Edited version of your written advice

Authorisation Number: 1012811150095

Ruling

Subject: GST and restriction on refund of overpaid GST

Question 1

Will the Commissioner refund the incorrectly remitted goods and services tax (GST) that you paid in your Business activity statements (BASs) for the relevant tax periods under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes

Relevant facts and circumstances

• You are registered for GST.

• After 1 July 2000 A (the supplier) and B (the recipient) entered into an agreement (the Agreement).

• Under the terms of the Agreement:

• You are independent of A;

• You are established for charitable objects that are for the benefits of a third party.

• You will hold the financial benefits and from this Agreement to be used for your purposes.

• All payments to you will be paid by B (the recipient) by depositing the amount of the payment into a bank account held for the benefit of the third party and nominated in writing to B by you. The amount deposited is deemed to have been paid to and received by A in accordance with the provisions of the Agreement.

The Business activity statements (BASs)

• You have reported the payments under the Agreement from B in your BASs since your GST registration.

• A recent review of your BAS has discovered amounts of GST have been incorrectly remitted in respect of the payments under the Agreement due to a manual error in the preparation of the BASs an amount of GST was inadvertently included on those receipts.

• You reported the overpaid GST amounts in the relevant BASs.

• Your Tax Advisor has provided a declaration that:

1. You did not receive any Recipient Created Tax Invoices from B for the relevant payments under review and

2. You did not issue any Tax Invoices to B for the relevant payments under review.

• B have advised that they were able to identify three of the four payments which corresponded with the remittance advices, that it appears there is no tax invoice, just a calculation of a royalty amount and a remittance advice, and that they did not claim ITCs in relation to these payments.

Relevant legislative provisions

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

Subsection 7-1(1)

Section 9-5

Section 9-10

Section 9-40

Taxation Administration Act 1953

Section 8AAZLF

Section 105-55

Section 105-65

Reasons for Decision

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 (as reasoned below).

However, the Commissioner need not give you a refund as the recipient is registered for GST.

Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. It is considered that your circumstances fall within the limited circumstances that the Commissioner would exercise the discretion to refund you the overpaid amount.

Detailed reasoning

Under subsection 7-1(1) and section 9-40 of the GST Act, an entity is liable for GST on the taxable supplies it makes.

Supply

The term 'supply' is defined in section 9-10 of the GST Act to mean:

(a) a supply of goods;

(b) a supply of services;

(c)  a provision of advice or information;

(d)  a grant, assignment or surrender of *real property;

(e)  a creation, grant, transfer, assignment or surrender of any right;

(f)  a *financial supply;

(g)  an entry into, or release from, an obligation:

(i)  to do anything; or

(ii)  to refrain from an act; or

(iii)  to tolerate an act or situation;

(h)  any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

It is considered that in return for the payments under the Agreement, a supply is made to B under paragraph 9-10(2)(g) of the GST Act.

The entity

The next issue that needs to be considered is whether you are the entity that makes the supply.

You are not a party to the Agreement which is between A and B.

Under a clause of the Agreement, you are nominated to receive payments under the Agreement. You hold the financial benefits from the Agreement to be used for the purposes of your organisation.

You do not make any supply under paragraph 9-10(2)(g) of the GST Act or make a supply of anything under section 9-10 of the GST Act in return for the payments under the Agreement.

We consider that the supplies made under the Agreement were made by A, a separate entity. They are the supplier in relation to the supplies made under the Agreement. You are not the supplier. This means you should not have remitted any GST in respect of the supplies, whether or not they are subject to GST.

Will the Commissioner refund of the relevant overpaid GST?

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 Taxation Administration Act 1953.

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) applies to your circumstances

The restriction of refunds of overpaid GST under section 105-65 will apply if all three of the following conditions are present:

• 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

• one of the following applies:

(i) the supplier has not reimbursed a corresponding amount to the recipient of the supply, or

(ii) the recipient of the supply is *registered or *required to be registered for GST.

Miscellaneous Tax Ruling 2010/1 (MT 2010/1), which was issued on 15 December 2010, provides the view of the Commissioner on the application of section 105-65.

