Today the Assistant Treasurer released draft legislation for public consultation dealing with refunds of overpaid GST. The legislation repeals the discretion in s 105-65 of Schedule 1 to the TAA and introduces Division 36 into the GST Act which does not provide any discretion but simply provides when refunds will (and will not) be payable, which will allow taxpayers to self-assess their entitlements to refunds.

The amendments are to apply to tax periods commencing on or after today, effectively meaning monthly tax periods starting 1 September and quarterly tax periods starting 1 October.

The press release states as follows:

The draft legislation clarifies the circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement to a GST refund by reference to ascertainable criteria.

The same criteria will also apply for refunds associated with miscalculations of GST payable on a supply.

The amendments will protect the integrity of the tax system by ensuring that taxpayers who have passed on an amount of GST to their customers are not able to obtain a windfall gain irrespective of how that overpayment occurs.

Submissions are due by 14 September 2012.

The Exposure Draft legislation can be accessed here.

The Explanatory Memorandum can be accessed here.

INITIAL ANALYSIS

The draft legislation repeals s 105-65 of Schedule 1 to the TAA, which has had a controversial and difficult history.  The legislation effectively starts again by replacing that discretion and introducing Division 36 into the GST Act, which is headed “Excess GST” and provides as follows:

Division 36—Excess GST

36-1 What this Division is about

Amounts of any excess GST will usually not be refunded if you have passed on those amounts.

36-5 Working out if your excess GST can be refunded

(1) This section applies if, apart from subsection (2), your *assessed net amount for a tax period takes into account an amount of GST that exceeds what is payable.

Note: This section applies whether or not you have paid, or been refunded, the assessed net amount.

Example 1: Storm Co reports a negative net amount of $4,000 made up of GST of $10,000 less input tax credits of $14,000. In fact, Storm Co’s GST should have been $8,000 making its negative net amount $6,000. Storm Co has excess GST of $2,000.

Example 2: Snow Enterprises reports and pays a net amount of $2,400 made up of GST of $3,200 less input tax credits of $800. In fact, Snow Enterprises has incorrectly included an amount of $400 for a supply that should have been treated as GST-free, making its net amount $2,000. Snow Enterprises has excess GST of $400.

(2) For the purposes of this Act, the excess GST is taken to have always been payable except for:

(a) so much of the excess GST as you have not passed on to any other entity; and

(b) if:

(i) you have passed on some or all of the excess GST to another entity; and

(ii) that entity is neither *registered nor *required to be registered;

so much of that passed-on amount for which that entity has been reimbursed.

Note 1: Only excess GST covered by paragraph (a) or (b) can be considered for working out a refund under section 155-75 in Schedule 1 to the Taxation Administration Act 1953.

Note 2: If the excess GST has been passed on to a registered entity (or an entity required to be registered), that entity can treat the excess GST as being payable for working out the amount of its input tax credits under section 11-25.

(3) For the purposes of subsection (2):

(a) some or all of the excess GST may pass on to another entity even if:

(i) a *tax invoice is not issued to or by that other entity; or

(ii) a tax invoice issued to or by that other entity relates to that excess GST, but does not contain enough information to enable that excess GST to be clearly ascertained; and

(b) if: (i) a tax invoice is issued to or by another entity; and

(ii) it contains enough information to enable some or all of the excess GST to be clearly ascertained;

the tax invoice is prima facie evidence of that part of the excess GST having passed on to that other entity.

The aim of the amendments appears to be to ensure that taxpayers will only be entitled to a refund of overpaid GST if the GST has not been passed on to the recipient of the supply.  Also, the provisions will apply to all GST paid, regardless of the circumstances which gave rise to the overpayment.  This seeks to address previous decisions of the Courts and Tribunals to the effect that refunds should be made either because the discretion did not apply (see KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 and International All Sports v Commissioner of Taxation [2011] FCA 824) or the discretion should be exercised and a refund paid (see Luxottica Retail Australia Pty Ltd and Commissioner of Taxation [2010] AATA 22).

Of course, these new provisions will likely give rise to a new series of disputes about whether the GST was in fact passed on to the recipient. Similar issues arose in the context of Sales Tax.