Edited version of private advice

Authorisation Number: 1012683503319

Ruling

Subject: Request for GST Refund

Question

Will the Commissioner exercise the 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) incorrectly included in the price of a GST-free supply?

Answer

No

Relevant facts and circumstances

• You are a not for profit entity that provides support and rehabilitation services to people with physical disabilities.

• You are registered for GST.

• The program run by you is an individually designed intensive activity based rehabilitation program to assist people with spinal cord injuries to improve and maximise their functional ability and lead more independent lives.

• You prepared your activity statements from 200X until 20XX on the basis that the supplies of the program by you to your clients were taxable supplies.

• In 200X you engaged your representative to provide advice on the GST implications of the program and were advised that it was a taxable supply at that time.

• In 20YY the manner in which the program was run changed.

• In 20XX you instructed your representative to apply for a ruling on the GST treatment of the program.

• You received a private ruling in 20XX from us in which the Commissioner ruled the supply of the program was a GST-free supply of medical services.

• Your fee structure for the program, as provided to the Commissioner when requesting your ruling, prior to the ruling being issued was a set amount per hour plus GST.

• You issued tax invoices for the supply of the program to clients which included a GST amount.

• You contend that the prices charged for the program were not calculated to include GST. The fees were determined taking into consideration what the market was willing to pay and the price of similar, though less specialised, services. As a result the program has been operating at a loss in the relevant period.

• You contend that the GST overpaid in relation to your supply of the program is over $100,000 in the period for which you misclassified your supplies.

• You have not reimbursed, nor propose to do so, the amount of GST collected over the above period in relation to these supplies as you contend that the GST was not passed on to your clients but rather absorbed by yourself.

Relevant legislative provisions

Taxation Administration Act Section 105-65 Schedule 1.

Reasons for decision

Summary

The Commissioner is satisfied that you have overpaid an amount of GST because you treated your supply of the program as taxable when the supply was not a taxable supply.

The Commissioner has the discretion to give a refund of overpaid GST in circumstances such as yours where section 105-65 of the TAA applies to deny the payment of a refund.

Based on the information provided we consider that GST has been included in the price of your supply and has been passed on to the recipients of the supply and accordingly the Commissioner will not exercise the discretion to give you a refund of overpaid GST.

Detailed reasoning

Under the general rules the Commissioner is required to give a refund or apply an amount owing as a credit against tax debts that you owe. However this requirement is subject to section 105-65 of the TAA which modifies the general rules so that the Commissioner need not give a refund (or apply that amount) if the requirements of the section are met.

Section 105-65 of the TAA applies when all three of the following requirements are met:

• there was an overpayment of GST

• a supply was treated as taxable, or an arrangement was treated as giving rise to a taxable supply , to any extent 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 overpaid GST and/or the recipient of the supply is registered for required to be registered for GST.

Miscellaneous Tax Ruling MT 2010/1 provides the Commissioner's views on section 105-65 of the TAA and the circumstances in which the Commissioner may exercise this discretion.

In exercising the discretion the Commissioner must take into account the purpose of section 105-65 of the TAA. That is the prevention of windfall gains to suppliers and to ensure the refund compensates the person or entity that bore the cost of the GST. Given the framework of the GST system is that the end consumer ultimately bears the cost of the GST.

In your case section 105-65 of the TAA does act to restrict the refund of overpaid GST as you have misclassified your supplies of the program as taxable. As a result of this misclassification you have taken into account and remitted GST that you were not legally liable for on those supplies when calculating your net amount for your lodged activity statements in the relevant period. Finally you also meet the conditions of this provision as you have not reimbursed the recipients of these supplies nor do you propose to do so.

As discussed above it is important when exercising the discretion to consider who ultimately bears the cost of the GST. Under the GST framework it is the supplier who determines if GST applies to the good or service they are supplying and where the decision is made to treat a supply as taxable, the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on in the price charged by the supplier. It is for the supplier to prove that the GST has not been passed on.

The cost structure in 20XX and the issuing of tax invoices by you show that GST has been included in the price of the supply and is evidence that the supply included GST.

You have advised that you did not take into account the GST when establishing the price charged to clients and the fact that the program ran at a loss in the relevant period shows that the economic burden of the GST was borne by you.

Whilst you contend that you did not take into account the GST when establishing your price and have ultimately run the program at a loss, it is our view that setting a price based on market pressures, even if this results in an operating loss, does not mean that the supplier has necessarily borne the cost of the GST. Your pricing decisions were market based business decisions made at the time, relevant to and in conjunction with economic and competitive forces and your own pricing philosophy and business plans.

We have considered the guiding principles as provided by MT 2010/1 when exercising the Commissioner's discretion and have concluded that it would not be fair and reasonable to give you a refund of overpaid GST and there are no other countervailing reasons to exercise the discretion.