Unless the Commissioner exercises his discretion to pay a refund, the general rule under Division 142 is that a taxpayer will only be entitled to a refund of overpaid GST (referred to as excess GST) if:
- the GST was not “passed on” to the recipient; or
- if the GST was passed on, the taxpayer has reimbursed that amount to the recipient.
The terms “passed on” and “reimburse” are therefore fundamental to the operation of Division 142 of the GST Act and a taxpayer’s entitlement to a refund of overpaid GST. The draft ruling seeks to outline the Commissioner’s view on the meaning of these terms.
The meaning of “passed on”
The opening paragraph of the draft ruling dealing with the meaning of “passed on” states as follows:
Whether the excess 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. However, section 142-25, and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.
The remaining paragraphs reflect this central theme, being that the facts will always be relevant, but in each case they will be viewed in light of the presumption that GST has been passed on. Given that the onus falls to the taxpayer to establish that GST was not passed on, the taxpayer may often face a difficult task. This is reflected in the following observation of the Commissioner (at 103):
…an entity will need to have convincing grounds to demonstrate that its circumstances are outside the ordinary. An entity will need positively to demonstrate that it did not pass on excess GST.
The scope of the enquiry
The draft ruling (at 28) states that a taxpayer should have regard to the following matters in determining whether or not excess GST has been passed on:
- the manner in which the excess GST arose;
- the entity’s pricing policy and practice;
- the documentary evidence surrounding the transaction; and
- any other relevant circumstance.
A broad enquiry is required and it will be necessary to adduce direct evidence as to the particular circumstances in which GST was overpaid.
(i) the manner in which the excess GST arose
The Commissioner takes the view that where an error occurs after the transaction has taken place (e.g., an error in completing the BAS), this may point to a finding that GST was not passed on. Conversely, where the error was made before setting the price (e.g., incorrectly treating a GST-free supply as taxable), “the error will generally flow through to the sale price paid by the recipient and is likely to point to a finding that excess GST has been passed on”.
(ii) the entity’s pricing policy and practice
This is an enquiry into the entity’s conduct and knowledge at the time of setting the price of the supply, and whether there have been any changes to account for GST. The Commissioner’s views on this evidence appear to be as follows:
- where an entity sets a price with the knowledge or belief that the transaction will be subject to GST, including a belief that GST is a cost of doing business, that will point to a finding that the excess GST has been passed on – further:
- this may be demonstrated where the price is charged so as to exceed costs (including GST)
- it does not matter whether the GST is calculated under the general rules or the margin scheme
- where an entity sets a price on the basis that no GST is payable on the transaction, this may point to a finding that the entity has absorbed and not passed on the cost of the excess GST.
- where an entity sets its prices to a market that primarily makes non-taxable supplies, this may support a conclusion that the entity has not passed on the excess GST.
(iii) the documentary evidence surrounding the transaction
The focus appears to be on whether the documents show that GST was “included” in the price of the supply, rather than on the question of whether GST was “added” to the price. The prime example of such a document is the issue of a tax invoice (being prima facie evidence that GST was passed on). The Commissioner also considers that the evidence may be found in other documents, such as a contract of sale of real property, regardless of whether the price was GST inclusive or exclusive.
The meaning of “reimbursement”
The Commissioner considers that the recipient will be reimbursed where it has been compensated by an equivalent amount of the excess GST which was passed on. The reimbursement may be in the form of a monetary payment or the setting off of mutual liabilities. A journal entry will also be sufficient, provided it gives effect to an agreement between the parties.