Exposure Draft published for the re-introduction of Division 142 dealing with refunds of overpaid GST

Yesterday the Treasurer published an exposure draft of the Tax and Superannuation Laws Amendment (2014 Measures No.2) Bill 2014:refunding Excess GST. The legislation will repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. Legislation was originally introduced into the House of Representatives on 26 June 2013, but the legislation lapsed after the election was called.

The legislation can be accessed here. The Explanatory Memorandum can be accessed here. The relevant page from the Treasury website can be accessed here.

The key changes to the earlier legislation are stated to be as follows:

  • restore rights of review for taxpayers following a subsequent finding by the Administrative Appeals Tribunal (AAT) that it does not have jurisdiction to consider refund matters under the existing refunds provisions in section 105-65 in Schedule 1 to the Taxation Administration Act 1953;
  • strengthen the integrity aspects of the provisions by  clarifying that tax invoices are only prima facie evidence of amounts being passed on to another entity to the extent that the amount of GST ascertained from the tax invoice has been paid to the Commissioner of Taxation; and
  • reduce uncertainty and compliance costs for industry by amending the measure to only apply on a prospective basis. Under the earlier legislation, the measure was to have applied for tax periods commencing on or after 17 August 2012 (the date of the original announcement of the measure) with exceptions for refunds claimed before the date of introduction of the Bill into the House of Representatives.

Submissions are due by Friday 28 February 2014.

Commissioner publishes final GST Determination on objecting to a private ruling dealing with s 105-65 of the TAA and refunds

Happy new year and welcome to my first post for 2014.

Last week the Commissioner published GST Determination GSTD 2014/1 ‘Goods and Services tax: can you object to a private ruling that the Commissioner makes on the way in which section 105-65 of Schedule 1 to the Taxation Administration Act 1953 applies or would apply to you?”

The Determination has been issued in response to the decision of the Tribunal in Naidoo and Commissioner of Taxation [2013] AATA 443 where the Tribunal found that it had no jurisdiction to hear an application to review a decision of the Commissioner with respect to s 105-65. On 23 August 2013 the Commissioner published a  Decision Impact Statement confirming that he accepted the decision of the Tribunal and that the Tribunal has no jurisdiction to consider an application with respect of the Commissioner’s refusal to exercise his discretion under s 105-65 to refund overpaid GST. 

The issue addressed in the draft GST Determination is whether taxpayers have jurisdiction to object to a private ruling dealing with the application of s 105-65.

The Commissioner considers that he has the power to make an private ruling on the application of s 105-65. However, an objection can only be made to a private ruling if an assessment of the applicant’s net amount has not been made: paragraph 359-60(3)(a) of Schedule 1 to the TAA.

This means:

  • for tax periods prior to 1 July 2012, if no assessments have been made an objection can be made to a private ruling on the application of s 105-65;
  • for tax periods post 1 July 2012, due to the introduction of the self-assessment regime, GST returns are regarded as assessments and an objection cannot be made to a private ruling dealing with s 105-65 if it relates to a tax period in which a GST return has been lodged. An objection can be made if the private ruling relates to future tax periods.  As observed by the Commissioner, given that s 105-65 is about the refund of overpaid GST, this is unlikely to frequently occur in practice.

Implications

The current state of the law appears to be that taxpayers cannot exercise the powers of review under Part IVC of the TAA (including objections and seeking reviews by the AAT or the Federal Court) where the issue involves refunds of GST under s 105-65 of Schedule 1 to the TAA. Rights of review are limited to judicial review proceedings under s 39B of the Judiciary Act 1903 or under the Administrative Decisions (Judicial Review) Act 1977.

However, in November 2013 the Treasurer announced that the Government would be proceeding with the previously announced measures to restrict GST refunds and that the amendments would address the finding of the Tribunal in Naidoo. The previous measures were introduced into the House of Representatives on 26 June 2013 as the Tax Laws Amendment (2013 Measures No.4) Bill 2013The Bill proposed to repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. 

Tribunal sets aside amended assessment aimed at recovering GST refund paid to applicant

On Friday the Tribunal handed down its decision in Swanbat Pty Ltd and Commissioner of Taxation [2013] AATA 891 where the Tribunal found that the Commissioner could not issue an assessment to recover a GST refund paid to the taxpayer more than 4 years after the relevant tax period, even though the taxpayer’s entitlement to the refund was exhausted by the operation of s 105-55 of Schedule 1 to the TAA.

