Focus: Tax – July 2002
The incorrect GST treatment of supplies
In brief: The ATO's new practice statement sets out its policy on the exercise of its discretion to give refunds of GST where a non-taxable supply is erroneously treated as taxable. The statement also outlines an alternative approach, explains partner Ross Stitt (view CV).
A new Practice Statement released by the Australian Taxation Office (ATO) has potentially significant implications for GST-registered entities. The statement, PS 2002/12, addresses the scenario of a non-taxable supply being erroneously treated as a taxable supply.
To date, there have been two major concerns under this scenario. The first is that when the error is discovered, the supplier has to reimburse the recipient for the additional amount charged on account of GST, but is unable to obtain a refund for that amount from the ATO. The second is that the recipient is reimbursed by the supplier, but is subject to the General Interest Charge (GIC) for having incorrectly claimed an input tax credit in relation to the supply.
Although released in June, PS 2002/12 is effective from 19 September 2001.
The ATO's discretion
Section 39(3) of the Taxation Administration Act 1953 provides that where a non-taxable supply is treated as a taxable supply, the ATO is not required to refund the GST incorrectly paid by the supplier, unless the supplier reimburses the recipient and the recipient is neither registered nor required to be registered. This means that in the case of a supply to a registered entity, it is at the discretion of the ATO as to whether the supplier gets a refund. That is a wholly unsatisfactory position.
The purpose of PS 2002/12 is to set out the
ATO's policy on the exercise of its discretion.
The essence of the policy is that the ATO will allow a refund, provided that the supplier has reimbursed the recipient for the amount incorrectly charged. Whilst that is the only sensible outcome, it is nevertheless reassuring to see it spelt out by the ATO.
General Interest Charge
In most cases where a non-taxable supply is erroneously treated as a taxable supply, the recipient of the supply will claim an input tax credit.
Broadly speaking, where a taxpayer incorrectly claims an input tax credit, it will automatically be liable to the GIC for the period from the claiming of the input tax credit until its reversal.
That is, of course, a ridiculous and unfair outcome if the GST on the supply has been paid by the supplier. Under that scenario, the ATO is not out of pocket because the amount incorrectly claimed by the recipient from the ATO has also been incorrectly paid to the ATO by the supplier.
Paragraph 25 of PS 2002/12 states that where a supplier reimburses a registered recipient, 'the ATO will give favourable consideration to any requests by the registered recipients for remission of the GIC'.
It is to be hoped that 'favourable consideration' means that the GIC will be remitted in every situation where the ATO has not been out of pocket because the supplier has paid the GST.
An alternative approach
Much of PS 2002/12 is devoted to what the ATO describes as 'an alternative approach' to the incorrect treatment of non-taxable supplies between registered entities.
The essence of that approach is to do nothing; in other words to act as if the supply was in fact taxable and to neither pay a refund to the supplier nor reverse the recipient's input tax credit. In this way, all three parties are left in the same net financial position and are relieved of the compliance burden of unwinding the treatment previously adopted.
The key prerequisites for this alternative approach are that the supplier has not reimbursed the recipient and has not issued a new invoice.
This policy obviously benefits the ATO, the supplier and the recipient. As noted in paragraph 20, from the recipient's perspective the 'GIC that would otherwise be payable by the recipient is effectively waived'.
The policy does not assist a supplier that has claimed input tax credits on acquisitions made in relation to input taxed supplies that were erroneously treated as taxable. In that situation the supplier will be required to repay the input tax credits incorrectly claimed.
Points to note
Where a non-taxable supply is incorrectly treated as taxable and the supplier subsequently becomes aware of this fact, the supplier should not automatically reimburse the recipient or issue a new invoice. It should liaise with the recipient so that the parties can consider applying the ATO's alternative approach. An automatic reimbursement or reinvoicing will remove that opportunity.
If the parties do decide to adopt the ATO's alternative approach, consideration also needs to be given to the terms of any contractual arrangements between the parties and, in particular, any GST gross-up clause.
