Private ruling: GST and restriction on refund of overpaid GST
Published: January 2014

Ruling: Q1: Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (Section 105-65) to refund the incorrectly remitted goods and services tax (GST) by you for the supply of residential accommodation to A? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · You are registered for goods and services tax (GST). · You and A are not associates. · You have included GST in your supply of residential accommodation and issued tax invoices with GST components to A · A has paid the full amount of the tax invoices including the GST component. You have remitted the GST component included in the tax invoices issued to the Australian Taxation Office (ATO). · A changed its public officer and authorised tax contacts recently · A has reviewed its relevant Business activity statements (BASs) and found that since the first tax invoice no input tax credits (ITC) had been claimed. This change prompted the issue of overpaid GST to you. · Both you and A have an agreed on the correct treatment of the supply. · A has provided a statement to the Tax Office confirming that it has never claimed any ITCs on the supply. The overpaid GST is $xxxxxx. · You will withdraw/cancel all relevant tax invoices issued to A. · You intend to reimburse A the overpaid GST amount

Relevant legislative provisions: A New Tax System (Goods and services Tax) Act 1999 Section 9-5 | Section 40-35 | Taxation Administration Act 1953 Divisions 3 and 3A of Part IIB | Sections 105-65 to the Schedule 1

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. The requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). This section contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Your circumstances warrant the exercise of the discretion. | 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 Taxation Administration Act 1953 (TAA). However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA (section 105-65) 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 section 105-65 are satisfied. Subsection 105-65(1) states: (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if: (a) 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 to any extent; and (b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST-free); and (c) one of the following applies: (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered. Note: * asterisk denotes a defined term in the Act | Detailed Reasoning - 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) you have 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 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]. In your circumstances · You have mischaracterised the supplies of the student residential accommodation as taxable supplies and have dealt with the recipients of the supply as if the supply was a taxable supply and have remitted an amount of GST to the Commissioner on that supply in the calculation of your net amount. · It follows that as no GST should have been payable on those supplies, the amount legally payable was nil and you have overpaid a GST amount in relation to those supplies. If Section 105-65 would apply to your circumstances depends on whether: o you have not reimbursed a corresponding amount to the recipient of the supply, or o the recipient of the supply is *registered or *required to be registered for GST. As your client, A, is registered for GST, section 105-65 applies, 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 that 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]. Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states: 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) The overpayment of GST occurs as a result of arithmetic or recording error made by the supplier. … (ii) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause. … (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 - No windfall: Of relevance to your circumstances is that 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. A tax invoice issued to a recipient that contains enough information to allow the amount of GST payable in relation to the supply to be clearly ascertained, is prima facie evidence of that part of the excess GST having been passed on. You have passed on the GST to A. The refund will not be made to you. However, the Tax Office will refund you the overpaid GST where the circumstances in paragraph 128(d)(iii) applies. The subparagraph is restated as follows: (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. A has provided a statement confirming that A has never claimed any ITCs from the supply of the lease. You have confirmed that A has paid the relevant tax invoices in full (GST inclusive). Therefore, the Tax Office will refund you the corresponding overpaid GST amount that you first reimbursed A. | Detailed Reasoning - What is the amount of the refund: In accordance subsection 105-65(2) of the TAA the Commissioner will refund you the overpaid amount that has not been refunded to you. However, the obligation to pay you the overpaid amount under section 8AAZLF of the TAA is subject to the supplier (you) satisfying other legislative conditions. In this case, the time limits contained in section 105-55 of the TAA. This section states: | Detailed Reasoning - 105-55(1): You are not entitled to a refund, other payment or credit to which this subsection applies in respect of a *tax period or importation unless: (a) within 4 years after: (i) the end of the tax period; or (ii) the importation; as the case requires, you notify the Commissioner (in a *GST return or otherwise) that you are entitled to the refund, other payment or credit; In general terms, section 105-55 prevents an entity from claiming GST refunds, other payments and credits more than four years after the end of the tax period to which the entitlement relates, unless within that four year period, the taxpayer has notified the Taxation Office of their entitlement to the refund. (See the fact sheet Time limits on GST refunds attached) The Tax Office will refund you the overpaid GST amount included in your BASs as from the XXX BAS to XXX BAS as requested. You may preserve your entitlement to a refund by lodging a Notification of Entitlement to GST refund form within the time limits for seeking refunds. However, we will treat your Private Binding Ruling Application lodged on xxxx as equivalent to the Notification of Entitlement to GST Refund. Therefore, you can revise your BASs from xxxx to now to correct the GST error. GSTE 2013/1- Goods and Services Tax: Correcting GST Errors Determination allows you to correct GST errors, made in an earlier tax period, in a later tax period in specified circumstances. As you have made credit errors (mistake you made in working out your net amount for a tax period that it would, if it was the only mistakes made in the tax period, have resulted in the net amount or assessed net amount being overstated), in accordance with GSTE 2013/1 you can correct the errors made in your BASs started from xxxx to xxxx in your next BAS.