Edited version of your written advice

Authorisation Number: 1012690138140

Ruling

Subject: GST and GST-free education course and refund of overpaid GST

Question 1

Is the supply of Learn to Swim (LTS) classes provided by Entity A at the Building A a supply of a GST-free aquatic education course under section 38-85 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when the LTS classes mainly provide personal aquatic survival skills and are taught by instructors who possess Austswim Limited qualifications?

Answer

Yes

Question 2

Will the Commissioner exercise his discretion under Schedule 1, section 105-65 of the Taxation Administration Act 1953 (TAA) to allow you a refund of the goods and services tax (GST) you incorrectly included in the price of a non-taxable supplies in the period 1 August 2009 to 31 July 2013 (relevant period)?

Answer

No.

Relevant facts and circumstances

• Entity A owns and operates the Building A.

• Entity A offers LTS classes at Building A for a fee payable to Entity A.

• The classes mainly provide instruction in personal aquatic survival skills.

• The LTS classes at all relevant times have been taught by instructors who held training qualifications to teach the classes issued by Austswim Limited.

• During the relevant period, Entity A collected fees in exchange for the provision of the LTS classes.

• Fees are typically paid over the counter or by direct debit and receipts are automatically generated by an automated receipting machine.

• The prices paid by the customer were calculated on a per lesson basis and were always even numbers.

• The LTS customers were mums and dads who were not registered or required to be registered for GST.

• During the relevant period, Entity A paid GST on the fees collected for the LTS classes to the Australian Taxation Office ('ATO').

• Entity A made these payments to the ATO incorrectly believing the fees collected for the LTS classes were for taxable supplies.

• As is their practice, Building A recommended pricing for LTS classes each year to Entity A and those price recommendations were set according to market forces and with the aim of maintaining a value for money program that is affordable to lower income families without reference to or consideration of GST.

• Building A did not know that neighbouring councils were correctly treating their LTS earnings as GST-free.

• You contend that Entity A adopted the prices recommended by Building A without reference to or consideration of GST.

Relevant legislative provisions

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

Division 38

Subdivision 38-C

Subdivision 38-85

Section 195-1

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

Regulation 195-1.02 - First aid or life saving course

Schedule 12

Taxation Administration Act 1953

Divisions 3 and 3A of Part IIB

Sections 105-65 to the Schedule 1

Reasons for decision

Issue 1

Question 1

Summary

The supply of the learn-to-swim courses provided by Entity A at Building A is a supply of a GST-free education course.

Detailed reasoning

An education course is GST-free under section 38-85 of the GST Act. An education course includes, amongst other things, a first aid or lifesaving course as defined in section 195-1 of the GST Act.

To be GST-free as a first aid or lifesaving course, a course must satisfy two requirements.

First requirement

A first aid or lifesaving course is one that is principally trains individuals in one or more of the following:

(i) first aid, resuscitation or other similar lifesaving skills, including personal aquatic survival skills but not including swimming lessons

(ii) surf lifesaving or

(iii) aero medical rescue

We accept that personal aquatic survival skills include:

• sculling

• treading water

• floating

• basic swimming skills

• safe entry and exit from the water, and

• techniques of clothed swimming survival.

You have advised and provided information which indicates that all the levels of your courses principally involve training adults and children, in personal aquatic survival skills as described above.

As all the levels of your courses and the courses as a whole, principally provide training in personal aquatic survival skills, the courses satisfy the first requirement, irrespective of whether they are provided to children or adults.

Second Requirement

To be GST-free as an education course a first aid or lifesaving course must be provided by an entity that is:

(i) registered or otherwise approved by a State or Territory authority that has the responsibility for registering (or otherwise approving) bodies that provide such courses or

(ii) approved to provide such courses by a State or Territory body that has the responsibility for approving such courses or

(iii) that uses, as the instructor for the course, a person who holds a training qualification for that course that was issued by Austswim Limited (ACN 097 784 122) or

(iv) that uses, as an instructor for the course, a person who holds a training qualification for that course that was issued by Surf Life Saving Australia Limited (ACN 003 147 180) or

(v) who holds a training qualification for that course that was issued by the Royal Life Saving Society-Australia (ACN 008 597 616), or

(vi) that uses as an instructor for the course, a person who holds a training qualification for that course that is a qualification (in life saving) specified in, or of a kind specified in the regulations.

