Introduction

Refunds of overpaid GST has been a significant problem in the United Kingdom.  The sheer scale of the issue was illustrated by the decision of the House of Lords in Fleming (t/a Bodycraft) v HMRC [2008] 1 WLR 195 which involved a claim for a refund of VAT as far back as 1973, the date the VAT was introduced in the UK. The House of Lords ruled that UK legislation providing for a retrospective limitation on claiming VAT refunds, without including a transitional regime to allow taxpayers with accrued rights to bring proceedings, breached the EU principles of effectiveness and legal expectation.  As a result of the decision, legislation was introduced to ensure that repayments would be subject to a four-year cap, but traders had a period to submit refund claims for periods as far back as 1973 (known as “Fleming Claims”). An article in The Telegraph on 21 July 2009 states that by the end of the deadline the Revenue had received 13,000 claims for the refund of overpaid VAT refunds totalling 8.5 billion pounds, that to date the Revenue had repaid 1.5 billion pounds and that 4.8 billion pounds had been set aside for repayments. Staggering sums.

The Australian experience with refunds of GST has not been as extreme. However, we have experienced a “mini-Fleming”, through the decision of the Federal Court in KAP Motors in 2008 which allowed car dealers to recover refunds of GST paid in respect of holdback payments back to 1 July 2000, being the date of the introduction of GST. According to reports at the time, it was estimated that such refunds could cost the revenue more than $300 million.  The legislation introduced to remedy this position gave taxpayers a five week window to protect their refund claims. However, my understanding is that while a large number of claims were lodged, the refunds actually paid were nowhere near that of the UK.

A snapshot of the Australian position

The Commissioner’s role is to administer the taxation laws, including the GST Act. However, the Commissioner has no power to collect or to retain amounts incorrectly paid as tax, including the GST. So much can be seen from the observations of the High Court in Commissioner of State Revenue v Royal Insurance Australia Ltd (1994) 182 CLR 51 where the High Court considered the question of whether an overpayment of stamp duty by Royal Insurance had to be refunded by the Victorian Commissioner of State Revenue. In that case, Mason CJ stated as follows (at [18]):

… the first and foremost consideration is that the Act is a taxing Act and that in terms it confers no authority upon the Commissioner to levy, demand or retain any moneys otherwise than in payment of duties and charges imposed by or pursuant to the Act.

The Chief Justice went on to refer to the decision of the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 378 where the Court observed as follows:

the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment.

The Chief Justice observed that “prima facie, that is all that is required where, as here, the recipient has no legal entitlement to receive or retain the moneys.”

In the context of GST, the general law position is supported by the provisions in the the GST Act and the  Taxation Administration Act 1953 dealing with a taxpayer’s Running Balance Account. Where a taxpayer pays an amount on account of GST that is not properly payable, eg by lodging an activity statement which over-states the GST payable, the taxpayer’s Running Balance Account will be over-stated. Under the statutory regime the taxpayer has a statutory entitlement to a refund of that overpaid GST through s 8AAZLF of the TAA (to the extent that the net amount is positive) and through s 35-5 of the GST Act (to the extent that the net amount is negative).

However, from the inception of the GST the taxpayer’s statutory (and general law) entitlement to a refund of overpaid GST has been subject to provisions which allow the Commissioner to retain overpaid GST subject to a discretion to pay the refunds. It is clear that the obligation on the Commissioner to not retain payments to which is is not entitled can be overridden by Parliament – however such a statutory provision must be clear: see Dawson J in Royal Insurance Ltd where his Honour stated at [19]:

The principle that a statute will not be read as authorising expropriation without compensation unless an intention to do so is clearly expressed has been described as a “firmly established rule of law” (footnote omitted).  It is at least an analogous proposition that clear words are required to authorize the retention of moneys received without any entitlement and I, for my part, would not construe a statute as conferring a discretion to do so unless such an intention were made explicit.

The provisions (s 39 of the TAA followed by s 105-65 of Schedule 1 to the TAA) have had a tortured history and have been the subject of a number of disputes before the Tribunal and the Federal Court. In recent times Treasury has decided to start with a clean slate and to introduce a totally new set of provisions into the GST Act, in the form of Division 142. These provisions will likely effect a fundamental change the treatment of GST refunds in Australia.

The aim of this paper is to review the history of the provisions and the various attempts by the Commissioner and Treasury to remedy what were seen as unintended defects, most of which were identified upon taxpayers being successful in legal proceedings. The paper will also analyse the proposed Division 142 and consider its potential impact.

The legislative history of s 105-65 – the early days

Section 39 of the TAA

The initial provision dealing with refunds of overpaid GST was s 39 of the TAA. The section provided as follows:

(1) This section applies to:

(a) so much of any net amount or amount of indirect tax as you have overpaid; and

(b) so much of any net amount that is payable to you under section 35-5 of the GST Act as the Commissioner has not paid to you or applied under Division 3 of Part IIB of this Act

(2) [repealed]

(3) The Commissioner need not give you the refund, or apply the amount under Division 3 or 3A of Part IIB, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply to any extent; and

(b) the supply is not a taxable supply to that extent (for example, because it is GST-free);

unless:

(c) the Commissioner is satisfied that you have reimbursed a corresponding amount to the recipient of the supply; and

(d) the recipient is neither registered nor required to be registered.

