Edited version of your private ruling

Authorisation Number: 1012502090446

Ruling

Subject: GST and the personal liability for GST representative of an incapacitated entity

Question

Is Entity A (in Liquidation) (Receivers and Managers Appointed) (the Liquidator) personally liable for GST on any part of the GST liability of the Partnership in respect of asset sales?

Advice/Answers

Yes, the Liquidator in its capacity as representative of the incapacitated entity does have personal liability to pay the GST liability of the Partnership in respect of asset sales.

Relevant facts and circumstances

Entity A entered into a partnership ('the Partnership') with Entity B under an Agreement to acquire and develop properties.

Pursuant to the Agreement, the Partnership acquired x parcels of land, although only three are of interest to this ruling application. These parcels of land became knows as:

· Parcel 1

· Parcel 2

· Parcel 3

There were three main elements to each of the parcels of land, being:

(1) the initial freeholds,

(2) the creation and registration of leasehold lots in respect of each of the parcels of land. The leaseholds were granted to:

· Entity 1

· Entity 2

· Entity 3

The Partnership intended to sell a specific number of year leases in respect of these leasehold lots.

(3) the ongoing conduct of the business on the parcels of land were referred to as:

· Parcel 1 Business

· Parcel 2 Business

· Parcel 3 Business

The registered proprietors of the parcels of land were as follows:

· Parcel 1 - Entity A was the sole registered proprietor

· Parcel 2 - Entity A and Entity B were the registered proprietors as tenants in common in the proportion of two thirds Entity A and one third Entity B

· Parcel 3 - Entity B was the sole registered proprietor

The Partnership has since been dissolved and there has been extensive litigation between Entity A and Entity B.

A judgement made by the Supreme Court ruled that:

(a) Unsold Leases are Partnership property;

(b) Parcel 1 and Parcel 2 are beneficially owned by Entity A and Entity B as tenants in common in the proportion of two thirds Entity A and one third Entity B;

(c) the businesses conducted on the parcels of land are not Partnership property but are owned by Entity A and Entity B as tenants in common in the proportion of two thirds Entity A and one third Entity B.

Entity A was wound up by the Supreme Court and a Liquidator appointed.

Entity A (as represented by its Liquidator), Entity B and others entered into a Deed of Settlement to resolve all outstanding matters.

The Deed of Settlement provides that it is the intention of Entity A and Entity B that:

(a) Entity A shall become the sole registered proprietor of Parcel 1 free of any claim by Entity B and shall own all the Unsold Leases at Parcel 1;

(b) Entity B shall become the sole registered proprietor of Parcel 2 free of any claim by Entity A or any creditor of Entity A and shall own all the Unsold Leases at Parcel 2 and Parcel 3.

To affect this intention the following supplies and consideration were made by Entity A, Entity B and the Partnership.

Supplies made by Entity A

Under the Deed of Settlement, a number of supplies were made by Entity A to Entity B. The supplies that are relevant to this private ruling application are:

· two thirds interest as registered proprietor in Parcel 2 and a two-thirds interest in the Parcel 2 Business;

· two thirds interest in the shares in Entity 1 and Entity 2.

Supplies made by the Partnership

Under the Deed of Settlement, a number of supplies were made by the Partnership to Entity A and Entity B. The supplies that are relevant to this private ruling application are:

· the assignment of the Partnership's interest in the Unsold Leases for Parcel 2 to Entity B;

· the assignment of the Partnership's interests in the Unsold Leases for Parcel 1 to Entity A;

· the assignment of the Partnership's interests in the Unsold Leases for Parcel 3 to Entity B.

Consideration provided by Entity B

Under the Deed of Settlement, Entity B provided the following consideration that is relevant to this private ruling application to Entity A for the abovementioned supplies:

· a Settlement Sum;

· One third beneficial interest in Parcel 1

· One third interest in the Parcel 1 Business.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 48-40, 48-45, 48-50

A New Tax System (Goods and Services Tax) Act 1999 section 58-10

A New Tax System (Goods and Services Tax) Act 1999 subsection 58-10(1)

A New Tax System (Goods and Services Tax) Act 1999 section 184-1, 184-5

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Schedule 1 to the Taxation Administration Act 1953 section 444-30

Reasons for decision

The meaning of the term 'entity' is set out in section 184-1 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and includes partnerships.

Section 184-5 of the GST Act deals with supplies made by partnerships and other incorporated bodies. It states:

(1) For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a *partnership in his or her capacity as a partner:

(a) is taken to be a supply, acquisition or importation made by the partnership; and

(b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.

(Items marked with an *asterisk are defined in section 195-1 of the GST Act).

Section 444-30 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) deals with the liability of partners for the obligations imposed on a partnership under the GST Act.

In particular, subsections 444-30(1) and 444-30(2) of Schedule 1 to the TAA 1953 state:

(1) Obligations that are imposed under this Schedule, the * MRRT law or an * indirect tax law on a partnership are imposed on each partner, but may be discharged by any of the partners.

