Edited version of private advice

Authorisation Number: 1051730096231

Date of advice: 25 November 2020

Ruling

Subject: GST refund claims

Question 2

If the Commissioner declines to apply paragraph 10 of MSV 2020/1in the manner sought in question 1, will the Commissioner confirm that an approved valuation has not been produced and give you the opportunity to obtain a valuation that is an approved valuation which the Commissioner will then accept for the application of the margin scheme for prior and future lot sales?

Answer

The Commissioner confirms that the valuations you relied upon to lodge your BAS are not approved valuations. The joint valuation issued by Party Z is an approved valuation and the Commissioner accepts that it can be used by you for margin scheme purposes for both prior and future lot sales.

Question 3

Will the Commissioner administer section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)so as not to prevent you from claiming a GST refund arising from using the valuation accepted under question 1 or question 2 to calculate your GST liability under the margin scheme?

Answer

Where your lot sales were originally taxable supplies and remain as such, section 105-65 of Schedule 1 to the TAA does not apply to restrict you from claiming a GST refund arising from using the approved valuation issued by Party Z to calculate your GST liability under the margin scheme on such lot sales.

Question 4

In respect of your GST refund entitlements claim arising from you using the approved valuation issued by Party Z to calculate your GST liability under the margin scheme, does the Commissioner agree that you have not 'passed on' the excess GST and that section 142-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) cannot therefore apply to prevent the Commissioner from refunding any excess GST?

Answer

No. The Commissioner considers that you have 'passed on' the excess GST, and since lot purchasers have not been reimbursed, section 142-10 of the GST Act will apply to prevent the Commission from refunding the excess GST unless satisfied it is inappropriate for section 142-10 to apply.

Relevant facts and circumstances

•         You are registered for GST and account for GST on a non-cash (accruals) basis.

•         You notified the ATO of GST refund entitlements which we acknowledged and confirmed had been made within the appropriate time.

•         Your ruling request concerns land owned by you that is being developed by another entity.

•         Contracts for the sale of land are entered into between you and the lot purchaser. You have treated the sales as taxable supplies and you have reported the GST in your Business Activity Statements (BAS).

•         As part of the contracts for the sale of land, it has been agreed that the sale price is inclusive of GST and that the margin scheme applies.

•         You do not play any active role in undertaking the development and are not entitled to receive any of the gross proceeds other than a set amount per lot.

•         The valuation that you used to calculate your margin and report your GST was found not to be an approved valuation.

•         An approved valuation was obtained from an independent third party valuer at a later date by you and the ATO jointly.

Relevant legislative provisions

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

Division 75

Section 75-10

Section 75-15

Section 75-30

Section 75-35

Division 142

Section 142-5

Section 142-10

Section 142-15

Division 134

Section134-15

Section 134-20

Division 142

Subsection 142-5(1)

Subsection 142-5(2)

Section 195-1

Taxation Administration Act 1953 (TAA)

Section 105-65 of Schedule 1

Reasons for decision

Question 2

If the Commissioner declines to apply paragraph 10 of MSV 2020/1in the manner sought in question 1, will the Commissioner confirm that an approved valuation has not been produced and give you the opportunity to obtain a valuation that is an approved valuation which the Commissioner will then accept for the application of the margin scheme for prior and future lot sales?

Detailed reasoning

Subsection 75-35(2) of the GST Act provides that a valuation made in accordance with the requirements of the relevant determination (currently MSV 2020/1) is an approved valuation.

As mentioned earlier, Party Z found both earlier valuations not be approved valuations.

The parties jointly instructed Party Z to undertake an approved valuation of the Subject Property in accordance with Division 75 of the GST Act, MSV 2020/1 and paragraphs 66 to 79 of Goods and Services Tax Ruling 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000(GSTR 2006/7).

You can use the approved valuation issued by Party Z for the Subject Property as at 1 July 2000, to calculate your margin for property sales settled both prior to and after 30 October 2020.

Question 3

Will the Commissioner administer section 105-65 of Schedule 1 to the TAA so as not to prevent you from claiming a GST refund arising from using the valuation accepted under question 1 or question 2 to calculate your GST liability under the margin scheme?

