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Transcript: IndirecTV™ video update – September 2012

Overpaid GST - refunds to be more restricted?

[Tim Sinclair] Welcome back to Deloitte IndirecTV™.

The Government has recently proposed some important changes to the GST refund rules.

A new Division 36 to the GST Act is planned which restricts a supplier's ability to obtain a refund of overpaid GST.

Businesses overpay GST more frequently than might be expected. For example, this can occur because of:

  • Arithmetic or transcription errors when completing a BAS
  • Misclassification of a supply as taxable, when in fact its GST-free, input taxed or outside the scope of GST
  • The wrong entity could account for GST, or treat a taxable supply as having been made when in fact it hasn't
  • Mistakes are often made when applying the margin scheme – for example, a valuation which is too low
  • Failing to apply GST concessional provisions where available is another common mistake.

Suffice to say, the reasons for excess GST arising are many and varied, and no business should assume it won't be affected by the proposal to restrict refunds.  

So what would the new law do?

Essentially, businesses would be denied a refund of excess GST recorded in the BAS and paid, except in two specific cases:

  • Firstly, where the GST has not been 'passed on' to another entity. In other words, where the supplier bears the economic burden of the GST, rather than transferring it to its customer by way of increased prices
  • Secondly, where the excess GST has been passed on by the supplier to another entity, but that entity has received a reimbursement of the GST and is neither registered nor required to be registered for GST.

Outside of those two exceptions, the Commissioner has no clear basis for refunding the excess GST. This is in stark contrast to the current law which gives the Commissioner a discretion to pay refunds of excess GST to suppliers.

Several practical issues have been flagged concerning the proposed change, including:

  • The Commissioner's general presumption would be that excess GST will have been passed on. The taxpayer would have to counter this presumption, which may be difficult from an evidentiary point of view
  • There may also be circumstances where GST registered customers could compel a supplier to reimburse excess GST passed on (for example, under contract law). However, there is no ability under the proposed law for the supplier to in turn obtain a refund of the excess GST from the Commissioner, potentially leaving the supplier out of pocket
  • The proposed law also appears to limit the Commissioner's discretion to refund in deserving cases. There is some uncertainty whether the Commissioner's powers of general administration would extend to permit refunds outside of the exceptions within the proposed law
  • There is also some uncertainty about how Division 36 might in practice interface with existing rules in the GST law, such as those regarding correcting GST mistakes and adjustments.

As drafted, Division 36 applies from the beginning of the first tax period after 17 August this year. For most taxpayers on monthly tax periods, the new law would apply from 1 September 2012.

Division 36 is a significant 'one to watch' for taxpayers, as not only might it affect a business's entitlement to GST refund, but could also influence overall GST compliance strategy. It is possible that the new Division 36 will encourage taxpayers to take a more aggressive view where the GST position of a transaction is uncertain, given the limited prospect of a refund if a mistake is made.

To discuss the proposed Division 36 in more detail, please contact your Deloitte indirect tax adviser.

Thanks for watching.


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