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

Ruling: Q1: Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (Section 105-65) to allow you a refund of the goods and services tax (GST) when you incorrectly included GST in the price of a GST-free supply? | A1: No | Q2: Does the methodology that you propose to use to refund the overpaid GST to the recipients of your supply of food products satisfy the reimbursement requirements pursuant to Section 105-65? | A2: No

Relevant facts and circumstances: • You are a food retailer/wholesaler and are registered for goods and services tax (GST). • You have been expanding by opening new stores and gaining new customers. • In a meeting with Tax Office representatives you advised that you sell a mixture of known brands and own labels; you have a broad range of products but compared to other retailers your range of stock is shallow. • A review of your entire product range was undertaken and you identified five products that were incorrectly treated as taxable rather than GST-free. • You received a Private Binding Ruling (PBR) in 2013 from the Taxation Office in which the Commissioner ruled that certain 'Food Products' that you supply are GST-free. • You advise that prior to receiving the PBR, for a relevant period, you treated these Food Products as taxable and incorrectly remitted GST on sales. • You are seeking a refund of the GST overpaid by you with respect to supplies of Food Products to unregistered recipients only. • You contend that you have overpaid an amount of GST because you incorrectly treated supplies of the Food Products to unregistered recipients as taxable during the relevant period. • You have not reimbursed any amount to unregistered recipients in relation GST included in the price of the Food Products. • You intend to reimburse a corresponding amount to unregistered recipients for items where you contend the burden of the GST remitted was borne by the unregistered recipients. For items where you contend the GST burden was borne entirely by you, no corresponding amount will be reimbursed to the unregistered recipients. • It is generally your policy to rely on the suppliers to determine if a product is taxable. In respect to one of the Food Products - whether the product is processed or unprocessed impacts on whether it is GST-free or taxable and in this instance the product was classified incorrectly. • You have advised that prior to receiving the PBR your point of sale receipts for the Food Products showed an amount of GST included in the price and that upon receiving the advice in the PBR your point of sale receipts no longer show GST as being included in the price for the Food Products. • In a letter provided to the Tax Office, you have provided a table showing the prices of the Food Products before and after you received the PBR: • In later correspondence you have advised that the reason why the prices did not reduce by the amount of the GST is that you were bearing all or some of the GST. Also there were other cost factors and competitive pricing issues that would have changed and hence were taken into consideration while setting the new prices. • In your letter provided to the Tax Office you advise that you make a price comparison on like for like items as far as possible. You follow the Unit price legislation that came into force in Australia. • In your letter provided to the Tax Office, you have provided certain examples of your pricing comparisons and methodology. • You advise that competitor pricing is an ongoing activity and you generally do not keep records of pricing analysis for more than 3 months as long as you are price competitive/correct on comparable items for your customers. • You have no competitor price comparisons on the Food Products for the relevant period. • You have advised that the prices for the Food Products were not determined by you having regard to their GST status, you take into account factors such as supplier cost, exchange rate (imports), government duties (being custom duties and/or excise duties that are payable at the time of import), distribution centre charges, freight charges, labelling costs (imports), and labour costs where applicable. • You have advised that all selling prices of goods (including the Food Products) are set in accordance with your pricing parameters. This must be as close as it can be to the threshold margin, without exceeding a certain prescribed margin. However, the selling prices must be lower than all competitor prices. • In response to further questions you advised on that you do not have general or product specific pricing policy document, other than your mission statement - 'To provide customers with the lowest possible price'. • In a further letter provided to the Tax Office you have advised that the percentage of the profit earned on each product must not exceed a certain prescribed margin - namely, (Sell price - Cost of product)/Sell price = no greater than a certain prescribed margin. • In your application letter you have advised that the Sell price of a product is based on certain price parameters. • In order to determine which entity bore the cost of the GST on the Food Products, you have conducted an internal review of the actual margins made on the items sold. Where the margin achieved by you on the sale of an item was at or over a threshold margin percentage (based on internal pricing policies), you have concluded that the GST incorrectly paid on that item was borne by the unregistered recipients. However, where the margin achieved was under the threshold margin, you have concluded that the GST incorrectly paid on the item was borne by you up to the value of the threshold margin. • You contend that based on your pricing analysis and the methodology noted above, you have determined that the GST on all the Food Products excluding a particular product was absorbed completely by you. However, in respect of the particular product, the GST amount overpaid was funded partially by you and partially by the unregistered recipients. • In your application letter you contend that despite the fact that you incorrectly remitted GST on your supplies of Food Products whilst your competitors were correctly treating comparable goods as GST-free, you still supplied the Food Products at a lower retail price than your competitors. You contend that this evidences that the retail prices for the Food Products were not determined by you having any regard to their GST status, but based entirely on retail prices charged by your competitors for comparable products. • You also contend that this indicates that at least some of the GST cost on the Food Products was borne by you in order to preserve your competitive price position. • In relation to the part of the GST overpaid on a food product borne by unregistered recipients you are proposing to reimburse by way of a general in-store discount to all customers. The discount would be for a certain period and up to the value of the overpaid GST. • You contend that as you do not retain customers' credit card details for security reasons; it is not possible to reimburse customers by way of a credit card refund. In the context of the supermarket environment (i.e. comprising millions of low value, high volume transactions per year), the administrative costs of issuing a bank cheque to each affected unregistered recipient would greatly outweigh the financial value of the refund itself. • You note that, over xxx thousand sales of a particular were made during the relevant period, and state that it would be unreasonable and impractical (maybe even impossible) for you to issue a large number of cheques to reimburse the corresponding amount to the actual unregistered recipients who purchased the Food Product. • You submit that this is a particularly good (and targeted) way to effect the reimbursement because the relevant food product are not routinely purchased by all customers, so it is likely that those customers who have purchased them in the past from you would take part in this discount offer when they buy them again in the future. • Once this discount offer has been run and taken up by customers to the value of the overpaid GST, you will amend the relevant historical Business Activity Statements to reflect the refund. • You contend that you will not have a windfall gain in the above circumstance as the GST refund obtained from the Taxation Office will be passed on to your customers by way of a general discount on the Food Product. • You state that you already have a significant re-visit rate from your unregistered recipients so it is expected that the majority of the unregistered recipients affected by the initial overpaid GST would benefit from the discount strategy. • In preparation for a meeting between your representatives and representatives from the Taxation Office you were sent a questionnaire, you provided answers to various questions provided by the Tax Office.

