The Commissioner issued a ruling [on 25.3.15] that explains his view on the meaning of the terms “passed on” and “reimburse” for the purposes of Div 142 of the GST Act.
Generally, Div 142 operates so that a supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on the GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST.
“Excess GST” is an amount of GST that has been taken into account in an entity’s assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Div 142.
Excess GST does not include:
- an amount of GST that was correctly payable but is later subject to a decreasing adjustment, and
- an amount of GST that is payable but is correctly attributable to another tax period.
Division 142 may apply regardless of how the excess GST arose. For example, excess GST can arise as a result of a mischaracterisation, a miscalculation, or a reporting or administrative error.
When is excess GST passed on? The Commissioner considers that whether excess GST has been passed on is a question of fact and must be determined on a case-by-case basis taking into account the particular circumstances of each case. However, s 142-25, and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.
Relevant matters – A supplier should have regard to the following matters when determining whether or not it has passed on the excess GST, including whether or not its circumstances are out of the ordinary:
(i) the manner in which the excess GST arose;
(ii) the supplier’s pricing policy and practice;
(iii) the documentary evidence surrounding the transaction, and
(iv) any other relevant circumstances.
The question of passing on is one of fact and not [about] fairness — considerations of fairness may be relevant in deciding whether the Commissioner exercises the discretion under s 142-15(1), but are not relevant to whether excess GST has been passed on.
The manner in which an amount of excess GST arises is relevant in considering whether or not the excess GST was passed on. Some common circumstances in which excess GST may arise include:
- incorrectly treating something which is not a supply as a taxable supply;
- miscalculating a GST liability under the GST law;
- incorrectly reporting an amount of GST on a GST return; and
- incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).
Where an error occurs after the transaction has taken place, for example through a simple transcription error, this may point towards a finding that excess GST has not been passed on.
On the other hand, where the excess GST arises as a result of an error made before setting the price (eg where a supplier incorrectly treats a GST-free or input taxed supply as a taxable supply), this error will generally flow through to the sale price paid by the recipient and is likely to point towards a finding that excess GST has been passed on.
The entity’s pricing policy and practice involves a consideration of the supplier’s conduct and knowledge at the relevant time of setting the price of a supply, and whether there have been any changes in the price to account for GST.
- Where a supplier sets a price with the knowledge or belief that the transaction is subject to GST, including a belief that the GST which later proves to be an overpayment is a real cost of doing business, that will point towards a finding that the excess GST has been passed on.
- On the other hand, where an entity sets a price on the basis that no GST is payable on the transaction, and subsequently pays the GST liability without seeking (or being able to seek) recovery from the recipient, this may point towards a finding that the entity has absorbed and not passed on the cost of the excess GST. [Yes, but how does this amount to an overpayment of GST that might need to be refunded?]
Whether GST is included in the price of a supply may be demonstrated by the documentary evidence surrounding that transaction. This evidence may be in any form, including a tax invoice, a contract of sale, other correspondence between the parties or internal pricing policy documents and other relevant manuals.
What constitutes reimbursement? – The Commissioner considers that, for the purposes of s 142-10, an amount of excess GST that has been passed on to the recipient is appropriately reimbursed when the recipient has been compensated [by payment of] an equivalent amount by the supplier. This reimbursement may be made voluntarily by the supplier or in satisfaction of a contractual obligation. For the purposes of s 142-10, a supplier has reimbursed the recipient for the passed-on excess GST where:
- the reimbursement takes the form of a payment of money, the setting off of mutual liabilities, or the issuing of a voucher. The recipient must be able to choose the form in which reimbursement is made.
- the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved, and
- the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made, and is not merely planned to be made.
Administration fees charged for reimbursement – There may be situations where the supplier charges a recipient an “administration fee” and reduces the reimbursement to the recipient by the amount of that fee. In this situation, the supplier will be able to obtain a refund of the full amount of the excess GST it has passed on if:
- the fee is based on reasonable administration costs incurred by the supplier in making the reimbursement, and
- the customer agrees to pay the administration fee.
If these conditions are not satisfied, s 142-10 continues to apply in respect of the excess GST passed on which the supplier has not reimbursed to the recipient. The supplier will not be able to obtain a refund of the full amount of the excess GST it has passed on.
An administration fee is one charged to cover the reasonable costs of effecting the reimbursement such as identifying the recipients and quantifying the amount of the passed-on excess GST. Costs will be considered reasonable when they closely reflect the actual costs incurred by the supplier in making the reimbursement.
Circumstances where only some recipients are reimbursed – There may be circumstances where only some of the recipients [can] be identified, so that the excess GST can only be reimbursed to known recipients. Where this occurs, s142-10 ceases to apply to [only] that part of the excess GST, which the supplier was able to reimburse. The provision continues to apply to the excess GST passed on but not reimbursed to the unidentified recipients.
Note: This ruling was previously issued in draft form as Draft GST Ruling GSTR 2014/D4.
[IT 25/3/15]
This GST Ruling, issued [on Wed 25.3.2015], explains the Commissioner’s view on the meaning of the terms “passed on” and “reimburse” for the purposes of determining whether s 142-10 of the GST Act applies to an amount of excess GST.
It says generally, Div 142 operates so that an entity would not be entitled to a refund of an amount of excess GST where the entity has passed on GST to another entity, and has not reimbursed the other entity (ie a recipient) for the passed-on GST.
The Ruling examines in detail matters relevant for a supplier to determine whether or not GST has been passed on. It also explains circumstances that constitute a reimbursement.
The Ruling was previously issued as Draft GST Ruling GSTR 2014/D4 and contains changes to both the Ruling and the examples.
DATE OF EFFECT: Applies both before and after its date of issue.
[LTN 57, 25/3/15]