The Explanatory Memorandum to the A New Tax System (Goods and Services Tax Administration) Bill 1998, which inserted s 39 into the TAA, provided as follows under the heading “In what situation can a refund not be payable?”:

3.39  Ordinarily, if GST has been overpaid or entitlements to credits have been understated the Commissioner is obliged to refund the amount overpaid or credit understated. [New subsection 39(1)] 

Alternatively, the Commissioner may apply any or all of it against other taxation liabilities. [New subsection 39(2)]

Refunds may result from error in the calculation of a net amount for a tax period or from GST being paid in error on a non-taxable importation.

3.40  However, if GST is overpaid in a situation where supplies were incorrectly treated as taxable supplies in a GST return or assessment, a refund will have to be paid only if the Commissioner is satisfied that the recipients of the supplies on which GST was overpaid have been reimbursed.  The recipients of the supplies must not be registered or required to be registered for GST purposes. [New subsection 39(3)]

3.41  Because GST is payable by suppliers but is ultimately borne by the consumers of goods and services, a refund of overpaid GST would ordinarily result in a windfall gain to the supplier.  A supplier will need to satisfy the Commissioner that an amount corresponding to the refund will be passed on to the persons who ultimately bore the cost of the overpaid GST.

Section 105-65 of Schedule 1 to the TAA

On 1 July 2006, s 105-65 of Schedule 1 to the TAA was introduced. At its introduction, the section provided as follows:

105-65 Restriction on Refunds

(1) The Commissioner need not give you a refund to which this section applies, or apply amount under Division 3 or 3A of Part IIB to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply to any extent; and

(b) the supply is not a taxable supply to that extent (for example, because it is *GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply;

(ii) the recipient is *registered or *required to be registered.

Note: Divisions 3 and 3A of Part IIB deal with payments, credits and RBA surpluses.

(2) This section applies to:

(a) so much of any *net amount or amount of *indirect tax as you have overpaid; or

(b) so much of any net amount that is payable to you under s 35-5 of the GST Act as the Commissioner has not paid to you or applied under Division 3 of Part IIB of this Act.

Note: Division 3 of Part IIB deals with payments, credits and RBA surpluses.

Section 105-65 was introduced by the Fuel Tax (Consequential and Transitional Provisions) Act 2006. The Explanatory Memorandum explained the basis of the amendment in the following terms:

4.11 The administration rules for indirect taxes have been rewritten and relocated into Schedule 1 to the TAA 1953. The rewrite does not change the existing outcomes for indirect taxes. Therefore, this chapter does not explain the general operation of the rewritten provisions.

To understand s 105-65 one must therefore have regard to the Explanatory Memorandum to s 36, which is extracted above.

While it appears that the intention was that the law was not to change, there does appear to be a fundamental change in the drafting. In s 39(3), the discretion applied unless (emphasis added):

(c) the Commissioner is satisfied that you have reimbursed a corresponding amount to the recipient of the supply; and

(d) the recipient is neither registered nor required to be registered.

The effect of the requirements being cumulative is that the discretion would always apply to “business to business transaction” – where the recipient of the supply is registered or required to be registered for GST, regardless of whether the overpaid GST was reimbursed to the recipient.

In s 105-65(1)(c), the discretion refers to the same two factors, but instead of both requirements needing to be satisfied, the section provides that it is sufficient if “one of the following applies”. Whether this was an intentional change is unclear, however it does appear to involve an example of the unfortunate drafting of the section.

Practice Statement PSLA 2002/12

The administrative practice of the ATO to GST refunds was found in PS LA 2002/12 ‘Refunds of GST incorrectly included in the price of non-taxable supplies’. The Practice Statement included the following:

• where either or both of the conditions in sub-paragraphs 105-65(1)(c)(i) and (ii) were satisfied, s 105-65 provided that the ATO was not under an obligation to refund overpaid GST, but had a discretion to do so (paragraphs 1-3);
• as a general rule, the ATO would not exercise the discretion to allow a refund if the supplier had not first reimbursed the recipient (paragraph 5);
• the ATO would consider that a refund or credit would have been validly received only in circumstances where they were satisfied that the supplier had not received a windfall gain

2008 – the coming of the “holdback” and Treasury steps in

2008 was a watershed year for s 105-65 .

KAP Motors Pty Ltd and Commissioner of Taxation 

In February 2008 Justice Emmett of the Federal Court handed down his decision in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159; (2008) 168 FCR 319. The decision highlighted a number of problems with the drafting of s 105-65 and also s 105-55 of Schedule 1 to the TAA.

The case involved the question of whether the Commissioner could rely on s 105-65 to refuse to pay refunds of overpaid GST to car dealers where GST had been overpaid in respect of “holdback” payments received from car manufacturers. For the purpose of the case, both parties agreed that the holdback payments were not consideration for any supplies made by the taxpayer. Without necessarily accepting the correctness of that assumption, the Court proceeded on that basis.

The question before the Court was  whether s 105-65 could apply where there was no supply made by the taxpayer who overpaid GST. The Commissioner contended that the Court should depart from the literal construction of the section. The Commissioner’s contention was as follows (at [28]):

The contention is that s 105-65(1) should be construed as though the word supply included a purported supply or a putative supply such that it refers non-technically to any transaction that was incorrectly treated as a taxable supply; the provision should relevantly be construed to provide that the Commissioner need not give to a taxpayer a refund of so much of any amount of any net amount the taxpayer has overpaid if:

• the taxpayers overpaid the amount because a transaction was treated as a taxable supply to any extent;
• the transaction was not a taxable supply to that extent; and
• the Commissioner is not satisfied the taxpayer has reimbursed a corresponding amount to the recipient of the transaction.

