The GST Act has been amended to introduce new restrictions on Australian Taxation Office (ATO) refunds for GST overpayments. The amendments will primarily affect suppliers that inadvertently overpay GST and pass on the cost to recipients. However, the amendments also raise practical considerations for recipients, which may be best addressed through changes to GST clauses used in procurement contracts. This is particularly relevant for businesses which are not entitled to full input tax credits (GST credits) for their acquisitions.
In this Tax Update we have summarised the new refund restrictions and the potential implications for procurement contracts. We have also included two illustrative examples at the end.
Restrictions on refunds for "excess GST"
The A New Tax System (Goods and Services Tax) Act 1999 (GST Act) was amended on 30 May 2014. The provisions are effective from 1 June 2014 for monthly GST taxpayers, and from 1 July 2014 for quarterly GST taxpayers.
The new provisions apply where GST has been overpaid and the cost has been "passed on" by the supplier to the recipient. This may occur where a supply or arrangement is incorrectly treated as involving a taxable supply that is subject to GST, or where the GST payable on a taxable supply has been incorrectly calculated. The overpaid GST is referred to as "excess GST" in the new provisions.
Generally speaking, the excess GST will be treated as having been "passed on" if the supplier issues a tax invoice which enables the amount of GST to be clearly ascertained. However, the excess GST may have been passed on even if a tax invoice is not issued.
Under section 142-10 of the GST Act, passed-on excess GST is deemed to have always been payable on a taxable supply. Consequently, the ATO is not required to refund the passed-on excess GST.
However, if the supplier reimburses the recipient for the passed-on excess GST, section 142-10 ceases to apply. The supplier should then be able to recover the excess GST from the ATO (generally as a "decreasing adjustment" in the supplier's next GST return).
Is the supplier obliged to reimburse the recipient for any passed-on excess GST?
The GST Act does not oblige a supplier to reimburse a recipient for passed-on excess GST. Any such reimbursement is a matter of commercial negotiation between the parties, having regard to the GST provisions (if any) in the relevant contract.
If a procurement contract sets out prices on a GST exclusive basis, and GST is payable as an additional amount pursuant to a GST clause, that clause may not oblige the supplier to reimburse any excess GST. The wording of GST clauses varies considerably between contracts. However, most GST clauses provide that a supplier can pass on an amount "equal to any GST payable on a taxable supply" made under or in connection with the contract. Given that passed-on excess GST is now deemed to have always been payable on a taxable supply, some suppliers may argue that they do not have any obligation to reimburse excess GST under the terms of the GST clause.
Of course, many suppliers will reimburse passed-on excess GST, even if there is no contractual obligations to do so, in order to maintain a positive commercial relationship. However, this may not always be the case, particularly if there has been a break down in a commercial relationship, or if a supplier is uncertain of its entitlement to a refund from the ATO. Further, some suppliers could potentially seek to a charge a fee before agreeing to process and pay a reimbursement.
Can the recipient claim an input tax credit for passed-on excess GST?
If a recipient would otherwise be entitled to a full input tax credit for an acquisition, credits will also be available to the recipient for an amount of passed-on excess GST. Consequently, a recipient that is entitled to full input tax credits for passed-on excess GST will generally not need a reimbursement payment from the supplier.
However, not all recipients are entitled to full input tax credits. Such recipients may include financial supply providers (including banks, credit unions, life insurance companies, superannuation funds, managed funds and entities engaged in M&A activities). Other recipients that may not be entitled to full credits include those who lease residential premises (such as private sector retirement village owners) and businesses which are not GST registered (such as non-resident companies).
Recipients which are not entitled to full input tax credits will likely want to press suppliers to reimburse any material passed-on excess GST amounts.
GST clauses in procurement contracts
As the amendments are recent, most procurement contracts will not include GST provisions that expressly require a supplier to reimburse to the recipient any passed-on excess GST. As explained above, such provisions may not be necessary for recipients who are entitled to full input tax credits, including for passed-on excess GST.
However, for recipients that are not entitled to full input tax credits, it may be prudent to ensure that the GST clause in any material procurement contracts obliges the supplier to pay a reimbursement for any passed-on excess GST, at no cost to the recipient. It would then be a matter for the supplier to separately recover the excess GST from the ATO.
Example - software as a service
Subscription Co, a US based software company, has recently begun supplying access to its software platform to two Australian companies. One customer is Bank Ltd and the other is Retail Ltd.
Subscription Co provides access to the platform for an annual subscription fee of AU$500,000 plus GST. The supply of the right to access the platform is not connected with Australia and is not subject to GST. However, due to an error, Subscription Co has charged GST of AU$50,000 in addition to the first annual subscription fee. Subscription Co issued tax invoices to both Bank Ltd and Retail Ltd, and remitted AU$100,000 to the ATO as GST, before the error was identified.
The AU$100,000 that Subscription Co has overpaid to the ATO is "excess GST". The excess GST has been "passed on" to both Bank Ltd and Retail Ltd (as to AU$50,000 each). Until such time as Subscription Co reimburses Retail Ltd and Bank Ltd, the passed-on excess GST will be treated as GST that was always payable on a taxable supply.
Retail Ltd is entitled to full input tax credits for its all of its acquisitions and has claimed a full credit for the AU$50,000 paid to Subscription Co as GST. Consequently, Retail Ltd is unlikely to want Subscription Co to refund the passed-on excess GST.
In contrast, Bank Ltd is not entitled to full input tax credits and has only claimed a small portion of the AU$50,000 paid to Subscription Co as a credit. Bank Ltd will want Subscription Co to reimburse the AU$50,000 of passed-on excess GST.
As a practical matter, Subscription Co may be prepared to reimburse Bank Ltd, even in the absence of a contractual obligation to do so. Nonetheless, Bank Ltd may want to include a specific provision in the contract which obliges Subscription Co to reimburse any excess GST.
As a separate issue, Bank Ltd itself may be liable for GST on the acquisition of the right to access the platform under the reverse charge rules in Division 84 of the GST Act. The fact that Subscription Co may be deemed to have made a taxable supply to Bank Ltd (to the extent any passed-on excess GST is not reimbursed) may not necessarily override the reverse charge provisions.
Example - margin scheme sale
Land Ltd sold a parcel of land to Developer Ltd for $10 million, plus GST of $600,000. The margin scheme was applied to the sale. Land Ltd did not issue a tax invoice (not required for margin scheme sales) and remitted the AU$600,000 to the ATO as GST.
Post-acquisition, Developer Ltd noticed that the GST liability had been incorrectly calculated and should have been AU$500,000.
The AU$100,000 that has been overpaid by Land Ltd would be "excess GST". Assuming the GST is accepted as having been "passed on" to Developer Ltd, that amount would be treated as GST that was always payable on a taxable supply. Developer Ltd would not be entitled to an input tax credit for the AU$100,000, as the land was acquired under the margin scheme.
Land Ltd would have little incentive to seek a refund from the ATO, as it would first need to reimburse Developer Ltd for the same amount.
From Developer Ltd's perspective, it may be prudent for the GST clause in the sale contract to include a provision that obliges Land Ltd to pay a reimbursement for any excess GST.