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

Ruling: Q1: Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to allow the taxpayer a refund of the goods and services tax (GST) when the taxpayer incorrectly included GST in the price of a non-taxable supply? | A1: No

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 a privately owned Australian company which provides investment advisory services and comprehensive wealth management solutions for private clients, institutions and corporations. • You are registered for goods and services tax (GST). • You provide an international wealth management service which enables your Australian clients to hold and transact in international securities listed in several countries and that other services supplied to your clients include foreign exchange, interest rate securities, global managed funds and foreign currency margin lending. • You generally charge your Australian clients either per transaction, a portfolio management and administration fee based on the market value of the client's portfolio, or a combination of both. • If your Australian client wishes to trade foreign listed securities you opens an investment account in the client's name with Company A in accordance with Company A 's account opening procedures. • Company A is a wholly-owned subsidiary of an international bank located overseas. Company A has an Australian Financial Services Licence and an affiliate of Company A is incorporated in Australia. • You engage Company A to facilitate international execution, clearing, custody and margin lending facilities on behalf of your Australian clients. • Where your Australian client wants to undertake a foreign currency conversion, you assist as follows: • you obtain a market exchange rate quote from Company A for the relevant foreign exchange transaction. • The exchange rate quoted includes a fee or 'margin' for facilitating the transaction. • Generally, your client authorises your Investment Adviser to execute the foreign exchange transaction at the 'going rate'. In some cases, however, your client may wish to be advised of the rate prior to authorising the foreign exchange transaction. • Following acceptance of the quoted exchange rate by your client, your Investment Adviser will instruct Company A to execute the foreign exchange transaction via either the foreign exchange desk or the electronic trading platform. • The settlement date of the foreign exchange transaction is nominated at the time that transaction is entered into and usually occurs two business days after the value date of the transaction. The amount payable your client in order to purchase the foreign currency should be deposited into the client's Company A's investment account by the settlement date. • A confirmation of the foreign exchange transaction is issued under your name directly to your client and a copy is provided to you. The confirmation does not separately disclose the margin for facilitating the foreign exchange transaction. • Company A and you share the margin. • The margin is calculated, collected and shared as follows: • You have established a default commission grid for calculating the amount of the margin and the shares of that margin which are to be received by you and Company A. • Your Investment Advisers have the discretion to adjust the margin to any level, subject to a minimum margin, either at the time Company A calculates the quoted exchange rate or when the foreign exchange transaction is executed. • Company A retains the margin when each foreign exchange transaction is settled. • Following the end of each calendar month, Company A aggregates the margins on all foreign exchange transactions undertaken for your clients during that month and calculates your share. • Company A then remits your share in foreign currency to your Commission Account which is held with Company A overseas. • You have received a Private Binding Ruling (PBR) from the Taxation Office in which the Commissioner ruled that supply of services made by you in relation to the case of foreign exchange transactions involving the conversion of AUD to foreign currency and foreign exchange transactions involving the conversion of foreign currency into AUD were GST-free pursuant to item 4(a) in subsection 38-190(1) of the GST Act. • Upon receipt of the PBR you altered your treatment applied to the fees received for services provided in relation to foreign exchange transactions by treating them as GST-free. You have maintained the same fee structure in respect of the total fees charged to your clients which applied to those supplies since the commencement of the service offering. • You contend that until the treatment of the fees was clarified by the PBR you had borne the cost of the GST and had not passed it onto your clients. • You contend that GST was not taken into account when determining the fees to be charged to clients for the services. The fees were determined by you benchmarking against other competitor's fees which were generally treated by those entities as GST-free. • You have advised that the fees charged in relation to the foreign exchange transactions have remained consistent during the six months prior, and the six months subsequent to the issuing of the PBR which the taxpayer contends evidences the assertion that you had not factored GST into your pricing model when the fees were set. • You advise that you have not provided your clients with a tax invoice in relation to the supplies but instead provide them with a "Confirmation" document. This document provides clients with a summary of the transaction the client has agreed for you to undertake on the client's behalf. • You advise that for the relevant period, you incorrectly remitted GST on your supplies of the foreign exchange transactions, notwithstanding that these supplies were GST-free. • You are currently seeking a refund of the GST overpaid by you with respect to supplies of the foreign exchange transactions. • You have not reimbursed any of your clients the amount of the GST collected during the relevant period in relation to these supplies as you contend the GST was not passed onto your clients but borne wholly by you. • In a further letter to the ATO you provided further information summarised as follows: • You cannot confirm the percentage of your client base that is registered for GST… …This is evidenced by the fact you do not systematically collect the ABN details nor do you systematically record the GST registration status of your clients as part of the client application and/or transaction process. … As such, you consider it reasonable to expect that individual clients would not be registered for GST in that capacity. … • Each month you received a foreign currency payment from Company A representing your share of the commission paid by clients … In addition to the payment, you also received a spreadsheet .detailing all the foreign exchange transactions. You converted the foreign currency value of the commission amounts received into Australian dollars using the spot rate on the receipt date. You then multiply the Australian dollar amount by the fraction 1/11 to determine the amount of GST to remit to the ATO. • … the total amount listed in the Confirmation statement, being the total amount of cash settled by the client, is inclusive of both the commission fee (your and Company A 's respective shares) and the GST amount remitted by you in respect of your share of the commissions. …. …

