Edited version of your private ruling

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Ruling

Subject: Entitlement to refund of goods and services tax

Question 1:

Will the Commissioner exercise the discretion available under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) to allow a refund of any overpaid GST in relation to your supplies for the refund period?

Answer:

No. The Commissioner is unable to consider the exercise of the discretion under section 105-65 of Schedule 1 to the TAA as you have not sufficiently identified the overpaid amount of GST during the refund period.

Question 2

Will the Commissioner approve the apportionment methodology used to establish whether a supply is GST-free or taxable?

Answer

No. You must determine with more certainty the extent to which your supplies are GST-free.

Relevant facts and circumstances

Background

You are an Australian entity registered for GST.

You make supplies to residents and non-residents of Australia which indemnifies the recipients from specified costs which they may incur in Australia.

Recipients can purchase the goods directly from you using your website (retail sales) or through your agent (wholesale sales).

The application forms may be completed by the recipients whilst they are overseas or whilst they are in Australia. You did not request this information before making supplies in the relevant period. You provided your supplies to both offshore recipients, and to those who were in Australia at the time of the supply.

In response to your request, we advised, by private ruling, that certain supplies are GST-free in accordance with paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Only supplies made to overseas recipients who are outside Australia at the time of the supply are GST-free.

You notified us of a possible entitlement to a GST refund. You had been treating the supplies as taxable and remitting GST on these supplies. We advised that the notification of entitlement was made within the appropriate time.

You wrote to us requesting a refund, being the amount that you calculated as representing the GST overpaid. You requested the Commissioner exercise the discretion in section

105-65 of the TAA to allow the refund amount.

You submitted that the GST component of your supplies has been absorbed and has consequently not been passed on to recipients. You also advise that the overpayment of GST was a consequence of the inherited position on acquiring the business and the subsequent pricing model adopted.

You provided your supplies to both offshore overseas recipients, and to recipients who are in Australia at the time of the supply, and you did not ask the customers whether they were outside Australia at the time the supply is concluded (as you did not consider this commercially significant). You therefore paid GST on both of these supplies, and any amount overpaid in relation to GST-free supplies has to be established.

To determine an amount of GST that may relate to the GST-free supplies you provided a series of calculations, based on assumptions. These are considered in further detail below.

You have advised that the price remains the same for the products whether they are taken up outside of Australia or within Australia.

Apportionment methodology

You do not know which supplies are GST-free or taxable at the time of making the supply (for past and ongoing supplies). You have therefore asked us to approve an apportionment methodology for your refund claim and for your future supplies.

Your apportionment methodology is as follows:

· You identified all GST amounts in your Business Activity Statements (BAS) for the refund period relating to wholesale or retail supplies. You have identified this as 'the total amount of GST charged on the supplies'.

· You trace each of the GST amounts identified above back to the individual supply issued to the student.

· You use the supply details to determine whether the supply was a new supply. You have assumed that all supply renewals would have taken place when the customer was in Australia. You have therefore excluded these supplies in accordance with the private ruling issued to you.

· You have then assumed that a percentage of the recipients are outside Australia at the time the supply is made. You have assumed this on the basis of statistical data.

· For the refund amount claimed, you have reduced the GST amount requested to take into account refunds to recipients (for cancelled supplies, overpayments and any other reason) and settlement payments (decreasing adjustments).

Relevant legislative provisions

Taxation Administration Act 1953

Section 105-65 of Schedule 1

Division 382 of Schedule 1

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

Section 9-5

Section 38-190

Paragraph 78-10(2)(a)

Division 123

Subdivision 153-B

Reasons for decision

Issue 1

Question 1:

We consider that you have not sufficiently identified the overpaid amount of GST during the relevant period (refer question 2).

Section 105-65 only applies where there is an overpayment of GST. As you are unable to sufficiently identify what amount of GST has been overpaid, the Commissioner is unable to consider the exercise of the discretion.

We note that your request for refund is based on an assumption that section 105-65 will apply. If you are able to identify the overpaid amount of GST, and are prima facie entitled to a refund, the Commissioner will then consider the exercise of the discretion under section 105-65. We note for your reference that even if it were open to the Commissioner to exercise the discretion, in doing so there must not be a resulting windfall gain to the supplier.

Further matters - decreasing adjustments

You are entitled to a decreasing adjustment in the settlement of a claim under a supply where the supply is solely or partly a taxable supply (and certain other requirements are met) (see paragraph 78-10(2)(a) of the GST Act).

