Introduction

On 26 February 2013 the Assistant Treasurer released an Exposure Draft of legislation which is the second attempt to change the legislative landscape for GST refunds. On 17 August 2012 the Assistant Treasurer released the first tranche of exposure draft legislation.  Under that legislation, the existing discretion in s 105-65 of Schedule 1 to the TAA was to be repealed and replaced by a new Division 36 in the GST Act.  This new Division contained no discretion to pay refunds and simply set out the criteria whereby taxpayers would (or would not) be entitled to a refund of overpaid GST. My analysis of that legislation can be accessed here.

A raft of submissions were received by Treasury in response to the exposure draft.  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.

The provisions are relatively short, but appear to be quite complex. The following analysis approaches the proposed legislation one section at a time.

The proposed provisions – Division 142

142-1 What this Division is about

Amounts of excess GST will not be refunded if this would give an entity a windfall gain.

Note: Refunding excess GST to a supplier will give it a windfall gain if it has already passed on the excess GST in the price of the supply (and not reimbursed the recipient).

Discussion

Ensuring that taxpayers do not receive a windfall gain appears to be at the heart of Division 142. One can readily understand the basis for this view where a taxpayer has passed on the GST to a private consumer who remains out of pocket. However, the provisions appear to go further and operate in any case where the taxpayer may receive a windfall gain, regardless of whether a private consumer is out of pocket.

Having regards to the breadth of the provisions, the following comments of Emmett J in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159; (2008) 168 FCR 319 at [33] with regards to s 105-65 of Schedule 1 to the TAA come to mind:

Section 105-65 should not be given an expansive construction. While its object may be commendable, in seeking to avoid windfall gains for taxpayers, it is, in a sense, a paternalistic interference with the rights of taxpayers.  It proceeds on the basis that GST that should not have been paid has been paid by a taxpayer.  its operation is to ensure that the Commissioner receives a windfall rather than a taxpayer.

Subdivision 142-A – Excess GST unrelated to adjustments

142-5 When this subdivision applies

(1) This Subdivision applies in relation to the amount in subsection (2) if your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

Note: This Subdivision can apply whether or not you have paid, or been refunded, the assessed net amount.

(2) The amount (the extra GST) is the excess GST less any of it that:

(a) is covered by a *decreasing adjustment attributable to a later tax period; or

(b) is correctly attributable to a different tax period.

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

Discussion

The provisions apply only to “extra GST”, being that part of an entity’s “net amount” constituted by an amount incorrectly included as GST. A ready example is where an entity mistakenly includes an amount in its BAS referrable to GST. The Explanatory Memorandum refers to the following examples (at [1.27]):

• incorrectly treating a GST-free or input taxed supply as a taxable supply
• incorrectly treating something which is not a supply as a taxable supply
• miscalculating a GST liability under the GST law, for example, under Division 75 or 126
• incorrectly reporting an amount of GST on a GST return.

Expressly excluded from the concept of “extra GST” are decreasing adjustments attributable to a later tax period and amount of GST correctly attributable to a different tax period.  Implicity excluded are entitlements to input tax credits.

142-10 Refunding extra GST

(1) For the purposes of each *taxation law, so much of the extra GST as you have passed on to another entity is taken to have always been:

(a) payable; and

(b) on a *taxable supply;

until you reimburse the other entity for the passed-on GST.

Note 1: If you reimburse the passed-on GST so that this subsection ceases to apply, you may have a decreasing adjustment (see section 19-15) and the other entity may have an increasing adjustment (see section 19-80).

Note 2: The rest of the extra GST will be refunded as described in section 155-75 in Schedule 1 to the Taxation Administration Act 1953

(2) Subsection (1) does not apply for the purposes of how subsection 11-15(2) (about creditable purpose) applies to you.

(3) Subsection (1) does not apply to the extent that the Commissioner is satisfied that a refund of the extra GST:

(a) would flow to the entity that has effectively borne the cost of the extra GST; and

(b) would not give an entity a windfall gain.

(4) Subsection (1) does not apply for the purposes of applying a *taxation law to the other entity if, and while, that other entity knows, or could reasonably be expected to have known, that you have not paid the extra GST to the Commissioner.

Note: Subsection (1) still applies for the purposes of applying taxation laws to you.

Discussion

The deeming provision – subsection (1)

The effect of subsection (1) is to deem the “extra GST” to have always been payable and to have always been paid on a taxable supply.

The “condition precedent” to the operation of the subsection is that the “extra GST” has been passed on to another entity. This is reflected in the Explanatory Memorandum (at [1.28]):

However, overpayments of GST do not attract Division 142 unless the extra GST is also passed on to another entity. If, for example, the overpayment simply occurs as a result of an error in preparation of the GST return, it will be clear that there has not been a passing on of the extra GST.