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 9-20 | Section 11-5 | Section 38-190 | Section 40-5 | Taxation Administration Act 1953 : Section 105-65 Schedule 1 | Reasons for decision | Question 1 | Summary | The Commissioner is satisfied that you had overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply. | Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (Section 105-65) contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. | Based on the information provided we consider that GST has been included in the price of your supply and it has been passed on to the recipients of the supply and in your circumstances the Commissioner will not exercise his discretion to refund the overpaid GST. | Detailed reasoning | Section 105-65 of the TAA | 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. | 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. | Paragraphs 20 and 20A of MT 2010/1 explain the circumstances in which Section 105-65 of the TAA applies and provides further clarification of the term overpaid. They state: | 20. For section 105-65 to apply, there must firstly be an amount of GST taken into account in an entity's assessed net amount which is in excess of what was legally payable on the particular supply in the relevant tax period ('incorrect GST'). | 20A. Section 105-65 applies to the extent that an entity's assessed net amount for a tax period takes into account an amount of incorrect GST and this resulted in: | • an overpaid amount - because the assessed net amount the entity paid was more than its amended assessed net amount for the tax period, or | • an amount not refunded - because the assessed net amount paid to the entity was less than the amended assessed net amount payable to it. | Paragraph 21 of MT 2010/1 explains the meaning of 'treated as taxable supply'. It states: | 21. 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 and remitted an amount as GST to the Commissioner on that supply in the calculation of their net amount. They may also have overtly dealt with the recipient of the supply as if the supply was a taxable supply (for example, by issuing a tax invoice) though this may not always be apparent when the dealings are with unregistered recipients. [emphasis added] | In your circumstances subsection 105-65 would apply because: | • You have mischaracterised the supplies of the products 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 provided that you have not refunded the recipients of the overpaid GST amounts. | • The 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 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…. | (i) 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. | (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 | Section 105-65 is designed to prevent windfall gains to suppliers | 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. | As noted from MT 2010/1 paragraphs 127 and 128(d)(ii) it is important when making a decision on whether to exercise the discretion to identify 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. When a price of a taxable supply is set or agreed to, GST is included in the price. | 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 MT 2010/1 at paragraph 39 and 41, the Commissioner notes that the GST regime is like the former sales tax regime. It is an indirect tax regime with a central characteristic being that the entity liable to remit the tax is not intended to be the entity that bears the cost and that the Sales Tax Assessment Act 1992 (STAA 92) and its predecessor Acts contained a similar provision to section 105-65 which restricted the payment of a refund of overpaid sales tax. In determining who has borne the burden of the GST, the Commissioner takes into consideration factors outlined in the sales tax decision Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). 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 … | For GST purposes, it is the supplier that determines the GST status of the supply. Where a decision is 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. | The 'confirmation document' you provided shows that GST has been included in the price of the supply, and is prima facie evidence that the transaction includes GST. Based on this information it is considered that your clients would be of the understanding that GST has been included in the final amount.. | Without contrary evidence this demonstrates or indicates that the GST has been passed on and borne by the recipient and that you have considered GST in determining your price. | You have advised that you have established a default commission grid for calculating the amount of the margin and the shares of that margin which are to be received by you and Company A. | Your Investment Advisers have the discretion to adjust the margin to any level, subject to a minimum margin, either at the time Company A calculates the quoted exchange rate or when the foreign exchange transaction is executed. | As you can determine the commission and adjust the margin at your own discretion you have the control of the price of the supply. | You have advised that when determining the price for the supply GST was not taken into account. The fees were determined by you benchmarking against other competitor's fees which were generally treated by those entities as GST-free. | You have further advised that the fees charged in relation to the foreign exchange transactions have remained consistent during the six months prior, and the six months subsequent to the issuing of the PBR which you contend evidences the assertion that you had not factored GST into their pricing model when the fees were set. | There may be situations where GST is not consciously factored into a price by the supplier, but such a failure to consider the GST is not generally sufficient to show that GST has not been passed on in the price. Whilst you contend that they have not considered the GST as a cost when determining the price of your supply, not explicitly considering the GST at the time of the price setting does not mean that you have not passed on the GST. The Taxation Office does not consider that pricing to a market price means that the supplier has necessarily borne the cost of the GST. | We consider that the 'confirmation document' that you provided to clients evidences an amount of GST included in the price of the supply that has been passed on / borne by your clients. | Therefore we conclude that GST has been included in the price and accordingly has been borne by the recipient (as intended by the GST regime). | We have considered MT 2010/1 paragraph 128 which, as noted above outlines guiding principles when exercising the discretion section 105-65. Your circumstances do not fall into the limited circumstances for the Commissioner to exercise the discretion.