Category Archives: Refunds

Assistant Treasurer releases new draft legislation on GST refunds for consultation – now Division 142?

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Yesterday afternoon the Assistant Treasurer released new draft legislation dealing with refunds of overpaid GST for a second round of public consultation.  The previous draft legislation proposed to introduce Division 36 into the GST Act, whereas the current draft legislation proposes to introduce Division 142 into the GST Act. The amendments will apply to tax period commencing 17 August 2012.

The draft legislation can be accessed here and the Explanatory Memorandum here.

My initial analysis of the draft legislation can be found here.

The media release from Treasury acknowledged that the first round of consultation highlighted a number of concerns with the initial draft legislation, with the main issues being as follows:

  • the perceived inability to obtain a refund of overpaid GST would encourage taxpayers to shy away from adopting a conservative approach to their GST obligations;
  • a concern that rights to object to an assessment of GST would be removed as the relevant assessment would not be excessive as section 36-5 would deem the GST to have always been payable;
  • the restriction on refunds would override the operation of the adjustment provisions resulting in businesses not being able to get a refund in their dealings with other businesses;
  • the concept of passing-on was introduced without being adequately defined creating considerable uncertainty;
  • recipients that have excess GST passed on to them may not have an entitlement to an input tax credit on the excess GST as it may not be consideration for a taxable supply and therefore would not be a creditable acquisition for the purposes of Division 11; and
  • the Commissioner should be able to retain his discretion to pay refunds where appropriate e.g. where a taxpayer does not satisfy the requirements of Division 36 but there is no windfall gain to the taxpayer.

My analysis on the initial exposure draft of the legislation can be accessed here. Also, the submissions lodged by various professional bodies can be accessed here.

It appears that Treasury has listened and the new draft provisions try to address many of the concerns raised in the submissions. Nevertheless, this second raft of proposed amendments is likely to be controversial and one can expect significant comment from taxpayers and the profession as part of the consultancy program.  Comments are sought by 28 March 2013.

Summary of the new provisions

In summary:

  • S 105-65 of Schedule 1 is to be repealed
  • The restriction operates on two types of refunds, excess GST unrelated to adjustments (subdivision 142-A) and excess GST related to cancelled supplies (subdivision 142-B)
  • Subdivision 142-A only applies to restrict refunds of “extra GST” – the provisions do not cover input tax credits, GST correctly attributable to a different period or deceasing adjustments attrtibutable to a later tax period (save for the operation of subdivision 142-B)
  • Subdivision 142-B applies to decreasing adjustments attributable to a later tax period as the result of the cancellation of the supply.
  • The Explanatory Memorandum states that the provisions are to ensure that overpaid GST is only refundable in certain circumstances and that the provisions apply irrespective of whether the overpayment arises as a result of a mischaracteriation or miscalculation of the GST payable. Further, the taxpayer is allow to self-assess their entitlement to a refund and the Commissioner will have a discretion to refund excess GST in exceptional circumstances where it would be appropriate.

Tribunal finds that applicant not entitled to GST refund where notification lodged out of time

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In Tom and Commissioner of Taxation [2013] AATA 28 the Tribunal found that the applicant was not entitled to refunds of GST as he had not notified the Commissioner of his entitlement to those refunds within the four year time limit stipulated in s 105-55(1) of Schedule 1 to the TAA. The applicant had lodged revised BASs outside the four year time period.

The Tribunal also found that the Commissioner had no discretion to extend the time provided for the Applicant to give notice of its entitlement to claim a refund, referring to Australian Leisure Marine Pty Ltd and Commissioner of Taxation [2010] AATA 1065.

ATO publishes ID on points fees for loyalty programs; Tribunal decision on GST refunds and time limits

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Earlier this month the ATO published ATO ID 2013/1 “GST and points fee in a loyalty program” which takes the view that a loyalty program operator is making a taxable supply to a program partner where it allocates points to members in return for a points fees and those points would be redeemed by members for vouchers which are subject to the voucher provisions in Division 100 of the GST Act. The ATO ID applies the views of the Commissioner in GSTR 2012/1 that the supply of points by the program operator to the program partner is a supply of rights, being the rights that program members obtain on receiving points.

