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

Ruling: Q1: Will the Commissioner exercise his discretion to refund the overpaid goods and services tax (GST) on your supplies to the non-resident recipients? | A1: No

Relevant facts and circumstances: • You are registered for GST. • You are an online business which offers services to either resident and non-resident businesses (recipients). • A number of your recipients are non-resident entities that are not in Australia at the time your service is done. • In consideration for your services, you charge the recipients a commission calculated by reference to the total GST-inclusive monies received from customers that purchase the recipients' goods and services through you. The commission charge varies depending on the nature of the purchase. • Historically, you have accounted for GST on all commission received from the recipients irrespective of whether the recipients are non-resident. • Under a clause of the Agreement your commission is calculated as a percentage of the total GST inclusive monies which you receive from the customers who place orders to buy goods and services through you. • You have provided a number of samples of tax invoices issued to resident and non-resident merchants. • In all those tax invoices provided, the total amount was split into 3 components: Total Ex GST, GST and Total included GST. The amount applied is the same as the Total included GST. Total Ex GST: GST: Total Inc GST: Amount applied: Balance Due: (total of Sub Total Ex and GST) • In all tax invoices provided GST is calculated at 10% of the Total Ex GST. • The GST was overpaid in relation to Services provided to non-resident recipients during the relevant period is $xxxxx. This amount has not been reimbursed to non-resident recipients.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 38-190 | Taxation Administration Act 1953 s 105-65 to Schedule 1. | Divisions 3 and 3A of Part IIB | s 8AAZLF | Summary | No, the Commissioner will not exercise his discretion to refund you the overpaid goods and services tax (GST) on the supply of the relevant services unless you reimburse the recipients of your supply the overcharged GST.