Paragraph 20 of MT 2010/1 explains the meaning of 'overpaid'. It states:

In the context of 105-65 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated as taxable supply'. It states:

In the context of section 105-65 a supply would be treated as a taxable supply where the supplier has mischaracterised a supply as taxable because they believed the supply to be a taxable supply, has dealt with the recipient of the supply as if the supply was a taxable supply and has remitted an amount as GST to the Commissioner on that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as GST-free or input taxed but mistakenly includes GST for that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as taxable but miscalculates the GST for that supply in the calculation of their net amount [emphasis added].

Further paragraphs 94 to 98 of MT 2010/1 explain that the Commissioner's view where the wrong entity remits GST is that section 105-65 does apply in such circumstances provided the requirements of subsection 105-65(1) are met.

In your circumstances:

• You have mischaracterised the supplies made under the Agreement as taxable supplies by you and have remitted an amount of GST to the Commissioner on that supply.

• It follows that, as you did not make those supplies and you should not have paid any GST in relation to those supplies, the amount of GST legally payable by you was nil and you have overpaid GST in relation to those supplies.

Section 105-65 applies to your circumstances where:

• you have not reimbursed a corresponding amount to the recipient of the supply, or

• the recipient of the supply is *registered or *required to be registered for GST.

As B is registered for GST, section 105-65 applies and the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

However, the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied:

Paragraphs 116 and 117 of MT 2010/1 provide that:

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 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 where the AAT referred to 'residual discretion':

As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should. [Emphasis added].

Windfall Gain

In exercising his discretion the Commissioner must have regard to the subject matter, scope and purpose of section 105-65. This is explained in paragraph 127 of MT 2010/1 that states:

… 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.

The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) (which introduced the current version of section 105-65) adds further:

2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax.

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. Whether GST has been passed on is a question of fact and must be determined on a case by case basis taking into account the particular circumstances of each case.

The Tax Office will refund the overpaid GST where the circumstances in subparagraph 128(d)(iii) of MT 2010/1 applies. Subparagraph 128(d)(iii) states in part:

(iii) Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated.

Your Tax Advisor has provided a declaration that:

1. You did not receive any Recipient Created Tax Invoices from B for the relevant payments under review. (Only) Remittance advices were issued by B which accompanied the payments made to you; and

2. You did not issue any Tax Invoices to B for the relevant payments under review

Furthermore, B have advised that they were able to identify three of the four payments (which corresponded with the remittance advices, that it appears there is no tax invoice, just a calculation of a royalty amount and a remittance advice, and that they did not claim ITCs in relation to these payments.

It is considered that the payments you made did not include a GST component and so you have not passed on any GST to the recipient. Accordingly the Commissioner will refund the overpaid GST to you. The refund will be subject to the conditions discussed below.

The time limit

In accordance subsection 105-65(2) of the TAA the Commissioner will refund you the overpaid amounts. However, the obligation to refund you the overpaid amount under section 8AAZLF of the TAA is subject to other legislative conditions. In this case, the time limits contained in section 105-55 of the TAA. Section 105-55 of Schedule 1 to the TAA provides a four-year time limit for entitlements to refunds, other payments or credits in relation to GST, luxury car tax, wine tax and fuel tax in respect of a tax period or importation. The four-year time limit commences after the end of the tax period or importation.

However, an entitlement does not cease to exist under section 105-55, if within the four-year time limit an entity notifies the Commissioner that they are entitled to the refund, other payment or credit (paragraph 105-55(1)(a)).

Miscellaneous Taxation Ruling MT 2009/1 sets out the Commissioner's views on what constitutes notification by an entity to the Commissioner under paragraphs 105-55(1)(a) and 105-55(3)(a) of Schedule 1 to the TAA (section 105-55 notifications).

Paragraph 12 of MT 2009/1 provides that valid notifications for the purposes of section 105-55 include an application for a private indirect tax ruling, an objection or other correspondence from an entity that asserts the entity has an entitlement and provides a description of the entitlement to a refund, other payment or credit, which is sufficient to bring the entitlement to the Commissioner's attention, such that when a subsequent claim is made it could reasonably be identified as being covered by the notification; and specifies the tax period(s) or importation(s) to which the entitlement relates.

It is considered your refund request dated day/month/year is a section 105-55 notification to the Commissioner under paragraph 105-55(1)(a) of the TAA. The four year rule limitation will not apply to the tax periods within four years.