In Dandenong Motors Unit Trust and Commissioner of Taxation [2012] AATA 920 the Tribunal found that the applicant was not entitled to a refund of overpaid GST paid in respect of holdback payments beyond the four year statutory time period to the extent that the applicant’s net amount was negative.  The case dealt with the construction of s 105-55 before its amendment in 2008.  The applicant contended that the effect of the decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 was that the limitation period in s 105-55 (prior to its amendment) only had application to GST paid on supplies – the provision did not apply to GST paid in respect of arrangements which were not supplies.  The Commissioner accepted that the applicant was entitled to a refund of overpaid GST to the extent that it reported a positive net amount in its monthly GST returns, but contended that s 105-55 operated to restrict that entitlement to the extent that its net amount was a negative amount. The Tribunal found that the applicant’s contention was based on a misunderstanding of what the amendments in s 105-55 (and s 105-65) were intended to do.  Further, at all relevant times, s 105-55 limited the right to refunds of negative net amounts.

NZ Supreme Court dismisses appeal by receivers for refund of GST

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Yesterday the NZ Supreme Court handed down its decision in Stiassny and others v Commissioner of Inland Revenue [2012] NZSC 106  where the Court dismissed an appeal against the decision of the Court of Appeal that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out.

The case is interesting as it considers the question of whether the receivers of the partners (who were not appointed as receiver to the partnership) were personally liable to pay GST on the sale of partnership property. A similar question may arise under s 58 of the GST Act.  Secondly, the case discusses the scope for a claim based on restitution.  An outline of the facts and my analysis of the decision of the Court of Appeal can be accessed here.

Were the receivers personally liable for GST?

The Court of Appeal rejected the Commissioner’s contention that the receivers were personally liable for the GST of the partnership.  Before the Supreme Court, the Commissioner ran the same argument, being that the provisions of s 57 and s 58 (dealing with the GST consequences of “incapacitated entities”) should be given a construction which was consistent with their purpose, being to make the receivers liable for the GST of the partnership (notwithstanding that the partnership itself was not in receivership).

The Supreme Court rejected the argument for similar reasons to the Court of Appeal – essentially that the argument required words in s 57 to be ignored and additional words to be put into s 58.  The decision is another example of the limits of a “purposive” construction to statutory construction.

Can the receivers recover the GST paid?

The first argument of the receivers was that the payment of GST was made by them, rather than by the partnership.  This argument was rejected on the basis that the documents lead to the conclusion that it was simply not arguable that the GST payment was made otherwise than from a partnership bank account with funds to which it had title.

The second argument was that because the proceeds held by the receiver were insufficient to discharge the obligations owing by the partnership to secured creditors, those funds were held on bare trust for the secured creditors and, in equity the payment to the Commissioner utilised the property of the secured creditors, which can be recovered. This claim was rejected because of the effect of the introduction of the Personal Property Securities Arrangement regime which gives a creditor priority over a security interest in the funds paid to the creditor.

The third argument was that the payment had been made because of a mistake by the receivers or because they were, in practical terms, compelled to make it.  The Supreme Court agreed that the receivers were making a mistake about the law when they wrongly caused the partnership to pay the GST – they wrongly thought they were personally liable for the GST so paid it to protect their personal position. The Supreme Court also observed that it was well-settled that someone who makes a payment acting on a view of the law which a court later declares to be wrong, may be able to recover it.  In this context, the basis of the claim was to recover a payment made by mistake to the wrong creditor, to someone who would not have been paid but for the mistake.

