The Federal Court decision yesterday in favour of car dealer KAP Motors Pty Ltd against the Tax Commissioner could mean the Tax Office has to pay up to $300 million in retrospective refunds.

Deloitte Indirect Tax Leader Jon Graham said KAP Motors Pty Ltd had been successful in arguing that the Tax Office had to honour a GST refund in respect of ‘holdback’ payments received from their manufacturer.

“All car dealers across Australia now have an opportunity to request similar GST refunds,” Mr Graham said.

“The refunds are worth, on average, about $100 for every new car sold in Australia dating back to the introduction of the new tax system on 1 July 2000.

“The ATO will be bracing itself for a flurry of claims by other car dealers.

“Some taxpayers may have been concerned about lodging claims to date in case it affected their relationship with the ATO. However the ATO cannot expect taxpayers to ignore yesterday’s decision of the court.

“This is a landmark decision dealing with a complicated area of the GST law and one that many tax advisers have felt needed to be challenged.”

Mr Graham said the Australian Tax Office ruled back in 2005 that certain payments between car dealers and manufacturers known as ‘holdback’ payments, which had until then been treated by the Tax Office as subject to GST, were in fact outside the scope of GST.

“The ATO refused to pay claims on grounds that this would be an unfair windfall to the taxpayer and they imposed the part of the GST legislation which enables them to refuse refunds unless they are passed on to the recipient of the supply, in this case to the manufacturer.”

Mr Graham said KAP appealed against the ATO’s refusal to refund the claims.

“The only matter of dispute was whether the 'passing on' provision of the GST legislation applied in these circumstances.

“I would be very surprised if the decision was not appealed by the Tax Office, if for no other reason than the huge amounts of money involved.

“We may even see changes to the GST legislation as a protective measure, although the Government is on the record as being against retrospective changes to the law.

“Taxpayers need certainty, particularly with transaction taxes like the GST, and changing the law retrospectively would be a backward step for the Australian tax system in my view.”

Mr Graham said the decision is not limited to car dealers and any taxpayer who has been refused a GST claim on the grounds of it not being ‘passed on’ to the recipient should review their position in light of this case.

“The decision may have fairly narrow application as it turns on the word ‘supply’ for GST purposes.

“It will affect any situation where something was incorrectly classified as a supply for GST purposes but then later considered to be a non-supply. However, the way the law was written there are not many non-supplies out there.”