Edited version of private advice

Authorisation Number: 1012618778371

Ruling

Subject: Goods and services tax (GST) and supplies of digital application

Question 1

Is GST payable on your sales of the application when you make these sales through the agent?

Answer

GST is not payable on your sales of the application when you make these sales through the agent and the purchaser is overseas.

GST is payable on your sales of the application when you make these sales through the agent and the purchaser is in Australia.

Question 2

Can you amend the BAS's in error without the need for the Commissioner to exercise discretion to refund the incorrectly remitted 'GST' amounts?

Answer

No.

Question 3

Will the Commissioner exercise the discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund any GST incorrectly remitted in relation to your sales of the application through the agent's stores?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You operate from Australia.

You sell a digital application that is downloaded onto your customer's device.

You sell this application through an agent

You have entered into a section 153-50 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) arrangement with the agent.

The application is sold through virtual stores.

Payment for the application may be in Australian currency or foreign currency. The location of the purchasers may be Australia or overseas.

With the sales being made through the agent's store online, and based on the monthly reports provided by the agent, there appears to be control and breakup of the origin of the purchaser by reference to the currency/store the application was purchased through. A GST amount is only shown for Australian sales.

The agent issues Recipient Created Tax Invoices (RCTI) to you where you make sales through it.

You have not included GST in all these sales.

There is no GST included in the RCTI for sales made to purchasers who are not located in Australia.

There is GST included in the RCTI for sales made to purchasers who are located in Australia.

You have reported all your sales made through the agent as taxable sales at G1 of your activity statements and remitted GST to the ATO on all these sales. You have not refunded to the customers equivalent amounts.

You have reported all your sales made through the agent as taxable sales for a certain period.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Taxation Administration Act 1953 Schedule 1 section 105-65

Reasons for decisions

Question 1

Summary

You make a GST-free supply where the purchaser is outside Australia because consumption takes place outside Australia in these cases.

Where the purchaser is in Australia, you do not make a GST-free supply because consumption takes place in Australia in these cases.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

(*Denotes a term defined in section 195-1 of the GST Act)

You meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

• you are supplying the application for consideration

• you supply the application in the course or furtherance of an enterprise that you carry on;

• you are registered for GST.

Your supplies of the application are connected with Australia because you make these supplies through an enterprise that you carry on in Australia. Hence, the requirement of paragraph 9-5(c) of the GST Act is met.

There are no provisions in the GST Act under which your supplies of the application are input taxed.

Therefore what remains to be determined is whether your supplies of the application are GST-free.

Item 3

Item 3 in the table in subsection 38-190(1) of the GST Act (item 3) provides that a supply of a thing other than goods or real property is GST-free if:

(a) the supply is made to a recipient who is not in Australia when the thing supplied is done; and

(b) the effective use and enjoyment of the supply takes place outside Australia;

other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

You are making a supply of something other than goods or real property. You are supplying a digital program.

Where the purchaser is overseas when they download the application, they are not in Australia.

Where the purchaser is overseas when they download the application, effective use and enjoyment takes place overseas.

The supply of the application is not a supply of work physically performed on goods situated in Australia when the work is done, nor is it a supply that is directly connected with real property situated in Australia.

Therefore, where the purchaser is overseas when they buy the application, you make a GST-free supply under item 3. Hence, under such circumstances, you do not make a taxable supply, and therefore, GST is not payable on these supplies.

There are no provisions of the GST Act under which you make a GST-free supply where the purchaser is in Australia when they buy the application. Hence, under such circumstances you make a taxable supply because all of the requirements of section 9-5 of the GST Act are met. Therefore, GST is payable on these supplies.

GST is not payable on the sales paid for in overseas currency.

GST is payable on the sales paid for in Australian dollars.

Question 2

In accordance with section 105-65 of Schedule 1 to the Taxation Administration Act 1953, because you have overpaid GST to the ATO as a result of classifying non-taxable supplies as taxable supplies and you have not reimbursed corresponding amounts to the recipients of these supplies, the Commissioner need not give you a refund of the overpaid GST.

Therefore, you cannot amend the BAS's in error unless the Commissioner exercises his discretion to refund the incorrectly remitted 'GST' amounts.

Question 3

Summary

The Commissioner is satisfied that you have overpaid an amount of GST because you reported all your sales of the application through the agent's stores as taxable supplies where not all your supplies were taxable supplies.

However, the Commissioner is not satisfied that you reimbursed a corresponding amount to the recipient of the supply and so section 105-65 of Schedule 1 to the TAA applies to restrict the refund.

It is the ATO view that there is a discretion contained in section 105-65 of Schedule 1 to the TAA to nonetheless allow the refund in certain circumstances. Your circumstances warrant the exercise of the discretion and it is accordingly exercised to allow the refund.

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 the arrangement foes not give rise to a taxable supply to that 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 in the periods (certain date) to the current period in a certain year you reported all your sales on your activity statement as taxable supplies and remitted GST of 1/11 of your total sales of the application through the agent's stores when these sales were in fact not all taxable. It follows that you remitted more GST than was legally payable and that there has been an overpayment of GST.

Recipients 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 need not give a refund.

Exercise of the discretion to refund

It is the ATO view that where section 105-65 of Schedule 1 to the TAA applies to restrict a refund, the Commissioner nonetheless has the discretion to pay a refund in appropriate circumstances (see paragraphs 116 and 117 of MT 2010/1).

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion, including subparagraphs (c) and (d) which state:

(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:

…

(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'. …

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 your case you have advised that the GST was not passed on to the recipients of the supply where the supply was GST-free under subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Therefore, the cost of the GST has been borne by you.

Application to the present case

It is reasonable to conclude in the circumstances that the price for your supply of the application did not include a GST component for sales made through the overseas agent's stores.

It is accepted that an inadvertent 'arithmetic' or recording error was made by you in the supply of the application and thus the preparation of your business activity statement. It is also accepted that in the circumstances the price of the application did not include a GST component. It follows that the overpaid GST was not passed onto the recipients and the burden of the GST was borne by you.

Further, if the sales of the application that were GST-free were treated correctly as a GST-free supply then the price the recipients paid for the application would be the same. Therefore, a refund of the overpaid GST to you will not result in a windfall gain to the supplier at the expense of the recipient.

In the circumstances the Commissioner will exercise the discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for the supply of the devices application from April 20XX up to the current period.

Additional information

There is a 4 year time limit on claiming back GST overpaid to the ATO. This time limit can be extended by lodging a notification of intention to claim the amounts. The notification must be lodged before the 4 years has passed. See copy of the notification form enclosed.