(2) The partners are jointly and severally liable to pay any amount that is payable under this Schedule, the * MRRT law or an * indirect tax law by the partnership.

Further, section 58-10 of the GST Act states:

A *representative of an *incapacitated entity:

(a)  is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a *taxable supply or a *taxable importation; and

(b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a *creditable acquisition or a *creditable importation; and

(c)  has any *adjustment that the incapacitated entity would, but for this section or section 48-50, have;

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The Liquidator submits that while Entity A (as a partner in the Partnership) may be jointly and severally liable for any GST payable in respect of the assignment of the Unsold Leases, the Liquidator will not incur any such liability.

The Liquidator also submits that support for this view in an overseas court decision.

The overseas case quoted by the Liquidator cannot be accepted as precedent for this issue as the relevant provisions of the overseas GST Act are dissimilar to the provisions of the Australian GST Act, which, under section 58-10 specifically assigns a liability 'to pay any GST' to a representative in particular circumstances.

Division 58 of the GST Act sets out how to ascribe the activities of a representative of an incapacitated entity for GST purposes. Relevantly it applies to situations where an entity is incapacitated and a representative is appointed to administer the affairs of that entity. The definition of 'representative' at section 195-1 of the GST Act includes a liquidator while the definition of 'incapacitated entity' includes an entity that is in liquidation. In the present case, the incapacitated entity in question is Entity A and the representative is the Liquidator.

Entity A is a partner in the Partnership. For GST purposes, a partnership is an entity in its own right and under section 9-40 of the GST Act must pay the GST on any taxable supply that it makes. However, by virtue of section 444-30 of the TAA the partners of the partnership are jointly and severally liable to pay this GST to the ATO. This was confirmed in the Federal Court case Yacoub vs Federal Commissioner of Taxation 2012 ATC 20-328. Therefore the question at issue is whether, in its capacity as the representative of Entity A, the Liquidator is jointly and severally liable to pay to the ATO the GST charged by the Partnership after the date the Liquidator was appointed.

As explained in ATO Interpretative Decision ATO ID 2012/7 Goods and services tax - GST and liability for a supply made by an incapacitated entity prior to the appointment of a representative (ATO ID 2012/7), subsection 58-10(1) of the GST Act provides as a general rule that a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would (but for sections 58-10 and 48-40 of the GST Act) be liable to pay on a taxable supply to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The insertion of subsection 58-10(1) into the GST Act is explained at paragraphs 1.26 and 1.27 of the explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 (EM) as follows:

1.26 New section 58-10 sets out the circumstances in which a representative of an incapacitated entity will be liable for GST on a taxable supply or a taxable importation, entitled to an input tax credit for a creditable acquisition or creditable importation and have any adjustments. [Schedule 1, item 8]

1.27 New subsection 58-10(1) provides that a representative of an incapacitated entity is liable for any amount of GST, is entitled to any input tax credit, and has any adjustment that would, in the absence of this subsection, be an amount that the incapacitated entity is liable for, or entitled to. However, this only applies to the extent that the making of the supply, acquisition or importation to which the amount of GST, input tax credit, or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs. [Schedule 1, item 8]

In the present case, the supply to which the GST relates are supplies made (by the Partnership) for the purposes of winding up the Partnership. Further, paragraphs 129 and 130 of Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships (GSTR 2003/13) as quoted below explain that for this purpose (the winding up of the partnership), the partners' rights and obligations continue.

129. When a partnership dissolution leads to its winding up, the partners retain their authority to bind the other members of the partnership for the purpose of winding up the affairs of the partnership, and only for that purpose. Their other rights and obligations also continue for this purpose. See for instance, subsection 41(1) of Queensland's Partnership Act 1891:

After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.

130. Effectively, a partnership continues, although only for the purpose of winding up. As stated in Lindley & Banks:

For the purposes of winding up, the partnership is deemed to continue; the good faith and honourable conduct due from every partner to his co-partners during the continuance of the partnership being equally due so long as its affairs remain unsettled; and that which was partnership property before, continuing to be so for the purpose of dissolution, as the rights of the partners require.

It follows that it is the Partnership that made the relevant supplies giving effect to the promises made by the partners in that capacity under the Deed of Settlement.

At the time the parties entered into the Deed of Settlement, the representative had been appointed (as Liquidator) over Entity A's assets, including its interest in the Partnership, and, in that capacity, had the responsibility or authority for managing the affairs of Entity A as a partner in the Partnership. In that regard, it is noted that Entity A's signatory to the Deed of Settlement (therefore a party to that deed) was in fact the Liquidator. Therefore the supplies made by the Partnership in accordance with the Deed of Settlement were within the Liquidator's authority for managing Entity A's affairs.

Accordingly, under subsection 58-10(1) of the GST Act the Liquidator is liable for the GST that Entity A as a partner (albeit an incapacitated partner) in the Partnership would (but for that section) be jointly and severally liable to pay GST by virtue of section 444-30 of the TAA on taxable supplies made by the Partnership in accordance with the Deed of Settlement.

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