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.

GST Private Rulings for July 2012, focus on bare trusts and GST refunds

In July 2012 the ATO published over 70 private rulings on the Private Rulings Register dealing with GST Issues.  A list of the rulings can be accessed here.  Two rulings stood out as justifying some discussion, one dealing with bare trusts and the other with refunds of GST and the Commissioner’s discretion in s 105-65 of the TAA.

Ruling No 1012169974256 – bare trusts

An interesting ruling dealt with the issue of bare trusts in the context of real property.  The views of the ATO on bare trusts are found in GSTR 2008/3 and Ruling No. 1012169974256 provides a helpful application of those views.

The facts outlined in the ruling were as follows:

  • a SMSF owned residential land which was leased plus listed securities.  The SMSF voluntarily registered for GST
  • the trustees of the SMSF determined to acquire commercial property for rental, but the rental would be less than $75,000 per year
  • prior to the acquisition, a separate trust would be created to hold legal ownership of the commercial property on behalf of the SMSF as sole beneficiary until such time as the SMSF had repaid the loan used to acquire the property.  Once the loan was paid off, the property would be transferred to the SMSF
  • the SMSF would conduct all the transactions relating to the property, including the borrowing and the leasing, plus pay all the rates and outgoings on the property.

In the ruling, the applicant asked the following questions:

  • is it the trust or the beneficiary that is carrying on the enterprise
  • when the trust purchases commercial property which is subject to a lease, should the trust or the beneficiary be registered in order to satisfy the ‘going concern’ exemption
  • when legal ownership transfers from the trust to the beneficiary, is it a taxable supply

The ruling answers the questions as follows:

  • the beneficiary is carrying on the enterprise and can voluntary register for GST
  • the beneficiary should be registered in order to satisfy the going concern exemption
  • the transfer from the trustee to the beneficiary is not a taxable supply

The basis for the view is that the trustee is a bare trust and it effectively ignored for GST purposes.

Ruling No.1012171312428 – refunds of GST

A consistent area of controversy is the Commissioner’s application of the discretion in s 105-65 in Schedule 1 to the TAA as to whether or not to pay GST refunds.  In Ruling No.1012171312428 the determination of the Commissioner not to exercise the discretion where a charity overpaid GST illustrates the arguably harsh impact of this provision, and also the difficulties faced by taxpayers in recovering refunds of GST.

The applicant was a Public Benevolent Institution which sold tickets to the public for certain events.  Until 2011 the applicant charged GST on the tickets but then was advised that the tickets were GST-free under s 38-250 of the GST Act as the ticket price was less than 75% of the cost to the supplier.

The Commissioner refused to exercise the discretion to refund the GST because the applicant had not demonstrated that it had borne the cost of the GST in relation to the supplies made, rather the GST had been “passed on” to the customers (who were not registered or required to be registered).  The Ruling provides an insight into the way the Commissioner appears to be applying the discretion, and the following points were made in the context of the application:

  • the underlying premise of the GST is that GST is payable by suppliers but is ultimately borne by consumers.  Therefore in normal circumstances the GST is passed on to the end consumer such that the supplier who remits the tax is not bearing the cost of the tax
  • at the time of making the supplies, the applicant was not aware of the GST-free concession and GST was understood to be a cost to the applicant.  Also, simply because some tickets have been sold at less than cost, it does not necessarily follow that the price that was charged did not include GST
  • the ATO does not accept that pricing to a market price (or using other pricing mechanisms such as fixed prices, price points etc) means that the supplier has necessarily borne the cost of the GST at the time of pricing or thereafter
  • there is a presumption that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier.
  • while for ‘not for profit’ entities there may not be a general presumption that entities set prices to recover costs, each case must be assessed on its merits and it is appropriate to approach the question with reference to the supplier’s conduct in setting prices based on its knowledge and belief at the time that GST was a cost (even if it is later determined that GST was not payable)
  • the applicant increased its prices each year in line with increasing running costs and the ATO considered that the applicant’s aim was to meet its costs as far as possible
  • while the terms of the sale were that the price was GST inclusive, it is reasonable to conclude that the customers would form the opinion that the amount they paid included GST
  • the ATO considered that there was a GST component in the price advertised to customers and the cost of the GST had been passed on to customers.

The above analysis illustrates the difficulties faced by taxpayers in showing that they have not “passed on” the GST to customers.  Even, as in this case, the supplier is selling the tickets at a loss.