Edited version of your private ruling

Authorisation Number: 1012474157783

Ruling

Subject: GST and refund of overpaid GST

Question 1

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 remitted GST to the Australian Taxation Office (ATO) in the price of a non-taxable supply?

Answer

Yes

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 company registered for GST.

· You carried on an enterprise at various locations in Australia. (Enterprise).

· You entered into an agreement (the Agreement) with another entity (Entity A). Under the Agreement, you agreed to transfer to Entity A the Enterprise.

· You and Entity A agreed in the Agreement that subject to obtaining a private ruling (PBR) from the Commissioner of Taxation, the Enterprise was to be supplied as a GST-free going concern.

· You reported the transaction in your business activity statement (BAS) and made a decision to pay an amount to the ATO representing the GST that would have been payable should the PBR (that had not yet been applied for) from the ATO result in an unfavourable decision.

· To avoid any penalties and interest and the ATO refunding the payment, you reported that you had made taxable supplies on your BAS when you had not.

· You and Entity A applied for a PBR in on whether the acquisition of the Enerprise including shares from you was a GST-free supply of going concern under Div 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

· A favourable PBR was issued to both parties.

· You wrote to the ATO on asking for your relevant BAS to be amended to exclude the above sale from taxable supplies and to reduce the GST paid.

· You claim that the supply was always treated as a GST-free in accordance with the Sales contract but GST was remitted to the ATO pending the PBR.

· You and Entity A both confirm that a tax invoice was not issued in relation to the sale of your Enterprise.

· Entity A confirms that it has not claimed any input tax credits (ITC) in relation to the purchase of the going concern.

· You advise that Entity A has not been reimbursed for any amount corresponding to the GST overpaid as they have not been invoiced or paid a GST amount.

· You contend that you have borne the cost of the GST.

Relevant legislative provisions

Taxation Administration Act 1953,

Section 105-65 of Schedule 1

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

Section 9-5.

Section 9-25.

Reasons for decision Issue 1

Question 1

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 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 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.

You have provided the information you have provided to the ATO that

"…you were forced to report that it had made taxable supplies…"

"… you did not treat the transaction as a taxable supply and section 105-65 should not have any operation here. It would seem very inappropriate to use this section where a taxpayer has simply paid an amount to ensure it is complying with the GST legislation where some uncertainty exists…."

By reporting this amount in your BAS you have in fact treated the supply as a taxable supply when it was not a taxable supply and therefore 105-65 of Schedule 1 to the TAA needs to be considered.

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 supply as you were unsure of the correct treatment of the supply.

Upon receipt of the PBR the ATO has found that the supply was in fact a GST-free supply of a going concern.

As the supply is GST-free it follows that you remitted more than was legally payable and that there has been an overpayment of GST.

On the facts provided the recipient of your supply is registered for GST purposes. You have also advised that they have not been reimbursed for any amount corresponding to the GST overpaid as they have not been invoiced or paid a GST amount and you did not include GST in the price of your supply.

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 T 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.… [Emphasis added].

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 your supply of the going concern to Entity A was made as a GST-free supply and you have provided a copy of Agreement and an Amendment to the Agreement which includes a GST going concern clause. Additionally the ATO has issued a PBR to both yourself and Entity A indicating that the supply was a GST-free supply of a going concern.

On the facts provided you also indicate that you treated this transaction as a GST-free going concern. You did not issue a tax invoice and did not "gross up the GST" or ask for or receive any additional payment from the purchaser to cover the cost of GST. The 'error' was made because of the mischaracterisation of the payments in your BAS as discussed above. And because of the error, you are the entity who ultimately has borne the GST. You have not passed on the GST to the clients and would not receive any windfall gain following the refund.

The refund of the overpaid GST is fair and reasonable in the circumstances.

Consequently the Commissioner will exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you.