Taxpayers that have mistakenly over paid GST to the Tax Office on the basis that they have made a taxable supply, when in fact they have made no supply at all.
What do you need to do?The Federal Court decision in KAP Motors Pty Limited v Commissioner of Taxation considers whether taxpayers are entitled to GST refunds where the taxpayer has mistakenly over paid GST in circumstances where they have not made any supply. For example, suppliers may have over paid GST in respect of forfeited deposits and, depending on the outcome of the High Court decision in the Reliance Carpet Case, they may be entitled to a GST refund on the basis they have not made any supply.
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The Federal Court decision in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 concerns the ability of a taxpayer to recover GST that has mistakenly been paid to the Tax Office in circumstances where the taxpayer has not made a "supply".
Summary of facts
KAP Motors Pty Ltd (the "Taxpayer") had made GST payments to the Tax Office over a number of years in the mistaken belief that certain payments it had received were consideration for a "taxable supply". However, the Tax Office has since agreed that the payments were not consideration for any supply and that the Taxpayer is not liable for GST in respect of the payments.
The Taxpayer had claimed a refund for the over paid GST. The Tax Office denied the refund request on the basis that the "windfall gain" provisions in section 105-65 of the Taxation Administration Act 1953 apply.
Those provisions allow the Tax Office to deny a refund of GST where a taxpayer has mistakenly treated a "supply" as being a "taxable supply", if the Commissioner is not satisfied that the taxpayer will reimburse a corresponding amount to the recipient of the supply (i.e. the party that had made the payment to the taxpayer).
Questions to be considered
The Court was asked to consider two questions:
- Does section 105-65 apply to deny the refund?
- If section 105-65 does not apply, does the general law apply to deny the refund, particularly if the taxpayer has not made corresponding reimbursements (or given an undertaking to make such reimbursements) to the persons that had made the payments to the taxpayer?
Summary of decision
Justice Emmett held:
- section 105-65 does not apply to deny the refunds, and
- the general law does not apply to prevent the refunds, even if the taxpayer does not pass on the refunds, or give undertakings to the Court that it will pass on the refunds.
It is not currently known whether the Tax Office will appeal this decision. Subject to any successful appeals, the result will be that the Tax Office will make the refund payments.
Significantly, one of the questions that arose in the case was whether section 105-65 can apply where there is no "supply" at all. As noted above, section 105-65 refers to a "supply" which has mistakenly been treated as a taxable supply.
The Tax Office argued that the section should be interpreted broadly and the reference to "supply" read as a reference to "transaction", so that the section may apply even where the taxpayer has not made any supply at all. Emmett J rejected this argument.
Implications of this decision
This decision may be relevant in the context of the GST refunds that may be claimed by vendors and other suppliers in respect of GST they have previously over paid on forfeited deposits, assuming the High Court upholds the decision in Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2007] FCAFC 99 (and maintains the same reasoning . For example, there is no supply made in consideration of a forfeited deposit).
The Tax Office has previously indicated that section 105-65 may apply to restrict such refunds. However, based on Justice Emmett's decision, section 105-65 would have no application if there is no supply in the context of a forfeited deposit.