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Ruling

Subject: Refund of GST

Question

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 included GST in the price of a non-taxable supply and propose to reimbursed the recipients of the supply by way of a face value voucher (FFV) redeemable through your website or a credit note which may be applied as a discount against future purchases.

Answer

No

Relevant facts

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 retailer established in Australia selling goods to Australian and overseas customers on-line.

You are registered for GST.

When a customer places an on-line order with you, you forward the individual order to a foreign manufacturer for fulfilment of the order.

The goods are shipped from the foreign manufacturer directly to the customer.

If the customer is located in Australia, the goods are shipped on a Free Carrier ("FCA") basis.

For the relevant period you incorrectly charged and remitted GST on all your sales to Australian based customers.

You contend that these supplies are outside the scope of GST, being supplies that involve the goods being imported into Australia by the recipient of the supply'.

Given the nature of the goods sold by you, it is your understanding that your customers are generally not registered or required to be registered for GST purposes, and/or do not purchase goods from your website in the course of carrying on an enterprise. That is, the transactions constitute 'business to consumer' supplies only.

As customers establish an on-line account with you at the time they order and purchase goods, you are able to identify all customers during the relevant period who have been incorrectly charged GST on their supply.

You intend to reimburse customers the GST incorrectly charged by way of a face value voucher which can be redeemed for goods on your website or a credit note which can be applied as a discount against a customer's next purchase.

Consistent with other vouchers currently issued by you, there will be no set expiry date for the redemption of these vouchers or the validity of the credit notes.

You are seeking confirmation that your intended course of action would likely result in the Commissioner not exercising his discretion to disallow a refund per section 105-65 of Schedule 1 to the TAA.

Relevant legislative provisions

Taxation Administration Act 1953, Section 105-65 of Schedule 1

Reasons for decision

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.

However, the Commissioner is not satisfied that you have reimbursed or will reimburse a corresponding amount to the recipient of the supply and so need not give you a refund.

Section 105-65 of Schedule 1 of the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Your circumstances do not 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.

Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances

The restriction on refunds of overpaid GST under subsection 105-65 (1) 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.

In this case you remitted GST of 1/11 of the price of your goods when these goods were in fact not taxable. It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

You have advised that the majority of the recipients of your supply would not be registered for GST purposes. You have also advised 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 exercise his discretion and 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.

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.

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.

In this case you have advised that the GST was in fact passed on to the recipients of the supply. Therefore, the cost has been passed on to the recipients and has not been borne by you.

You further advise that you intend to reimburse your customers the GST incorrectly charged by way of a FVV which can be redeemed for goods on your website or a credit note which can be applied as a discount against a customer's next purchase, and that consistent with other vouchers currently issued by you, there will be no set expiry date for the redemption of these vouchers or the validity of the credit notes.

Whether this action constitutes reimbursement requires further discussion.

The term reimburse is not defined in the GST Act and is therefore defined by its ordinary meaning.

The word 'reimburse' is defined in the Macquarie Dictionary Version 5.0 as follows:

reimburse

1. to make repayment to for expense or loss incurred.
2. to pay back; refund; repay.

Paragraph 18 of Frequently used terms for the purposes of this Ruling in MT 2010/1 states the following:

18. The term 'reimburse' encompasses not only an actual monetary payment but also crediting of the recipient's account such that it reduces the debt owed or offsetting the credit against liabilities.

From the above it is clear that the reimbursement of the overpaid GST must either be of a monetary payment or a crediting of a customer's account that reduces a debt owed to you by the customer.

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. However, the Commissioner is not satisfied that the arrangements that you propose would constitute you reimbursing a corresponding amount to the recipient of the supply Accordingly section 105-65 applies and the Commissioner need not give you a refund.

The Commissioner will not 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 goods.

Further issues for you to consider

Where reimbursement has occurred, that is the discounts have been taken up by the customers to reduce their debt or liability to you, then section 105-65 will not apply to restrict the refund where they are not registered or required to be registered. At this point you are entitled to a refund of that amount of overpaid GST. For this to occur, you would need to revise each affected Activity Statement (AS). As this could result in multiple revisions of the same AS over time as the discounts are taken up, you may choose instead to do one set of AS revisions at the end of a year for all discounts taken up.