This is yet another decision of the Tribunal dealing with the interaction between the GST Act and the recovery provisions in Schedule 1 to the TAA. Interestingly, the decision appeared to result in a partial win to both parties although it is likely that the taxpayer will be ultimately required to pay back the refund under the mistaken payment provisions in s 8AAZN of the TAA. My analysis of the decision can be accessed here.

The Tribunal also handed down its decision in The Married Couple and Commissioner of Taxation [2013] AATA 888. In this case the applicants purchased a rural property, which was vacant land, having been used as a cattle station. The couple constructed a residential building on the property and also did some other works, including clearing of some of the land. They intended to make the building available for short-term holiday letting. They also intended to grow olive trees on the property for production of table olives and olive oil. At one stage, Mr and Mrs C also intended to farm goats.

In or about early October 2009, Mr and Mrs C executed a partnership agreement and became registered for GST purposes, initially with a date of effect of 29 September 2009. However, the partnership’s registration was subsequently backdated by the Commissioner of Taxation, at the request of the Married Couple’s accountant, to 1 January 2007. This was because Mr and Mrs C wanted to claim input tax credits (ITCs) for their acquisitions, including in relation to the construction of the residential building.

The Commissioner conducted an audit shortly after backdating the GST registration of the Married Couple as a partnership and concluded that the Married Couple was not a partnership and was not carrying on an enterprise within the meaning of the GST Act. Also, the input tax credits that had been claimed by the partnership in respect of the tax periods between 1 January 2007 and 30 June 2010 (Relevant Period) were incorrect because the Married Couple was not carrying on an enterprise. Even if the Married Couple was carrying on an enterprise during the Relevant Period, the Commissioner stated that the acquisitions were not made in the course of carrying on an enterprise or even if they were, they were excluded from being acquired for a creditable purpose because they related to making supplies that would be input taxed supplies of residential premises.

The Tribunal found that the activities of Mr and Mrs C were essentially preparatory in nature, while there was an intention to carry on a business in the future. Similarly, their evidence reflected an intention that they were to carry on business as partners, but the business activities had not yet commenced. Accordingly, no enterprise was being carried on and input tax credits could not be claimed. The Tribunal also found that the property constructed was not commercial residential premises.

Treasury to proceed with previously announced measures to restrict GST refunds

Yesterday the Treasurer announced that it would be proceeding with the previously announced measures to restrict GST refunds. The previous measures were introduced into the House of Representatives on 26 June 2013 as the Tax Laws Amendment (2013 Measures No.4) Bill 2013. The Bill proposed to repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. Due to the federal election being called the Bill lapsed.

Importantly, the Treasurer has also announced that amendments to the measures will address the recent finding in Naidoo and Commissioner of Taxation [2013] AATA 443 that the Tribunal does not have jurisdiction to consider refund matters.

The start date for the proposed legislation is 17 August 2012, which was the same start date in the Bill introduced into Parliament. Save for the amendment to address the Naidoo case, one would expect the legislation to be in a similar form.

Earlier this year I completed a paper entitled “Refunds of overpaid GST: from s 105-65 to Division 142 – where did we come from, how did we get here and where are we going?” which takes a detailed look at the troubled history of s 105-65 and also provides an analysis of the proposed provisions in Division 142. My paper can be accessed here.

 

Commissioner issues ATO ID on GST refunds and reimbursement

Today the Commissioner published ATO ID 2013/56 ‘GST refund and reimbursement by a journal entry’ where the Commissioner takes the view that he will not be satisfied that an amount of overpaid GST has been reimbursed to a recipient when a supplier merely makes a journal entry in its accounts acknowledging a debt owed to the recipient.

The ATO ID addresses the operation of s 105-65 of Schedule 1 to the TAA, which he says gives him a discretion to refuse to pay refunds of overpaid GST, save in certain circumstances. However, the discretion will not apply where the entity has overpaid GST and “the Commissioner is satisfied that you have reimbursed a corresponding amount to the recipient”.

