Private ruling: Refund of GST
Published: July 2012

Ruling: Q1: Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to allow you a refund of the overpaid goods and services tax (GST) in your activity statements? | A1: Yes in part. Refer to the Reasons for Decision below.


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

Reasons for decision: Summary: The Commissioner considers that you have overpaid a GST amount where you treated a supply as a taxable supply when the supply was not a taxable supply. The Commissioner may exercise discretion under section 105-65 of Schedule 1 to the TAA to refund you the overpaid GST on the reimbursement of fees and charges you paid to the authorities as a paying agent for your clients. | Detailed Reasoning - Paying Agent: For GST-exempt taxes, fees and charges the GST treatment of the reimbursement depends on whether the supplier or the recipient of the supply is liable for meeting the expense. This will determine whether the expense is 'recovered' or 'on-charged' (i.e., whether it was incurred as principal or agent) and whether the supply is taxable, input taxed or GST-free. Where your client is liable to pay the fee by the operation of a relevant law, the Tax Office considers that you act as the paying agent of your client. This is because your client is legally obliged to pay the fees and you simply make a payment on their behalf and expect to receive reimbursement for the payment. Under these circumstances, the reimbursement you receive for the fees is not made in return for any supply that you make and therefore does not form part of the consideration for a taxable supply you have made. The reimbursement of taxes, fees and charges (excluded from GST under Division 81 of the GST Act) by your clients to you will be excluded from the GST if a 'paying agent' relationship can be established between you and your customers. In accordance with the general principles of agency, the reimbursement will retain the original character of the payment between you and the relevant statutory authorities and thus be excluded from GST. Where you incur costs in providing the taxable supply of your services and pass on the costs as part of your fee for service (on-charging), the entire fee will be taxable. | Detailed Reasoning - On-charging of taxes, fees or charges: The on-charging of an Australian tax, fee or charge that is listed in the Treasurer's Determination will not be covered by Division 81 of the GST Act and will be subject to GST. This is because a tax, fee or charge that is on-charged is no longer a tax, fee or charge. A tax, fee or charge incurred by an entity is a business cost, similar to other acquisitions for that entity. In subsequent supplies made by the entity, the cost of the tax, fee or charge is included in the calculation to arrive at the total value of the supplies. The fact that the cost may be identified on the agreement/invoice as a tax, fee or charge does not alter the fact that it is a cost component to the supplier. The recipient of the supply is not paying a tax, fee or charge to you; rather the recipient is paying you for the supply. In these subsequent supplies, the nature of the payment of an amount identified as a tax, fee or charge has changed and will be subject to the normal GST rules. Therefore, GST is payable by you on any reimbursement by the client of expenses you incurred on those goods or services. This is whether the reimbursement is separately itemised or included as part of your overall fee. The issue of on-charged expenses that do not include any GST component has been discussed in Goods and Services Tax Determination GSTD 2000/10. This public ruling deals with the on-charging of expenses that are not subject to GST or are GST-free by landlords to tenants. However, the principles outlined are also relevant in this situation. Paragraph 2 of GSTD 2000/10 provides that the consideration for the supply of premises by a landlord includes amounts which are paid by the tenant under the lease: o to the landlord for amounts for which the landlord is liable; or o directly to a third party where the tenant is in satisfaction of the landlords liability. The GST principals are illustrated in Example 8 in the Determination. | Detailed Reasoning - Example 8 - the outgoing is GST-free under Subdivision 38-I of the GST Act: 29. On 1 July 2000 Vanessa leases a shop to John. The consideration under the lease agreement consists of $1,000 base rent per month plus Vanessa's expenses relating to the water supplied to the property. Under the agreement Vanessa can recoup from John any GST payable by her in relation to the lease. 30. Vanessa pays the local authority $ 220 for water for July. The supply of water to Vanessa is GST - free under Subdivision 38 - I of the GST Act. She is not entitled to an input tax credit in relation to the acquisition of water. The supply of water by Vanessa, even if metered to John, is incidental to, and cannot be separated from the supply of the premises. Vanessa invoices John for $1,342. This amount is made up of $1,000 base rent, $220 outgoings and $122 GST. Applying the principles contained in paragraphs 2 and 3 of the Determination, the consideration for the supply of your services to your client includes amounts for which you are liable and which are paid by your client pursuant to the tax invoice. Where you recover from your clients costs that you have incurred on your own behalf, the payment from your customers will constitute consideration for a separate supply that you have made to those customers. This is so even if the acquisition to which the recovery relates was not subject to GST or you made that acquisition primarily for the purpose of providing services to those customers. The cost of acquisitions that you make on your own behalf in the course or furtherance of your enterprise forms part of the cost structure of your enterprise and not that of your customer. In your case you advise that you provide services to your clients and those services are subject