We want our money back! Excess GST refund rules to change

In brief

After two years, three rounds of public consultation and one aborted attempt, Federal Parliament looks likely to pass legislation amending the rules governing when the Australian Taxation Office is required to refund 'excess GST' to a taxpayer. Partner Katrina Parkyn, Senior Associate Marc Johnston and Lawyer Scott Lang report on how taxpayers can get their money back and the practical problems they will face attempting to do so.

The (long) road to reform

The Federal Government first announced its intention to amend the excess GST refund rules on 17 August 2012. Exposure draft legislation was released for public comment in August 2012 and re-released in February 2013. A Bill was introduced into Parliament in June 2013 but lapsed when Parliament was prorogued in the lead-up to the election.

In November 2013, the newly elected Coalition Government announced that it would proceed with the reforms. Fresh exposure draft legislation was released by the Government in February 2014, including only minor changes to the June 2013 Bill. The Bill is based upon the February 2014 exposure draft.

Excess GST payments that are refundable

The new rules define excess GST to be 'an amount of GST exceeding that which is payable' (although certain amounts are disregarded).¹ This wording overcomes a previous decision of the Federal Court that the rules in the Administration Act applied only to mischaracterisations of supplies and not miscalculations of GST payable.²

The intent is that taxpayers will have accounted for excess GST where they have overstated their GST payable (or understated the input tax credits to which they are entitled) as a result of:

• characterising a transaction or arrangement as a supply when in fact there was no supply;
• mischaracterising a supply (as taxable when it was in fact GST-free or input-taxed);
• miscalculating their GST liability (for example, when applying the margin scheme); or
• as a result of an accounting or reporting error.

Eligibility and procedure for refund of excess GST

Self-assessment by taxpayers

Taxpayers will be eligible to self-assess a refund of excess GST in two circumstances.

• To the extent that the taxpayer has not 'passed on' the amount of the excess GST to another entity, to obtain a refund the taxpayer will need to either apply to amend or object to the GST assessment for the tax period in which they accounted for excess GST.
• To the extent that the taxpayer has reimbursed the other entity for any excess GST that they have 'passed on' to it, the taxpayer will generally be entitled to claim a decreasing adjustment in the tax period in which the refund is made equal to the amount of the excess refunded (although in cases where there was no supply in the first place, it will be necessary for the taxpayer to apply to amend or object to the GST assessment).

Any excess GST that is 'passed on' and not reimbursed is deemed to be payable on a taxable supply. This has important implications, which are explored further below.

When is excess GST 'passed on'?

Whether or not excess GST has been 'passed on' is the lynchpin on which entitlement to a refund turns.

However, the new rules do not exhaustively define when an amount is 'passed on'. The rules merely state that an amount of GST can be 'passed on' to an entity even if the entity has not been issued with a tax invoice or, where there is a tax invoice, it does not contain enough information to enable the GST to be ascertained clearly. Conversely, there is a presumption that GST has been 'passed on' to an entity where:

• the taxpayer issues a tax invoice to the entity or the entity issues a recipient created tax invoice;
• the tax invoice contains enough information to enable some or all of the GST to be clearly ascertained; and
• the taxpayer has paid to the Commissioner any net assessed amount in relation to the tax period to which the invoice relates.

Beyond this, the Bill is silent on the meaning of 'passed on'. The Explanatory Memorandum to the Bill states that determining whether excess GST has been 'passed on' is a complex inquiry that is a question of fact to be determined by the particular circumstances of each case. However, the taxpayer's pricing policy and practice (based upon its actual knowledge at the time it sets its prices), the market in which the taxpayer operates and the contracts under which it makes sales will all be relevant to the inquiry.

The Explanatory Memorandum states that the jurisprudence of the courts in relation to the meaning of 'passing on' under the former sales tax regime will be relevant to determining whether excess GST has been 'passed on' under the new rules.³ The Explanatory Memorandum claims that these and other cases indicate that there is an assumption that GST is generally 'passed on' because it is a foreseeable cost that businesses account for when setting their cost and pricing structures.

Merely asserting that GST was not a factor in setting prices will be insufficient to prove that excess GST has not been 'passed on'. However, the Explanatory Memorandum outlines some circumstances where excess GST may not have been 'passed on':

• the recipient of the supply has not in fact paid an amount on account of GST (despite being contractually obliged to do so); or
• the excess GST resulted from an accounting or reporting error on the part of the taxpayer (as such errors do not involve actual transactions with other entities).

This all indicates that, as a practical matter, it is likely to be very difficult for taxpayers to demonstrate that GST has not been 'passed on'.

Apply to Commissioner to exercise discretion

Taxpayers may also apply to the Commissioner in the approved form for the Commissioner to exercise a discretion to allow a refund despite the fact that the excess GST was 'passed on' to another entity and not reimbursed by the taxpayer.

In order to exercise this discretion and grant a refund, the Commissioner must be satisfied that applying the self-assessment criteria 'would be inconsistent with the principle that excess GST is not to be refunded if this would give an entity a windfall gain'. The Explanatory Memorandum to the Bill emphasises that this means that no entity can receive a windfall gain; it is insufficient that the taxpayer would not receive a windfall gain.

When will the Commissioner exercise his discretion?

The Explanatory Memorandum provides no useful guidance on this point. It states that the discretion would only be exercised in exceptional circumstances or unusual cases with unintended consequences. The Explanatory Memorandum provides three examples dealing with the exercise of this discretion; however, the examples are of limited assistance for taxpayers as they provide no guidance on when exceptional circumstances will exist to justify the exercise of the Commissioner's discretion.⁴

Impact of excess GST on input tax credits

Impact on taxpayer

Despite 'passed on' excess GST being deemed to have been payable on a taxable supply, the taxpayer cannot take advantage of this by claiming input tax credits for the costs associated with making input taxed supplies that it mischaracterises (either mistakenly or deliberately) as taxable supplies.