Another example is where the Commissioner assesses the taxpayer for GST, the taxpayer pays the assessment (with no rights to recover the GST from the recipient) and successfully objects to the assessment.

The intent of deeming there to have always been a taxable supply in paragraph (1)(b) appears to be to protect the recipient’s claim for input tax credits on the basis it believed (albeit incorrectly) it was making a creditable acquisition. Under the current provisions, while the Commissioner refused to refund GST to the supplier relying on s 105-65, no protection (other than the Commissioner’s administrative practice) was given to the recipient who had overclaimed input tax credits on the mistaken view that the supply to it was a taxable supply.

The “condition subsequent” to the deeming provision no longer applying is the reimbursement of the extra GST to the recipient of the supply. Unlike s 105-65, where reimbursement of overpaid GST was only effective where the recipient was not registered nor required to be registered for GST, this provision extends to all reimbursements.  Accordingly, commercial parties will be able to “unwind” transactions to refund GST improperly collected and there will be matching increasing and decreasing adjustments. In some cases there are commercial drivers for such action. For example, real estate transactions where stamp duty is payable on the GST-inclusive consideration.

The exclusions – subsection (2) – creditable purpose

The Explanatory Memorandum (at [1.47]) states that this subsection makes it clear that the deeming effect of subsection (1) does not affect the supplier’s creditable purpose.  Accordingly, while the supplier may have incorrectly treated a supply as taxable and the deeming provisions in subsection (1) treat the supply has having always been taxable, where the supply was actually an input taxed supply the acquisitions made by the supplier will not be for a creditable purpose.

This result does appear harsh, if the intent of the legislation is to preserve the “status quo” position as though the supplier made a taxable supply. The taxpayer is deemed to have properly paid GST on a taxable supply, but the taxpayer is not entitled to recover input tax credits on its acquisitions.  The potential unfairness is illustrated by the following example:

A enters into a residential lease with B for a rental of $1,000 per month.  The parties mistakenly take the view that the lease is taxable and a rental of $1,100 is charged. A incurs agents fees of $110 per month (including $10 GST). Under the provisions, the GST of $100 is deemed to have always been payable and A is deemed to have always made a taxable supply, however A is not entitled to recover input tax credits of $10 on its acquisitions. Further, if A has already claimed input tax credits of $10, A would now have  GST shortfall as it has over-claimed credits as well as being exposed to penalties and interest.

The exclusions – subsection (3) – the discretion?

Subsection (3) appears to be intended to give the Commissioner a discretion to refund GST. The Explanatory Memorandum at [1.1] refers to the Commissioner having “a discretion to refund the excess GST in exceptional circumstances where it would be appropriate, but for the provisions would not otherwise allow a refund”. The example at [1.43] also refers to the Commissioner exercising the “discretion” in s 142-10(3).

My first comment is that the section does not expressly give the Commissioner a “discretion” – rather, it appears to be a mandatory provision which operates to require the Commissioner to refund the GST if the matters in paragraphs (a) and (b) are satisfied.

My second comment is that is unclear how paragraph (a) is to be satisfied, particularly the identification of the entity that has “effectively borne” the cost of the extra GST. When regard is had to the Explanatory Memorandum at [1.4] the entity which has “effectively borne” the cost of GST appears to be the private consumer who ultimately purchases something and pays GST . Where there is a transaction between a business and a private consumer and GST is charged, it is clear that the GST will be borne by the consumer. However, for transactions further up the supply chain the concept of GST being “effectively borne” by a consumer is questionable. This is illustrated by the following examples:

Example 1: A Pty Ltd sells a widget to B Pty Ltd for a price of $1,000.  The parties mistakenly treat the supply as taxable and the price is increased to $1,100 so that A Pty Ltd pays GST of $100 and B Pty Ltd claims an input tax credit of $100. B Pty Ltd sells the widget to a private consumer for $2,200 which includes GST of $200. The private consumer has clearly borne the GST of $200. However, it is difficult to see how it could be argued that the private consumer has “effectively borne” the GST of $100 charged by A Pty Ltd to B Pty Ltd. That GST simply disappeared as part of the cascading regime of GST and input tax credits along the supply chain.

Example 2: A Pty Ltd sells flour to B Pty Ltd for the price of $100. The parties mistakenly treat the supply as taxable and the price is increased to $110 so that A Pty Ltd pays GST of $10 and B Pty Ltd claims an input tax credit of $10. B Pty Ltd uses the flour to make bread and sells the bread to a private consumer for $10 GST-free. Again, it is difficult to see how it could be argued that the private consumer has “effectively borne” the GST of $10 mistakenly charged by A Pty Ltd to B Pty Ltd.