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: Summary 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. Section 105-65 contains a discretion which the Commissioner may exercise to allow the refund. Based on the information provided we consider that GST has been included in the price of the Food Products 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 | Detailed Reasoning - Section 105-65 of Schedule 1 to the TAA: Under the general rules of the TAA the Commissioner is required to give a refund or apply an 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 Subsection 105-65(1) of Schedule 1 to the TAA provides that the Commissioner need not provide a refund of an amount to which this section applies if: a) the amount was overpaid because a supply was treated as a taxable supply; and b) the supply is not a taxable supply; and c) one of the following applies: (i) the Commissioner is not satisfied that the taxpayer has reimbursed a corresponding amount to the recipient of the supply; or (ii) the recipient is registered or required to be registered. Miscellaneous Tax Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) outlines the Commissioner's view on Section 105-65. Paragraphs 20 and 20A of MT 2010/1 explain the circumstances in which Section 105-65 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. In your circumstances subsection 105-65 would apply because: • You have mischaracterised the supplies of the Food 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 advised that you have not reimbursed to the recipients of the supply an amount corresponding to the overpaid GST. • 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. However, it is the view of the Taxation Office 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 your circumstances, the discretion to pay the refund to you will 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. 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 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 | Detailed Reasoning - 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 sample tax invoices you provided shows that GST has been included in the price of the relevant Food Products and without contrary evidence 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 the prices for the Food Products were not determined by you having any regard to their GST status, you take into account factors such as supplier cost, exchange rate (imports), government duties (being custom duties and/or excise duties that are payable at the time of import), distribution centre charges, freight charges, labelling costs (imports), and labour costs where applicable. You also consider your pricing parameters and threshold margins in determining the retail price to customers. You acknowledge that you add the GST to derive the cost or final retail price to your customers (reference is made to your response the additional questions - question 6). You advise that you aim to ensure the selling prices are lower than all competitor prices. You have advised that the percentage of the profit earned on each product must not exceed a certain prescribed margin - namely, (Sell price - Cost of product)/Sell price = no greater than a certain prescribed margin; For the Food Products, where the product has been incorrectly treated as being taxable you have determined an 'acceptable' threshold margin, for example xx% and here you achieved a margin of yy% (i.e. above the threshold margin) on the sale of an item, you contend that the burden of the GST incorrectly remitted was borne by the unregistered recipients to the extent of the additional margin. Where you achieved a margin of ww% (i.e. below the threshold margin) on the sale of an item, you contend that the burden of the GST incorrectly remitted was partially borne by you. In this case, you will only seek a refund of the 'lost" margin up to the maximum amount of GST paid on the item. You advise that you undertake price comparisons with competitors on like for like items as far as possible. You have provided the following as an example of where you have set your 'taxable' price against a competitor's GST-free price. You advise that competitor pricing is an ongoing activity and you generally do not keep records of pricing analysis for more than 3 months as long as you are price competitive/correct on comparable items for your customers. You have provided the calculation of as an example of how you have determined whether the GST on the Food Products was borne by you or by your customer. You also propose that because you establish your retail prices for the Food Products at an amount lower than your competitors' prices you must have absorbed a significant portion of the GST incorrectly remitted to the Taxation Office. It is our view that achieving a margin of less than the threshold margin does not show that you have borne the cost of the GST. It merely indicates that you have determined your price taking in a range of factors, including consideration of competitor's prices, that you believe will deliver the best value for your customers. Your prices in these instances still included the GST and were sold at a reduced profit margin. It was a marketing/pricing decision and the GST was still borne by your customers in full. You have stated that you did not consciously factor the GST as a cost when determining the price of the Food Products. 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 your product buyers may not have considered the GST as a cost when sourcing products and determining price, 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 invoices /cash register receipts that you provided to your customers evidences an amount of GST included in the price of the Food Products that has been passed on / borne by your customers. Additionally the Commissioner considers that the basis used to arrive at the price would have taken into account the belief that GST was payable and is a cost of carrying the enterprise. In particular we note that you acknowledge in determining a retail price you add up all the costs, add the margin and then add the GST. 