Private ruling: GST and restriction on refund of overpaid GST
Published: October 2012

Ruling: Q1: Will the Commissioner exercise the discretion to refund the GST overpaid on your supplies? | A1: Yes, subject to the application of the time limit rule.

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 (GST). · Your enterprises are health services to your clients and commercial property leasing. · You do not have corporate clients. All of your clients (individuals) receive your supply for the treatment of their illnesses. · Your health supplies meet all the requirements of an item in the table in subsection 38-10(1) and so those supplies are GST-free. · You have just discovered that the supply of your health services is GST-free under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). · The person who prepares the activity statement (BAS) is a director who is not working on site in the practice. · The director has not used the tax invoice which clearly states 'No GST included'. He used instead the bank statements as the basis for calculating the GST payable with the belief that the supplies of the health services are taxable. · Label G1 included two amounts rental receipts (which are taxable) and health services (which are GST-free). Your have attached a spreadsheet that contains amounts relating to each type of receipts in each BAS. · You have not reimbursed the recipients the overpaid GST amounts (and will not do so).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 38-10 | Taxation Administration Act 1953 Divisions 3 and 3A of Part IIB | Sections 105-65 to the Schedule

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 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. | 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 · the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) 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 section 105-65 applies because: · You have incorrectly characterised the supplies of your health services as taxable and treated them as taxable supplies when you should have treated them as GST-free. · You have treated the supply in your BAS as if the supply was a taxable supply and have remitted GST to the Commissioner on those supplies in the calculation of the your net amounts. · As no GST was payable on those supplies, the amount legally payable was nil and you have overpaid GST in relation to those supplies. · You have provided that you have not and will not reimburse the recipients the overpaid GST amounts. In your circumstances, the error resulted in the mischaracterising the supply as taxable and so section 105-65 does apply to restrict the refund. | Detailed Reasoning - When the Commissioner exercises the discretion: 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 Commissioner that he has discretion in certain limited circumstances 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) … (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) … 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) Act (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 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. 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. The following facts are relevant: · You have mistakenly treated the supply of your health service as taxable whilst it is always GST-free under Division 38 of the GST Act. · The invoice issued to the clients stated that "No GST included". · The director used the bank statement as the basis to report GST instead of the invoices. · GST has been paid on the supply of your services in your BASs since GST registration more than 4 years ago. In your circumstances we accept that the amount your clients paid for your services does not include GST. The clients do not pay GST as there is no GST included in the price of the supplies. The mistake was made at the reporting stage when your director treated the supplies as taxable rather than GST-free. The Commissioner is satisfied that the Consortium has borne the cost of the GST overpaid rather than passing it on the recipients. Therefore the Commissioner will exercise his discretion to refund the overpaid GST. | Detailed Reasoning - What is the amount of the refund: In accordance with subsection 105-65(2) of the TAA the Commissioner will refund you the overpaid amount. However, the obligation to pay you the overpaid amount under section 8AAZLF of the TAA is subject to the supplier (you) satisfy other legislative conditions. In this case, the time limits contained in section 105-55 of the TAA. 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 Australian Taxation Office (ATO) of their entitlement to the refund. (See the fact sheet Time limits on GST refunds attached) For tax periods starting before 1 July 2012, your entitlement to an outstanding indirect tax refund (other than an entitlement relating to overpaid indirect tax on an importation) will expire four years from the end of the tax period to which the refund relates unless either of the following applies: · you notify us of your entitlement to the refund during the four year period, · we notify you of your entitlement to the refund during the four year period. To ensure you can claim any outstanding indirect tax refund you are entitled to in relation to a tax period, you must do either of the following within four years of the end of that tax period: · lodge your refund claim in an activity statement · notify us of your entitlement to the refund. · The Tax Office received on 24 September 2012 your notification of your entitlement to the refund of the overpaid GST. Your correspondence also included copies of the relevant BASs and a spreadsheet working out the correct GST and the remitted GST. It is considered that you have met the requirements of a notification under section 105-55 of the TAA. As we received your notification on in June 2012, the earliest tax periods that falls into the time limit under section 105-55 of the TAA is the June 2008 BAS. In conclusion, the Tax Office will refund you the overpaid GST amount included in your BASs as from the September 2008 BAS to June 2012 BAS. Please note that your income for income tax purposes is net of GST. As the overpaid GST will be refunded to you, you are required to amend your relevant income tax returns (2009, 2010, 2011 and 2012) to reflect the increase in your assessable income.

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