My third comment is that paragraph (b) appears to be a “catch-all” to prevent all windfall gains, including where no private consumer has borne any GST cost (for example the second example outlined above).

The exclusions – subsection (4) – anti avoidance

The Explanatory Memorandum (at [1.46]) states that this provision has been added to guard against the potential for parties to contrive arrangements that may enable additional input tax credits to be claimed where there would otherwise be no entitlement – and where the corresponding GST is not paid to the Commissioner.

142-15 Working out if the extra GST has been passed on

For the purposes of section 142-10:

(a) some or all of the extra GST may pass on to the other 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 extra GST, but does not contain enough information to enable that extra GST to be clearly ascertained; and

(b) if:

(i) a tax invoice is issued to or by the other entity; and

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

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

Discussion

One of the more difficult issues in Division 142 will likely be determining when GST has been “passed on”.  The Explanatory Memorandum notes that the phrase “passed on” is not defined in the GST legislation, but it is clear from the detailed observations in the Explanatory Memorandum that in most commercial transactions it would be expected that GST was passed on.

The approach in the Explanatory Memorandum (at [1.48]-[1.59]) can be summarised as follows:

• the onus is on the taxpayer to demonstrate that the extra GST has not been passed on
• some guidance on the question of “passing on” can be obtained from the decision of the High Court in Avon Products Pty Ltd v Commissioner of Taxation [2006] HCA 29 which concerned the former sales tax regime
• In an economy geared to making a profit, GST is expected to be passed on
• Businesses set prices to cover forseeable costs
• GST will be passed on in the usual course of doing business
• Determining whether an indirect tax has been passed on through the pricing process can be a relatively complex inquiry – however, the seller’s pricing policy and practice will be the starting point of the inquiry – it is also relevant to consider the actual knowledge of the taxpayer at the time, including the belief that the component of tax which later proves to have been an overpayment is a real cost of doing business
• a mere assertion that GST was not a factor in setting the price is not, of itself, sufficient to establish that the extra GST was not passed on

In practice, save for cases of errors in BAS preparation, it may be very difficult for taxpayers to establish that they did not pass on GST.

Subdivision 142-B – Excess GST related to cancelled supplies

142-20 Refunding excess GST relating to cancelled supplies

(1) If:

(a) your *assessed net amount for a tax period takes into account an amount of GST on a supply; and

(b) you have a *decreasing adjustment attributable to a later tax period as a result of the cancellation of the supply;

the decreasing adjustment is reduced to the extent that you have passed on that GST to the *recipient of the supply, but not reimbursed the recipient for the passed-on GST.

(2) Subsection (1) has effect despite section 19-55 (which is about decreasing adjustments for supplies).

Discussion

The scope of this provision is unclear. It appears that the provision is intended to cover situations where there is a cancellation in a supply which gives rise to a decreasing adjustment but the GST-inclusive consideration is not refunded to the purchaser. The Explanatory Memorandum (at [1.37]) refers to the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 and notes that there may be cases where money is paid with a mere expectation of a future supply, which does not eventuate.

Objection rights

The Explanatory Memorandum at [1.60] states as follows:

Division 142 impacts on the assessed net amount and therefore the assessment of that net amount. Accordingly, taxpayers may challenge that assessment, including the Commissioner’s decision not to exercise the discretion to pay the refund, under Part IVC of the TAA 1953.

One would expect that the issue of whether the GST was “passed on” will be the subject of dispute. This is because the provisions only apply to overpaid GST which has been passed on to another entity.

Conclusion

It is interesting to consider these new provisions in light of the main concerns with the initial draft legislation.

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

• Given the broad view to what constitutes “passing on” in the Explanatory Memorandum (which is consistent with the Commissioner’s view), one may question whether these new provisions will significantly relieve these concerns
• The reality would appear to be that save for errors in BAS completion, it will generally be difficult for suppliers to recover GST refunds. A ready example which comes to mind is a large supermarket chain which has a multitude of customers and no real way of identifying those customers for the purpose of reimbursement.

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

• This concern has not been addressed in the legislation, but rather in the Explanatory Memorandum. These concerns would appear to remain valid – there is either a right to object in the statute or there is not. As noted recently by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 at [39]: “This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text…Legislative history and extrinsic materials cannot displace the meaning of a statutory test. Nor is their examination an end in itself.“

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

• Save for certain decreasing adjustments involving cancelled supplies, these concerns appear to be addressed.

The concept of passing-on was introduced without being adequately defined creating considerable uncertainty

• Again, this concern has not been addressed in the legislation, but rather in a detailed discussion in the Explanatory Memorandum.

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

• This concern has been addressed

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

• This concern does appear to be addressed – although it is questionable whether the Commissioner retains a discretion.