Reasons for decision: Summary: 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 the section 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 Miscellaneous Tax Ruling MT 2010/1 which was issued on 15 December 2010 and subsequent amendments provides the ATO view on how section 105-65 applies. | Detailed Reasoning - Whether subsection 105-65(1) applies to your circumstances: Section 105-65 applies to restrict refunds of overpaid GST 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 was taxable to a lesser extent, and • 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. | Detailed Reasoning - Meaning of overpaid: In the context of section 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. In your circumstances, you have provided that the supply of your services to the non-resident recipients is GST-free under section 38-190 of the GST Act. No GST is payable on the supply. 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 subsection 105-65 would apply because: • You have accounted for GST as 1/11 th of all commission received on the basis that all the commissions were a taxable supply for GST purposes. You have mischaracterised the supplies of the services to non-resident recipients 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. • You have advised that you have not and will not reimburse the recipients of the overpaid GST amounts. • The non-resident recipients are generally not registered or required to be registered for GST. As 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. For instance, an entity correctly treated its supply as GST-free when making the supply to the customer. However, when filling out its activity statement the entity incorrectly included the supply as a taxable supply in the calculation of the net amount returned on the activity statement. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered. (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. For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered. (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. You have contended that the "tax invoices" were issued in error The circumstance under sub-paragraph 128(d)(i) applies where the net amount included an overpaid GST because of an arithmetic error. The error in the example was not caused by a mischaracterisation of the supply, only a miscalculation of the GST payable (the status of the supply is treated correctly). The consequence of the error in the paragraph was that the supplier remitted more GST than legally required but the client did not pay any excess GST due to the error. It is noted that in your circumstances you mischaracterised the GST status of the supply and treated the supply as GST payable rather than GST-free. It is considered that the tax invoices are not issued in error, the issue of the tax invoices are the consequence of the mischaracterisation of your services to non-resident Merchant. This is not the type of error that the Commissioner would consider exercising his discretion for under sub-paragraph 128(d)(i) of MT 2010/1. | 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 regardless of whether the supply will generate a profit or loss situation. Generally GST on a supply is payable on the price of the supply without considering whether the supply is profitable. When a price of a taxable supply is set or agreed to, GST is included in the price. [emphasis added]. 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. In determining who has borne the burden of the GST, the Commissioner takes into consideration the factors outlined in Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by Avon 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. In that case the High Court stated, at paragraphs 9 and 12: 9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit … In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered ... it forms part of the cost structure of doing business...There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on … 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 consequences that proof to the contrary will occur comparatively seldom … You have provided samples of a number of tax invoices issued to resident and non-resident recipients. In all those tax invoices provided, the total amount was split into 3 components: Total Ex GST, GST and Total included GST. The amount applied is the same as the Total included GST. Total Ex GST: GST: Total Inc GST: Amount applied: Balance Due: (total of Sub Total Ex and GST) Under a clause the Agreement between you and the recipients, the commission is calculated as a percentage of the GST-inclusive price. In the absence of any GST clause on the commission, you have applied GST on both types of transactions. The calculated commission is the net of GST amount. This is evident by the sample tax invoice stated the calculated commission (GST-exclusive), the GST amount and the GST-inclusive amount for all merchants. In your circumstance, it is considered that your recipient also understood that they have paid the GST included in the GST-inclusive amount as stated in the tax invoices. You have not absorbed the GST component on the supply. It is the recipient (non-resident recipients) that paid the GST when they paid the tax invoices you have issued. The sample tax invoices allowed the amount of GST payable in relation to the supply to be clearly ascertained and the recipients all have actually paid the GST-inclusive amount as stated above. Your tax invoices issued to non-resident merchants 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 contended you determine the level of its commission based on the type of deal being offered by the recipients. Therefore, you seek to retain the same amount of commission regardless of whether the recipient is local or foreign based. Given that the supply by non-resident suppliers (your recipient) are typically GST-free and your commission is based on the percentage of total GST-inclusive monies received from the customers that purchase goods and services through you. You have effectively absorbed the cost of the GST incorrectly remitted on its commission from non-resident recipients by sacrificing your margins. It is noted that for GST purposes, it is the supplier that determines the GST status of the supply. Where a decision was made to treat a supply as taxable, the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier. It is for the supplier to prove that the GST has not been passed on. You have been carrying on an enterprise that includes the provision of the services to the merchants (local and non-residents). In order to be able to maintain viability, you must conduct your enterprise in a business-like manner. Budget control, marketing, accounting, planning, promotional activities and other aspects of management are essential to your business. It is appropriate to approach the question with reference to your conduct in setting prices based upon your knowledge at the relevant time, including a belief that the GST which later proves to have been an overpayment is a real cost. There are many situations where GST may not consciously be factored into a price by the supplier, but such a failure to consider the GST is not normally sufficient to show that GST has not been passed on. Not explicitly considering the GST at the time of the price setting does not mean that the supplier has not passed on the GST. We do not consider that your intention to charge your recipients equal net commission regardless of the tax status is critical. You have calculated your commission as a percentage of the GST-inclusive monies which you receive on the orders by the members. This is a method of working out the commission that you agree to provide your services to the non-resident recipients. Regardless of amount (or how it is calculated), you have decided to provide the services with the understanding that you can only receive the consideration, net of GST as the return for your Services and you actually provided your Services on that basis. Whether that amount is corresponding with other commission is not the factor that determines that you have necessarily borne the cost of the GST at the time of pricing or thereafter. We need to be satisfied that you have borne the cost of GST rather than passed it on the recipients, considering that your supply has been mischaracterised for more than 2 years. In the absence of other information to the contrary, the Commissioner considers that the basis used to arrive at the price would have taken into account the fact that the price was set in the belief that GST was payable and was a real cost of carrying the enterprise, this is supported by the fact that the commission rate was the same for both domestic and international merchants. Therefore, GST has been included in the price and accordingly has been borne by the recipient (as intended by the GST regime). This view is further supported by the fact that you believed at the time that you would be liable for GST on the supply. In your submission you contend that you demonstrate you have absorbed the GST with an example showing you receive less commission and therefore a lesser margin from foreign merchants. This example in fact shows that the commission from a local merchant is higher because the commission is also calculated on the GST component of the goods which is not the case for sales made by the foreign merchant where there is no GST component in your example. The removal of the commission from the GST component of the domestic sale would result in the same net commission being received from domestic and international merchants. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may choose to exercise in certain limited circumstances to allow the refund. Your circumstances do not fall into the limited circumstances for the Commissioner to exercise the discretion. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may choose to exercise in certain limited circumstances to allow the refund. Your circumstances do not fall into the limited circumstances for the Commissioner to exercise the discretion.