You have advised that Austswim qualified instructors conduct all of your classes or programs and therefore the second requirement is satisfied.

As both of the requirements are satisfied, the courses provided by you, as listed above, are GST-free as a first aid or lifesaving course.

Question 2

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 do not 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.

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 supplies (being the supply of certain learn to swim courses) when these supplies were in fact not taxable. It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

You have advised that the majority of the recipients of your supply would not be registered for GST purposes. You have also advised that they 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 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 (Luxottica) 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 answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 9-12 of Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by the Avon case about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect. Those paragraphs are reproduced as follows:

9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit. It is the profit-making motive of business which, in the nature of things, generally results in sales tax being passed on. This is because, leaving aside rare cases where sales tax is separately identified and superadded to the invoice price after sale, sales tax can only be passed on indirectly through the price mechanism. In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered, anything above this being conceptualised as a margin of profit. Because sales tax is levied upon the vendor prior to the ultimate sale by retail in the manner explained by Dixon J in Ellis & Clark, it forms part of the cost structure of doing business. There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on.

10. As has been explained, it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment of sales tax has not been passed on. Where the whole or part of the economic burden of sales tax may have been passed on indirectly through prices, the inquiry in this regard is likely to be complex. The complexity arises because prices may be set with reference to a wide range of factors (including considerations of cost of production, competitive advantage, operational cash flow and customer goodwill). However the starting point must be the seller's pricing policy and practice.

11. In this way, the question is to be approached with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. That knowledge includes the belief that the component of sales tax which later proves to have been an overpayment is a real cost of doing business. Accordingly, it is unsurprising that a seller's intention, whether subjective or objectively ascertained, will generally be to pass the burden of the impost on to the purchaser. Since the onus of proof lies upon the taxpayer, it will be for it to establish that a price which is set so as to ensure that it recovers its cost does not include the economic burden of the sales tax.

12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom. …. But, given what has been said above, realism requires a recognition that in the ordinary course sales tax will have been passed on.

Whether GST is passed on is a question of fact that needs to be determined in any particular case.

In your circumstances, the following facts/contention are considered:

• You have advised that GST was included in the fees (price of the supply) during the relevant period.

This indicates that prima facie, the supplies made during the relevant period were treated as taxable supplies.

• You have advised that the price was charged as a retail price to your clients based on competitive market forces and that prices were set by reference to what you felt the market would bear and did not include a GST component.

The Commissioner's approach is set out in MT 2006/1, at paragraphs 36 - 45 and summarised at paragraph 126 which provides that the GST Act is structured on a basis that GST is passed on when the supply is treated as a taxable supply. This means that the presumption is that:

• In an economy geared to making a profit GST is expected to be passed on. The GST will be passed on in the usual course of doing business.

• the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier.

• It is inherent in an indirect tax system that GST will be passed on, proof to the contrary will occur comparatively seldom.

There are many situations where GST may not consciously be factored into a price by the supplier, but such a failure to consider the GST is not normally sufficient to show that GST has not been passed on. Not explicitly considering the GST at the time of the price setting does not mean that the supplier has not passed on the GST.

It is the commissioner's view that where an entity which sets price without immediate regard to the GST or other particular costs, this does not mean that GST or other costs are not accounted for by the entity or are not passed on by it.

As the supplies were treated as taxable supply during the relevant period, the correct report was to include the supply in G1. There was no reporting error made during the relevant period in relation to the supply.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST from your supply of supply of certain learn to swim courses for the relevant period.

In conclusion, 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 reimbursed a corresponding amount to the recipient of the supply and so need not give you a refund.