The Commissioner contends that such a construction should be given to s 105-65 in order to achieve the purpose of the provision, as gleaned from the Explanatory Memorandum that was promulgated in connection with the Bill for the A New Tax System (Goods and Services Tax Administration) Act 1999, which included s 39(3), the predecessor of s 105-65.

The Court rejected the Commissioner’s contention, finding that, in its terms, s 105-65 was limited to circumstances where there is a supply that is not a taxable supply and it does not, in its terms, extend to some transactions that does not involve a supply within the meaning of the GST Act. In coming to this finding, the Court observed as follows (at [32]-[33]):

32 The Commissioner’s contentions involve construing the words actually used by the Parliament as if they contained additional words. That nevertheless involves a process of construing the words actually used. However, the occasions on which the words actually used should be construed as if they contained additional words, so as to expand the sphere of operation that could be given for the words actually used, will be rare, assuming it would ever be a permissible way of construing a provision, in a statute relating to taxation (see for example R v PLC (2001) 51 NSWLR 736 at [88]).

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.

That the Federal Court rejected the Commissioner’s contention that s 105-65 should be given a broader operation than its words allowed would appear to be consistent with the view of Dawson J in Royal Insurance referred to above, where his Honour took the view that “clear words” were required to allow the Commissioner of Stamp Duties to retain funds to which he was not entitled.

Treasury steps in – the five week window

In addition to the identifying a fundamental drafting problem with s 105-65, the decision in KAP Motors identified a significant drafting problem with s 105-55 of Schedule 1 to the TAA.

Section 105-55 provided a four- year time limit to a taxpayer’s entitlement to refunds, other payments or credits in relation to GST. At the time, the section relevantly provided as follows:

(1)   You are not entitled to a refund or credit to which this subsection applies in respect of a tax period or importation unless:

(a) within 4 years after:

(i)        the end of the tax period; or

(ii)       the importation;

as the case requires, you notify the Commissioner (in a *GST return or otherwise) that you are entitled to the refund or credit.

…

(2)   Subsection (1) applies to:

(a) a refund under section 35-5 of the *GST Act…

Section 35-5 of the GST Act provided as follows:

If the *net amount for a tax period is less than zero, the Commissioner must, on behalf of the Commonwealth, pay that amount (expressed as a positive amount) to you.

Having regard to the above sections, the operation of s 105-55(1) could be described in the following terms:

You are not entitled to a refund under section 35-5 of the GST Act unless you notify the Commissioner that you are entitled to the refund or credit within four years after the end of the tax period.

The problem was that the limitation only applied to refunds under s 35-5 of the GST Act (ie, where you had a negative net amount because your input tax credits exceeded your GST) and the limitation had no application where you were in a tax positive position (ie, where your GST exceeded your input tax credits). Accordingly, taxpayers who were in a tax positive position could, subject to s 105-65, seek refunds of overpaid GST all the way back to 1 July 2000. Further, those taxpayers who had overpaid GST where no supply was made (eg, car dealers in respect of holdback payments) could seek a refund without s105-65 applying. To add salt to this wound, the Commissioner could only claim a refund of input tax credits improperly claimed by recipients for a period of four years pursuant to s 105-50 of Schedule 1 to the TAA.

On 29 May 2008 the Tax Laws Amendment (2008 Measures No.3) Bill 2008 was introduced into the House of Representatives. Schedule 2 to the Bill sought to amend section 105-55 and 105-65 and to fix both issues. This can be seen by the following extracts from the Explanatory Memorandum:

Restriction on refunds

2.11 This measure ensures that the restriction on refunds applies to all amounts of overpaid GST where transactions have been treated as taxable supplies, whether or not the transaction to which the overpayment relates, is in fact a supply [Schedule 2, part 2, item 17, section 105-65]

…

Four year time limit on refunds due to taxpayers

2.21 Under the indirect tax law there is also a four-year time limit, starting from the end of the relevant period, on the entitlement of a taxpayer to refunds and credits, unless before the end of the four-year time limit the taxpayer notifies the Commissioner of their entitlement to a refund or credit or the Commissioner notifies taxpayers of their entitlement.

…

2.24 The four year limit in the payment of refunds to taxpayers applies irrespective of how the entitlement to the refund arises.  Therefore the four year-time limit on refunds applies, for example, where there is a reduction in the taxpayer’s liability.  These amendments achieve this by ensuring that the time limit applies to any refund of a net amount or net fuel amount or other amount or payment that was overpaid as indirect tax. [Schedule 2, Part 1, items 7 and 8, 10 to 12 and 15, paragraphs 105-55(2)(a), (2)(aa) and (3)(c)] 

The Bill sought to replace s 105-65 with the following (the comparative amendments to the previous form are marked):

105-65 Restriction on Refunds

(1)             The Commissioner need not give you a refund to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a)  you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an arrangement was treated a giving rise to a taxable supply, to any extent; and

(b)  the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST-free); and

(c)  one of the following applies:

(i)    the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii)  the recipient is *registered or *required to be registered, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

Note:  Divisions 3 and 3A of Part IIB deal with payments, credits and RBA surpluses.

(2)       This section applies to:

(a) in the case of a *supply:

(i) so much of any *net amount or amount of *indirect tax *GST as you have overpaid (as mentioned in paragraph (1)(a)); or

(ii) so much of any net amount that is payable to you under s. 35-5 of the *GST Act as the Commissioner has not paidrefunded to you (as mentioned in paragraph (1)(a)), either by paying it to you or by appliedying it under Division 3 of Part IIB of this Act;

(b)  in the case of an *arrangement:

(i) so much of any net amount or amount of GST to which subparagraph (a)(i) would apply if the arrangement were a supply; or

(ii) so much of any net amount to which subparagraph (a)(ii) would apply if the arrangement were a supply.