Although you have treated all of your supplies as taxable during the refund period, but have been unable to identify which particular supplies are GST-free, you will only be entitled to decreasing adjustments on any settlement payments if those supplies are in fact taxable to some extent, provided all of the other requirements relating to decreasing adjustments are met.

Question 2:

Summary

We consider that the apportionment methodology that you have adopted does not adequately determine the extent to which your supplies are GST-free.

Detailed reasoning

You make supplies that are either taxable or GST-free depending on the location of the recipient. Supplies that meet the requirements for a taxable supply under subsection 9-5 of the GST Act are taxable to the extent that they are not GST-free or input taxed.

You received advice from us, by private ruling, that we consider that the supply is GST-free under section 38-190 of the GST Act when purchased by a person who is outside of Australia at the time of the supply.

Where you have made a supply that is GST-free, any amount of GST that has been remitted for that supply is in excess of what was legally payable and is an overpayment of GST.

It is for the supplier to determine whether a supply is taxable or otherwise.

You have advised that you have applied an apportionment methodology to estimate what proportion of your supplies is GST-free. You reduce your GST payable to allow for these supplies. You have also used the methodology to calculate the refund you have requested. You have requested that we endorse this methodology.

Division 123 of the GST Act provides for simplified accounting methods that may be used by certain retailers to determine their net amount. As these methods are only available to entities with a turnover of $2 million or under, you are not eligible to use them.

Instead the Electronic Commerce Industry Partnership - issues register (available on www.ato.gov.au) provides guidance on what will establish 'consumption outside Australia' for the purposes of determining whether any of your supplies are GST-free.

This document provides that:

To work out whether the supplies provided are for consumption outside of Australia and therefore GST-free, a supplier needs to ascertain certain information at the time the thing supplied is done.

The supplier must obtain the following information if the recipient of the supply is an individual:

· the residential status of the individual and their physical location at the time of the supply

· confirmation that the individual is not a member of the Australian Public Service or Australian Defence Forces

· the use of the supply

· if they are a non-resident and are in Australia, whether their presence is in relation to the supply, and

· if they are a resident of Australia and are outside Australia, whether their presence is integral to (as distinct from being merely coincidental with) the provision of the supply.

You have advised that you do not capture the type of information noted above.

Since becoming aware that some of your supplies may be GST-free you have not implemented systems to determine which of your supplies are GST-free. You have advised that your application forms and information systems do not identify the location of the recipient at the time of making the supply. You are therefore using a methodology to estimate a proportion of supplies that you consider to be GST-free and reducing your GST payable to allow for this.

We would expect that the methodology used would provide an accurate determination of the correct GST payable for each tax period and be based on a consideration of all the circumstances.

It is relevant to note that, pursuant to Division 382 of Schedule 1 to the TAA, you need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free. Division 382 requires that, inter alia, you keep records such as to enable your liabilities and entitlements under an indirect tax law to be readily ascertained.

Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles provides guidance about the meaning of readily ascertained. It states that:

… We consider that the requirement in paragraph 262A(3)(b) that a person must keep records so as to 'enable' the person's liability under the Act to be readily ascertained, refers to the ability of ATO staff to be able to readily ascertain that person's liability. This is consistent with the underlying purpose of section 262A to assist the Commissioner in ascertaining a person's liability. We recognise that ATO staff need to have accounting skills to be able to readily ascertain a person's liability.

55. The Macquarie Dictionary defines 'readily' as:

'1. promptly; quickly; easily.'

It defines 'ascertain' as:

'to find out by trial, examination or experiment, so as to know as certain; determine.'

Generally, we would expect that ATO staff with accounting skills would be able to quickly and easily determine a person's taxation liability without needing too much assistance from that person. However, we recognise that because of the complexity of some businesses, ATO staff will find it useful to have the helpful assistance of the person and/or the person's representative to readily ascertain the person's liability …

The information you have provided does not allow us to readily ascertain your liability, either for particular transactions or for tax periods.

In those circumstances we consider that you are unable to sufficiently identify which, or the extent to which, supplies that you made were GST-free. You do not capture information that establishes that a recipient is outside of Australia at the time of a supply. Without this information, you are unable to determine which particular supplies are GST-free under section 38-190 of the GST Act.

The statistical data you have relied on is not sufficient to determine whether particular supplies are GST-free or to accurately ascertain your GST for each tax period. One reason for this is that the figures you use provide an average for each financial year, but do not reflect any variation month by month.

You have not provided any evidence to show that you have tested, whether by sampling or otherwise, the accuracy of the percentages you have used.

In all the circumstances we consider that the apportionment methodology that you have adopted does not adequately determine the extent to which your supplies are GST-free.