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Ruling

Subject: GST and tax law partnership carrying on an enterprise

Question 1

Are you required to remit goods and services tax (GST) in relation to supplies made in respect of your activities?

Answer

As an individual no. However, see Reasons for Decision.

Relevant facts and circumstances

You are registered for GST.

You registered for GST in respect of certain activities.

You have an ownership interest a number of assets.

There is no formal entity structure registered for the purchase of these assets nor an ABN or GST registration.

No legal/written document is drawn up and signed by the parties involved with the assets.

Records are kept for the income and expenses and these are allocated on a percentage of ownership basis.

You have advised that you have established expertise in relation to the assets.

You also select the assets for purchase.

Income received from the utilisation of the assets is paid into a single bank account in your name.

You have set up a bank account in your own name to serve for the entity's income and expenses.

Another member reconciles the accounts and if there is a shortfall requests that the related owners make cash injection or makes a transfer if there is a surplus.

This member also provides a report for each asset showing the winnings and costs and the share percentage of the respective owner.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-20

Section 184-1

Section 188-10

Section 188-25

Income Tax Assessment Act 1997

Section 995

Reasons for decision

Summary

For GST purposes the entity conducting the enterprise is a tax law partnership. There will be a separate tax law partnership in each where the composition of the partners is different between the assets. Therefore, there may be a number of tax law partnerships in existence in relation to the conducting of the enterprise. Therefore each tax law partnership that is so created needs to be to determine whether it is required to be registered for GST. Where the GST turnover of the tax law partnership is at or above $75,000 per annum the partnership is required to be registered for GST. Where it is below this threshold the tax law partnership may register for GST but is not required to do so.

Detailed reasoning

Section 9-5 of the GST Act provides that 'you' make a taxable supply where:

§ you make the supply for consideration

§ the supply is made in the course or furtherance of an enterprise that you carry on

§ the supply is connected with Australia, and

§ you are registered, or required to be registered for GST.

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

The term supply is defined in section 9-10 of the GS Act and is given a broad definition. It encompasses supplying an asset in anticipation of a return.

There is no provision in the present case in the GST Act or any other Act to make the supply GST-free or input taxed.

The 'you' in the above is the entity that makes the supply. Subsection 184-1 of the GST Act provides that an entity includes inter alia an individual, a partnership and any other unincorporated body of persons.

Entity structure

In order to ascertain the GST obligations if any in respect of the ownership and utilisation of the assets, we need to establish the entity which is the owner.

In this case, as the assists are jointly owned by individuals, it is necessary to consider whether this relationship amounts to a partnership for GST purposes.

Partnership

The term 'partnership' is defined in the GST Act. It provides that it has the meaning given by section 995-1 of the Income Tax Assessment Act 1997. That definition states:

partnership means:

(a) and 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.

The first limb of paragraph (a) of the definition refers to an association of persons carrying on a business. This reflects the general law definition of a partnership, which is the 'relation which subsists between persons carrying on a business in common with a view of profit'.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership.

The GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes. Tax law partnerships exist for tax purposes only. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

In your case, we consider that a tax law partnership exists because there is an association (existence of a mutual or common purpose) between each co-owner, all of whom share an entitlement to receive income jointly from the assets.

Consequently, the relevant entity for GST purposes is the tax law partnership consisting of the individual co-owners.

However we need to determine if it is the tax law partnership which is carrying on the enterprise or whether it is carried on by each co-owner and not by the tax law partnership.

Goods and Services Tax Ruling GSTR 2004/6 is about tax law partnerships and co-owners of property.

Paragraph 62 of GSTR 2004/6 lists the factors which may point to an enterprise being carried on by a tax law partnership. These include

§ An agreement setting out the rights and obligations of the parties.

§ The property is jointly acquired under one contract.

§ The persons hold the property as joint tenants.

§ The acquisition is funded from joint funds.

§ The joint activities of the co-owners are for their mutual benefit.

§ The co-owners appoint an agent or manager.

§ Income is paid into a joint bank account.

§ Expenses are paid from a joint bank account.

§ The co-owners jointly pay all liabilities relating to the property. 