Note:  Division 3 of Part IIB deals with payments, credits and RBA surpluses.

The amendment was to apply in respect of tax periods starting on or after 1 July 2008. Accordingly, the previous form of s 105-65 continued to apply to tax periods prior that date.

The Bill also sought to amend s 105-50 to clarify that the four year limitation period applied to all GST refunds. Interestingly, the Bill provided for the following transitional rules:

The amendments made to section 105-55 of Schedule 1 to the Taxation Administration Act 1953 by this Schedule apply in relation to a refund, other payment or credit:

(a) that if of a kind referred to in subsection 105-55(1) or (3) of Schedule 1 to that Act as amended by this Schedule; and

(b) to which you became entitled before the commencement of this Schedule;

unless, before that commencement, you notified the Commissioner in writing, or the Commissioner notified you in writing, that you were entitled to the refund, other payment or credit.

This transitional rule allowed taxpayers to seek to protect their refund rights prior to 1 July 2008 by lodging a a notice  – which became commonly known as a “stop the clock” notice.

Taxpayers therefore had a “window” between 29 May 2008 and 1 July 2008 in which to lodge a notice to protect its refund rights.  Much of the subsequent litigation can be attributed to this transitional window. This probably also explains why one of the subsequent battlegrounds involved what constituted a valid notice. In this context, on 29 April 2009 the Commissioner published Miscellaneous Taxation Ruling MT 2009/1 ‘Miscellaneous taxes: notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953’.

The Taxpayer Alert

On 27 August 2008 the Commissioner issued Taxpayer Alert 2008/17. These alerts are stated to be “an “early warning” of significant and new and emerging higher risk planning issues or arrangements that the Tax Office has under risk assessment”. The Taxpayer Alert described the following situation:

…where a taxpayer seeks to claim a refund four or more years after the end of a tax period on the basis that they incorrectly classified a supply as a taxable supply and they now contend it is GST-free. In this situation the Commissioner may not be able to recover the input tax credits previously claimed on what are contended to be incorrectly classified supplies. This could lead to a situation where either the supplier or the recipient of the supply obtains a windfall gain.

This situation involved a taxpayer taking advantage of the timing anomaly created by the drafting problem with s 105-55 which allowed a taxpayer to recover overpaid GST beyond the four year limitation period.

The Taxpayer Alert indicated that the Commissioner would refuse to exercise his discretion under s 105-65 in circumstances where there was a “business to business” transaction and a potential “windfall gain” to either the supplier or the recipient. The Taxpayer Alert stated that the Commissioner may only exercise the discretion to pay the refund if he was satisfied that the refund did not create a windfall gain for either the supplier or recipient.

By issuing the Taxpayer Alert, the Commissioner was drawing a line in the sand with respect to the payment of GST refunds. By doing so, it could be argued that such an approach, in particular the use of the word “only” in the Taxpayer Alert, constituted an impermissible fetter on the exercise of the Commissioner’s discretion.  As stated by Hely J in Elias v Commissioner of Taxation [2002] FCA 845; (2002) 123 FCR 499 at [34]:

The Commissioner is entitled to adopt a policy to provide guidance as to the exercise of the discretion, provided the policy is consistent with the statute by which the discretion is conferred.  Thus if the statute gives a discretion in general terms, the discretion cannot be truncated or confined by an inflexible policy that it shall only be exercised in a limited range of circumstances.  A general policy as to how a discretion will “normally” be exercise does not infringe these principles, so long as the applicant is able to put forward reasons why the policy should be changed, or should not be applied in the circumstances of the particular case.

I note that in that case, Hely J considered that the use of the word “only” in the Commissioner’s published policy, taken at face value, was not consistent with these principles.

2009-2011 – the battle rages on

Draft Miscellaneous Taxation Ruling MT 2009/D1

On 16 December 2009 the Commissioner published MT 2009/D1 ‘Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953’. The draft ruling provided the Commissioner’s draft views on how s 105-65 applied and also provided examples on how the discretion may be exercised. Comments on the draft ruling were due on 12 February 2010.

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

Ironically, on the same day that MT 2009/D1 was published, the Administrative Appeals Tribunal was hearing the proceeding in Luxottica Retail Australia Pty Limited and Commissioner of Taxation [2010] AATA 22. That case involved whether the taxpayer had overpaid GST in respect of the sale of spectacles (the lenses were GST-free and the frame was taxable) and whether the Commissioner must pay the refund having regards to s 105-65.

Luxottica ran various promotions whereby frames were offered at a discount from the normal selling price, but on the condition that the customer acquired not only the frames but also the lenses (ie, the entire pair of spectacles). The issue was how the discount should be treated for GST. Luxottica contended that the GST should be calculated by reference to the discounted price for the frame, whereas the Commissioner contended that the discount should be apportioned between the frame and the lenses. The Tribunal agreed with Luxottica, with the effect that Luxottica had overpaid GST with respect to the sale of spectacles. The Tribunal also found that the discretion in s 105-65 should be exercised and the GST refunded.

