“Excess GST”, “passed on”, “reimbursed”…

One of the best amendments to the GST Act ever was inserting a new Division, Division 142. This Division applies to tax periods starting on or after 31 May 2014.

The object of Division 142 is to ensure that excess GST is not refunded if this would give an entity a windfall gain.

In summary, the Division operates so that an entity is not entitled to a refund of an amount of excess GST where the entity has passed on the GST to another entity, and has not reimbursed the recipient for the passed-on GST.

Yes, I know you are asking me what is “excess GST”, “passed on” and “reimbursed”. To help, the Commissioner has released Draft GST Ruling GSTR 2014/D4. This is titled:

Goods and services tax: the meaning of the terms ‘passed on’ and ‘reimburse’ for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999

But first, an example if you have never seen Division 142 before…

Joshua sells his widgets to a Canadian company and incorrectly charges GST (excess GST). The Canadian company pays the $100 on the invoice that states there has been $10 of GST (GST passed on). Under Division 142, the supply Joshua made is a taxable supply and is not a GST-free export until Joshua refunds (reimburses) the $10 to the Canadian company. Once this amount is refunded Joshua can amend their BAS and reclaim the excess $10.

Excess GST is pretty simple…

Excess GST can arise by incorrectly treating something which is not a supply as a taxable supply, miscalculating a GST liability under the GST law, incorrectly reporting an amount of GST on a GST return or incorrectly treating a GST-free or input taxed supply as a taxable supply.

Notice this is not where you find addition input tax credits but only where the GST has been too high.

Has the GST has been passed on…

The Draft Ruling says look at the following factors to assess if the GST has benn passed on:

  • The manner in which the excess GST arose
  • The entity’s pricing policy and practice
  • The documentary evidence surrounding the transaction, and
  • Any other relevant circumstances.

In relation to the manner to which the excess GST arose, the Draft Ruling states that where an error occurs after the transaction has taken place, for example through a simple transcription error, this may point towards a finding that excess GST has not been passed on. Where the excess GST arises as a result of an error made before setting the price, this error will generally flow through to the sale price paid by the recipient and is likely to point towards a finding that excess GST has been passed on.

For example:

Diana provides personal aquatic survival skills courses and swimming lessons. She holds qualifications issued by a relevant accrediting association. Diana’s supply of the personal aquatic survival skills course is a GST-free supply of an education course under section 38-85 and Diana issues each student of this course with a tax invoice showing the amount of GST on the supply as nil.

When preparing her GST return, Diana mistakenly reports supplies of personal aquatic survival skills course as taxable and remits GST on each course.

As the excess GST arose when Diana filled out her GST return and she had issued tax invoices showing the amount of GST as nil, this would indicate that Diana has not passed on the excess GST.

In relation to pricing and policy the Commissioner states you need to consider if GST was included in working out what to charge for the supply. If it was, then the GST has been passed on.

Big-mart sells a range of food and retail products. Big-mart sets its prices at a level that is lower than its competitors for equivalent products. Big-mart contends that GST was not factored into its pricing methodology, despite the fact that it sets prices then adds GST at the end.

Big-mart realises that one of its products is GST-free, but has been treated as taxable. Big-mart immediately reduces the price of the product by 1/11th. The price reduction points towards a finding that the excess GST has been passed on.

The documentary evidence is basically what the tax invoice says. While it is not a 100% certainty, if there is a tax invoice with GST on it that has been paid by the customer, Division 142 will generally apply.

Taylor Co and David Co enter into an agreement for David Co to purchase Taylor Co’s business as a GST-free supply of a going concern. All the requirements of section 38-325 are met and the contract of sale is clear that the supply is a GST-free supply.

As Taylor Co regularly makes taxable supplies, Taylor Co’s new accounts manager does not realise that the supply of the business is a GST-free supply. The accounts manager issues a tax invoice to David Co showing an amount of GST payable, and includes the GST on the GST return.

Even though Taylor Co has issued a tax invoice for the supply showing an amount of GST payable, it has other documentary evidence including the contract of sale and other written correspondence with David Co which indicate that the excess GST has not been passed on.

However, excess GST may have been passed on even if there is no tax invoice, if the evidence suggests it was included in the price.

When is the GST reimbursed?

There are only two real issues here as what is a reimbursement will generally be obvious.

The first is when I cannot identify my customers? Bad luck…

Gavin Co is a large retailer that has introduced a new stock item, supplies of which it treated as taxable. Tax invoices were issued to customers showing an amount of GST on these supplies. Gavin Co later discovers that the supplies should have been treated as GST-free.

Gavin Co has an excess GST amount of $135,000 which was passed on to its customers.

In order to claim a refund of the excess GST that was passed on, Gavin Co must reimburse the excess GST that was passed on to its customers. However, Gavin Co is not able to identify those customers and so is unable to reimburse them.

Section 142-10 applies so that the excess GST is treated as always having been payable. Accordingly, Gavin Co is not entitled to a refund of the excess GST

The other issue is what if you don’t reimburse the whole amount, specifically as you decide to keep an administration fee. No luck again.

Patel Co is registered for GST and makes a supply to Kim which it believes to be taxable. Kim pays $3,300 for the supply which includes GST of $300 and receives a tax invoice. Kim is not registered or required to be registered for GST.

In its quarterly GST return, Patel Co includes GST payable of $300 for the supply to Kim. The $300 is taken into account in Patel Co’s net amount for the relevant tax period.

Subsequently Patel Co realises that the supply was not taxable and that the $300 is excess GST. The excess GST is taken to have always been payable until Patel Co reimburses Kim. However, Patel Co decides that it will only reimburse Kim if he agrees to pay a $30 administration fee which can be offset against the amount of excess GST to be reimbursed. Kim agrees to pay the fee and Patel Co only reimburses Kim $270 of the excess GST Kim paid.

Consequently, Patel Co is only entitled to a refund of $270. The remaining $30 (being the difference between the excess GST and what has been reimbursed) is taken to have always been payable under section 142-10. Patel Co is entitled to a decreasing adjustment of $270 in the tax period in which it became aware of the adjustment.

So in summary, your GST scheme where the supplier recovers all the GST is over if the GST was passed on to the customer – as it will in almost all sitiuations…


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