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. | Detailed Reasoning - Question 2: Summary The Commissioner is not satisfied that the arrangements that you propose would constitute you reimbursing a corresponding amount to the recipient of the supply. Detailed reasoning As outlined in question 1 above, the Commissioner is of the view that the GST incorrectly included in the price on all the Food Products, was passed on to the recipients of the supply. Therefore, the GST has been passed on to and borne by the recipients and has not been borne by you. You have proposed a process that you would apply in refunding part of the overcharged GST to unregistered recipients by offering a general in-store discount to all customers, at all stores on the Food Products for a certain period and up to the value of the overpaid GST. You submit that this is sufficient to constitute a reimbursement of the corresponding amount. You consider that in providing the discount, each time a customer purchases the discounted Food Product, they will be effectively receiving a 'credit' from you which is offset against the total liability payable by the customer to you for the Food Product thus effecting a reimbursement. You assert that the discount will provide a targeted reimbursement because the Food Product are not routinely purchased by all customers, so it is likely that those customers who have purchased the Food Product in the past and would have incurred the GST in the relevant period will be those customers most likely to take part in the discount offer. Once this discount offer has been run and taken up by customers to the value of the overpaid GST, you will amend the relevant historical Business Activity Statements to reflect the refund. You contend that you will not have a windfall gain in the above circumstance as the general discount offered on the Food Product and passed on to your customers will be equivalent to the GST refund obtained from the Taxation Office. You state that you have a significant re-visit rate from your unregistered recipients so it is expected that the majority of the unregistered recipients affected by the initial overpaid GST would benefit from the discount strategy. In support of this proposal you advise that as you do not retain customer's credit card details, it is not possible to reimburse the actual Food Product customers who would have borne the GST on their purchase of the Food Product in the relevant period. You also advise that the administrative costs of issuing a bank cheque to each affected registered recipient would greatly outweigh the financial value of the refund itself. By way of context, you advise that over xxx thousand sales of the Food Product were made during the relevant period, as such, it would be unreasonable and impractical (maybe even impossible) for you to issue a large number of cheques to reimburse the corresponding amount to the unregistered recipients. In the context of section105-65 we need to consider whether your proposal constitutes reimbursement such that the Commissioner has an obligation to pay the refund. 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. MT 2010/1, paragraph 18 states: 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 . [emphasis added] 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 . [emphasis added] In regard to when the Commissioner considers the recipient of a supply to be appropriately refunds MT 2010/1 paragraph 115A states: 115A. In cases where the recipient is not registered or required to be registered, taxpayers can consider (that is self-assess) that the Commissioner will be satisfied that the recipient has been appropriately reimbursed (and that therefore section 105-65 will not apply) where: • the recipient can be specifically identified; • the amount of the reimbursement corresponds exactly to the amount of the GST overcharged to the recipient and the method of reimbursement ensures this is achieved; • the reimbursement is in money, or if made through a journal entry, to the extent that the journal entry offsets the recipient's pre-existing liability to the taxpayer; and • the reimbursement or journal entry has actually been made, and is not merely planned to be made. You have advised that as at a particular date unregistered recipients constituted xx% of your customers and at the present time the unregistered recipients have increased with your current customer renewal rate being xx%. We also acknowledge you are a relatively new business with new stores and the number of new customers growing significantly in the period since your first store opened. You also advised in your further information following from the meeting with the Tax Office that you are able to identify each affected sale and customer where GST has been overpaid. However, of concern to the Commissioner is the fact that your proposal for reimbursement by way of discount does not necessarily mean that the affected customers will receive the reimbursement, The discount will be offered to all customers, not just unregistered recipients, it will be offered nationally, given the changes in your customer base since the relevant period we consider that there will be significant proportion of current customers who are not entitled to a reimbursement that will receive a windfall by way of the discount. You advise that you would expect the discount to reduce the existing price of the Food Product as determined under your pricing policy, and that you do not intend to market or advertise the fact that this further discount is as a result of GST previously incorrectly charged. Additionally, as you have advised that there are many factors that may influence the price of the product such as cost price, indirect costs, profit margin, price comparisons and marketing concerns this does not provide an effective way to determine that the proposed discount would be seen as a genuine reduction to reimburse the customers reflecting the GST overpaid. 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. However, the Commissioner is not satisfied that the arrangements that you propose would constitute you reimbursing a corresponding amount to the recipient of the supply for the reasons mentioned above. Accordingly section 105-65 applies and the Commissioner need not give you a refund.