The Tribunal first looked at the kinds of “amounts” to which s 105-65 applied, noting that the section referred to “so much of any net amount…as you have overpaid”. In regards to this phrase, the Tribunal observed as follows (at [55]):

Strictly speaking, there must be some doubt as to whether an amount can ever meet that description, since the amount overpaid, by definition, will not form part of a taxpayer’s net amount. Assume a taxpayer, whose net amount for a tax period is x, but who mistakenly thinks it is x+y, which he pays. Of course, the overpaid amount, y does not form any part of the net amount, which and always was x. But that simple analysis, unimpeachable as it seems to be, would render the relevant words in subparagraph (2)(a)(i) meaningless. The words must be taken to encompass any payment in excess of the true net amount, and we approach our consideration of the remainder of the section on that basis.

With regards to paragraph (c), the Tribunal observed that it was a fact that the customers had not been “reimbursed” to the extent of the overpaid GST. Accordingly, the question was whether the residual discretion to pay the refund should be exercised. In finding that the discretion should be exercised and the refund paid, the Tribunal’s conclusion was as follows (at [58]):

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 customer would walk away from the transaction having paid, in net terms, less than he or she contracted with the Applicant to pay. 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”.

The Tribunal also noted the following comment of Emmett J in KAP Motors:

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.

The Tribunal found that on the Commissioner’s approach, the windfall would flow to the undeserving customer, which was not the right outcome.

The Tribunal appears to have taken the view that the customer had come to an arm’s-length agreement with the supplier for the price to be paid for the spectacles and that  the customer would receive an undeserving windfall if the GST was repaid. Such a view would appear to be in direct conflict with the Commissioner’s views in MT 2009/D1. Unfortunately, while the Commissioner appealed the decision to the Full Federal Court (see [2011] FCAFC 20), he did not appeal the discretion issue.

The basis for the decision of the Commissioner not to appeal this part of the Tribunal’s decision appears to be found in the Decision Impact Statement issued on 6 August 2010, being that:

The Commissioner accepts that the decision of the Tribunal was open to it on the particular facts of this case as found by the Tribunal. While, with respect, the Commissioner does not agree with the reasoning used by the Tribunal to arrive at their conclusion to exercise the discretion, the exercise of the discretion based on the facts as found by the Tribunal is consistent with examples of arithmetic errors made in the the preparation of the BAS contained in MT 2009/D1.

It was unfortunate that the Commissioner did not (or could not) appeal this issue to the Full Federal Court.

Miscellaneous Taxation Ruling 2010/1

On 15 December 2010 the Commissioner issued MT 2010/1 ‘Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953’. The ruling set out the Commissioner’s views on s 105-65 and provided example on how the discretion may be exercised. Possibly with the views of Hely J in Elias in mind (see above re the Taxpayer Alert), the ruling stated that in providing the examples, there was no intention to lay down conditions that may restrict the exercise of the discretion in any case.

The ruling gave a broad application to s 105-65.  Further, in considering the exercise of the discretion, paragraph 127 of the ruling stated as follows:

It is clear from the scope and purpose of s 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are all factors that must be taken into account in relation to the exercise of the discretion.

It is interesting that in the disputes that have followed, no taxpayer has repeated the success in Luxottica in having the discretion exercised in favour of the refund. The taxpayers’ success has lied in “chipping away” at the broad scope given to the discretion by the Commissioner.

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

In International All Sports v Commissioner of Taxation [2011] FCA 824 the taxpayer contended that it had overpaid GST because of a mistaken interpretation of s 126-10 of the GST Act in respect of gambling supplies. The Commissioner disagreed with the contention and also sought to rely on s 105-65 to refuse to pay  GST refunds if the taxpayer’s contention was correct. The Federal Court agreed with the taxpayer and also found that, on its terms, s 105-65 had no application.

The Court observed that the function of Division 126 was to provide an alternative way of working out the net amount where gambling supplies were concerned. Accordingly, this case was concerned with the taxpayer’s “global GST amount” in s 126-10, which required the identification of two components, namely, “total amount wagered” and “total monetary prizes”. The operation of the section was described by the Court as follows (at [17]) (emphasis added):

Calculation of the former requires the summation of the consideration for all the entity’s “gambling supplies” that are attributable to the period in question. Calculation of the latter requires (under para (a) of the definition) the summation of the monetary prizes that the entity is liable to pay, during the tax period, on the outcome of gambling events. One eleventh of the difference between the two is the entity’s “global GST amount”, which is then carried into the calculation of its “net amount” under s 126-5. At least at the superficial level, this has the appearance of mimicking the way in which an entity’s net amount is calculated under the general provisions in the GST Act, using an artifice in which monetary prizes are treated as a kind of analogue for the consideration which an entity pays for creditable acquisitions.

A literal reading of the definition of “total monetary prizes” would include gambling supplies that were GST-free – eg a lottery ticket supplied to a non-resident, with the result that the entity would be effectively allowed an input tax credit in relation to a prize paid to a gambler upon whose wager no GST was paid. The Commissioner contended that such a result could not have been intended by the legislature. The Federal Court disagreed and found that it would not be justified in departing from the ordinary meaning conveyed by the text of the definition of “total monetary prizes”.

With respect to s 105-65, the Federal Court found that the Commissioner encountered significant difficulties under paragraph (a), which provided as follows:

(a) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply, to any extent.

The first point made by the Federal Court was that it was common ground that the supplies were not taxable supplies so s 105-65(1)(a) was “quite irrelevant”. The Court observed as follows (at [55]) (emphasis added):

Despite the persistent endeavours of counsel for the Commissioner, I confess to a complete inability to appreciate how it might be said, on the assumed facts of the present case, that the overpayments made by the applicants arose because supplies were treated as taxable supplies, or arrangements were treated as giving rise to taxable supplies, to any extent. On the view which I have taken on s 126-10, the overpayments were because the applicants took the view that it was only prizes paid to gamblers whose wagers had been by way of gambling supplies that were to be subtracted as “total monetary prizes” in the formula set out in s 126-10(1). It is common ground that those supplies were not taxable, and it is not suggested that the applicants ever treated them as taxable. In my view, therefore, s 105-65(1)(a) is quite irrelevant to the circumstances of the present case.

