Private ruling: GST and 'wash transactions'
Published: July 2012

Ruling: Q1: Are you as the supplier required to retrospectively amend the business activity statements in relation to the non-taxable supplies that have been incorrectly treated as taxable? | A1: No, subject to certain conditions.

Relevant facts and circumstances: You are a non-resident entity and are not registered for goods and services tax (GST). You make supplies of certain rights to Australian resident customers. The agreements between you and the Australian residents (Agreement) are not executed in Australia. You have entered into a Services Agreement with an Australian resident related party. The related party is registered for GST and provides various support services to your clients. The related party is not authorised to enter into contracts as your agent. As consideration for performing its services under the Service agreement, the related party is paid a commission. The commission is equal to a reimbursement of the operating expenses incurred by the related party in carrying out the services plus a percentage of your gross revenue from the Agreement. You have treated the supplies under the Agreement to your Australian resident customers as taxable. The tax invoices issued to your Australian resident customers have included the related party's Australian Business Number (ABN). The related party reports and remits the GST you charged your Australian resident clients in its Business activity statements (BASs). Your tax agent provided you with a written advice which states that the related party was not acting as your agent on the basis that: · the Services Agreement specifically states that the relationship between you and the related party is that of service and not agent · the related party has no authority to bind you in relation to the Agreement · you determine the consideration payable by the Australian resident customer under the Agreement, and · the related party does not have the authority to execute the Agreement on your behalf. You have contended that your supplies are not connected with Australia and therefore are not subject to GST as: · the rights under the Agreement (the subject matter of the supply) are not connect with Australia because the Agreements were not executed in Australia · the related party is not acting as your agent and therefore supplies made under the Agreements to Australian resident customers are not made through an enterprise that you are carrying on in Australia (as there is none). It should be also noted that some of your Australian resident customers are financial institutions and therefore the acquisitions from you may not have been made solely for a creditable purposes From a particular date (Relevant Date) you ceased charging GST on supplies made under the Agreement on the basis that those supplies are not connected with Australia and are not subject to GST. You have specifically requested that the Australian Taxation Office (Tax Office) address the "wash transaction" issue only, not whether the supplies under the Agreement are connected with Australia.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 9-25 | Section 84-5

Reasons for decision: Summary: The Tax Office will not require you to retrospectively amend the business activity statements in relation to the non-taxable supplies that have been incorrectly treated as taxable, subject to certain conditions. The Tax Office will also not credit or refund to you the amount of GST incorrectly included in the price. | Detailed Reasoning - Detailed reasoning: As your supplies are not connected with Australia, they are not subject to GST under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Prior to the Relevant Date you have mistakenly remitted GST on your supplies under the Agreement. The consequence of your error: There has been a mischaracterisation as to the nature of your supplies. You have treated your supplies as taxable and have issued tax invoices to the recipients of the supply as if the supply was a taxable supply and have remitted the GST to the Commissioner on those supplies. The recipients in good faith have treated your supplies as taxable supplies to them and have treated the transactions as follows: · where the recipients acquired your supplies for a creditable purpose, the recipients were entitled to a corresponding input tax credit. The result in these circumstances is a neutral revenue position for the Tax Office and reversing the transactions would create a similar neutral revenue position for the Tax Office and simply result in a round robin of cash payments. · where the recipients acquired your supplies for non-creditable purposes (i.e. in relation to making input tax supplies) there would have been no entitlement to input tax credits. Reversing the transactions would require the recipients to include the GST component by 'reverse charge' as required under section 84-5 of the GST Act. This would result in a round robin of cash payment with no impact on GST revenue. In both of the scenarios above, to correct the transaction would result in a round robin of payments with no impact on the GST revenue received, your financial position or the recipients of your supplies as discussed above. Allowing a registered recipient to retain an input tax credit where a non-taxable supply has been treated by the supplier as taxable is not supported by a strict legal interpretation of section 11-5 of the GST Act. This section defines a creditable acquisition for the purposes of establishing entitlement to an input tax credit. Paragraph 11-5(b) requires that the supply of the thing to the recipient be a taxable supply. However, the Commissioner has given his approval to exercise his power of general administration in relation to the 'preserving status quo policy'. This policy allows the recipient to retain the input tax credit where the Commissioner does not refund the GST overpaid by the supplier subject to certain conditions. | Detailed Reasoning - The Commissioner's power of administration: The Commissioner will abide by the 'preserving the status quo approach', that is the Tax Office will not require reversal of transactions where a supply or arrangement that occurs solely between registered entities that have been incorrectly treated as taxable supply, provided certain conditions are met. The conditions are: A non-taxable supply is treated as a taxable supply In your circumstances, the supply is not connected with Australia but is treated as a taxable supply. The supplier issued to the recipient an invoice that would be a valid tax invoice if the supply is a taxable supply You issued tax invoices, using your related party ABN on the tax invoice and the tax invoice were received by the recipients in good faith as valid tax invoices. The supply did not occur in the current tax period. The amount incorrectly included as GST in the price has been included in the supplier's BAS for the previous tax period and the amount remitted to the Tax Office. You ceased treating the supply as a taxable supply since the Relevant Date. You have included GST on the supplies in your BAS prior to the Relevant Date and the incorrect GST amounts have been remitted to the Tax Office. The supplier has not cancelled the tax invoice by issuing any document that indicates the correct non-taxable status of the supply. You have not cancelled the tax invoices and have not issued any document that indicates that the supply is out of scope of GST. The supplier has not reimbursed the registered recipients for the amount incorrectly included as GST in the price. You have not reimbursed your clients for the GST amounts incorrectly included as GST in the price. The supplier began to treat current and future supplies of the same type as non-taxable as soon as it becomes aware of the error. You ceased to treat the supply a taxable as from the Relevant Date. It is considered that it is appropriate for the Commissioner to exercise his general administrative power to apply the 'preserving the status quo' approach in your circumstances. This will not disturb the GST on the supply and the corresponding input taxed credit and will not give rise to an unintended benefit to any parties of the transaction. However, it should be noted that the 'preserving status quo approach' does not extend to other supplies/acquisitions. That is, you are not entitled to any input tax credit in relation to acquisitions made to make your supplies where you are not registered or required to be registered for GST. | Detailed Reasoning - Note:: The decision is made under the assumptions/conditions that: Your supplies are not connected with Australia. The conditions for registered recipients of your supplies are also met. They are: · The recipients hold tax invoices issued by you for the supplies · The invoices indicate that the supply is a taxable supply and includes an amount represented as GST. · The recipients would have been entitled to an input tax credit (in full or in part) and relied on your tax invoice to claim the input tax credit. · The Tax Office has already refunded or credited the amount included as GST in the price. · The recipients have not been reimbursed by you. · The tax invoices have not been cancelled by you or replaced by a later document that indicates the true status of the supply as non-taxable. · The registered recipient ceased to claim input tax credits for current and future acquisitions of the same type as soon as it becomes aware of the error. The decision will not hold where the assumptions above fail to be met.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.