The Supreme Court nevertheless found that the third argument failed on restitutionary principles.  This is because the partnership did owe the Crown the GST which was paid, therefore the Commissioner gave good consideration in accepting the payment in discharge of the debt.  Also, there could be no suggestion that the Commissioner induced the mistake – he made no demand for payment.  There was no unjust enrichment to the Crown at the expense of the partnership.

UK Tribunal looks at whether retailer entitled to refund of VAT for goods paid for by fraudulent use of credit cards – is there a supply?

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In Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 the UK Tax Tribunal has referred to the ECJ the question of whether a retailer is required to account for VAT on the sales of goods paid for by the fraudulent use of credit cards where the retailer has not been required to repay the payments received from the issuing banks.

This case raises the interesting question of whether the retailers made a “supply” of goods to the customers, notwithstanding that the goods were obtained by fraudulent means.  The context of the dispute has a similarity with the recent decision of the High Court in Qantas as in both cases the taxpayer received a payment in circumstances where the “intended transaction” does not proceed but is entitled to retain the funds received. If a supply is nevertheless made, VAT/GST is payable.  If a supply is not made, the taxpayer receives a financial benefit with no VAT/GST consequences.

While the Tribunal referred the question to the ECJ, it is interesting to consider the arguments put by both parties.

The taxpayer made the following submissions:

  • the presence of a legal relationship requiring reciprocal performance is a fundamental criterion to the identification of a “supply of goods”
  • the existence of a supply will primarily be determined by the terms of the agreement between the retailer and the cardholder
  • it has already been held that obtaining goods by illegal means (theft) does not equate to a transfer of a right to dispose of tangible property as owner – there is no legitimate distinction to be drawn between goods obtained illegally by theft and those obtained by credit card fraud
  • any payment received by the retailer only forms part of the “taxable amount” to the extent that there is a direct link between the goods provided and the consideration received.  In the circumstances of a fraudulent card transaction there is no reciprocal assumption of any obligation by the fraudster in connection with the payment for the goods and thus no direct link between any sum received by the retailer and the release of the goods
  • it is crucial to identify what the payment is “for”

The Commissioner made the following submissions:

  • there is plainly a supply of goods by the retailer to a customer where the customer fraudulently uses a credit card which he knew he was not authorised to use – in the course of the transaction the relevant goods were handed over to the fraudulent customer by the retailer in the same way a they would have been to any other customer
  • the transactions are not identical to the theft of goods – the latter is a unilateral undertaking by the thief, with nothing agreed and no relationship between the thief and the owner
  • the state of mind, motive or dishonest intent of a customer is not relevant to whether there is a supply – an objective approach is required.  A transaction is not prevented from being a supply because it involved some fraud and is therefore unlawful
  • the retailer received payment of the price of the goods from the third party bank – the payment was directly linked to the making of the supply of the goods to the customer – this payment constituted third party consideration for the supply of the goods

While the UK VAT system is different to here, in particular the UK requires a “direct link” between supply and consideration whereas here the link is the broader “in connection with”.  Nevertheless, the views of the ECJ on this issue may well have relevance in the Australian context.


PSLA issued on retaining GST refunds pending verification; Appeals update on “son of holdback” – Commissioner lodges Cross Appeal

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In the wake of the Multiflex decision, Tax and Superannuation Laws Amendment Act (2012 Measures No.1) Act 2012 was introduced to amend the Taxation Administration Act 1953 to allow the Commissioner of Taxation to hold refunds for verification prior to payment.  Yesterday, the Commissioner published PSLA 2012/6 ‘Exercise of the Commissioner’s discretion under section 8AAZLGA of the Taxation Administration Act 1953 to retain an amount that would otherwise have to be refunded’.  The purpose of the practice statement is to provide guidance to tax officers on when it is reasonable to exercise the Commissioner’s discretion to delay a refund amount pending verification of the taxpayer’s entitlement to the amount.

An analysis of the practice statement will be posted next week.

