be remitted to the ATO and you would have received only the net amount of the proceeds of the supplies.

While it is accepted that you make the supplies of the ticket below cost for the purposes of section 38-250 of the GST Act, it does not follow that the price does not include a GST component.

Further, that GST is not explicitly considered at the time of the price setting by the supplier is not normally sufficient to show that GST has not been passed on, nor that pricing to a market price means that the supplier has necessarily borne the cost of the GST at the time of pricing or thereafter. In the latter case it would be necessary to show that you are pricing to a market where there is no GST in competitive supplies and you have not done so.

Similarly, we do not consider that merely retaining the same ticket price as for the last years Event is sufficient evidence to support a view that the supplier absorbed the cost of GST, particularly where the earlier year event's ticket had been treated as taxable.

It is for you to present evidence to show that, either by circumstance or conscious decision, the price that was set did not include GST and you have not been able to do so. In the absence of evidence to the contrary, the Commissioner considers that the process used to arrive at the price would have taken into account the belief that GST was payable and was a real cost of carrying on the enterprise. It is not necessary to this conclusion that the person/people who made the price decision explicitly considered GST, as they made the decision in the context of the budget and other financial information that took account of the GST that had been payable and was believed to still be payable.

In your circumstances, where the supplies of the tickets had been treated as taxable for a long period of time, it is reasonable to conclude that the price set each year did include a GST component and that this would have been the belief of the responsible officers of the Event. This conclusion is further supported by the fact that you consciously considered the GST treatment of the ticket over a long period of time, had treated them as taxable, and had remitted the GST to the ATO.

The Commissioner is of the view that the GST was passed on to recipients (as intended by the GST regime) and so to allow a refund in this case would result in a windfall gain to you. In these circumstances, the Commissioner will not exercise the discretion to allow a refund.