Detailed reasoning

Prior to June 2014, the primary restriction on claiming GST refunds was contained in section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). The section continues to apply to tax periods commencing on or before 30 May 2014 (refer to subsection 105-65(2) of Schedule 1 of the TAA).

Section 105-65 of Schedule 1 to the TAA relevantly provides that the Commissioner need not give you a refund of an amount if you overpaid the 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, and the supply is not a taxable supply or the arrangement does not give rise to a taxable supply.

Thus, section 105-65 of Schedule 1 to the TAA only applies where a taxpayer treated a supply as taxable and it was not taxable or the taxpayer treated an arrangement as giving rise to a taxable supply and it did not give rise to a taxable supply.

As confirmed in the decision in International All Sports v Commissioner of Taxation [2011] FCA 824 (Sportsbet), the restriction in section 105-65 of the TAA does not apply where the supply is always correctly characterised by the supplier, but the overpayment of GST arises from a miscalculation of the GST payable. This includes situations where a taxpayer miscalculates the amount of GST in applying the margin scheme.

This is also further discussed in Miscellaneous Taxation Ruling 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1). Relevant paragraphs from this ruling, including how section 105-65 applies in margin scheme cases, read as follows:

80. Following the reasoning of the Court in International All Sports , the Commissioner takes the view that section 105-65 will apply where an overpayment of GST arises from a mischaracterisation of a supply as taxable to some extent and it is not taxable to that extent (and the other requirements of the section are satisfied).

81. The Commissioner also takes the view that section 105-65 does not apply where the supply is always correctly treated as a taxable supply but an overpayment of GST arises from a mere miscalculation.

Margin scheme cases

83. Under Division 75 of the GST Act the amount of GST payable on taxable supplies of real property may be calculated (using the margin scheme) on the margin for the supply. There may be circumstances where the margin for a supply is less than the amount reflected in the activity statement lodged by the taxpayer. For example, a more favourable valuation method may apply.

84. The Commissioner takes the view that section 105-65 will not apply in cases where:

•         supplies are treated as taxable under the margin scheme where there was an error in the calculation of the margin; or

•         GST on supplies of real property has been calculated under the ordinary provisions when in fact the margin scheme applied.

85. However, section 105-65 will apply where supplies are treated as taxable under the margin scheme but are actually GST-free (for example, as a GST-free going concern) or input taxed.

As your supplies of lots to purchasers remain taxable supplies upon you substituting the approved valuation from Party Z for the earlier valuations in order to re-calculate your GST liability under the margin scheme, section 105-65 of Schedule 1 of the TAA does not apply and will not restrict you from claiming a GST refund in respect of any excess GST paid on lot sales where you have originally used one of the earlier valuations for the purposes of calculating the margin.

Question 4

In respect of your GST refund entitlements claim arising from you using the approved joint valuation issued by Party Z to calculate your GST liability under the margin scheme, does the Commissioner agree that you have not 'passed on' the excess GST and that section 142-10 of the GST Act cannot therefore apply to prevent the Commissioner from refunding any excess GST?

Detailed reasoning

Division 142 of the GST Act applies to tax periods starting on or after 31 May 2014. Generally, the Division operates so that a supplier is not entitled to a refund of 'excess GST' where the supplier has 'passed on' the GST to another entity and has not reimbursed that other entity for the passed-on GST.

Section 142-10 of the GST Act provides that so much of the excess GST as you have passed on to another entity (usually the recipient) is taken to have always been payable, and payable on a taxable supply, until the other entity has been reimbursed for the passed-on GST.

The meaning of 'excess GST' can be found in subsection 142-5(1) of the GST Act, which provides that it is an amount of GST that has been taken into account in your assessed net amount for a tax period exceeding that which is payable (after disregarding any amounts covered by subsection 142-5(2)).

Goods and Services Tax Ruling 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1) provides guidance in relation to the meaning of 'passed on' for the purposes of determining whether section 142-10 of the GST Act 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.

Paragraph 23 of GSTR 2015/1 provides 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, section 142-25 of the GST Act and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.

The Explanatory Memorandum to the Tax Laws Amendment (2014 Measures No.1) Bill 2014 (Explanatory Memorandum) states that the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply. This simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply (refer to paragraph 24 of GSTR 2015/1).

