Edited version of private advice

Authorisation Number: 1051701406665

Date of advice: 22 July 2020

Ruling

Subject: GST and rebates

Question 1

Are the supplies made by the entity GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supplies made by the entity are GST-free under section 38-190 of the GST Act.

Question 2

If the answer to Question 1 is yes, is the entity entitled to a refund of the excess GST?

Answer

Yes. The entity is entitled to a refund of the excess GST except to the extent that the excess GST has been passed on. If the entity reimburses the overseas entity the passed-on excess GST, the entity is entitled to make a decreasing adjustment in the tax period in which the reimbursement is made.

Question

Do the rebates payable by the supplier to the entity give rise to decreasing adjustments?

Answer

Yes. The rebates payable by the supplier gives rise to decreasing for the entity.

This ruling applies for the following periods: 1 October 2018 to 30 September 2023

Relevant facts and circumstances

·        The entity has an agreement with an overseas entity for the latter to supply the entity with things other than goods or real property

·        Pursuant to Division 84 of the GST Act, the entity accounts for GST on the supplies made by the overseas entity

·        To further the alliance between the parties, the overseas entity pays certain amounts to the entity

·        The entity accounted for GST on the amounts it received from the overseas entity

·        The overseas entity also pays the entity rebates when certain volume thresholds are achieved

·        The overseas entity is not registered, and is not required to be registered, for GST.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 19-10

A New Tax System (Goods and Services Tax) Act 1999 section 142-5

A New Tax System (Goods and Services Tax) Act 1999 section 142-10

A New Tax System (Goods and Services Tax) Act 1999 section 142-25

Reasons for decision

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise specified.

Question 1

Section 38-190 provides that supplies of things other than goods or real property for consumption outside the indirect tax zone (hereafter referred to as 'Australia') are GST-free.

Relevantly, item 2 in the table under subsection 38-190(1) (hereafter referred to as 'Item 2') provides that a supply is GST-free if:

·        the supply is made to a non-resident

·        the non-resident is not in Australia when the thing supplied is done, and

·        the non-resident acquires the thing in carrying on the non-resident's enterprise but is not registered nor required to be registered for GST.

For the purpose of section 38-190, GSTR 2004/7 sets the Commissioner's view regarding when is an entity a non-resident and when is a non-resident not in Australia when the thing supplied is done.

When is an entity a non-resident

Paragraph 23 of GSTR 2004/7 states that a supply is made to a non-resident for the purpose of Item 2 if the supply is made to an entity that is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). A non-resident includes a company that is not a resident of Australia as defined in subsection 6(1) of the ITAA 1936.

When is a non-resident 'not in Australia' when the thing supplied is done

For the purpose of Item 2, paragraph 31 of GSTR 2004/7 states it is the Commissioner's view that the 'not in Australia when the thing supplied is done' is a requirement that the non-resident is not in Australia in relation to the supply when the thing supplied is done.

This means that a non-resident may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply (paragraph 184 of GSTR 2004/7).

Paragraph 37 of GSTR 2004/7 states that a non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a)   at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)   through an agent at a fixed and definite place for a sufficiently substantial period of time.

If a company is registered with ASIC or the company has a permanent establishment in Australia for income tax purposes, it would be reasonable to conclude that the company is in Australia (paragraph 38 of GSTR 2004/7).

Application to your facts

In this case, we consider that the supplies made by the entity to the overseas entity are GST-free under section 38-190 because the overseas entity is a non-resident who is not Australia when the supplies are done and the overseas entity acquires the thing in carrying on its enterprise and it is not registered nor required to be registered for GST.

Question 2

Section 142-5 provides that there is excess GST when an entity's assessed net amount for a tax period includes an amount of GST which exceeds the amount which is payable for that period.

Section 142-10 provides that so much of the excess GST that an entity has passed on to another entity is taken to have always been payable and on a taxable supply until the entity reimburses the other entity the passed-on GST.

Broadly, the policy intent is to ensure that any excess GST is not refunded if it would give an entity a windfall gain.

GSTR 2015/1 sets out the Commissioner views on the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142.

