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Edited version of your private ruling
Authorisation Number: 1012457834287
Ruling
Subject: Product recall
Question
Are you entitled to a goods and services tax (GST) refund on products which have been recalled?
Answer
No
Relevant facts:
§ You are registered for GST.
§ You carry on an enterprise of supplying products to your customers in Australia.
§ You include GST in the price of the product.
§ You provide a copy of your tax invoice.
§ You recalled the product and replaced them with another similar product.
§ Under your supply contract, you are required to replace the product recalled with same product at no cost to your customer.
§ You did not charge for the product replaced.
§ You have not issued a new tax invoice for the product replaced.
§ You have not cancelled the tax invoice for the product (under product recall).
Relevant legislative provisions:
A New Tax System (Goods and Services Tax) Act 1999 section 9-5
A New Tax System (Goods and Services Tax) Act 1999 Division 19
A New Tax System (Goods and Services Tax) Act 1999 subsection 19-10(4)
A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-15(1)(a)
Reasons for decision
Under section 9-40 of the GST Act, you must pay the GST for your taxable supply.
Under section 9-5 of the GST Act, an entity makes a taxable supply if:
(a) it makes the supply for consideration
(b) the supply is made in the course or furtherance of its enterprise
(c) the supply is connected with Australia; and
(d) the entity is registered or required to be registered.
However the supply is not taxable to the extent that it is GST-free or input taxed.
Your supply of the product satisfies the criteria in section 9-5 of the GST Act. You advised that you treat your supply in Australia as taxable and charge GST for the supply. You issue tax invoices to your customers for your taxable supply. The supply in Australia is not GST-free nor input taxed under the GST legislation. However, the export of the product could be a GST-free export under section 38-185 of the GST Act.
Product Recall
TGA had required you to perform a product recall on your product sold in Australia. The product recall was conducted and you replaced the recalled product with a replacement product as per Clause 8.2 of your "Term and Conditions of Sale".
You provided the replacement product free of cost to your customer and your customer was not required to pay for the replaced product. You did not issue a new tax invoice for the product replaced and have not cancelled the original tax invoice, issued earlier to your customer for your supply of your product (which had been recalled).
Decreasing Adjustment?
Therefore the issue to consider is whether the product recall was an adjustment event which would result in an adjustment to your GST liabilities under Division 19 of the GST Act.
The Australian Taxation Office (ATO) view on adjustments under Division 19 of the GST Act is outlined in the Goods and Service Tax Ruling GSTR 2000/19.
Paragraph 16 of GSTR 2000/19 states:
Cancellation of a supply or an acquisition
The cancellation of a supply or an acquisition is an adjustment event. Generally, the return of a thing or a part of it, to a supplier is an adjustment event (whether or not the return involves a change of ownership). If, on the facts, the return does not have the effect of cancelling the supply, it will not be an adjustment event. For example, the return of a thing for repair or maintenance is not an adjustment event. In the case of exchange of goods, where the exchange does not result in a cancellation of the supply or a change in the consideration, it will not be an adjustment event. This will depend on the facts and the contractual arrangements between the parties.
Where there is an exchange of the replacement goods for the product recalled and the circumstances indicate that the return of the product recalled does not have the effect of cancelling the original supply or change in consideration for the original supply, the exchange of goods is not an adjustment event under Division 19 of the GST Act.
In your case, you exchanged your product with replacement products free of cost to your customer. The exchange was done under clause 8.2 of the "Terms and Conditions of Sale" where you were required to replace the goods.
In addition you have not cancelled the original supply of your product as you have not withdrawn and cancelled your tax invoice. You have not issued a new tax invoice for the replaced product.
Based on the above information, we considered that, although you have provided the same product to replace the product recalled, you have not cancelled your taxable supply. You are therefore still liable for GST on your taxable supply.
In addition, there is no adjustment event in the exchange of goods under the product recall which would result in a decreasing adjustment under Division 19 of the GST Act. The Commissioner will not refund the GST on the product recall.