The Commissioner considers that the concept of “reimbursement” takes its ordinary meaning, and refers to the definitions in the Macquarie Dictionary of  “to make repayment to for expense or loss incurred” or “to pay back; refund; repay”. The Commissioner considers that where a journal entry is made, he is not satisfied that the reimbursement has actually been made. However, if the recipient has a pre-existing liability owed to the entity, the Commissioner states that he would be satisfied that a reimbursement has occurred if a journal entry is made. While not expressly saying so, the Commissioner appears to accept that in such circumstances there would be a “set-off” of liabilities between the parties.

The concept of “reimbursement” is a difficult one. A mere journal entry may be at one end of the spectrum and the payment of cash at the other. The Commissioner appears to accept that a “set off” of liabilities will be sufficient. However, based on some private rulings issued by the Commissioner, his does not appear to accept that the following circumstances are sufficient:

  • where the entity proposes to reimburse recipients by way of a face value voucher (FFV) redeemable through your website or a credit note which may be applied as a discount against future purchases – click here for the private ruling
  • where the parties enter into an arrangement where the entity pays any refund into a trust account for the benefit of the recipient and those funds would be paid to the recipient (save for an administration fee charged by the entity) – click here for the private ruling

The Commissioner appears to require that the supplier actually reimburse the overpaid GST to the recipient before any refund can be claimed. This of course exposes the entity to the commercial difficulties of having to effectively fund the repayment of the GST to the recipient before getting any certainty that a refund will ultimately flow from the Commissioner. In contrast, if the Commissioner pays out GST refunds on the basis that the refunds will ultimately flow to the recipient, it appears that the Commissioner has some concerns about whether that will occur – these concerns are disclosed in the second private ruling referred to above. There is no easy answer.

Tribunal denies application for extension of time to review objection decision because four year limitation period had expired

On Friday the Tribunal handed down its decision in Hampson and Commissioner of Taxation [2013] AATA 731 where it denied the applicant’s application for an extension of time to lodge an application to review the Commissioner’s objection decision to deny a refund of input tax credits on the basis that the application was made more than four years after the tax period in which the refund related.

The decision illustrates that the four-year limitation rule in s 105-55(1) of Schedule 1 to the TAA operates in a mandatory way with potentially harsh results. The Commissioner acknowledged that the applicant was entitled to the refund, but because of the expiry of the limitation period there was no discretion which could be exercised in his favour. The Tribunal agreed and referred to the following observation of the Tribunal in Re Australian Leisure Marine Pty Ltd and Commissioner of Taxation (2010) 76 ATR 390[2010] AATA 620 at [17]:

In my view, s 105-55 of Sch 1 to the Act has substantive effect in that the expiry of the 4-year time-limit extinguishes the right of a taxpayer to notify the Commissioner of an entitlement to the input tax credit. As such the provision certainly denies the entitlement of an entity to an input tax credit. The High Court of Australia has also recognised that taxation legislation which imposes time-limits on amending an income tax assessment to have substantive rather than procedural operation: see McAndrew v FCT [1956] HCA 62(1956) 98 CLR 263[1956] ALR 1008.

I also note that early last week the Tribunal handed down its decision in Lakatos and Commissioner of Taxation [2013] AATA 712 where it affirmed the Commissioner’s decision that the applicant (who operated a used-car business) had not substantiated his entitlement to input tax credits and had a shortfall of GST given his failure to report GST on sales of vehicles. The Tribunal did not accept the applicant’s contention that as the sales were consignment sales, GST was only applicable to the 10% commission he charged on each sale and that any GST on the sale price should be paid by the vendor.

Commissioner publishes draft GST Determination on objecting to a private ruling dealing with s 105-65 of the TAA and refunds of overpaid GST

Today the Commissioner published draft GST Determination GSTD 2013/D4 ‘Goods and services tax: can you object to a private ruling that the Commissioner makes on the way in which section 105-65 of Schedule 1 to the Taxation Administration Act 1953 applies or would apply to you?’

The draft Determination has been issued in response to the decision of the Tribunal in Naidoo and Commissioner of Taxation [2013] AATA 443 where the Tribunal found that it had no jurisdiction to hear an application to review a decision of the Commissioner with respect to s 105-65. On 23 August 2013 the Commissioner published a  Decision Impact Statement confirming that he accepted the decision of the Tribunal and that the Tribunal has no jurisdiction to consider an application with respect of the Commissioner’s refusal to exercise his discretion under s 105-65 to refund overpaid GST. My post discussing the Decision Impact Statement can be accessed here.

