Paper published on GST refunds and Division 142

As noted previously on this site, on 26 June 2013 the Tax Laws Amendment (2013 Measures No.4) Bill 2013 was introduced into the House of Representatives which would repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act.

Rather than restrict my analysis to Division 142, I have 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. The aim of the paper is to outline the historical context in which Division 142 has been introduced as well as my views on the provisions themselves. My paper can be accessed here.

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

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

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

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

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.

GST private rulings for August 2012 – focus on Executors Commission and GST refunds

In August 2012 the Commissioner published over 40 private rulings on the Private Rulings Register dealing with GST issues.  A list of the rulings can be accessed here.

Of particular interest were private rulings dealing with the GST implications of Executors Commission and the perennial issue of GST refunds.

Private Ruling No.1012201810746 dealt with the question of whether GST was payable on executors commission to be received by an executor appointed to administer an estate. The Private Ruling found that GST was payable because the executor was carrying on an enterprise (he was already registered in respect of a farming business) and GST was payable.  While accepting that the appointment was a “one off”, the ruling found that the activity had the characteristics of a business deal and fell within the definition of “enterprise” in the GST Act.

This ruling has important implications for any person who takes an appointment as executor and seeks to recover executors commission.  Where a person is not registered for GST, there will only be an issue where the turnover threshold of $75,000 is exceeded.  However, where a person is registered (albeit in respect of a totally unrelated enterprise – in the case of the private ruling, the applicant was registered as a farmer), that person will be potentially exposed to a GST liability of 1/11th of the Commission.  This also raises the question of whether the Commission can be “grossed up” for the GST liability and whether the Estate should (or can) be registered for GST so that it can claim an input tax credit in respect of the GST.

Private Ruling No.1012202126278 dealt with the GST treatment of an out of court settlement payment and whether the Commissioner would exercise its discretion in s 105-65 of Schedule 1 to the TAA to refund the overpaid GST.  In the private ruling, the Commissioner confirmed that the payment was not subject to GST and that “on balance” the Commissioner would exercise the discretion to pay a refund of GST because he was satisfied that the settlement amount was set without taking GST into account and the applicant made a later decision to treat the amount as consideration for a taxable supply, meaning that the overpaid GST was not passed on to the recipient and the burden of the GST was borne by the applicant.

Last month the Treasurer released a controversial exposure draft for introduction of Division 36 into the GST Act, which is to replace s 105-65 of Schedule 1 to the TAA.  My post on the exposure draft can be accessed here and my analysis of the new provisions can be accessed here.  Under the new provisions, the same result would occur because the Commissioner accepted that no part of the overpaid GST was passed on to the recipient.

It is interesting that in the private ruling, no tax invoice was given to the recipient.  Under the proposed changes, if a tax invoice had been provided (which the applicant would have been required to do under the GST Act if required by the recipient), this would have provided “prima facie evidence” of the GST being passed on to the other entity.  In these circumstances, it is difficult to see how the mere fact of the provision of a tax invoice can potentially convert a situation where GST is not passed on, to one where GST is passed on.