GST refunds – analysis of the Exposure Draft on new Division 36 of the GST Act


On 17 August 2012 the Assistant Treasurer released an Exposure Draft of legislation which fundamentally changes the landscape around GST refunds.  In summary, the existing discretion in s 105-65 of Schedule 1 to the TAA will be repealed and will be replaced by a new Division 36 in the GST Act.  This new Division contains no discretion and simply sets out the criteria whereby taxpayers will (or will not) be entitled to a refund of overpaid GST.

The proposed amendments will likely be controversial and one can expect significant comment from taxpayers and the profession as part of the consultancy program.  Comments are sought by 14 September 2012.

Section 105-65

The history of s 105-65 of Schedule 1 to the TAA (s 105-65) is a controversial one.  Through a number of disputes, taxpayers successfully sought to chip away at its scope and effectiveness. Also, while the Commissioner published a number of Rulings and Practice Statements on its proposed application, there has always been considerable uncertainty around its proper application.

KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159

This was an expensive decision for the Commissioner and a boon for car dealers.  In this case, the taxpayer successfully argued that the discretion in s 105-65 (as it read at the time) did not apply to prevent the payment of GST refunds to car dealers in respect of GST mistakenly paid on “holdback” payments received for the sale of vehicles.  This was because the Commissioner accepted that these holdback payments were not consideration for a supply and the taxpayer succeeded in arguing that the discretion did not apply because its terms did not extend to circumstances where GST was overpaid because no supply was made.

As a result of this decision, s 105-65 was amended to extend its operation to where payments were made in respect of an arrangement which was not a supply.

MT 2010/1 ‘Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the TAA’

This Ruling set out the Commissioner’s views on s 105-65 and the circumstances in which the discretion to pay the refund may be exercised.

Luxottica Retail Australia Pty Ltd and Commissioner of Taxation [2010] AATA 22

This case involved the question of whether the discretion should be exercised so that the refund of GST be paid to the taxpayer.  In circumstances where the customer had not been reimbursed for the overpaid GST, the Tribunal nevertheless found that a refund should be paid.  In doing so, the Tribunal stated as follows:

As to paragraph (c), and accepting that subparagraph (ii) cannot apply, it is a fact that the customer has not been “reimbursed” to the extent of the overpayment.  The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised.  We think it should.

The reason for this is quite straightforward.  A reimbursement to the customer would, of course, have the effect of reducing the selling price of the spectacles.  The amount reimbursed would also need to be allocated, in some way, to the separate components of the supply – the frame and the lenses.  Unless it were allocated solely to the lenses (and we can see no justification for that approach), the act of reimbursement would necessarily cause an adjustment to the price (and, hence, the value) of the frame component, with a consequent adjustment to the GST amount payable on the transaction.  This, in turn, would lead to a need for a further reimbursement, despite our having found that the GST payable should be calculated on the contracted selling price.  Such a process of reiterating prices, values and GST payable has no place in a taxpayer’s compliance with GST as a “practical business tax”.

We also note the comments of Emmett J in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159; (2008) 168 FCR 319 at [33]:

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.

On the Commissioner’s approach in this case, the windfall would flow to the undeserving customer.  That is not the right outcome.

The Commissioner appealed this decision to the Full Federal Court, but chose not to appeal this part of the decision, thus depriving the Full Court the opportunity to test this issue.

International All Sports v Commissioner of Taxation [2011] FCA 824

This case tested the Commissioner’s contention that the discretion in s 105-65 extended to circumstances where a taxpayer miscalculated its GST liability payable on a taxable supply, rather than as a result of a mis-classification of a supply. The taxpayer was successful and the Federal Court found that the discretion did not, on its terms, apply in the way contended for by the Commissioner.

As a result of this decision, the Commissioner published a Decision Impact Statement which effectively conceded that the discretion did not apply to miscalculation cases (including where a taxpayer overpaid GST by reason of the use of the margin scheme).