The issue addressed in the draft GST Determination is whether taxpayers have jurisdiction to object to a private ruling dealing with the application of s 105-65. The view is that an objection can only be made to a private ruling if an assessment has not been made. This means:

  • for tax periods prior to 1 July 2012, if no assessments have been made an objection can be made to a private ruling on the application of s 105-65;
  • for tax periods post 1 July 2012, due to the introduction of the self-assessment regime, GST returns are regarded as assessments – therefore, an objection cannot be made to a private ruling dealing with s 105-65 if it relates to a tax period in which a GST return has been lodged. Accordingly, an objection can be made if the private ruling relates to future tax periods.  As observed by the Commissioner, given that s 105-65 is about the refund of overpaid GST, this is unlikely to frequently occur in practice.

Comments are invited on the draft Determination by 6 November 2013.

Commissioner publishes Decision Impact Statement for Naidoo and s 105-65 – no more Part IVC review

Today the Commissioner published a Decision Impact Statement for the decision of the Tribunal in Naidoo and Commissioner of Taxation [2013] AATA 443 where the Tribunal:

  • rejected the Commissioner’s contention that the applicant was still obliged to pay GST in the relevant period by relying on s 105-65 of Schedule 1 to the TAA and the issue of a GST assessment for a positive net amount – even though the applicant was not carrying on an enterprise;
  • found that it had no jurisdiction to hear an application to review a decision of the Commissioner with respect to s 105-65

My post discussing the decision can be accessed here.

The Decision Impact Statement confirms that the Commissioner accepts the decision of the Tribunal, and also that:

  • s 105-65 does not apply to extent that an additional amount of GST is included in a net amount, but the net amount itself is not overpaid (eg, where the additional GST is offset by overclaimed input tax credits); and
  • the Tribunal has no jurisdiction to consider an application with respect of the Commissioner’s refusal to exercise his discretion under s 105-65 to refund overpaid GST.

The effect of the finding on jurisdiction is that taxpayers who are not happy with the Commissioner’s refusal to exercise the discretion in s 105-65 are not able to utilise the review procedures in Part IVC of the Taxation Administration Act (including objection rights), and taxpayers will be forced to initiate judicial review proceedings, for example in the Federal Court under s 39B of the Judiciary Act. The absence of review rights (in particular, the absence of any right to object) severely constrains the ability of taxpayers to dispute a decision of the Commissioner to refuse to refund overpaid GST and will force taxpayers into costly and time-consuming administrative law proceedings in the Federal Court.

The Decision Impact Statement outlines the Commissioner’s proposed administrative treatment going forward.

The first point to note is that where taxpayers have paid money to the Commissioner as a result of the application of s 105-65 in similar circumstances to the Naidoo case (ie, where the Commissioner found that the taxpayer was not carrying on an enterprise), refunds may be available.

The second is that the position re review rights is addressed as follows:

  • where the Commissioner makes a decision refusing to exercise the discretion, he will advise the taxpayer that they have a right to seek judicial review of the decision – although the Commissioner states that, on request, he will conduct an informal review of decisions involving the exercise of the discretion
  • where a taxpayer self assesses a refund on the presumption that the Commissioner will exercise the discretion in their favour, the Commissioner may recover any refund paid as an “administrative overpayment” under s 8AAZN of the TAA

The third point outlines how the Commissioner will administratively deal with the impact of the finding in Naidoo that s 105-65 does not impact on the “net amount” of the taxpayer. The approach is as follows (emphasis added):

Where a taxpayer is found to have overpaid GST in circumstances where section 105-65 applies, the taxpayer’s assessment of net amount for the relevant tax period will be amended to reflect the correct net amount for the tax period. However, unless the Commissioner exercises his discretion to pay a refund under section 105-65, an adjustment will be made to the taxpayer’s account to reflect the amount that is not being refunded because of the operation of section 105-65.

It appears that the Commissioner accepts that where the taxpayer’s assessment of net amount includes GST that was not payable, that net amount must be reduced accordingly. In the absence of s 105-65, that would trigger an obligation on the Commissioner to refund that excess net amount (under s 8AAZLF of the TAA to the extent that the taxpayer was in a positive tax position, and under s 35-5 of the GST Act to the extent that the taxpayer was in a negative tax position). This will be addressed by the taxpayer’s Running Balance Account being adjusted to cancel out the excess.