A supplier claiming a refund, because it considers that the excess GST has not been passed on, will need to clearly substantiate the grounds on which it claims the refund. In any dispute, the taxpayer would have the onus of proving that its circumstances are outside the ordinary and that it did not pass on the excess GST (refer to paragraph 27 of GSTR 2015/1).

In accordance with paragraph 28 of GSTR 2015/1, when determining whether or not the excess GST has been passed on, the following matters should be considered, including whether or not the supplier's circumstances are out of the ordinary:

(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 circumstances.

As seen above, a wide range of factors may be relevant to the question of passing-on in any particular case. In the case of taxable sales of real property, some of those factors may include the market in which the taxpayer operates and the contracts under which sales are made.

It is also necessary to consider the seller's pricing policy and practice, with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. As such, that knowledge includes the belief that the component of tax which later proves to have been an overcharge is a real cost of doing business.

Paragraph 29 of GSTR 2015/1 provides that the question of passing on is one of fact and not of fairness.

GST may have been passed on even though a tax invoice has not been issued, or the GST component is not specifically or separately identified, or an invoice is not a valid tax invoice for the purposes of the GST Act.

You have advised that you have an amount of excess GST and that you have not made any reimbursements to lot purchasers regarding the excess GST. You also advised that you were not required to issue tax invoices as your lot sales were made under the margin scheme.

As outlined in paragraph 24 of GSTR 2015/1, the GST Act envisages that the supplier passes on the GST to the recipient of the supply. Thus, the fact that you have not issued tax invoices because you were not required to do so does not mean that you have not passed on the GST.

Example 16 from GSTR 2015/1 makes it clear that even though no tax invoice is issued in relation to a supply by way of sale under a contract which stipulates that the margin scheme will apply to the sale, the contract itself is the documentary evidence that GST has been passed on.

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. A GST liability calculated under either the margin scheme or the general rules is likely to be a foreseeable cost which forms part of the cost recovery and pricing structure for doing business. (refer to paragraphs 41 and 43 of GSTR 2015/1).

Example 13 from GSTR 2015/1 deals with miscalculating GST liability under the margin scheme. The example makes it clear that even though a later valuation results in a higher market value and consequently a lower taxable margin, since the supplier considered the amount of GST applicable under the margin scheme (albeit using the lower valuation figure) in determining its pricing policy and practice, and the properties were sold at a price including the GST which was paid by the purchasers, the evidence shows that the supplier passed on the excess GST. Reference should also be made to example 2.16 from the Explanatory Memorandum.

A supplier may seek to demonstrate that GST was not considered when setting the price charged to its customers. This is not, of itself, sufficient to establish that the excess GST has not been passed on. For example, where a supplier is a 'price taker' in a market that primarily makes taxable supplies, this usually indicates that the supplier has passed on the excess GST. (refer to paragraph 45 of GSTR 2015/1).

You contend that as a 'price-taker' in the market you have not passed on the GST. However, as discussed above, a supplier in a market that primarily makes taxable supplies (such as the market you operate in where vacant land sales are sold under the margin scheme as part of a multi-staged subdivision), being a price-taker is not, of itself, sufficient to establish that the excess GST has not been passed on.

Paragraphs 57 and 58 of GSTR 2015/1 discuss documentary evidence regarding whether GST was included in the price of a supply, and how this evidence may be in any form, including a tax invoice, a contract of sale, etc. While in most cases, a supplier will have issued a tax invoice for the transaction which gives rise to the excess GST, in other cases where a supply is made under contractual obligations (such as a supply of real property), a contract of sale may disclose that GST has been included in the price of the supply. Reference should also be made to example 2.15 of the Explanatory Memorandum.

The sample contracts for lot sales that you provided copies of, state that the sale price includes GST and that the supply is a taxable supply on which the margin scheme will be used.

You have not provided any evidence that GST was not passed on, although you were given the opportunity to do so.

Therefore, as you have not demonstrated that your circumstances are outside the ordinary, the Commissioner is satisfied that section 142-10 of the GST Act applies to treat the excess GST as always having been payable for the relevant tax periods.