Division 36

The Explanatory Memorandum to the Exposure Draft Legislation acknowledges some of the difficulties faced by s 105-65.  In its place, Division 36 is described as having the following intended effect (at 1.1-1.2):

…to ensure that overpaid goods and services tax (GST) is only refundable if certain conditions are met.  It also ensures that the restriction on GST refunds applies to overpayments of GST, irrespective of whether the overpayment arises as a result of a mischaracterisation of miscalculation of the GST payable.

The amendments also remove the Commissioner of Taxation’s (Commissioner) discretion to pay a refund and instead allow taxpayers to self assess their entitlement to a refund of amounts of excess GST by reference to the specified conditions.

And further at 1.22-1.24:

This Schedule also ensures that the policy that taxpayers should not receive a windfall gain is achieved, irrespective of how the overpayment arises.  In doing so, the amendments address the impacts of the Federal Court’s decision in Sportsbet by amending the law to ensure that overpayments of GST resulting from a miscalculation of the GST payable are also subject to the restriction on refunds.

Section 36-5 is inserted to provide that, subject to certain exceptions, where an assessed net amount takes into account an amount of GST that exceeds what is actually payable, then that excess is taken to have always been payable.  The provision does not differentiate between the circumstances that give rise to the overpayment.

The main exception is where the GST has not been passed on to the recipient of the supply.  A further exception provides that if the GST has been passed on, then a refund is only available for excess GST where the GST has been reimbursed to the recipient of the supply and the recipient is neither registered nor required to be registered.

The new Division is intended to work with the new self-assessment regime for GST, whereby each BAS lodged is deemed to be an assessment.  Section 36-5 deems any “excess GST’ to always have been payable unless one of the exceptions is satisfied (being that the amount has not been passed on to the recipient, or if it has been passed on and the recipient is not registered or required to be registered the recipient has been reimbursed for that amount) then the taxpayer can request a refund by lodging a revised GST return or seeking an amendment to the relevant assessment.  Of course, whether the Commissioner accepts the amendment may be a different issue.

This means that unless one of the exceptions is satisfied, any overpaid GST (for whatever reason) will be deemed to have been always payable and there is no scope to claim a refund of that GST.  This can clearly have some harsh results for taxpayers, including those circumstances where the Commissioner accepted in MT 2010/1 that it may be appropriate to exercise the discretion in s 105-65 to pay the refund, including:

  • where the taxpayer acts on informal advice from the ATO which is subsequently found by a Court to be incorrect; and
  • where the taxpayer initially treats a supply as GST but as a result of audit activity the ATO determines that GST should have been remitted and an assessment is made and the GST is paid.  However, the taxpayer subsequently objects to the assessment on the basis that the supply was not taxable and the Commissioner allows the objection

When the above matters are considered, it does raise the question as to how the Commissioner will treat those circumstances where taxpayers successfully object to GST assessments (whether at the objection stage or before the Tribunal or a Court) – if the GST has been paid, does that mean taxpayers will be prevented from recovering the GST?

The exemptions – passing on

MT 2011/1 shows that the Commissioner considers that it will be difficult to establish that GST has not been passed on to the recipient.  The Explanatory Memorandum appears to adopt a similar approach, by stating that an amount of GST is generally taken to have been passed on if it is has been included in the price of a supply, even if that amount is not separately identified and disclosed.  Further, the issue of a tax invoice will be strong evidence that GST has been passed on, although GST may still have been passed on if no tax invoice is issued.

An example involves an overpayment of GST as a result of a miscalculation under the margin scheme. The view taken in the Explanatory Memorandum is that in such circumstances, although no tax invoice may be issued, the contract of sale is sufficient evidence that GST is included in the price, and thereby passed on to the purchaser.  This example provides a useful insight into the conflict between the Commissioner and taxpayers in regards to the passing on question.  In the context of real property and the margin scheme, the purchaser simply pays a price for the land.  The purchaser does not know, or care, how much GST the vendor is paying under the margin scheme.  Further, the price does not change depending on what that GST liability actually is.  In this regard, one can see similarities with the description of the Tribunal in Luxottica of the “undeserving purchaser” getting a windfall of GST.

