2016 is a big year for GST. For a few months it was nearly impossible to watch the evening news without a GST rate rise being front and centre – but ultimately, all we ended up with is the extension of GST to consumer imports of intangibles. Yes, the Netflix tax will soon be sneaking into your living room.
However, the maintaining of the status quo belies the fact that GST continues to be a source of much confusion and risk in the tertiary sector. Perhaps the most common misunderstanding is the contention that universities qualify for a broad exemption from GST.
While it is certainly true that universities can qualify for a range of concessions in the GST Act, such as the GST-free supplies of 'affordable' accommodation and education courses, there are still a wide variety of transactions, even in these areas, where GST can apply. Common examples include sponsorship, grants, intellectual property arrangements, parking, extra curricular activities, consultancy services and leasing of property. Even in the case of student accommodation (which is generally GST-free if provided by an approved charitable organisation for less than 75% market value) there are still some fees that will often attract a GST liability, such as basic internet service fees, the supply of linen packs or similar products, or termination fees arising from terminating a rental agreement prior to taking possession of the room.
Getting the GST treatment right from the start
In our experience, the most common and potentially costliest mistake arises from a misunderstanding that there is some inherent and inalienable entitlement to pass on GST to a customer. In short – there is no such right. If a university makes a supply that is subject to GST it is the university that has an obligation to pay the GST to the ATO. In order to recover an amount to cover this liability the university must either adjust its prices to allow for that GST (by increasing them by 10%) or, where prices are quoted exclusive of GST, include an effective and enforceable GST clause in its contract with the customer. At that same time, care must also be taken to comply with the Australian consumer law requirement that prices presented to consumers must include all applicable taxes such as GST.
It's also worth highlighting some of the reasons why GST gross up clauses have failed in the past:
- the words 'exclusive of GST' on their own, without an express obligation on the customer to pay an additional amount for GST, may not be sufficient as they don't place an express obligation on the customer to pay an additional GST amount;
- clauses that simply refer to the customer paying all taxes may be deficient because of there often imprecise drafting – particularly where GST is not expressly identified or there isn't an express statement that such amounts must be paid in addition to the other payments to be made in the contract;
- clauses that adopt and then misapply the defined terms in the GST legislation have been subject to particular criticism by the courts. In one case, a clause expressly stated that "the consideration payable for any taxable supply made under this contract represents the value of the taxable supply". In the GST Act, consideration is generally the 'GST inclusive' amount, whereas 'value' is generally a GST exclusive amount. This confusion was one of the reasons why Supreme Court found the clause in question was incapable of being attributed any particular meaning.
In addition to the above, it is important to recognise that GST inclusive pricing (which may be necessary for consumer pricing purposes) can be risky in contracts with business counterparties as it doesn't allow for changes in the rate or base, or a simply mischaracterisation of the GST treatment of the transaction. Accordingly, if GST inclusive prices are to be used, there should be mechanisms to deal with these possibilities.
Pay as you go (PAYG) withholding
The 'non-ABN' PAYG rules were introduced in 1 July 2000 at the same time as GST. However, somewhat surprisingly, they have been far less prominent even though their misapplication can generate penalties far in excess of the GST payable on a particular transaction.
What's all the fuss about?
Under the PAYG provisions, if an entity that is carrying on an enterprise in Australia (which would include almost all tertiary institutions) makes a payment for a supply from another entity carrying on an enterprise in Australia, the payor must withhold PAYG withholding tax at 49% of the payment. If the payor fails to do so, it may become liable to an administrative penalty equal to the amount of the PAYG that should have been withheld (currently 49%). For example, if a university pays a contractor $1,000,000 and fails to withhold PAYG when required, it could become liable for a penalty of $490,000.
What should you do?
There are a number of exemptions that apply so that there is no requirement to deduct 'non-ABN' PAYG. The most common is that the payor has obtained the supplier's ABN in writing (e.g. on a tax invoice or on the contract) prior to the payment being made. There are also exemptions for payments for input taxed supplies (e.g. loans and other financial supplies), payments of less than $75 and payments to other tax exempt entities (e.g. other universities or governments).
Ultimately, given the significant penalties for non-compliance, any part of the institution that is responsible for making payments (or co-ordinating procurement activities) should ensure that it has established a robust procedure for ensuring that the PAYG provisions are complied with. Otherwise there may be a very unpleasant discussion if it is subject to an ATO audit!
In our experience the receipt of an ATO audit notification is often the prompter for institutions considering their internal GST and PAYG processes that were established many years ago. While this can be an adrenalin filled experience to rival bungy jumping or skydiving, it can also result in a less pleasant overall outcome! It is therefore strongly recommended that you maintain and revisit your internal GST and PAYG procedures on a regular basis to minimise the risk of that unintended rush.