Appeals update

In September the Tribunal handed down its decision in in AP Group Limited and Commissioner of Taxation [2012] AATA 617, finding that the taxpayer’s objection was partially allowed, on the basis that certain incentive payments were not consideration for a supply.  The Tribunal handed down its interim decision in July 2012, [2012] AATA 409.

The Federal Court portal shows that on 12 October 2012 the taxpayer lodged an appeal to the Federal Court.  Also, on 19 October 2012 the Commissioner lodged a cross-appeal.  Given both parties have appealed, it would appear that the Federal Court will have an opportunity to consider one of the fundamental planks of GST, namely whether payments are consideration for, or in connection with, a supply.

The matter has been set down for directions on 6 November 2012.  Because the decision was by two Deputy Presidents, the appeal can be heard by the Full Federal Court (rather than a single Judge) if considered appropriate. One would expect that this would likely be the case.

My post discussing the Tribunal’s decision can be accessed here.

Commissioner outlines administrative treatment of GST refunds pending amendment of existing law

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On 17 August 2012 the Assistant Treasurer released draft legislation for public consultation dealing with refunds of overpaid GST.  The amendments are intended to apply to tax periods commencing on or after the date of the announcement. Today the ATO published its proposed administrative treatment for GST refunds pending the enactment of the new legislation – the page of the ATO website can be accessed here.

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. My analysis of the proposed amendments can be accessed here.

The administrative procedure is as follows:

The ATO will apply the existing law and follow current procedure 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 of the announcement 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 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.

 

GST Private Rulings published in September 2012 – focus on grants of financial assistance and GST refunds

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In September 2012 the Commissioner published nearly 60 private rulings dealing with GST issues on the Private Rulings Register.  A list of the rulings can be accessed here.

This month I would like to focus on a private ruling made on the difficult issue of whether grants of financial assistance are consideration for taxable supplies and a private ruling made on the perennial issue of GST refunds.

Private ruling No. 1012140548318 – grants of financial assistance

This private ruling deals with the difficult issue of whether grants of financial assistance are consideration for taxable supplies.  The private ruling is interesting because it involves the application of the Commissioner’s views in GSTR 2012/2 ‘Goods and services tax: financial assistance payments which was published earlier this year.  My analysis of that ruling can be accessed here.

The facts of the private ruling were as follows.  The applicant (A) was registered for GST and under the terms of a deed, B made a grant to A for the approved purpose, being the design, construction, delivery and installation of an item to be used in a specified location.

Clause A provided the following conditions for the grant:

  • to use the grant only for the approved purpose
  • to store, maintain, transport, clean, erect and dismantle the item
  • to make the item available to authorised users
  • to maintain proper financial records in relation to the grant
  • to disclose the grant as a separate and identifiable item in your financial statements
  • to provide annual audited financial statements
  • to keep the other party informed on progress and provide other information as agreed

Clause B provided that A was required to publicly acknowledge the assistance of the grant from the other party

Clause C dealt with the possible repayment of the grant, at the option of the other party, if A failed to apply the grant for the approved purposes.

Clause D stated that the grant did not include GST, but B agreed that if GST was payable the additional amount for GST would be paid.

Having regard to GSTR 2012/2, the Commissioner concluded that, viewing the arrangement as a whole, A made a supply to B for consideration and GST was payable on the grant.  The basis for this conclusion is that the terms of the deed go beyond providing a grant to enable A to acquire the item, which on its own could result in a mere expectation only (and no supply).  The additional clauses (including the obligation to make the item available to authorised users and to store, maintain, transport, clean, erect and dismantle the item) evidence that there is more than a mere expectation.  Further, it is only be building the item that the express obligations to maintain them and make them available to users can be fulfilled.

