Private ruling: GST and refund of overpaid GST
Published: May 2014

Ruling: Q1: Will the Commissioner of Taxation (Commissioner) exercise the discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund any overpaid GST remitted in relation to your supplies? | A1: Yes. | Q2: How do you give effect to the revisions on your activity statement (AS) to get the refund of the overpaid GST? | A2: You can revise a later AS to correct the GST error.

Relevant facts and circumstances: You have the function of providing or arranging for the provision of integrated and reliable goods and services. You advise that you are a government related entity. You are registered for goods and services tax (GST) and account for GST on a non cash basis in monthly tax periods. The recipient of your services is a government department whose function is to provide direct and indirect services to customers. You executed an agreement (a copy of which was provided to the ATO) in the form of a Memorandum of Understanding (MoU) with the recipient whereby certain assets (staff, property, contracts and functions) were to be transferred to you and you were to provide the recipient with certain services. The MoU provides that you will submit to the recipient a tax invoice in respect of the services. Under the MoU, all prices or other sums payable or consideration to be provided under or in accordance with the MoU are exclusive of GST. The recipient's obligation to pay the GST component of the consideration is subject to it receiving a valid tax invoice in respect of the supply at or before the time of payment. In accordance with the arrangement set out in the MoU, you treated the supply of services to the recipient as taxable supplies on which GST was payable. You issued tax invoices to the recipient in relation to the supplies of services you made. Four such tax invoices have been provided to the ATO. Each of the tax invoices were for a 3 month period and included a description of the services provided, and nominated the GST exclusive value, the GST payable on the supply and the GST inclusive total amount due. You advised that you continued to treat the supplies of services as taxable supplies from 1 July 2012 onwards while you sought advice. You applied jointly with the recipient for a GST private ruling in respect of the GST treatment of the payments made for the services provided under the MoU. The initial joint ruling application referred to the operation of former paragraph 9-15(3)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to supplies of services made before 1 July 2012. However, it was confirmed in an email and in your separate private ruling application, you now only require advice on the operation of subsection 9-17(3) of the GST Act in relation to supplies of services made from 1 July 2012 onwards. The recipient advised in the initial joint ruling application that it is registered for GST and that the government appropriates funding to it for general operations which includes services acquired from you. The appropriations for general operations are recurrent and included in outputs which are not separately listed in the Government Budget Papers. The recipient further advised that the payments for the services made from 1 July 2012 onwards were covered under an Australian law and subsequent Appropriation Acts from which its general operational expenses are funded. You advised that the payments for the supply of services are calculated on the basis that the sum of the payment relating to the supply of services and anything that you receive from another entity in connection with the supply does not exceed your anticipated costs of making those supplies. That is, you provide your services at cost and the MoU details the costs applicable to each service provided. You further advised that the costs set out in the MoU are regularly updated. A private ruling was issued to you by the Australian Taxation Office (ATO) stating that the payments received by you from the recipient are not the provision of consideration for supplies of services made from 1 July 2012. In a number of periods you treated the payments received for the provision of services as provision for consideration and included GST on the invoices issued to the recipient. The recipient has stated to you that it was only allowed a partial claim of input tax credit on the acquisition of your services as the acquisition was partially for the supply of input taxed supplies of residential housing services. The recipient is now seeking a refund from you of the overpaid GST which it has not claimed as an input tax credit. The recipient has agreed to issue a receipt to you when you make payment to the recipient of the overpaid GST. The recipient has withheld a payment of the amount of the overpaid GST on your current invoice. The recipient has advised you in a letter that an adjustment was made against the final invoice for the 2013/14 year for the amount of the overpaid GST to resolve the issue in the financial year that the private ruling was provided. The recipient has advised that they have not passed on the cost of the GST to the recipients of their subsidised input taxed supply. The recipient supplies input taxed supplies to unregistered recipients at subsidised rates based on a percentage of the unregistered recipients income and is not based on a cost recovery basis. You are seeking clarification from the ATO that the Commissioner will be exercising the discretion under section 105-65 of Schedule 1 to the TAA to refund to you the overpaid GST once you have refunded the recipient.