If the test of “passing on” is simply whether GST forms part of price (in the sense that the supplier pays an amount of GST), rather than whether the purchaser actually pays a higher price because of the imposition of GST, it will likely be very difficult for taxpayers to show that GST has not been passed on.  In this context, it is instructive that the only example provided in the Explanatory Memorandum where GST may not be passed on is where the taxpayer makes a clerical or accounting error that resulted in GST being paid but the customer had not been charged the amount.

The exemptions – reimbursement

A refund will be paid if the taxpayer has reimbursed the recipient for the overpaid GST and the recipient is neither registered nor required to be registered.  Such a rule creates a number of potential problems, which are discussed below.

  • If the recipient is registered or required to be registered and the GST has been passed on, a refund will never be payable (and the GST will be treated as always being payable), even if the parties elect to unwind the transaction. Such a blanket rule may create problems going forward as there may be valid commercial reasons why the parties want to unwind the transaction.  An example is the sale of real property because stamp duty is payable on the GST-inclusive price.  Accordingly, if property is mistakenly treated as taxable where it was GST-free (e.g., as a going concern), the purchaser may want to unwind the transaction (by repaying input tax credits and repaying the GST to the vendor) so that stamp duty will be levied on the lower amount.  These new provisions would appear to prevent that outcome, as the GST will be regarded as always being payable, regardless of the fact that the parties have unwound the transaction.
  • Another issue involves transactions with recipients who are registered for GST, but are unable to claim input tax credits for the acquisition (or a reduced input tax credit).  Division 36 appears to be premised on the assumption that registered recipients will be entitled to claim an input tax credit for the GST imposed by suppliers.  The Division (as indeed was s 105-65) is silent in its application where recipients are registered by are unable to claim credits.  In those cases, where the GST charged is a cost to the recipient, it appears more difficult to argue that there has been a “windfall gain”.  To take an extreme example, a registered recipient (who is not entitled to credits) could successfully sue the supplier for the recovery of GST improperly charged but that supplier would be unable to recover any of that overpaid GST from the Commissioner.
  • The taxpayer is required to reimburse the recipient before being entitled to the refund.  If it subsequently turns out that the recipient is required to be registered for GST, the supplier will automatically be denied the refund, and will be out of pocket to the extent of the reimbursement made to the recipient.

How are adjustments treated?

While it is not clear whether this is an intended outcome, the new provisions could operate to prevent taxpayers from claiming the benefit of decreasing adjustments under Division 19.  Section 19-40 provides that you have an adjustment for a supply if, as a result of adjustment events, the “previously attributed GST amount for the supply” no longer correctly reflects the amount of GST on the supply.  Section 36-5(2) provides that “excess GST” (being that part of your net amount which exceeds the amount of GST payable) is taken to have always to be payable.  In the context of this section, one wonders how you can have a decreasing adjustment for the purposes of s 19-55 (being the difference between the previously attributed GST amount and the corrected GST amount) given that the previously attributed GST amount is taken to always have been payable.

What does this mean going forward?

As an initial comment, it is likely that the scope of these provisions, in particular what constitutes “passing on”, will be tested in the Courts.

Further, introducing provisions which provide such a limited scope to recover GST may also encourage taxpayers to not pay GST where there may be some doubt as to whether it is payable.  Taxpayers may feel that they are better off by not paying GST and objecting to an assessment to determine whether the GST should be paid, rather than paying GST and run the real risk of not being able to recover it.  This would not be a satisfactory state of affairs.

These provisions also call into question the effectiveness of the assessment/objection and review provisions in Part IVC of the TAA if there is doubt whether taxpayers will be able to recover where GST assessments are shown to be excessive.

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