The second point was in response to the Commissioner’s reliance on the concluding words of the paragraph – “to any extent”. The Commissioner’s submission was as follows:

[I]n our submission, one has to be careful about the reading, giving this section too literal a reading, because at the end of the day it is concerned with simply an overpayment, an overpayment followes because of the way the Act operates from the treating of a supply in a particular way and the words are only designed to do that. And one sees that it is really only concerned with overpayments and not this very close analysis of the words because of the words “to any extent”. And your Honour in our submission, it’s appropriate to read it that way and give full meaning to the words “to any extent” because of the evident – because otherwise the evident purpose of the section which is apparent from the condition (c) would not be met.

The contention made by the Commissioner was consistent to paragraph 74 of MT 2010/1 in the form introduced on 15 December 2010. That paragraph stated as follows (footnotes omitted):

The phrase ‘to any extent’ is an expression of wide import and the Commissioner considers that the provision is intended to apply to all amounts of overpaid GST. This interpretation is consistent with the broad purpose of the provision to prevent windfall gains where GST has been incorrectly imposed, as indicated in the Explanatory Memorandum that accompanied the Bill that introduced the original provisions.

And later at paragraph 82:

As the phrase ‘to any extent’ has a broad meaning, section 105-65 will apply to the circumstances of a transaction in real property in which the GST liability was calculated using the margin scheme, and to a supply that was determined to be a mixed supply or to the calculation of a global GST amount payable in relation to a gambling supply. These matters concern the GST payable on a supply that was treated as a taxable supply to some extent and the ‘extent’ of that treatment is greater than the correct treatment under the GST Act.

The  Court rejected the Commissioner’s contention, making the following observations:

• first, the reading preferred by the Court was not “too literal a reading” but rather the only reading which the words of the paragraph sensibly convey
• second, the subsection is not “concerned simply with an overpayment”, but with an overpayment of a particular kind, made in the circumstances referred to
• third, the words “to any extent” at the end of the paragraph, and the corresponding words in paragraph (b), address the situation in which a particular supply might have been treated as a taxable one to some extent only – it is not concerned to expand beyond its sensible meaning the wording of the main operative part of the paragraph
• fourth, the “evident purpose of the section”, in my view, is to deal with the situation in which the recipient of a particular supply has been charged an amount from which one eleventh was included in the calculation of the supplying entity’s “net amount”, but has not been reimbursed a corresponding sum in anticipation of a refund being received from the Commissioner

In the Decision Impact Statement issued on 30 September 2011, the Commissioner stated as follows:

In accordance with the decision, the ATO will administer section 105-65 on the basis that the restriction on refunds does not apply where, in tax periods which commenced prior to 24 March 2010, gambling operators have miscalculated their global GST amount under Division 126 by failing to include the value of monetary prizes paid to non-resident customers.

Although not before the Court in this case, the ATO has also reviewed the view in MT 2010/1 that the section 105-65 restriction on refunds may apply where a taxpayer overpays GST as a result of failing to apply, or miscalculating their liability under, the margin scheme. The ATO will now administer section 105-65 on the basis that the section does not apply in these circumstances.

The concession made by the Commissioner with respect to the margin scheme was not one which was directly required by reason of the decision of the Federal Court. However, one can see how that concession should follow. Under the margin scheme in Division 75 of the GST Act, the supply is always treated as a taxable supply and the application of the scheme impacts on the calculation of the GST payable.

On 19 September 2012 an Addendum was issued for MT 2010/1 to that effect.  Paragraphs 71 to 82 were removed and replaced. New paragraphs 80-81 stated as follows:

Following the reasoning of the Court in International All Sports, the Commissioner takes the view that section 105-65 will apply where an overpayment of GST arises from a micharacterisation of a supply as taxable to some extent and it is not taxable to that extent (and the other requirements of the section are satisfied).

The Commissioner also takes the view that section 105-65 does not apply where the supply is always correctly treated as a taxable supply but an overpayment of GST arises from a mere miscalculation.

The Commissioner conceded that there was a distinction to be made between an overpayment of GST arising from a “miscalculation” as opposed to a “mischaracterisation”. This concession allowed those taxpayers who had overpaid GST by reason of a miscalculation under the margins theme, and who had lodged a notification prior to 1 July 2008, to recover overpaid GST all the way back to 1 June 2000.

National Jet Systems Pty Ltd and Commissioner of Taxation [2011] AATA 766 and MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769

The decisions in National Jet Systems Pty Ltd and Commissioner of Taxation [2011] AATA 766 and MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769 can be considered together. They were heard consecutively and they involve  similar issues.

In each case the taxpayer contended that GST had been overpaid because GST was paid in respect of an agreement which was GST-free pursuant to s 13 of the GST Transition Act and that the overpaid GST should be refunded. The following issues arose for consideration by the Tribunal:

• whether the agreement was GST-free pursuant to s 13 of the GST Transition Act
• whether the taxpayer had lodged a valid notification
• whether the discretion in s 105-65 of Schedule 1 to the TAA applied
• if the discretion did apply, whether the discretion should be exercised and the refund paid

While the Tribunal found that the agreements were not GST-free, it nevertheless answered the remaining questions.