In coming to this conclusion, the Commissioner referred to the following example in GSTR 2012/2 where it was considered no supply was made because there is a mere expectation:

  • A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts.  The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.
  • The local council has an expectation that the works will be carried out.  However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council

As discussed in my analysis of the Ruling, the reasoning behind this example appears to be that the agreement with the local tennis club is not binding and it creates expectations alone. This may be a simplification of the arrangement between the parties, which in my view would necessarily involve a binding agreement, including the following terms (whether express or implied):

  • the funds will be used for no other purpose than to resurfacing the tennis courts; and
  • the funds will be repaid if the funds were not used for that purpose

If not, the payment would simply be a gift and the tennis club would be free to spend the money as it saw fit, including retaining the money.

The justification for departing from this example in the private ruling appears to the presence of additional obligations on A. However, those obligations only come into effect if A actually uses the grant to acquire the item.  There are no obligations on A to actually acquire the item, and in this regard it is difficult to see how a distinction can properly be made with the example of the local tennis club.

What this private ruling does show is the difficulty of drawing a line between those arrangements which, while being enforceable legal arrangements, involve no supply because there is simply an expectation on a recipient of the funds to do something, and those arrangements where there is an obligation on the recipient to do something.

The recent decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 may also raise difficulties with the Commissioner’s approach in GSTR 2012/2.  Where a party receives a grant in return for entering into a deed (and thereby entering into legal obligations), applying the reasoning of the majority (that the airline made a taxable supply upon entry into contractual obligations), it is difficult to see how there could not a be a taxable supply.

Private Ruling No. 101224509666 – GST refunds

The register shows that a number of private rulings were published on whether the Commissioner would exercise his discretion in s 105-65 of Schedule 1 to the TAA to refund overpaid GST.  This ruling is interesting because it deals with the difficult question of taxpayers having to reimburse recipients for the overpaid GST before being entitled to a refund of the GST (and thereby be exposed to the cash flow issues and also the risk of the Commissioner refusing to pay the refunds).

In this case, where the recipients were not registered nor required to be registered for GST, the applicant proposed the following arrangement because it claimed that it was not in a financial position to first reimburse its customers:

  • the applicant would send a letter to each recipient notifying them of their entitlement to a refund of GST, to which those recipients must respond within a specified time frame and also agree to being charged an administration fee, which would be offset against the refund entitlement
  • based on the response of the customers, the applicant could confirm the exact quantum of the GST refund to be claimed (i.e., the refund claim would equate to the claims made by recipients)
  • any refund paid by the Commissioner would be held in an audited trust account for the benefit of customers and the funds would be solely used to refund GST to customers (subject only to the administration fees)

The Commissioner denied to exercise the discretion to pay the refunds, for the following reasons:

  • the Commissioner will generally not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are countervailing reasons for doing so
  • the applicant has not presented any countervailing reasons why the discretion should be exercised – in citing cash flow reasons, the applicant has not demonstrated that its circumstances are exceptional or different to any other entity that may refer to receive a refund in advance.
  • if the Commissioner was to exercise the discretion, it would result in increased costs of administration for the Commissioner – he would need to take appropriate measures to ensure that all the terms of the arrangement were complied with both before and after the refund was paid, otherwise there was a risk that the refund would not be passed on to end consumers and this would result in a windfall gain to the applicant.

In denying the discretion, the Commissioner was clearly concern about setting a precedent.  As noted in the private ruling:

If the Commissioner were to exercise the discretion in your circumstances, then all future requests for similar arrangements would have to be considered accordingly.  The wording of the legislation, and the public ruling, indicate that this is not the scope or intention of the legislation.

The Commissioner was also clearly concerned about having to assume an administrative burden in ensuring that the refund was eventually paid to the recipients. In circumstances where the applicant has entered into legally binding arrangements to pay the refunds to customers, and the refunds are placed in a trust account solely for the benefit of those customers, whether the Commissioner should properly undertake this administrative burden may be doubted.

In any event, this private ruling shows that the Commissioner is taking a very strict approach to the requirement that the overpaid GST first be reimbursed to the customers before any refund is paid to the supplier.