Most gross-up clauses are triggered by the existence of a taxable supply. If it is determined that there is no such taxable supply but the parties wish to avail themselves of the ATO's concession, the supplier must ensure that it cannot be required at a later date to repay any amount to the recipient.
Significantly, PS 2002/12 does not address the resulting income tax issues.
Section 17-5 of the Income Tax Assessment Act 1997 states that an amount is not assessable income to the extent that it includes an amount relating to 'GST payable on a taxable supply'.
Where a supply is ultimately shown to be a non-taxable supply, this section will have no application. That leaves open the question of the correct income tax treatment if the parties decide to apply the ATO's alternative approach and not unwind the incorrect GST treatment of a supply. The ATO needs to address this issue.
The final point to note is that PS 2002/12 applies where a non-taxable supply is erroneously treated as taxable.
It does not provide any assistance in the reverse situation, namely where a taxable supply is treated as non-taxable, even though some of the principles enunciated in PS 2002/12 are equally relevant to this situation.
Take the example of a taxable supply incorrectly treated as non-taxable to a recipient that would have been entitled to a full input tax credit if the supply had been treated as taxable at the outset.
In this situation there is no loss to the ATO as a result of the incorrect treatment. While the ATO should have received a payment of GST from the supplier at the outset, it would have been obliged to give the recipient an equal and offsetting input tax credit.
However, at this stage, it appears that the GIC would apply to the supplier under this scenario.
Generally speaking, the primary rationale for the GIC is that if a taxpayer has not paid tax that should have been paid, then the taxpayer has had the use of that money and the ATO has not. It is argued that the taxpayer should pay interest for that use of money to compensate the ATO.
Although there are legitimate concerns in relation to the interest rate for the GIC, this rationale can, broadly, be accepted in relation to income tax. If a corporate taxpayer sells an asset for a profit of $100, and does not pay tax on that profit, the taxpayer retains the use of $30 that it would not have had if the payable tax had been paid. Equally, the ATO is denied $30 that it would have had if the tax had been paid.
This reasoning can be applicable in the GST context where the recipient of a supply is not entitled to claim an input tax credit and the supplier has not accounted for GST on the supply. In that case, the supplier has had the use of the GST component of the price that it should have paid to the ATO and the ATO has been denied the use of that money.
As yet, the ATO has not distinguished between that situation and the situation identified above where a recipient is entitled to an input tax credit for an acquisition.
In Practice Statement PS 2002/8, the ATO outlined its general policy on the application of the GIC in the second year of the new tax system. The policy is that the GIC will apply except where it is remitted. The grounds for remission are set out in paragraph 49. Broadly speaking, the GIC may be remitted where:
- the payment of the full GIC would result in serious financial hardship;
- the taxpayer has been granted partial relief from payment of a tax debt;
- the taxpayer can demonstrate that reasonable steps were taken to mitigate the reason for the delay;
- the GIC is the result of an undue delay or error caused by the ATO; or
- there are special circumstances that make the remission fair and reasonable.
Of the five possible grounds for remission, only two would seem to potentially have specific application where a taxable supply is erroneously treated as non-taxable and the supply is made to a recipient that is entitled to a full input tax credit for any GST component. These are that the supplier took reasonable steps to mitigate the reason for the delay in the payment or that there are special circumstances that make remission of the GIC fair and reasonable. However, the arguments are not compelling and it seems likely that the ATO would not remit the GIC even though there was no net cost to the ATO or benefit to the supplier.
It can be seen from the above analysis that where there is some doubt as to whether or not a supply between registered entities is taxable, PS 2002/12 suggests that it is better to err on the side of treating it as taxable, assuming that the recipient can obtain a full input tax credit. It remains to be seen whether the ATO will develop a concessional policy for taxable supplies incorrectly treated as non-taxable in circumstances where there is no loss of revenue.
For further information, please contact:
- Ross StittPartner,
Sydney
Ph: +61 2 9230 4643
Ross.Stitt@aar.com.au - Michael PerezPartner,
Melbourne
Ph: +61 3 9613 8500
Michael.Perez@aar.com.au - Peter AllenPartner,
Brisbane
Ph: +61 7 3334 3350
Peter.Allen@aar.com.au
