Taxpayer Alert TA 2008/17: Claims for GST refunds beyond four years arising from the reclassification of a previously taxable supply as GST free.
Date of issue: 27 August 2008
Status: Current


Description: This alert applies to situations that exhibit some or all of the following features: 1. A taxpayer has paid GST on a supply that they considered at the time was a taxable supply but they now contend that the supply is in fact not a taxable supply. 2. The taxpayer at the time of making the supply issued tax invoices to the recipient who was registered for GST or required to be registered. 3. The taxpayer's notification is now seeking a refund of the GST purportedly overpaid in an earlier tax period where more than four years has elapsed since the end of that tax period. 4. Depending on whether or not the taxpayer reimburses the refund of the overpaid GST to the registered entity who was the recipient of the supply, there may be an unintended windfall gain to either the taxpayer who made the supply or to the recipient of the supply. 5. In some cases there are arrangements in place for the supplier and recipient of the supply to share a percentage of the refund sought from the Commissioner. | 1. A taxpayer has paid GST on a supply that they considered at the time was a taxable supply but they now contend that the supply is in fact not a taxable supply. 2. The taxpayer at the time of making the supply issued tax invoices to the recipient who was registered for GST or required to be registered. 3. The taxpayer's notification is now seeking a refund of the GST purportedly overpaid in an earlier tax period where more than four years has elapsed since the end of that tax period. 4. Depending on whether or not the taxpayer reimburses the refund of the overpaid GST to the registered entity who was the recipient of the supply, there may be an unintended windfall gain to either the taxpayer who made the supply or to the recipient of the supply. 5. In some cases there are arrangements in place for the supplier and recipient of the supply to share a percentage of the refund sought from the Commissioner. | FEATURES WHICH CONCERN US | The Tax Office considers that the situations outlined above gives rise to taxation issues that include whether in the particular circumstances: (a) the supply has in fact incorrectly been treated as a taxable supply. (b) the Commissioner in the particular circumstances is required under section 105-65 of Schedule 1 to the Tax Administration Act 1953 (TAA) to pay the refund. (c) it is appropriate in any particular case for the Commissioner to exercise his discretion contained in section 105-65 of Schedule 1 to the TAA where a supply, as between two registered entities or entities that are required to be registered, has been incorrectly treated as a taxable supply. (d) the time limits on refunds or credits contained in section 105-55 of schedule 1 to the TAA should apply to any of the tax periods in which a refund has been sought or are to be sought. (e) the Commissioner is precluded by the time limits contained in section 105-50 of Schedule 1 to the TAA from recovering from the recipient of the supply input tax credits previously claimed on the transactions that it is now contended gave rise to GST free supplies.. (f) A windfall gain not intended by the law will arise because of (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | (a) the supply has in fact incorrectly been treated as a taxable supply. (b) the Commissioner in the particular circumstances is required under section 105-65 of Schedule 1 to the Tax Administration Act 1953 (TAA) to pay the refund. (c) it is appropriate in any particular case for the Commissioner to exercise his discretion contained in section 105-65 of Schedule 1 to the TAA where a supply, as between two registered entities or entities that are required to be registered, has been incorrectly treated as a taxable supply. (d) the time limits on refunds or credits contained in section 105-55 of schedule 1 to the TAA should apply to any of the tax periods in which a refund has been sought or are to be sought. (e) the Commissioner is precluded by the time limits contained in section 105-50 of Schedule 1 to the TAA from recovering from the recipient of the supply input tax credits previously claimed on the transactions that it is now contended gave rise to GST free supplies.. (f) A windfall gain not intended by the law will arise because of (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | The Tax Office is examining these arrangements and would not exercise the discretion in such circumstances where the taxpayer did not bear the economic burden of the GST. Note 1 : Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 provides that the Commissioner need not give a refund to a taxpayer in certain situations. Under this section the Commissioner may deny you a refund where one of the following applies (i) the Commissioner is not satisfied that the taxpayer seeking the refund has reimbursed a corresponding amount to the recipient of the supply; (ii) the recipient is registered or required to be registered. In any circumstances where either of the conditions outlined above apply the Commissioner need not pay a refund. The Commissioner has a discretion to release the refund but may only consider it appropriate to do so in the situation outlined in this alert where he is satisfied that the refund does not create a windfall gain for either the supplier or recipient. Note 2 : In the recent Federal Court decision KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 , the Court found that section 105-65 did not apply where there was no supply. Because the arrangements dealt with in this alert are cases where there is a supply, the KAP Motors decision has no application to them. Details of the Commissioner's response to the KAP Motors decision are at: http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD2070of2006/00001 | (i) the Commissioner is not satisfied that the taxpayer seeking the refund has reimbursed a corresponding amount to the recipient of the supply; (ii) the recipient is registered or required to be registered. | Date of Issue: 27 August 2008 | Date of Effect: 27 August 2008 | Related Practice Statements: PS LA 2002/12 - Refunds of GST PS LA 2005/13 - Taxpayer Alerts | Subject References: Goods and Services Tax GST-free GST refunds GST supply GST tax periods Taxable supply Tax invoices | Legislative References: Taxation Administration Act 1953 Division 105 | Contact Officer: Paul Tregillis Business Line: GST Section: GST Refund Project Phone: 03 92754739





Related documents: MT 2010/1 | GSTR 1999/1 | [2008] FCA 159 | http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD2070of2006/00001 | PS LA 2002/12 - Refunds of GST | PS LA 2005/13 - Taxpayer Alerts | Division 105

The ATO view on this arrangement is set out in Miscellaneous Taxation Ruling MT 2010/1 | This Taxpayer Alert describes a situation where a taxpayer seeks to claim a refund four years or more after the end of a tax period on the basis that they incorrectly classified a supply as a taxable supply and they now contend it is GST free. In this situation the Commissioner may not be able to recover the input tax credits previously claimed on what are contended to be incorrectly classified supplies. This could lead to a situation where either the supplier or the recipient of the supply obtains a windfall gain.