Addendum issued to MT 2010/1 on s 105-65 and GST refunds

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Yesterday the Commissioner issued Addendum MT 2010/1A1 to MT 2010/1 Miscellaneous tax: restrictions on GST refunds under s 105-65 of Schedule 1 to the TAA.

The Addendum amends the Ruling to reflect the decision of the Federal Court in International All Sports v Commissioner of Taxation [2011] FCA 824.  In that case the Court found that the restriction on GST refunds in s 105-65 did not apply where there was an overpayment of GST because of a miscalculation of GST using Division 126 of the GST Act (dealing with gambling supplies).

Importantly, as envisaged in the Decision Impact Statement to the decision, the Addendum acknowledges that s 105-65 does not apply in cases where the supply is always correctly characterised and treated by the supplier as taxable, but an overpayment of GST arises from a mere miscalculation.  Examples include:

  • a supplier correctly characterises a supply as taxable but merely miscalculates the GST for that supply in the calculation of their net amount;
  • supplies are treated as taxable under the margin scheme where there was an error in the calculation of the margin;
  • GST on supplies of real property has been calculated under the ordinary provisions, when in fact the margin scheme applied;
  • Division 72 of the GST Act applies but an overpayment of GST arises from an error in the calculation of market value;
  • a supplier chooses to apply Division 87 of the GST Act to a supply of long term accommodation in commercial residential premises, but the supplier then fails to apply the concessional rate when calculating the value of the supply
  • GST is overpaid due to a miscalculation of GST which arises when a taxpayer fails to pay LCT on a luxury car; or
  • GST on a taxable supply of an insurance policy is overpaid as a result of an error when working out the value of the taxable supply pursuant to s 78 of the GST Act

The Addendum is welcome, but there may be no victory for taxpayers because on 17 August 2012 the Assistant Treasurer released draft legislation to repeal s 105-65 and replace it with Division 36 of the GST Act, which would remove the Commissioner’s discretion and taxpayers’ entitlement to a refund in each of the cases outlined above. The amendments are to apply from monthly tax periods starting 1 September 2012 and quarterly tax periods starting 1 October 2012, so the effectiveness of this Addendum is questionable (on the assumption that the amendments proceed, of course).

My analysis of the proposed new refund provisions can be accessed here.

Tribunal hands down decisions finalising Wynnum Holdings and “son of holdback” cases

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On Friday the Tribunal handed down its decisions in Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616 and AP Group Limited and Commissioner of Taxation [2012] AATA 617

Wynnum Holdings

On 5 May 2011 the Tribunal handed down an interim decision ([2011] AATA 296) dealing with two preliminary matters, being whether the Commissioner’s claim was made out of time (“the timing issue”) and whether the Commissioner was prevented from recovering because of a ruling previously made in the Applicant’s favour (“the ruling issue”.  The Tribunal found against the Applicant on both these matters and found it necessary to decide the remaining issues of whether the Applicant was carrying on an enterprise at the time it purchased a property in 2003, or whether it was acting as bare trustee of joint venture parties (“the enterprise issue” and whether the property is properly characterised as “commercial residential premises” or “residential premises” (the commercial residential premises issue”).

The Tribunal found in favour of the Commissioner on both the remaining issues.  My analysis of the decision can be accessed here.

AP Group Limited

Also, the Tribunal handed down its final decision in AP Group Limited and Commissioner of Taxation [2012] AATA 617, finding that the taxpayer’s objection was partially allowed, on the basis that certain incentive payments were not consideration for a supply.  The Tribunal handed down its interim decision in July 2012, [2012] AATA 409 and my post discussing that decision can be accessed here.

The decision confirms that adjustments for three of the incentives were to be made for the May 2007 and March 2008 tax periods (being the sample months for testing), thereby reducing the taxpayer’s net amounts for those tax periods.  In the interim decision, the Tribunal raised the the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds and whether the Tribunal has jurisdiction to review such a decision.  The Tribunal did not appear to consider this issue.