Commissioner publishes administrative treatment of GST refunds pending the introduction of Division 142

On 26 June 2013 the Tax Laws Amendment (2013 Measures No.4) Bill 2013 was introduced into the House of Representatives which proposed to repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. Yesterday the Commissioner published his administrative treatment pending the enactment of the proposed laws. That treatment can be accessed here.

The publication notes that the Bill, as introduced, modifies the application of the amendments so that they  are intended to apply to refund claims relating to tax periods starting on or after 17 August 2012, but only for claims lodged on or after the date the Bill was introduced into the House of Representatives (26 June 2013).

The publication then outlines the following administrative treatment:

The ATO will apply the existing law and follow current procedures until the proposed law is enacted where taxpayers:

    • are required to write to the Commissioner to claim a refund of overpaid GST as a result of a mischaracterisation of a supply (for example, a supply is treated as taxable but is actually GST-free), and
    • are not required to write to the Commissioner to claim a refund of overpaid GST as a result of a miscalculation of an amount of GST payable (for example, the amount of GST payable was incorrectly calculated on a taxable supply of real property using the margin scheme), and can instead self-assess their claim to a refund of overpaid GST.

After the new law is enacted, taxpayers will need to review their circumstances regarding their claims for refunds of overpaid GST made during the period between the date the legislation was introduced into the House of Representatives and enactment.

If a taxpayer is required to seek amendments and the amendments result in an increase in their liability there will be no shortfall penalties or interest imposed where if the amendments are made within 28 days after enactment. Otherwise the full GIC will apply from the date of enactment.

If amendments reduce a taxpayer’s liability, appropriate interest on any overpayment will be paid.

The effect is that those taxpayers who may benefit from the current rules (eg, those taxpayers who have overpaid GST by reason of a miscalculation under the margin scheme) may seek a refund of GST. However, when the new provisions come in, it appears that the Commissioner will give such taxpayers 28 days to pay back that refund (unless they satisfy the provisions in the proposed Division 142) or be exposed to full GIC.

This administrative treatment is similar to that put in place previously, where the Bill was published as an exposure draft (my post on that treatment can be accessed here). However, an important difference  is that, as noted in an earlier post, due to the Federal election being called, the Bill has now lapsed, meaning that:

  • there is no “proposed law” or “new law” waiting to be enacted; and
  • there is no relevant date that “the legislation was introduced into the House of Representatives”

It may be that after the election the government of the day will re-introduce the Bill into the newly formed House of Representatives, and it may be that such a Bill will have transitional provisions which are similar to the Bill which was introduced into the House before the election was called, including provisions which retrospectively require taxpayers to disgorge refunds validly claimed under the current law. However, at the present time, that must be regarded as speculation. In this context, one must question the foundations upon which the Commissioner’s published administrative treatment is based.

Update on GST refunds – Bill introducing Division 142 has lapsed

On 26 June 2013 the Tax Laws Amendment (2013 Measures No.4) Bill 2013 was introduced into the House of Representatives which proposed to repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. Due to the Federal election being called the Bill has now lapsed. This means that the provisions of s 105-65 of Schedule 1 to the TAA will continue to apply to the payment of GST refunds.

This is good news for those taxpayers who have overpaid GST by reason of a “miscalculation” of GST (eg, under the margin scheme) as the Commissioner accepts that s 105-65 does not apply in those circumstances.

I also note that the transitional provisions in the Bill to introduce Division 142 provided that the new provisions would apply to tax periods starting on or after 17 August 2012, but that taxpayers could rely on the previous laws where they had done one of the following by 26 June 2013, being the date the Bill was introduced into the House (referred to as “the introduction day”):

  • if an amendment is made to an assessment, or is applied to be made, before the introduction day;
  • if an objection is made before the introduction day.

The Bill may well be re-introduced after the election and if so, the provisions may also apply to tax periods starting on or after 17 August 2012. With that in mind, taxpayers who believe that they may have an entitlement to a refund of GST may be able to protect their refund rights under the existing law by applying to amend their assessments or objecting to their assessments. Of course, whether that course of action would be effective would very much depend on the form of the transitional provisions in the re-introduced Bill.