Edited version of private advice

Authorisation Number: 1051824853246

Date of advice: 7 April 2021

Ruling

Subject: Enterprise and creditable acquisitions

Question 1

Does the Partnership continue to carry on an enterprise for the purposes of subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes

Question 2

If the answer to Question 1 is yes, are the supplies and acquisitions that have been made by the Partnership or by or on behalf of a partner in his or her capacity as a partner of the Partnership to date, or will be made in future, to resolve or settle the current legal claim be supplies and acquisitions made in the course of the Partnership's enterprise?

Answer

Yes, where the supplies are taxable supplies under section 9-5 of the GST Act and the acquisitions are creditable acquisitions under section 11-5 of the GST Act.

Relevant facts and circumstances

The Partnership registered for an Australian Business Number ("ABN") and for GST purposes. While the ABN remains current, the Partnership deregistered for GST after the sale of the business.

The supply of the business and associated assets by the Partnership to the Buyer was agreed to be a GST-free supply of a going concern, pursuant to subsection 38-325 of the GST Act.

The Buyer lodged a claim in the Courts. The partnership is currently defending the claim and engaging and instructing its legal advisers in respect of its defence of the claim and the discovery process.

Relevant legislative provisions

Section 7 of the A New Tax System (Goods and Services Tax) Act 1999

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999

Section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999

Section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1

Summary

The Partnership continues to carry on an enterprise for the purposes of subsection 9-20(1) of the GST Act.

Detailed reasoning

Section 9-5 of the GST Act states that:

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 the indirect tax zone; 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.

Note: The * denotes a defined term within the GST Act

Subsections 9-5(d) and 11-5(d) of the GST Act both necessitate that "you" must be registered or required to be registered in order to make a taxable supply and a creditable acquisition respectively. Similarly, both subsections 9-5(b) and 11-15(1) of the GST Act require the supply or acquisition (as relevant) to be made in the course of an entity carrying on an enterprise.

The term "you" defined in section 195-1 of the GST Act as applying to "entities" generally. In turn, "entity" is defined in section 184-1 of the GST Act as meaning one of the following:

a)    An individual;

b)    A body corporate;

c)    A corporation sole;

d)    A body politic;

e)    A partnership;

f)     Any other unincorporated association or body of persons;

g)    A trust; or

h)    A superannuation fund.

It follows from the discussion above that, for a taxable supply or creditable acquisition to exist, all the following must be present:

•         There must be an entity;

•         The entity must make a supply or acquisition in the course or furtherance of its enterprise; and

•         The entity must be registered or required to be registered for GST.

A partnership is defined in section 195-1of the GST Act by reference to the definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997. That definition states that a partnership means:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

Consistent with the Commissioner's views at paragraph 10 of Goods and Services Tax Ruling GSTR 2003/13, an association of persons carrying on a business as partners is known as a "general law partnership". A general law partnership is formed when two or more entities commence carrying on a business as partners. Whether, and from what date, a general law partnership exists are questions of fact having regard to the partnership agreement and the circumstances surrounding the partnership's formation. As such, the execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time.

On its formation, the Partnership exhibited all the pre-requisites of a general law partnership. in that there was clearly a common business undertaking of operating the Store. We further note the Partnership registered for an ABN and GST purposes as a general law partnership on the agreed understanding that such a partnership existed.

In this regard, the Partnership is a general law partnership that was established to carry on a business, consistent with the Commissioner's view in paragraph 17 of GSTR 2003/13.

Under general law, a partnership is not an entity since the term "partnership" is merely descriptive of the relationship between persons carrying on business with a view of profit. However, the effect of section 184-1 of the GST Act is to create a partnership as a GST entity such that it can make supplies and acquisitions in its own right, albeit these are made through one or more partners acting in their capacity of the partnership.

The Commissioner reinforces the position above at paragraphs 28-30 of GSTR 2003/13 wherein he states:

28.Supplies and acquisitions that are made by or on behalf of partners in their capacity as partners are treated as supplies and acquisitions by the partnership. This position is confirmed by subsection 184-5(1) which provides:

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.

29. Whether a partner makes a supply or acquisition in the capacity as a partner is a question of fact. Factors that may indicate that a supply is made by a partner in that capacity include:

•         the consideration for the supply is paid to a common fund, or to all the partners;

•         the supply is of a kind typically made in the type of enterprise carried on by the partnership; and

•         the invoice or tax invoice shows the firm or business name, or the names of all the partners as supplier.

30. Factors that may indicate that an acquisition is made by a partner in that

capacity include:

•         the acquisition is used in the enterprise of the partnership;

•         the acquisition is made with the consent of all the partners;

•         the acquisition is paid for out of partnership profits or from a partnership account; and

•         the invoice or tax invoice shows the firm or business name, or the names of all the partners as recipient.

In Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Numberthe Commissioner confirms the intent of including partnerships within the meaning of "entity":

Paragraph 110 of MT 2006/1 provides:

110. As explained in paragraphs 41 to 43 of this Ruling, the definition of partnership is wide and has the meaning given by section 995-1 of the ITAA 1997. Partnerships, except incorporated limited partnerships, are not recognised under the general law as a separate legal person distinct from the members of the partnership. They are an entity for ABN purposes because of the operation of paragraph 184-1(1)(e) of the GST Act. This means that the business the partners carry on in association with each other is taken to be an enterprise carried on by the partnership. As a result, a partner (that is required to carry on an enterprise to be entitled to an ABN), will not be entitled to an ABN unless they carry on some other enterprise independently of the partnership and in their own capacity.

Insofar as the discussion above relates to the Partnership, the Commissioner is satisfied that the Partnership made a significant number of supplies and acquisitions in the course of operating the Store during the initial period... The supplies and acquisitions were reported in the management reports, financial reports, income tax returns and business activity statements ("BASs") of the Partnership during the period.

In the Commissioner's view, and consistent with subsection 184-5(1) of the GST Act, it is accepted that the Partnership made supplies and acquisitions and, as a result, commenced and carried on an enterprise.

Notwithstanding that the Partnership sold the business conducted at the Store to the Buyer, it is the Commissioner's view that the Partnership has continued to carry on an enterprise.

Section 195-1 of the GST Act states "carrying on" an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

In the context of terminating an enterprise, the Commissioner's views are set out in paragraphs 140-145 of MT 2006/1:

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

141. In the course of terminating an enterprise, a number of obligations may need to be finalised. These include finalising accounts, paying creditors, repaying loans, cancelling licences and business registrations.

142. A change in purpose or use of all assets could result in the termination of an enterprise. A change could occur where an asset is no longer used by the entity in the enterprise and is instead used for private purposes.

143. If some assets continue to be held by the entity because they cannot be disposed of or converted to another use and those assets are worthless or likely to be of little value, the enterprise can still be said to have terminated.

144. In circumstances where assets have been sold or where they are no longer used in the enterprise there may still be some other activities undertaken to terminate the enterprise. These activities may include the preparation of final accounts, activity statements and income tax returns and the cancellation of the ABN and GST registration.

145. An enterprise is also considered to terminate where outstanding obligations cannot be satisfied and other activities have ceased.

As noted in MT 2006/1, the question of whether the activities are done in terminating the enterprise or at some later point is one of fact and degree depending on the circumstances of each particular case.

The Commissioner agrees that the sale of the business represented the end of the operation phase of the Partnership's enterprise and the start of the termination phase. However, given the nature and extent of the activities that the Partnership has undertaken since the sale and continues to undertake, it is the Commissioner's view that the Partnership is still in the process of terminating, yet still carrying on, its enterprise.

Accordingly, the Commissioner affirms that the Partnership continues to carry on an enterprise.

Question 2

Summary

As the answer to Question 1 is yes, the supplies and acquisitions that have been made by the Partnership or by or on behalf of a partner in his or her capacity as a partner of the Partnership to date, or will be made in future, to resolve or settle the current legal claim are supplies and acquisitions made in the course of the Partnership's enterprise?

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable

purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the

supply; and

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

Under section 11-15 of the GST Act, an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on its enterprise and the acquisition is neither related to making input taxed supplies nor of a private or domestic nature. Section 11-20 of the GST Act provides that an entity is entitled to the input tax credit for any creditable acquisition that it makes.

Goods and Services Tax Ruling 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? offers guidance to determine this issue. In particular paragraph 55 of GSTR 2008/1 states:

55. Subsection 11-15(1) requires that you acquire a thing in carrying on your enterprise. It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

The meaning of the term 'carrying on an enterprise' is defined by reference to section 195-1 of the GST Act to include '...doing anything in the course of the commencement or termination of the enterprise'.

The word 'enterprise' is given its meaning by section 9-20 of the GST Act and includes'...an activity or series of activities, done in the form of a business'.

The Commissioner has confirmed to you in question 1 that the Partnership is continuing to carry on an enterprise and therefore, satisfy the tests set out in section 9-20 of the GST Act. As such, the next issue that has to be considered is whether there is a connection between the acquisitions made from your suppliers and your enterprise.

Paragraphs 69 and 70 of GSTR 2008/1 states:

69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative.

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

•         the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

•         the thing acquired is used by the enterprise in making supplies;

•         the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

•         the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

•         the acquisition does not meet the personal needs of individuals such as partners or directors;

•         the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

•         the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.

Where your acquisition of goods and services satisfy the criteria and those of paragraphs 28-30 of GSTR 2003/13 (discussed above in question 1) and are made in carrying on your enterprise, it is our view that there would be a relevant connection between the acquisition of those goods and services and the enterprise you carry on.

Supplies made by the partnership will be taxable supplies where the requirements of section 9-5 of the GST Act are satisfied.

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