Edited version of your written advice

Authorisation Number: 1012838643624

Date of advice: 10 July 2015

Ruling

Subject: Refund of GST paid on GST free supplies

Question 1

For the tax periods from Period 1 to Period 2, are you entitled to a refund of overpaid GST under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

For the tax periods from Period 1 to Period 2, you are not entitled to a refund of overpaid GST in respect of your GST registered clients.

However, you are entitled to a refund of overpaid GST for the tax periods Period 1 to Period 2 in respect of your unregistered clients but only when you have reimbursed those clients entitled to that reimbursement.

Question 2

For the tax periods from Period 3 to Period 4, are you entitled to a refund of the excess GST under Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

You are only entitled to a refund of excess GST for the tax periods from Period 3 to Period 4 in respect of your GST registered and unregistered clients when you have reimbursed those clients entitled to that reimbursement.

Question 3

Will the reimbursement requirements be satisfied if the refund of GST payable to your current clients is paid by a credit on those clients' trade accounts?

Answer

The reimbursement requirements will only be satisfied where the reimbursement by way of a credit on your client's trade account is made pursuant to an agreement between you and the client, the credit is against a pre-existing liability and the amount of the credit for each client corresponds to the overpaid or excess GST that was incurred by that client.

Relevant facts and circumstances

Entity A (you) are an Australian resident company that is registered for GST.

You make supplies. You are currently remitting GST to the ATO for the supplies. You have recently determined the supplies are GST-free.

You acknowledge that you have 'passed on' the GST to your clients.

Some of your clients are registered for GST and some are not registered for GST.

In respect of your clients, regardless of their GST registration, you propose to refund the overpaid GST by:

• issuing an adjustment note for the amount of overpaid GST

• making a direct payment to the client, for example by way of cheque or electronic funds transfer, or

• crediting the client's trade account for an equivalent amount.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 142

Taxation Administration Act 1953 Section 105-55 of Schedule 1

Taxation Administration Act 1953 Section 105-65 of Schedule 1

Reasons for decision

All legislative references are to the GST Act unless otherwise stated.

Question 1

For refunds or credits relating to tax periods starting before 31 May 2014, subsection 105-65(1) of Schedule 1 to the TAA (subsection 105-65(1)) provides that the Commissioner need not give you a refund where:

• you overpaid an amount, or the amount was not refunded to you, because a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply

• the supply was not a taxable supply, or the arrangement did not give rise to a taxable supply, and

• either the Commissioner is not satisfied that you have 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.

These conditions seek to ensure that the supplier does not receive a windfall gain at the expense of the end consumer by retaining in full a GST-inclusive price for a supply on which GST is not payable.

You make supplies which are GST-free.

As you have treated these GST-free supplies as taxable, the first two conditions of subsection 105-65(1) are met. To date, you have not reimbursed a corresponding amount to the recipients of the supplies. Most of these recipients are registered for GST but some are not. It follows that as either or both the requirements in the third condition of subsection 105-65(1) are met, the Commissioner need not refund the overpaid GST to you but has a discretion to do so.

The Commissioner sets out his views on the operation of section 105-65 of Schedule 1 to the TAA (section 105-65) in Miscellaneous Taxation Ruling MT 2010/1 (MT 2010/1). Paragraph 127 of MT 2010/1 advises that the potential or otherwise for a windfall gain to a supplier, 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. From the supplier's perspective, subparagraph 105-65(1)(c)(ii) of Schedule 1 to the TAA reflects this by providing that the Commissioner need not give the supplier a refund of overpaid GST where the recipient is registered for GST.

Paragraph 123 of MT 2010/1 states:

The GST Act presumes GST is ultimately borne by end consumers. A key design feature of the GST system to ensure this occurs and to avoid double taxation is to generally allow a corresponding input tax credit to a recipient of a supply in business to business transactions. The GST Act envisages a degree of symmetry between the GST payable and the input tax credit which may be claimed in business to business transactions.

When the supplier treats a supply as taxable, it includes GST in the price it charges to the recipient. Where the acquisition of that supply is used by the registered recipient in its enterprise, it has been entitled to input tax credits in relation to that acquisition. Since the treatment of the supply as taxable was GST neutral, there would not usually be any policy reasons to unwind the treatment that was adopted. Such unwinding may give rise to administrative and compliance costs, as well as a risk to revenue if there is any doubt about the Commissioner's ability to recover input tax credits.

Subparagraph 128(e) of MT 2010/1 states:

The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient.

Further, from the recipient's perspective, the preserving the status quo approach set out in PS LA 2013/3 (GA), is consistent with the policy reasons behind the operation of subsection 105-65(1) by ensuring symmetry between the GST paid and the input tax credits claimed in respect of a business to business transaction.

In this case, most of your clients are registered for GST. You have not yet reimbursed any overpaid GST to your registered clients. These clients have presumably claimed full or partial input tax credits in respect of these supplies. If you were to refund the GST to these recipients, the Commissioner may be unable to recover the over claimed input tax credits from those recipients who would potentially receive a windfall gain. Additionally, you have not provided any compelling reasons to justify paying the refund to your registered clients.