Impact on recipients of taxpayer's supplies

On the other hand, because 'passed on' excess GST is deemed to have been payable on a taxable supply, recipients of the taxpayer's supplies are generally entitled to claim input tax credits for the excess GST until it is reimbursed by the taxpayer. If the excess GST is subsequently reimbursed by the taxpayer, the recipient will have an increasing adjustment.

Recipients will not be entitled to claim input tax credits for the value of excess GST where they know, or could reasonably be expected to have known, that the taxpayer has not paid the excess GST to the Commissioner. The Explanatory Memorandum explains that this provision is designed to prevent the taxpayer and the recipient colluding to allow the recipient to claim input tax credits on excess GST that is never remitted to the ATO. However, it remains unclear when a recipient ought to have known that the excess GST has been remitted and whether this requires the recipient to take positive steps to establish this fact before claiming input tax credits.

Special rules for cancelled supplies

Cancelled supplies are dealt with in a similar way to excess GST. Where a taxpayer remits GST in one tax period and has a decreasing adjustment in a later tax period due to the cancellation of the supply, the taxpayer's decreasing adjustment and the recipient's increasing adjustment (if any) is reduced to the extent that the taxpayer has not reimbursed the recipient for any GST 'passed on' on the cancelled supply. Curiously, the Explanatory Memorandum provides no justification for why this rule should only apply to adjustments as a result of cancelled supplies (as opposed to other adjustment events).

Rights of review

Because 'passed on' excess GST is deemed to have been payable on a taxable supply, it is included in taxpayers' GST assessments. Consequently, taxpayers can challenge a decision of the Commissioner to refuse to refund excess GST by objecting to the relevant assessment and then reviewing any objection decision in the AAT. Taxpayers are also given a specific right to have the AAT review the Commissioner's refusal to exercise his discretion to refund excess GST that has been 'passed on' and not reimbursed to another entity.

The AAT had previously held that it did not have jurisdiction to review a decision by the Commissioner to refuse to exercise his discretion under the Administration Act to grant a refund of excess GST.⁵ The Bill effectively reverses this decision and validates retrospectively previous objections taxpayers have made to such decisions and decisions made by the Commissioner or AAT in respect of such objections. It also extends the time for taxpayers to make or continue these objections.

Practical implications

Once the Bill is passed, the new excess GST refund rules will commence on the date of Royal Assent and apply to any tax periods commencing after the date of Royal Assent. Tax periods commencing prior to, or on the date of, Royal Assent will continue to be governed by the rules contained in the Administration Act. Given that the reform was originally proposed by the Gillard Government and the text of the Bill is similar to the most recent Bill proposed by the Gillard Government, it seems likely that it will be passed by the combined numbers of the Government and Opposition in the Senate.

The self-assessment approach adopted by the Bill is undoubtedly an improvement upon the Federal Government's first attempts at re-writing the excess GST refund rules. However, the Bill remains deficient because it proceeds upon a flawed premise that a taxpayer will make a windfall gain (if it does not reimburse excess GST) without having regard to the nature and character, and terms and conditions, of the relevant supply to which that excess GST relates. Additionally, the concept of when excess GST has been passed on is still not adequately defined and will create significant uncertainty for taxpayers when they try to self-assess their entitlement to a refund of excess GST.

Given that the Bill includes a provision that deems any excess GST 'passed on' and not reimbursed to be payable by the taxpayer on a taxable supply, questions may be raised in relation to whether the Bill is constitutionally valid. The High Court has held that Commonwealth legislation will not be supported by Parliament's power to legislate with respect to taxation if it imposes liability on the basis of criteria that are arbitrary or capricious, or applied in an arbitrary or capricious manner.⁶ There may be an argument that because the Bill deems any amount of excess GST that is 'passed on' and not reimbursed to be a tax payable, it imposes liability on an arbitrary basis and is therefore not a valid law with respect to taxation.⁷

While the new rules will allow taxpayers to self-assess their entitlement to refunds of excess GST, the criteria that taxpayers are required to apply when determining that entitlement are not clear. Further, the underlying assumption expressed in the Explanatory Memorandum (that GST is generally 'passed on') means that taxpayers will find it difficult to prove that GST has not been 'passed on' in respect of most supplies that they make.

For instance, the assumption sits uncomfortably in relation to property developers who offer residential premises for sale at a GST-inclusive price and apply the margin scheme. In such cases, the purchaser agrees to pay a single amount to the developer regardless of the amount of GST payable in relation to the sale. The amount of GST payable is a cost and risk borne by the developer because the price at which such premises can be sold is set by the market. There is no obligation on the purchaser to gross-up their payment: they make no payment they would not otherwise make. The effect of the Bill is that, in these circumstances, the only entity that will make a windfall gain is the Commissioner.

In the absence of an exhaustive definition of 'passed on', taxpayers will be exposed to both the vagaries of litigation, when trying to determine whether excess GST has been 'passed on', and the exercise of the Commissioner's discretion, when seeking to prove that no windfall gain is made if excess GST has not been reimbursed. It is likely that taxpayers will find it difficult to discharge the onus that will be on them when trying to prove that they have not 'passed on' excess GST on any supplies that they make. The Explanatory Memorandum suggests that taxpayers can seek a private binding ruling from the Commissioner to help determine whether GST has been 'passed on'. However, given the similarities between the text of the Explanatory Memorandum and the sections of the Miscellaneous Taxation Ruling MT2010/1 in relation to the excess GST refund rules in the Administration Act, it seems likely that the circumstances in which a taxpayer will be able to obtain a favourable ruling to get back their money will be quite limited.⁸