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Ruling

Subject: Refund of overpaid GST

Question 1

Are the developer's supply made as in kind contributions to an Australian government entity in return for the right to develop land taxable?

Decision

No

Question 2

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund the overpaid goods and services tax (GST)?

Decision

Yes

Relevant facts:

· You are registered for the GST.

· You carry on an enterprise of developing property.

· You made a supply to a government entity as in kind developer contribution.

· You reported the supply as taxable in error and remitted the GST to ATO.

· The government entity (recipient of supply) is registered for GST

Reasons for decisions

Question 1

Are the developer's supply made as in kind contributions to an Australian government entity in return for the right to develop land taxable?

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Therefore we need to determine whether the developer has made their supply for consideration.

Please note: Under section 2-15 of the GST Act, if there is a special provision in the GST legislation that may apply to a particular case, the special provision takes precedent over the general provision. Therefore, section 82-5 of the GST Act overrides section 9-15 of the GST Act, which is about consideration.

In kind developer contribution

Division 82 of the GST Act applies to supply (referred to as in kind developer contributions) made in return for the supply by an Australian government entity of a right to develop land. Division 82 of the GST Act ensures that there are no GST consequences for either a developer or an Australian government entity where the developer is required to make in kind contributions as a condition for the consent given by the Australian government entity.

Subsection 82-5(1) of the GST Act states:

The supply by an Australian government agency, of a right to develop land is not treated as consideration for another supply if the other supply complies with requirements imposed by or under an Australian law.

Based on the information provided, your supply of in kind developer contributions to the government entity is made to comply with the requirements under an Australian law. Therefore, your supply of in kind developer contributions is not treated as consideration under subsection 82-5(1) of the GST Act and therefore the criterion paragraph 9-5(a) of the GST Act is not satisfied. The supply as in kind developer contributions is not taxable supply under section 9-5 of the GST Act.

However, you advised that you made an error and remitted the GST to ATO for the supply which is not taxable under section 9-5 of the GST Act. You now ask for a refund of the GST which you consider to be an overpayment.

Question 2

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund the overpaid GST?

Under section 105-65 of Schedule 1 to the TAA, the Commissioner need not refund an overpayment of GST where this section applies. Section 105-65 of Schedule 1 to the TAA provides that the Commissioner need not refund overpaid GST on a supply that is not taxable, if one of the following circumstance listed in paragraph 105-65(1)(c) of Schedule 1 to the TAA applies. They are:

· the supplier has not reimbursed the GST to the recipient or

· the recipient of the supply is registered or required to be registered

Therefore, the Commissioner is not required to refund overpayment of GST. However, there maybe some circumstances where the Commissioner will consider exercising his discretion to allow a refund of overpaid GST. The guiding principles for the Commissioner exercising his discretion under section 105-65 of Schedule 1 to the TAA are outlined in paragraphs 128 to 132 of Miscellaneous Taxation Ruling (MT) 2010/1. Paragraph 128 of MT 2010/1 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 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.

(ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment … has not been passed on'.

(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.

(e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient

The Commissioner, in exercising the discretion, must consider all relevant facts and circumstances. The discretion will only be exercised where it is fair and reasonable. The discretion will generally not be exercised where it produces an unreasonable result, for example; a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the input tax credit from the recipient

We consider sub-subparagraph 128(d)(ii) in MT 2010/1 may apply to your claims which states:

The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment … has not been passed on'

This is illustrated in example 15 in Appendix 3 of MT2010/1 which outlines the case for the Commissioner to exercise his discretion under similar circumstance. In the example, the supplier provides their supply as GST free to the recipient but reported the supply as taxable while waiting for advice from ATO. As the supplier has not passed on the GST (supply was treated as GST free) to the recipient of the supply, it is therefore fair and reasonable for the Commissioner to exercise his discretion to refund the overpaid GST.

In your case, your supplies are not taxable as they are made as in kind developer contribution to a government entity (recipient of supply). Therefore, as you have not passed on the GST to the recipient of supply, it is fair and reasonable for the Commissioner to exercise his discretion to allow you to claim the refund of the overpaid GST.