Relevant legislative provisions: Section 105-65 of Schedule 1 to the Taxation Administration Act 1953

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. However, the transactions occurred between registered entities and paragraph 105-65(1)(c) of the TAA expressly contemplates that refunds need not be given in these circumstances. 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. Your circumstances do warrant the exercise of the discretion as the registered recipient has been reimbursed the overpaid GST and the nature of the recipient's supplies indicates that it is unlikely that the GST was passed on to the end consumers. | Detailed Reasoning - 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. | Detailed Reasoning - 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 the arrangement foes not give rise to a taxable supply to that 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 services to the recipient when these services were in fact not taxable. It follows that you remitted more GST than was legally payable and that there has been an overpayment of GST. You have advised that the recipient of your supply is registered for GST purposes and has claimed a part of the GST included in the acquisition of your services as an input tax credit. You have also advised that the recipient has not been reimbursed for any amount corresponding to the GST overpaid. However, the recipient has withheld an amount on the payment of your invoice which is equal to the GST overpaid. As the three conditions of section 105-65 of Schedule 1 to the TAA are satisfied, the section 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.… However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(1)(a), 105-65(1)(b) and 105-65(1)(c) are satisfied. It is to that limited extent that the Commissioner has a discretion. 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 CoT 2010 ATC 10-119 at 57 when the AAT referred to "residual discretion": The question then becomes whether, in these circumstances, the discretion to pay the refund to you should be exercised. Paragraphs 122 to 127 explain further: 122. The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 3) Bill 2008 (which amended section 105-65 in 2008) at paragraph 2.2 states: Without the restriction on refund requirement, there is a potential for a windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of the tax. 123. 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. 124. Further, where a business cannot fully claim an input tax credit this cost will ultimately be covered as a foreseeable cost of business and borne by the end consumer in the price paid for the good or service. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states at paragraph 5.4 You do not charge GST on supplies that are input taxed. However, you are not entitled to input tax credits on acquisitions relating to the supplies. The effect is that you have borne GST on those acquisitions and will pass on that cost in the price of the supply. 125. It is these factors that underlie the position that the Commissioner need not, that is, is under no obligation to, pay a refund where the condition in subparagraph 105-65(c)(ii) is satisfied. That condition is satisfied when the recipient of the supply is registered or required to be registered or, in other words, broadly, in business to business transactions. 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. 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. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following: (i) …. (ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon , 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment … has not been passed on'. (iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST. In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated. 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. | Detailed Reasoning - Application to the present case: It is important in the present case to determine who has borne the burden of the GST in relation to the supply of services by you to the recipient. In answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 10-12 of in 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: 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. The factors from Avon which we consider equally apply in a GST context are stated in paragraph 126 of MT 2010/1. • in an economy geared to making a profit GST is expected to be passed on; • businesses set prices to cover foreseeable costs; • GST is a foreseeable cost that forms part of the cost recovery and pricing structure of doing business; • GST will be passed on in the usual course of doing business; • as it is inherent in an indirect system that GST will be passed on, proof to the contrary will seldom occur; and • the fact that GST is presumed to be passed on forms the basis for permitting the corresponding input tax credit in business to business transactions. In your case we have established that the GST was passed on to the recipient in your tax invoices of services and the recipient is registered for GST and was only entitled to a partial input tax credit on the acquisition. While you intend to refund the overpaid GST to the recipient for the amount of GST not claimed as an input tax credit, before the Commissioner refunds the GST to you, you have to refund the recipient and the recipient has to show that it either did not pass the foreseeable cost (that is the 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 of the GST is compensated. The fact that the recipient has withheld an amount equal to the overpaid GST indicates that you have refunded the overpaid GST to the recipient of your supplies. Further the recipient has based their pricing policy for the supply of subsidised input taxed supplies on the income of the recipient and has not set their prices on a basis to recover costs and make a profit. Therefore, it is reasonable to conclude in the circumstances that no GST was passed on to the recipients and the price charged by the recipient did not include a GST component. Further, if the supply of your services was treated correctly as not subject to GST then the price paid by the recipients of the input taxed supplies supplied by the recipient would be the same. Therefore, a refund of the overpaid GST to you and ultimately to the recipient will not result in a windfall gain to the recipient at the expense of the final recipient. In the circumstances it is accepted that your client did not pass on the GST to its customers, but absorbed that cost itself. In conclusion, the Commissioner is satisfied that you have overpaid an amount of GST because you treated a supply as a taxable supply when the supply was not a taxable supply. Further, the Commissioner is satisfied that the GST registered recipient has absorbed the cost of the GST and has not passed on a corresponding amount to the recipient of their supply. 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. Based on the facts provided, your circumstances warrant the exercise of the discretion. The Commissioner will exercise the discretion under section 105-65 of Schedule 1 to the TAA to refund the amount of GST incorrectly remitted by you for the supply of IT services. | Summary: As we have agreed to refund the overpaid GST on your supply of services, that is a GST error which you can correct on a later AS. | Detailed Reasoning - Detailed reasoning: The ATO's publication entitled Correcting GST errors explains how to correct GST errors made in an earlier AS. In particular, it explains when you can correct GST errors on a later AS. In the circumstances where an entity is not entitled to a GST refund, the overpaid GST is not a GST error. As provided in this publication, as we have agreed to refund you the overpaid GST on your supply of services, this is a GST error which you can correct on a later AS. Consequently you are able to make the correction in a current or later AS provided you correct the error within the four year time limit.