Paragraph 66 of GSTR 2004/6 lists the factors that may point to an enterprise being carried on by each co-owner in their own right. Theses include.

§ The co-owner has its own enterprise and acquires an interest in property in carrying on that enterprise.

§ There is an agreement not to form a partnership nor jointly carry on an enterprise.

§ Each co-owner makes independent decisions on buying the property.

§ Each property acquisition is made separately.

§ The co-owners do not fund the acquisition out of a joint fund.

§ The co-owners make independent decisions.

§ Each co-owner does not act for mutual benefit but is only concerned with a return on investment.

§ Although contributing to a mutual fund to pay liabilities, each co-owner makes the payments in the course of their own enterprise.  

Having regard for the factors for both scenarios we consider that it is a tax law partnership that is the entity that is making the supply for GST purposes and not each co-owner in their own right as:

§ The assets are jointly acquired under one contract

§ The respective ownership interest is that of a joint tenant

§ The joint activities of the co-owners are for their mutual benefit

§ Income is paid into a joint bank account.

§ Expenses are paid from a bank account managed by one of the co-owners.

§ The co-owners jointly pay all liabilities relating to the assets.

Consequently, we need to consider whether the activity of exploitation of the assets amounts to an enterprise for GST purposes.

Enterprise

The activities undertaken are designed to return a profit as evidenced by the partnership's expertise in the exploitation of the assets.

The partnership is involved in the selection and development of each of the horses.

Separate records are maintained for income and expenses in relation to the activity. You have set up a bank account to pay expenses and deposit income.

Consequently, the tax law partnership has a reasonable expectation of profit from the activity

Therefore, the tax law partnership is conducting an enterprise for GST purposes.

Paragraph 67 of GSTR 2004/6 explains that if the enterprise is being carried on by a tax law partnership then the enterprise cannot be carried on by each co-owner in their own right at the same time in relation to the asset/s.

Therefore, you under you GST registration as an individual do not have any GST obligations in respect to this enterprise.

Is the tax law partnership required to be registered for GST?

An entity is required to be registered for GST if it is carrying on an enterprise and its annual turnover meets the GST registration turnover threshold. Currently, this is $75,000.

Pursuant to section 188-10 of the GST Act an entity will have an annual turnover that meets the GST registration threshold if:

§ its current annual turnover is at or above the turnover threshold, and the Commissioner is not satisfied that its projected annual turnover is below the threshold, or

§ its projected annual turnover is at or above the turnover threshold.

The current annual turnover at a time during a particular month is the sum of the values (GST-exclusive) of all the supplies that the entity made or is likely to make, during the 12 months ending at the end of that month. The projected annual turnover is sum of the values of all the supplies that the entity has made, or is likely to make during that month and the next 11 months. For the purpose of calculating both the current and projected annual turnovers, the following supplies are excluded:

§ supplies that are input taxed

§ supplies that are not made for consideration (and are not taxable supplies under section 72-5), or

§ supplies that are not made in connection with an enterprise that you carry on.

Please note that section 188-25 of the GST Act further provides that in working out its projected annual turnover, an entity must also disregard from its calculation any supply made, or likely to be made by way of transfer of ownership of a capital asset that it owns.

Where the turnover of the tax law partnership is at or above the GST registration turnover threshold it will be required to be registered for GST.

At a turnover which is below the threshold GST registration is optional.

Is the tax law partnership making taxable supplies?

The tax law partnership will be making taxable supplies where:

§ it makes the supply for consideration

§ the supply is made in the course or furtherance of an enterprise that it carries on

§ the supply is connected with Australia, and

§ it is registered, or required to be registered for GST.

However, a supply is not taxable to the extent that it is GST-free or input taxed. There are no provisions in the GST Act or any other Act to make the tax law partnerships' supplies in relation to exploitation of the assets as input taxed or GST-free.

The tax law partnership makes its supplies in return for consideration, the supply is made in the course or furtherance of its enterprise and the supply is connected with Australia as the assets are exploited in Australia.

Consequently where the tax law partnership is required to be registered for GST or chooses to do so, it will be making taxable supplies and thus will be required to remit GST on income received.

The tax law partnership will also be able to claim GST credits in relation to the GST included in the cost of the purchases it makes to provide the supply.