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  • Entities and Deaths

    Can a partnership have access to input tax credits without reimbursement of partners?

    Answer

    Yes

    Explanation

    Subsection 184-5(1) was inserted into A New Tax System (Goods and Services Tax) Act 1999 to remove any doubt as to the status of supplies, acquisitions and importations made by or on behalf of a partner of a partnership in his or her capacity as a partner. It states that such supplies, acquisitions and importations are taken to be made by the partnership and not the individual partner. As a result, it will not be necessary for the partnership to apply additional administrative effort in accounting for reimbursement transactions if this is not their normal business practice.

    Take the example of two brothers in a farming partnership, who individually and in their capacity as partners make acquisitions of goods in services such as petrol and repairs related to the business vehicles of the partners. The partnership would be taken to have made the acquisition. Therefore, it is the partnership, and not the individual partners, that claims the input tax credit in relation to such expenses. Of course, adjustments must be made for any private use of the vehicles.

    The partnership will need to satisfy the general documentary evidence for claiming an input tax credit. In most instances, this will require a tax invoice and evidence of the extent of business use.

    In relation to timing, since an acquisition made by a partner is taken to be an acquisition by the partnership, the timing of the reimbursement is irrelevant to the entitlement to claim an input tax credit. The input tax credit is to be claimed in the relevant tax period when the expense was incurred, subject to the way in which the partnership accounts for other expenses (that is, on a cash or accruals basis).

    13.5 Estates

    13.5.1 - Deed Of Release

    Question

    Where the beneficiary of a deceased estate gives the executor of the estate a 'deed of release' is the deed of release a taxable supply?

    Answer

    No

    Explanation

    Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which deals with taxable supplies provides:

    You make a taxable supply if:

    (a) you make the supply for consideration; and

    (b) the supply is made in the course or furtherance of an enterprise that you carry on; and

    (c) the supply is connected with Australia; and

    (d) you are registered, or required to be registered.

    However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

    It may be argued that the signing of a deed of release is consideration for a supply so that subsection 9-5(a) of the GST Act may be satisfied. When the beneficiary agrees to give up any rights to require the executor to undertake any further action in relation to them in exchange for receiving a distribution under the will, this may be considered to be making a supply for consideration. However, the giving of this type of right would not be a supply made in the course of furtherance or an enterprise as required by subsection 9-5(b) of the GST Act.

    Consequently such supplies will not be taxable supplies as described in section 9-5 of the GST Act.

    13.10 Death

    13.10.1 - Lodgement Of Returns Following Death Of Taxpayer

    Question

    Will the Tax Office require a GST payment or credit claim to be made within 21 days of the death of a taxpayer as this would be the point where the GST period ends? If so would penalties apply for lateness?

    Answer

    Paragraph 31-10(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) specifies that a GST return must be provided to the Commissioner on or before the 21st day of the month following the end of a tax period. However, section 31-10(1)(b) of the GST Act an entity must lodge a GST return for a tax period to the Commissioner within such time as the Commissioner allows. It is considered that delays in settling matters upon the death of a person would provide grounds acceptable to the Commissioner to give an extension of time to lodge a GST return.

    13.10.2 - Sale of farmland under the administration of a deceased estate.

    Question:

    Is the entity, an administrator of a deceased estate, making a GST-free supply of farm land under section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), despite the fact that there has been a break in the farming activities due to the administration of the deceased estate?

    Answer:

    Yes, the entity is making a GST-free supply of farm land under section 38-480 of the GST Act, despite the fact that there has been a break in the farming activities due to the administration of the deceased estate.

    Facts

    The entity is an executor of a deceased estate.

    The entity is selling a freehold interest in farm land.

    The deceased was the proprietor of the farming business on the farm land.

    The farming business had been carried on upon the land for a period in excess of 5 years.

    The executor is winding up the farming business and selling off all the assets and stock.

    The purchaser of the farm land intends to carry on a farming business upon the land.

    There has been a break in farming activities due to the death of farmer and the administration of the deceased estate.

    The executor is registered for Goods and Services Tax (GST) as the trustee of the deceased estate.

    Explanation:

    Subdivision 38-O of the GST Act allows the supply of farm land to be GST-free in certain circumstances. Section 38-480 of the GST Act provides that the supply of a freehold interest in land is GST-free if:

    the land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply; and

    the recipient of the supply intends that a farming business be carried on, on the land.

    Where the purchaser intends to carry on a farming business on the land, the main issue arising is whether a break in farming activities, due to the administration of a deceased estate, constitutes a break in the farming business which would cause the transaction to fail to meet the requirements of paragraph 38-480(a) of the GST Act.

    The term farming activities can be distinguished from the term farming business. A farming business includes farming activities such as fencing, but it also includes business activities such as keeping business records. Where a temporary cessation in daily farming activities occurs, for example poor weather, holidays are taken, land is left fallow etc, this does not mean the farming business has ceased altogether. This is further discussed at issues 6.2.1, 6.2.2 and 6.2.3.

    Paragraph 38-480(a) of the GST Act requires that a farming business has been carried on for at least the period of 5 years preceding the supply of the farm land, for that supply to be GST-free. It is considered that the farming business must be carried on for the 5 years immediately preceding the supply with no breaks in the farming business, in order to satisfy this requirement.

    Has a farming business continued to be carried on where the executor of a deceased estate winds up the business?

    The term 'carried on' is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise. Enterprise is defined in section 9-20 of the GST Act to include an activity or series of activities done in the form of a business. Therefore, a farming business is an enterprise. As such anything done in the course of the commencement or termination of a farming business, where carried out in a business like way, without unnecessary delay, is accepted as being a continuation of the enterprise.

    It is considered that the process leading up to the granting of probate and the steps that follow in administrating the estate, are necessary delays in winding up of the deceased's farming business.

    In summary, where a supply is made of the freehold interest in farm land on which the farming business has been carried on:

    continuously for a total period of at least five years immediately preceding the supply,

    firstly by a sole trader, and

    subsequently by that sole trader's executor, in winding up the farming enterprise, in a business like way,

    and provided the recipient intends that a business of primary production be carried on upon the land,

    the supply is a GST-free supply of farm land under section 38-480 of the GST Act.

      Last modified: 07 Jan 2005QC 17857