Having regard to the scope and purpose of section 105-65, there is not a persuasive reason to disturb the 'status quo'. In order to maintain the inherent symmetry in the GST system in your circumstances, the Commissioner will not refund the overpaid GST for Period 1 to Period 2 in respect to your registered clients. This is the case even were you to refund the GST to these recipients.

You have several clients who were not registered for GST. Paragraph 115 of MT 2010/1 advises that if the supplier satisfies the Commissioner that it has reimbursed the recipient of the supply who is not registered or required to be registered, the Commissioner has a prima facie obligation to pay the refund of overpaid GST under section 8AAZLF of the TAA, provided the supplier satisfies any other legislative conditions (for instance, the time limits contained in section 105-55 of Schedule 1 to the TAA).

In respect of your unregistered clients you intend to issue an adjustment note for the amount of overpaid GST and make a direct payment by cheque or electronic funds transfer corresponding to that amount.

A direct payment by cheque or electronic funds transfer is an acceptable form of reimbursement. Therefore, once you have reimbursed those clients, you are entitled to a refund of overpaid GST for Period 1 to Period 2.

For your unregistered clients you intend to issue an adjustment note for the amount of overpaid GST and credit their trade account for an amount equal to the overpaid GST for the relevant period.

As stated previously, you are only entitled to a refund of overpaid GST for your unregistered clients when you have reimbursed those unregistered clients who are entitled to that reimbursement. See question 3 for whether your proposed method constitutes a reimbursement.

Question 2

Division 142 applies to tax periods starting on or after 31 May 2014, and therefore it will apply to your claim for a refund of excess GST for Period 3 to Period 4.

Under Division 142 an entity can self-assess its entitlement to a refund of excess GST by reference to objective criteria, rather than relying on the Commissioner exercising a discretionary power such as in section 105-65.

Subdivision 142-A will apply where a net amount for a tax period includes 'excess GST'. Subsection 142-5(1) provides that 'excess GST' is an amount of GST that has been taken into account in an assessed net amount, but is not actually payable.

In relation to refunding the excess GST, section 142-10 provides that the excess GST that has been passed on to a recipient is taken to have always been payable, and payable on a taxable supply, until the recipient has been reimbursed for the passed-on GST.

GSTR 2015/1 discusses the meaning of the terms 'passed on' and 'reimburse' for the purposes of determining whether section 142-10 applies to an amount of excess GST. Paragraph 9 of GSTR 2015/1 advises that the object of Division 142 is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Refunding excess GST to a supplier will give it a windfall gain if it has already passed on the excess GST in the price of the supply and not reimbursed the recipient.

Consequently there is no entitlement to a refund of excess GST that has been passed on to the recipient until the recipient has actually been reimbursed.

In this case, you acknowledge that the excess GST has been passed on to your clients as the excess GST has been included on the tax invoices issued for your supplies. Most of your clients are registered for GST. You also have several clients who were not registered for GST. You have not yet reimbursed any excess GST to any of your clients but you intend to do so.

Under section 142-10, where an amount of excess GST is subsequently reimbursed, the excess amount stops being treated as payable on a taxable supply.

Once the excess GST has been reimbursed, section 142-10 ceases to apply and as provided in paragraph 17 of GSTR 2015/1, the supplier can claim a refund of the excess GST. This is the case regardless of whether the recipient is registered for GST or not, as illustrated in Example 8 at paragraphs 87 to 89 in GSTR 2015/1. Unlike section 105-65, the recipient's registration status is not relevant.

In respect of your clients, you intend to issue an adjustment note for the amount of excess GST and make a direct monetary payment corresponding to that amount. A direct monetary payment is an acceptable form of reimbursement. Therefore, once you have reimbursed those clients, you are entitled to a refund of overpaid GST for Period 3 to Period 4.

It should be noted that a reimbursement pursuant to Division 142 is an adjustment event because it has the effect of changing the consideration for a supply and in some cases because the supply is no longer treated as a taxable supply. Note 1 to section 142-10 states:

If you reimburse the passed-on GST so that this section ceases to apply there will be an adjustment event under paragraph 19-10(1)(b) or (c). You will have a decreasing adjustment (see section 19-55) and the other entity may have an increasing adjustment (see section 19-80).

This is further explained in paragraph 18 of GSTR 2015/1 which states:

In these cases, the supplier has a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to its recipient. The recipient has an increasing adjustment where it is registered for GST and has claimed an input tax credit in relation to the acquisition.

For your clients you intend to issue an adjustment note for the amount of excess GST and credit their trade account for a corresponding amount.

As stated previously, you are only entitled to a refund of excess GST for Period 3 to Period 4 when you have reimbursed the clients who are entitled to that reimbursement. See question 3 for whether your proposed method constitutes a reimbursement.

Question 3

The Commissioner's view on the reimbursement of an amount of overpaid GST by a journal entry is set out in ATO ID 2013/56. Essentially, the Commissioner will not be satisfied that an amount of overpaid GST has been reimbursed to a recipient when a supplier merely makes a journal entry in its accounts, unless the journal entry offsets a pre-existing liability owed by the recipient to the supplier. This is because a journal entry in the supplier's accounts which acknowledges a debt owed to the recipient is, at best, a promise to pay.

