Private ruling: GST and refund of overpaid GST
Published: September 2013

Ruling: Q1: Will the Commissioner approve the proposed process as outlined in the Private Binding Ruling (PBR) application that you would apply in refunding overcharged GST to unregistered clients? | 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 an Australian company and are registered for GST in Australia. · You have previously applied for a PBR seeking clarification for, amongst other things, whether the Commissioner would exercise his discretion under Schedule 1 to allow you a refund of the overpaid GST. · Your tax agent attended a teleconference with ATO discussing the Draft Legal Reasoning Document that would form the basis of the Private ruling decision. · In an email after that conference your tax agent requested a further question be answered regarding section 105-65 of the TAA and a proposed reimbursement/refund arrangement. · Your tax agent lodged a formal PBR application by email seeking the Commissioner's approval for a proposed process that you would apply in refunding overcharged GST to unregistered clients as follows: 1. Once a ruling has been obtained from the Commissioner confirming which supplies are GST-free, you will identify which clients are not registered for GST at the relevant time or times since the ATO has accepted the refund notification lodged by you to be valid) by checking the Australian Business Register. 2. Once the unregistered clients have been identified, you will calculate the exact amount of overcharged GST to be refunded to each client. You note that the GST overcharged to clients was in a foreign currency. However, for the purposes of lodging BASs and remitting the GST to the ATO, you were required to convert these amounts into Australian Dollars. You will calculate the overcharged GST to be refunded to each client based on the Australian dollar conversions used to remit GST to the ATO. 3. You will reimburse clients the overcharged GST in Australian dollars by way of a cheque or by crediting active clients' accounts with you. 4. Rather than amending the relevant BASs, you will claim a refund of overpaid GST in the BAS covering the tax period in which the unregistered clients were reimbursed the overcharged GST, in accordance with the Legislative Determination, GSTE 2013/1 on correcting GST errors issued on 23 April 2013. Please note that, to the extent cheques have been issued to clients but have not been banked by those clients, a refund of overpaid GST will only be claimed from the ATO once those cheques have been cleared.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 9-20 | Section 11-5 | Taxation Administration Act 1953 : Section 105-65 Schedule 1

Reasons for decision: Summary: Where you reimburse the full amount to the unregistered recipients in the manner described in their submission, and hold evidence of full reimbursement having taken place, section 105-65 of Schedule 1 (section 105-65) to the Taxation Administration Act 1953 (TAA) will no longer apply to restrict a refund of any such amount so reimbursed and the Commissioner will be obliged to pay the refund of overpaid GST under section 8AAZLF provided UBS WMA satisfies any other legislative conditions (for instance the time limits in section 105-55 of the TAA.) You may amend the Business Activity Statements to reflect the amended situation (and thereby claim a refund). | 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 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 section 105-65 applies to your circumstances: The restriction on refunds of overpaid GST under section 105-65 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 was taxable to a lesser 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. In this case you remitted GST of 1/11 of the price of your services when these services were in fact not taxable. It follows that you remitted more than was legally payable and that there has been an overpayment of GST. You have advised that the some recipients of your supply are not registered for GST purposes. You have also advised that the unregistered recipients have not been reimbursed for any amount corresponding to the GST overpaid. As the three conditions are satisfied, section 105-65 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 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.…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 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 the applicant should be exercised. 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.…[Emphasis added]. Paragraphs 126 and 127 explain further: 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. In this case you have advised in your previous PBR application that the GST was in fact passed on to the recipients of the supply. Therefore, the cost has been passed on to and borne by the recipients and has not been borne by you. You have now proposed a process that they would apply in refunding the overcharged GST to unregistered clients as follows: · Once a ruling has been obtained from the Commissioner confirming which supplies are GST-free, you will identify which clients are not registered for GST at the relevant time or times since the ATO has accepted the refund notification lodged by you to be valid) by checking the Australian Business Register. · Once the unregistered clients have been identified, you will calculate the exact amount of overcharged GST to be refunded to each client. You note that the GST overcharged to clients was in a foreign currency. However, for the purposes of lodging BASs and remitting the GST to the ATO, you were required to convert these amounts into Australian Dollars. You will calculate the overcharged GST to be refunded to each client based on the Australian dollar conversions used to remit GST to the ATO. · You will reimburse clients the overcharged GST in Australian dollars by way of a cheque or by crediting active clients' accounts with you. · Rather than amending the relevant BASs, you will claim a refund of overpaid GST in the BAS covering the tax period in which the unregistered clients were reimbursed the overcharged GST, in accordance with the Legislative Determination, GSTE 2013/1 on correcting GST errors issued on 23 April 2013. Please note that, to the extent cheques have been issued to clients but have not been banked by those clients, a refund of overpaid GST will only be claimed from the ATO once those cheques have been cleared. Whether this action constitutes reimbursement requires further discussion. The term reimburse is not defined in the GST Act and is therefore defined by its ordinary meaning. The word 'reimburse' is defined in the Macquarie Dictionary Version 5.0 as follows: | Detailed Reasoning - reimburse: 1. to make repayment to for expense or loss incurred. 2. to pay back; refund; repay. Paragraph 18 of Frequently used terms for the purposes of this Ruling in MT 2010/1 states the following: 18. The term 'reimburse' encompasses not only an actual monetary payment but also crediting of the recipient's account such that it reduces the debt owed or offsetting the credit against liabilities. [my emphasis] From the above it is clear that the reimbursement of the overpaid GST must either be of a monetary payment or a crediting of a customer's account that reduces a debt owed to you by the customer . From the stated facts this option does constitute reimbursement. In conclusion, 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 Commissioner is satisfied that the arrangements that you propose would constitute you reimbursing a corresponding amount to the recipient of the supply. Where you reimburse the full amount to the unregistered recipients in the manner described above, and hold evidence of full reimbursement having taken place, section 105-65 will no longer apply to restrict a refund of any such amount so reimbursed and the Commissioner will be obliged to pay the refund of overpaid GST under section 8AAZLF provided you satisfy any other legislative conditions (for instance the time limits in section 105-55 of the TAA.) You may amend the Business Activity Statements to reflect the amended situation (and thereby claim a refund).

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