A Federal Court decision confirming a car dealer’s right to claim refunds for GST paid mistakenly could open the way for a broad range of businesses to recover GST paid on transactions where no goods or services were actually supplied. By JAMES THOMSON
By James Thomson
A Federal Court decision confirming a car dealer’s right to claim refunds for GST paid mistakenly could open the way for a broad range of businesses to recover GST paid on transactions where no goods or services were actually supplied.
Federal treasurer Wayne Swan announced this week that he will seek to change indirect tax laws after a landmark Federal Court decision left the tax office open to GST refunds to car dealers worth more about $300 million.
But the changes will only come into effect after 1 July and businesses that have mistakenly paid GST in the last eight years will be able to claim refunds.
The Federal Court case involved a car dealer called KAP Motors. KAP’s business model (common in the car industry) worked like this:
- When a retail customer wanted to buy a car, KAP would order the car from a car distributor, which would then sell that car to a finance company.
- KAP would then buy the car from the finance company and sell it to the retail customer.
- KAP would then receive a payment from the distributor, known in the car industry as a “holdback” payment.
KAP paid GST on these holdback payments. But in 2004-05, the tax office a goods and services tax determination (GSTD 2005/4) which stated that holdback payments were not subject to GST, as they did not actually involve the supply of goods or services.
KAP attempted to claim a refund for the mistakenly paid GST, but was refused by the Tax Commissioner.
Argument in court centred about section 105-65(1), which says that the Commissioner need not give to a person a refund of GST if:
- The person overpaid the amount because a supply was treated as a taxable supply to an extent.
- The supply was not a taxable supply to that extent.
- The Commissioner is not satisfied that the person has reimbursed a corresponding amount to the recipient of the supply.
KAP argued section 105-65(1) had no application because there had been no supply. The Commissioner argued that section 105-65(1) should be interpreted as extending to “purported” supplies.
The Federal Court came down on the side of KAP, awarding it $300,000. The court said in its judgment: “The term supply as it appears in s105-65, is defined for the purposes of the GST Act and s105-65. To depart from the defined meaning given to a term, even if it is done by reading words into the context surrounding the use of the defined term, requires a particular justification. Such justification must be all the stronger in a case involving the interlacing complexity and delicate wording of a statute constituting part of the federal tax system. No such justification is present in this case.”
The tax office is not appealing the decision and says in its decision impact statement on the case that car dealers are now able to claim refunds on GST paid on holdback payments. Estimates put the cost of these refunds at around $300 million.
The decision impact statement also states that “if you believe you have overpaid GST in relation to a transaction where it is ultimately found that there was no supply at all, then you may seek to claim a refund for that overpayment”.
Mark Phillips, head of accounting firm William Buck’s automotive division, says the car industry is abuzz with clients and accountants trying to understand the implications of the Federal Court’s decision. “There’s a lot of people looking for answers at the moment,” he says.
Peter Bembrick, a tax partner from HLB Mann Judd, says that while the decision clearly applies to the specific car retailing sector, it could have implications for a broader range of businesses. “Any sort of situation where there might have been doubt about whether there has actually been supply is probably worth looking at,” Bembrick says. But he does point out that the definition of supply is wide and businesses will need to seek expert advice before proceeding.
The Government has moved to close the loophole with amendments to the tax act that will restrict refunds for tax periods starting after 1 July 2008. In a statement, Wayne Swan said the ruling is “inconsistent with the general operation of the refund provisions. These provisions seek to ensure that the benefit of the refund goes to the person who has borne the tax. Hence, a business that has overpaid GST must refund that amount to the customer that has borne the cost of GST before obtaining a refund.”