While the view in ATO ID 2013/56 specifically relates to section 105-65 it is also relevant to Division 142.

In relation to the overpaid GST applicable to Period 1 to Period 2, you consider that the proposed credit to the trade account of your unregistered clients will satisfy the reimbursement requirements of section 105-65.

Paragraph 18 of MT 2010/1 states:

The term 'reimburse' encompasses not only an actual monetary payment but also crediting of the recipient's account such that it reduces the debt owed or offsetting the credit against liabilities.

Also of relevance to this case is the following paragraph:

115A. In cases where the recipient is not registered or required to be registered, taxpayers can consider (that is self-assess) that the Commissioner will be satisfied that the recipient has been appropriately reimbursed (and that therefore section 105-65 will not apply) where:

• the recipient can be specifically identified;

• the amount of the reimbursement corresponds exactly to the amount of the GST overcharged to the recipient and the method of reimbursement ensures this is achieved;

• the reimbursement is in money, or if made through a journal entry, to the extent that the journal entry offsets the recipient's pre-existing liability to the taxpayer; and

• the reimbursement or journal entry has actually been made, and is not merely planned to be made.

Even though there is no mention in MT 2010/1 of the need for an agreement in relation to a reimbursement by way of an offset or credit to a client's account, we consider that to satisfy the requirements in section 105-65, any offset or credit would need to have the approval of the client. In other words, it would need to be done pursuant to an agreement.

At this stage, you have not repaid any amounts to your clients but you are considering crediting their trade account for a corresponding amount.

Only a set-off against a pre-existing liability will satisfy the requirements of section 105-65. A credit on the trade account where there is no pre-existing liability equal to or greater than the credit, will not satisfy the requirements of section 105-65 as outlined in ATO ID 2013/56.

Therefore, you will only be entitled to a refund of overpaid GST where the reimbursement by way of a credit to the trade account of your unregistered clients has been made pursuant to an agreement between you and the client, the credit is against a pre-existing liability and the amount of the credit for each client corresponds to the overpaid GST that was incurred by that client.

In relation to the excess GST applicable to Period 3 to Period 4, you will only be entitled to a refund where the requirements in Division 142 have been satisfied.

GSTR 2015/1 explains the meaning of the term 'reimburse' for the purposes of Division 142 and discusses the circumstances in which the Commissioner considers an amount of excess GST, which has been passed on to another entity, has been reimbursed to that other entity.

In relation to what constitutes reimbursement, paragraphs 69 to 70 of GSTR 2015/1 state:

69. The Commissioner considers that, for the purposes of section 142-10, an amount of excess GST that has been passed on to the recipient is appropriately reimbursed when the recipient has been compensated an equivalent amount by the supplier. This reimbursement may be made voluntarily by the supplier or in satisfaction of a contractual obligation.

70. For the purposes of section 142-10, a supplier has reimbursed the recipient for the passed-on excess GST where:

• reimbursement takes the form of a payment in money, the setting off of mutual liabilities, or the issuing of a voucher, the recipient must be able to choose the form in which reimbursement is made

• the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved, and

• the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made, and is not merely planned to be made.

In relation to a reimbursement in a form other than a payment of money, paragraphs 157 and 158 of GSTR 2015/1 state:

157.Reimbursement need not necessarily take the form of a payment of money. A supplier may reimburse the recipient by offsetting the amount of passed-on excess GST against a liability that is presently payable by the recipient to the supplier.

158.Reimbursement by set-off may be evidenced by way of a journal entry. However, the mere making of journal entries does not reflect reimbursement in the absence of an agreement to set-off between the parties. It is the agreement that provides the legal basis for discharging the liabilities between the parties, not the journal entry.

This means that to satisfy the requirements in section 142-10, any reimbursement by way of a set-off must be accompanied by an agreement, and any reimbursement to a client will need to correspond to the excess GST that was passed on to that client.

Similarly to the operation of section 105-65, a credit on the trade account of your clients where there is no pre-existing liability equal to or greater than the excess GST will not satisfy the requirements for Division 142 pursuant to GSTR 2015/1 and ATO ID 2013/56.

Therefore, section 142-10 will only cease to apply where the reimbursement is made by way of a credit against a pre-existing liability of your clients, it has been made pursuant to an agreement between you and these clients, and the amount of the credit for each client corresponds to the excess GST that was incurred by that client.

Where section 142-10 ceases to apply in respect of an amount of excess GST applicable to a supply made during Period 3 to Period 4, you will be entitled to claim a refund of that excess GST.

As previously noted, when you reimburse a recipient, an adjustment event arises and you have a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to your recipient. Similarly, your clients will have an increasing adjustment where they are registered for GST and claimed input tax credits in relation to that acquisition.

In addition, you will need to keep an accurate and complete record of the reimbursement made to each client and you will also need to cancel the original tax invoices and reissue new tax invoices to the affected clients.