to GST. In some cases, your services include the payment of fees to various Government authorities and local council. Your payment of these fees may not be subject to GST because of the operation of Division 81 of the GST Act. However, if under the terms of an agreement, your client is required to reimburse your expenditure on an exempt tax, fee or charge, the reimbursement to you is not a payment of an Australian tax, fee or charge by the client. When the costs are business costs that you incur in providing a service to your clients, then the amount payable by the client to reimburse you for these costs will form part of the consideration for the supply of your services which is subject to GST. In that event, you will be liable for GST when you on-charge these amounts. Taking the above analysis into account and applying it to the various fees that you have detailed in your correspondence to the ATO the GST implications are as follows: | Detailed Reasoning - Example 1: The fee is an exempt fee covered by Division 81 of the GST Act. The application can only be submitted by the client and therefore the transaction is between the client and the Council. The client is liable for the payment. In this example you are merely acting as the paying agent for the client and therefore there are no GST consequences on the reimbursement of this fee to you. | Detailed Reasoning - Example 2.: In this example you are liable for the payment of the charges, the account is in your name and you pay the amount to the relevant entity. The mere fact that you chose not to increase the fee charged to your clients to include the GST does not make this supply of the service GST-free. Where you incur such expenses in your own right in the course of providing a service, the subsequent payment by your client forms part of the consideration for a taxable supply you have made. Accordingly, you will have a liability for GST on this payment. This applies irrespective of whether or not the initial acquisition was exempt from GST under Division 81 of the GST Act. This is because the subsequent supply loses its characteristic as a supply exempt from GST when it is on-supplied by you. | Detailed Reasoning - Example 4.: It is unclear from the information provided as to who is legally liable for the payment. As per the examples above whether GST is applicable is dependant on whether you act as a paying agent for your client or whether you incur the expenses in your right in the course of providing your services. | Detailed Reasoning - Refund of GST: 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 of Schedule 1 to the TAA 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) of Schedule 1 to the TAA 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 | Detailed Reasoning - Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances: The restriction on refunds of overpaid GST under section 105-65 of Schedule 1 to the TAA 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 of Schedule 1 to the TAA. Paragraph 20 of MT 2010/1 explains the meaning of "overpaid". In the context of section 105-65 of Schedule 1 to the TAA, "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 this case you remitted GST of 1/11 of the reimbursement when these payments are not consideration for any supply. It follows that you remitted more than was legally payable and that there has been an overpayment of GST. Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. You treated your supplies as taxable supplies and remitted GST to the Commissioner when the supplies were not taxable supplies. You have advised that the recipients of your supply are not registered for GST purposes and that they have not been reimbursed for any amount corresponding to the GST overpaid. As the three conditions are satisfied, section 105-65 of Schedule 1 to the TAA 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 choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA 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. In this case you have advised that you pay certain taxes, fees and charges that are exempt from GST as a paying agent of your clients but have been remitting GST to the ATO on the reimbursements to you. The reimbursement is not subject to GST, the clients did not pay any GST on the reimbursement to you as the amount you received is the same as the amount that you paid to the authority on behalf of the clients. The error was made because of the mischaracterisation of the reimbursement as discussed above. And because of the error, you are the entity who ultimately borne the GST. You have not passed on the GST to the clients and would not receive any windfall gain following the refund. The refund of the overpaid GST is fair and reasonable in the circumstances. Consequently the Commissioner will exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you as paying agent for your client.

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. | · You are a company registered for GST. | · You are required to pay certain fees to the authority. | · When you bill your client for services, i.e. professional fees and disbursements, including the above mentioned GST exempt disbursements, you apply GST to the entire invoice value. | · The disbursements are mandatory to obtain certain Government services and form part of your services. | · The majority of your clients are individuals and are not registered for GST. | · The recipients of your supply have not been reimbursed for any amount corresponding to the GST overpaid. | · You contend that you have overpaid GST and have lodged a valid Notification of Entitlement to GST Refund . | · You are now entering the items into your accounts as GST exclusive and declaring to the client that it is GST exclusive on the receipt, so the errors should not happen again. | · You have provided examples showing how you have remitted GST to the ATO on services to clients where you have not charged GST on direct costs such as government charges incurred outside the contract with the clients.