Yesterday the Commissioner issued Draft PSLA 3521 – Treatment of input tax credits claimed by a recipient where the Commissioner does not give a refund to the supplier due to the operation of s 105-65 of Schedule 1 to the TAA.
The purpose of the draft PSLA is “to explain the circumstances in which the Commissioner will allow a recipient to retain an input tax credit that it has claimed where a transaction was incorrectly treated by a supplier as giving rise to a taxable supply”.
The draft practice statement confirms that where a refund is not paid to a supplier who overpays GST because an arrangement is incorrectly treated as a taxable supply, the Commissioner will generally not require the recipient to repay over-claimed input tax credits or pay general interest charge. This is referred to as ‘preserving the status quo’.
The practice statement is interesting because it effectively operates as an administrative override of the provisions of the GST Act and the TAA which cause the recipient to have a “GST shortfall” in these circumstances and to be exposed to recovery and the imposition of penalties and interest. In this regard, to the extent that the Commissioner does not follow the practice statement, the law will otherwise apply. Where there is truly a “status quo”, in the sense that GST was paid and credits were claimed, one can see the administrative ease of such an approach. However, the matter may not be so clear where credits are claimed but for some reason the GST is not paid (e.g., the supplier defaults, goes into liquidation or the Commissioner is required to disgorge the payments as a preference claim). In such circumstances the Commissioner is effectively “out of pocket” and recourse may be sought from the recipient to recover the over claimed credits.
Also, in some circumstances the recipient may want to “unwind the transaction”. A ready example is the sale of real property where stamp duty is paid on the GST-inclusive price.
As always, the devil is in the detail.
The practice statement has a couple of useful examples. The second example is where it is not appropriate to preserve the status quo (because the matter involved the sale of real property and the use of the margin scheme). In such a case, the recipient (entity Y) would be required to pay the over claimed input tax credit. The concerning part of the statement is what follows:
“The Commissioner would consider exercising the discretion to refund the overpaid GST to Entity X if Entity X reimbursed the overpaid GST component of the price to Entity Y.”
In circumstances where the recipient was required to repay the credits to the Commissioner and the recipient recovered that money from the supplier, it would appear to be a harsh result for the supplier that the Commissioner may only “consider” refunding the GST to the supplier (who would otherwise be out of pocket).