Paragraph 23 of GSTR 2015/1 states that whether the excess 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. However, the policy and scheme of the GST Act gives rise to an expectation that the excess GST will be passed on in most cases.

Paragraph 28 of GSTR 2015/1 states that the following are relevant matters to consider when determining whether or not a supplier has passed on the excess GST:

(i)               the manner in which the excess GST arose

(ii)              the supplier's pricing policy and practice

(iii)            the documentary evidence surrounding the transaction, and

(iv)            any other relevant matter.

The manner in which the excess GST arose

An amount of excess GST may arise in a variety of fact situations.

Where an error occurs after the transaction has taken place, for example through simple transcription error, this may point towards a finding that excess GST has not been passed. [paragraph 32 of GSTR 2015/1]

On the other hand, where the excess GST arises as a result of an error made before setting the price (for example, where a supplier incorrectly treats a GST-free or input taxed supply as a taxable supply), this error will generally flow through to the sale price paid by the recipient and is likely to point towards a finding that excess GST has been passed on. [paragraph 33 of GSTR 2015/1]

The supplier's pricing policy and practice

Where a supplier sets a price with the knowledge or belief that the transaction is subject to GST, including a belief that the GST which later proves to be an overpayment, is a real cost of doing business, that will point towards a finding that the excess GST has been passed on. [paragraph 41 of GSTR 2015/1]

On the other hand, where a supplier sets a price on the basis that no GST is payable on the transaction, and subsequently pays the GST liability without seeking (or being able to seek) recovery from the recipient, this may point towards a finding that the supplier has absorbed and not passed on the cost of the excess GST. [paragraph 44 of GSTR 2015/1]

The documentary evidence surrounding the transaction

Whether GST is included in the price of a supply may be demonstrated by the documentary evidence surrounding that transaction. This evidence may be in any form including a tax invoice, the contract, correspondence between the parties or internal pricing policy documents and other relevant manuals. [paragraph 57 of GSTR 2015/1]

Subsection 142-25(2) provides that a tax invoice that contains enough information to allow the amount of GST payable to be clearly ascertained is prima facie evidence of the excess GST having been passed on.

However, excess GST may have been passed on even if there is no tax invoice, or if a tax invoice has been issued but does not contain enough information to enable the GST amount to be clearly ascertained. [paragraph 63 of GSTR 2015/1]

Application to your facts

In the context of the particular circumstances of the case, we accept that the entity has not passed on the excess GST to the overseas entity except for one transaction. If the entity reimburses the overseas entity the passed-on excess GST, the entity is entitled to make a decreasing adjustment in the tax period in which the reimbursement is made.

Question 3

Division 19 provides that an adjustment can arise as a result of an adjustment event. The adjustment is designed so that the amount of GST or input tax credit reported in an activity statement for an earlier tax period is adjusted to correctly reflect the amount of GST payable or input tax credit entitlement. An adjustment event includes an event that has the effect of changing consideration for a supply or acquisition.

GSTR 2000/19 sets out the Commissioner's views about making adjustments under Division 19 for adjustment events.

Paragraph 18 of GSTR 2000/19 states that whether a payment or allowance changes the consideration for a supply will depend on the circumstances. The same commercial term could be used to describe various types of arrangements which may be quite different in substance. The substance of the arrangement or event will determine whether it is an adjustment event.

Under their terms of trade, suppliers may pay rebates to customers who reach certain levels of purchases. The rebates are typically expressed as a percentage of the purchases made in a particular period. A payment of this type is regarded as a reduction in the consideration for the relevant purchases and so is an adjustment event. [paragraph 24 of GSTR 2000/19]

Application to your facts

In this case, the substance of the arrangement of the parties is such that the rebate payable by the overseas entity reduces the consideration for the supply it makes to the entity, which the entity has reverse charged under Division 84. As such, the rebate gives rise to a decreasing adjustment for the entity.

The rebate may also give rise to a consequent increasing adjustment for the entity in respect of the input tax credits they have claimed on the relevant acquisitions from the overseas entity.