With respect to the notification, the decisions disclose that the relevant documents relevantly provided the following information:

For National Jet

The entity noted above has mistakenly overstated it’s [sic] net amount for the relevant tax periods quoted above, by:

– mistakenly treating supplied made within the periods as being subject to GST, where in fact they were GST-free pursuant to section 13 of the GST Transition Act

For MTAA

The GST liability has been overstated due to the fact that supplies made under certain contracts were treated as being subject to GST when in fact they were GST free pursuant to Section 13 of the GST Transition Act.

The Commissioner contended that the notifications were deficient, relying on matters similar to those raised in MT 2009/1, namely that it was too general, provided no details that were specific to the applicant’s circumstances, failed to set out the nature of the supply, failed to identify the recipient of the supply or the nature of the contracts pursuant to which the supply was made and failed to explain how the relevant entitlement related to specific tax periods. The Tribunal found that the notification was effective. In doing so, the Tribunal noted the earlier decision of the Federal Court in Central Equity Ltd v Commissioner of Taxation [2011] FCA 908 where Justice Gordon considered whether a document in the following terms was a valid notification:

The entity noted above has mistakenly paid GST in error in relation to the supply of real property transactions where the contract was entered into prior to 1 July 2000, and has overpaid GST on supplies made where the GST was calculated under the margin scheme as the acquisition price was used rather than a 1 July 2000 valuation.

The entity is currently in the process of quantifying the amount which it has overstated its net amount and will notify the ATO of the precise amount of the GST refund it will be seeking in due course.

Her Honour found that there was a valid notification as it served its statutory purpose of notifying the Commissioner of an entitlement to a refund of GST.

The applicants contended that s 105-65 did not apply to amounts affected by s 13 of the GST Transition Act. The Tribunal rejected the contentions, noting that both the GST Act and the GST Transition Act used the same term “GST-free”. The reference to “GST-free” in s 105-65 could apply to supplies being GST-free under the GST Act and other statues.

The applicants contended that if the discretion applied, it should be exercised so that the refund is paid. In both cases the recipient was registered for GST, so paragraph (c)(ii) was met. However, it was contended in each proceeding that the condition in paragraph (c)(i) was met. In MTAA it was met through the applicant undertaking to pay to the recipient any amount of GST recovered and in National Jet through an agreement being entered into with the recipient whereby any amount recovered would be paid to the recipient less a fee. In both cases, the Tribunal found that it must proceed on the basis that any payment to the recipient by the applicant would be a windfall gain to the recipient. In National Jet the Tribunal concluded as follows (at [79] – the Tribunal came to a similar conclusion in MTAA at [65]):

In the present circumstances, where would be a windfall gain if a refund were to be made. Either National Jet would receive a windfall, or Airlink would in circumstances where neither of them are or have been out of pocket on account of any overpaid GST. Ultimately, customers of Airlink have born the impact of GST and they would not enjoy any refund made. In these circumstances, it there was an amount refundable without consideration of the s 105065 discretion, that discretion ought to be exercised and no refund made. A practical business approach to administration of the GST laws is not consistent with allowing windfall gains. And to the extent that community standards and expectations have a role to play, those standards and expectations would require denial of windfall gains for two large company groups where the real cost of the overpaid GST has been born by the wider community paying fares for airline travel and transportation.

The taxpayer in MTAA unsuccessfully appealed to the Full Federal Court ([2012] FCAFC 89). The Full Court did not address the issue of s 105-65 as the grounds of appeal on s 13 of the GST Transition Act failed. The Full Court also noted, as a practical consideration, that the discretion under s 105-65 was never exercised by the Commissioner nor reviewed by the Tribunal.

2012-2013 – Treasury steps in again

Proposed Division 36 of the GST Act

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

The Explanatory Memorandum to the Exposure Draft Legislation acknowledged some of the difficulties faced by s 105-65.  In its place, Division 36 was 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 was intended to work with the new self-assessment regime for GST, whereby each BAS lodged is deemed to be an assessment.  Section 36-5 deemed 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.

Division 142 of the GST Act – an introduction

A raft of submissions were received by Treasury in response to the exposure draft for Division 36.  It appears that Treasury listened to the submissions and on 26 February 2013 a second Exposure Draft was released, this time for the introduction of Division 142 into the GST Act.

As with the proposed Division 36, a number of submissions on the Exposure Draft for Division 142 were received. On 26 June 2013 the Tax Laws Amendment (2013 Measures No.4) Bill 2013 was introduced into the House of Representatives. The Explanatory Memorandum at 3.1 supports a very broad application of the provision and states as follows:

The amendments apply to overpayments of GST as a result of a mischaracterisation of a supply or arrangement or miscalculation of the GST payable, or for any other reason, if the overpaid GST has been passed on.

The Explanatory Memorandum (at 3.15-3.18) states that the decision in International All Sports gives rise to the potential for windfall gains to taxpayers if an overpayment arises as a result of a miscalculation and the full amount of GST was not passed on. Other areas of uncertainty relating to the section raised in consultation forums were stated to include:

• whether s 105-65 should be taken into account by the Commissioner in an assessment;
• what rights of review are available in a court or the Tribunal where a taxpayer is dissatisfied with a  decision about the application of the section;
• whether the section is capable of applying to GST overpaid in circumstances where the net amount has actually been understated, for example where input tax credits have been overclaimed.

