Edited version of private ruling

Authorisation Number: 1011488363574

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Ruling

Subject: GST and entitlement to an input tax credit

Question

Are you entitled to an input tax credit, under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for professional services acquired in settling an out of court dispute in a partnership in which you are a partner?

Answer

No, you are not entitled to an input tax credit, under section 11-20 of the GST Act, for professional services acquired in settling an out of court dispute in a partnership in which you are a partner.

Relevant facts and circumstances

Your ruling is based on the following facts:

You are registered for goods and services tax (GST).

You formed a partnership with four other partners.

The partnership operated a property development enterprise.

There was no written partnership agreement.

Partner A's director managed the project and was in charge of daily ordering and payments.

A dispute arose on the accuracy and existence of construction costs incurred.

Partner A and B took legal action against the other three partners (including yourself) to recover debts that they claimed they had advanced the partnership project.

As a result of litigation, you, Partner D and Partner E acquired legal and accounting services.

The dispute was resolved with each partner (including yourself) paying their own costs.

The partnership has subsequently dissolved, however is still registered for GST.

The partnership had its own bank account.

Invoices from accountants and lawyers are addressed to three partners, including you.

Fees for legal and accountancy services engaged by the three partners, including you, in your capacity as partners in a partnership are being paid by each of those partners.

Reasons for decision

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

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

The first requirement in section 11-5 of the GST Act is that you make the acquisition solely or partly for a creditable purpose.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. Therefore, the acquisition of the legal and accounting services is for a creditable purpose if you acquire the services in carrying on your enterprise.

You currently carry on an enterprise of property development. You did not acquire the professional services in carrying on this enterprise. However, it is necessary to determine whether the legal and accountancy expenses were acquired by you in carrying on any other enterprise.

In this case, you were involved in a dispute with other partners in the partnership and you incurred the professional service expenses for the purpose of resolving the dispute with other partners in the partnership. For GST purposes, the partnership is the entity that carries on the enterprise and not the partners themselves. In addition, your activities as a partner in a partnership do not amount to the carrying on of the enterprise in your own right. You incurred these expenses in your capacity as a partner in the partnership.

Accordingly, the expenses were not incurred by you for a creditable purpose and as such the requirement in paragraph 11-5(a) of the GST Act is not satisfied.

As such, you are not making a creditable acquisition under section 11-5 of the GST Act. Therefore, you are not entitled to an input tax credit for the professional service expenses incurred in resolving a dispute within the partnership, in which you were a partner.

Further information

Acquisitions that are made by or on behalf of partners in their capacity as partners in a partnership are treated as acquisitions by the partnership and therefore the partnership may be entitled to an input tax credit for that acquisition. This view is discussed in Goods and Services Tax Ruling GSTR 2003/13. Paragraph 30 of GSTR 2003/13 gives the indicators that an acquisition is made by a partner in that capacity.

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.