In recent times, these other issues have been shown to be warranted. In Naidoo and Commissioner of Taxation [2013] AATA 443 the Tribunal recently found that the Tribunal had no jurisdiction under Part IVC of the TAA to consider s 105-65. By inserting Division 142 into the GST Act, this issue will be removed because it will have a direct impact on the “net amount” of a taxpayer.

The Tribunal also found that s 105-65 could not be used by the Commissioner as a basis to recover GST (and to assess the taxpayer for a positive net amount) where the taxpayer was not carrying on an enterprise. In that case the taxpayer registered for GST and lodged activity statements which were mostly for negative net amounts. The Commissioner conducted an audit and determined that the applicant was not carrying on an enterprise during the relevant period and cancelled its GST registration.  The Commissioner also found that the applicant was not entitled to input tax credits but was still liable for GST. As noted by the Tribunal (at [4]): (emphasis added)

The Commissioner formed the view that the Naidoo Partnership was still liabile to pay GST in the relevant period relying on s 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Peculiarly, even though the Commissioner formed the view that the Naidoo Partnership was not carrying on an enterprise, he assessed the Naidoo Partnership to positive net amounts for the relevant tax periods.

That issue will also be removed by Division 142.

The “Summary of new law” in the Explanatory Memorandum (3.19-3.23) states as follows:

Schedule 3 amends the GST law to allow taxpayers to determine whether they are entitled to a refund by reference to objective conditions, rather than having to rely on the Commissioner to exercise the discretion to refund an excess amount of GST.

A refund of overpaid GST can be claimed by taxpayers if it has not been passed on to another entity. Alternatively, if the excess GST has been passed on to another entity then a refund can be claimed following reimbursement of that amount.

However, the Commissioner’s discretion is retained for exceptional circumstances where the Commissioner considers that treating GST as payable would be inappropriate, having regard to the principle that excess GST is not to be refunded if it would give an entity a windfall gain.

The amendments also address the impact of the Federal Court’s decision in Sportsbet by ensuring that overpayments of GST resulting from a miscalculation of the GST payable are subject to the restriction on refunding excess GST.

Because the amendments in Schedule 3 impact on the assessed net amount, taxpayers are able to challenge the application of the amendments as part of an objection to their assessment under Part IVC of the TAA 1953. Specific review rights are introduced where the Commissioner refuses to exercise the discretion in the provision.

Division 142 – consideration of the provisions

The provisions are relatively short, but complex. The following analysis approaches the legislation one section at a time.

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).

The Bill was introduced into the House of Representatives on 26 June 2013, so that is the introduction day. The exceptions to the application of the general rule appear to be where you made or applied for an amendment before 26 June 2013 or lodged an objection before that date. It would not appear to be sufficient that you lodged a notification under s 105-55 of Schedule 1 to the TAA of an entitlement to a GST refund or sought a private ruling.

One issue going forward is timing. The Bill was introduced into the House of Representatives on the second last day before the winter break. Parliament is set to resume on 20 August 2013 unless an election is called, which one may consider likely. If that occurs, the Bill may not progress through Parliament for some time. A number of the submissions made in respect of the Exposure Draft took issue with the retrospective operation of the amendments. The prospect of a greater delay in the enactment of the legislation may well only increase the pressure on Treasury to remove its retrospective operation.

The prospect of significant delay also raises the question of how the Commissioner will approach GST refunds in the interim. Upon the release of the Exposure Draft for Division 142 on 26 February 2013, the ATO announced that it “will apply the existing law and current procedures until the proposed law is enacted”. It is unclear whether that administrative practice will continue until such time as the Bill is passed. In my view it should, because until such time that the Bill gains royal assent it does not represent the law.

Conclusion

The history of s 105-65 is one of unfortunate drafting and is also a reflection of the current approach of the Courts to statutory interpretation. As noted recently by the High Court in Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16 (the fourth GST case considered by the High Court):

This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text.

The Commissioner and Treasury clearly took the view that the intended effect of s 105-65 was to allow the Commissioner to retain all refunds of overpaid GST where that refund would give rise to a windfall gain. The Commissioner issued a detailed ruling in MT 2010/1 and made a number of valiant, but unsuccessful, attempts to convince the Federal Court that this was the correct construction. However, there is only so much that a Court can do. In this context I note the following words of Justice Hill in in a paper entitled: “To Interpret or Translate? The judicial role for GST cases”:

It is not often that the courts are given the opportunity of interpreting legislation providing for the implementation of an entirely new tax and especially one which is intended to operate broadly over the entire sphere of economic activity. The tools which permit judges to interpret in a purposive way with an eye to ensuring that the tax works as it may be assumed to be intended to work in the real world are there, but with one exception. There will obviously be unintended consequences which arise in the implementation of a new tax drafted in a way which in many respects differs from comparable legislation in other jurisdictions. While, in part, such unintended consequences can be dealt with by the ruling system that is not a satisfactory long-term solution to problems. There is a need for the legislature to cure defects from time to time. Yet there seems to be a refusal on the part of the government to admit there are defects and to make amendments other than amendments which may be thought necessary to overcome avoidance. In some cases, the courts may be able to resolve difficulties by applying a purposive construction but in the Australian constitutional context where there is a sharp separation of the legislative and judicial powers there is a limit to what one can expect of the courts. Ultimately the courts can not act as legislators. Parliament can not stand by and then blame the courts if a decision is one that does not favour the revenue when the problem lies not in how the legislation is to be interpreted in a common sense way, but in how it is written.

Treasury has now decided to start again with Division 142. Nevertheless, I expect that the issue of GST refunds will continue to be a vexed issue and disputes will continue.

30 July 2013

Chris Sievers

Lonsdale Chambers