Edited version of private advice

Authorisation Number: 1051885039371

Date of advice: 12 August 2021

Ruling

Subject: GST and termination of an enterprise

Question 1

Does the Commissioner agree that the partnership is no longer conducting an enterprise as defined by section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

The Commissioner considers that the partnership's enterprise terminated when the occupying partners moved into the secondary property and the property was used purely for a private purpose.

Question 2

On the basis that the Commissioner confirms Question 1 in the affirmative, upon deregistration for GST, will the partnership make an increasing adjustment under Division 138 of the GST Act equal to the input tax credits claimed in relation to all creditable acquisitions made with respect to the "second property"?

Answer 2

Yes. In relation to the second property the partnership will need to make an increasing adjustment under Div. 138 of the GST Act.

Question 3

Would the answer to Questions 1 or 2 be different if full ownership of the second property was transferred to the partners occupying the premises?

Answer 3

No. The answer to questions 1 or 2 will not change if full ownership of the second property was transferred to the occupying partners after deregistration and termination of the partnership.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The partnership was constituted under tax law pursuant to the definition of a partnership under s995-1 of the ITAA 1999.

The partnership is not a general law partnership. The partnership is also an entity for the purposes of the GST Act under Division 184 of the GST Act. Upon acquisition of the title property, the Partnership commenced to exist on the basis that the individual owners would be in joint receipt of income; originally being residential rent associated with the existing residential premises on the site, and subsequently being the proceeds associated with the sale of two newly constructed residential properties.

The partners of the partnership are related individuals, all represented on the title property in equal share.

The partnership acquired the property for $xxx. At the time of acquisition, the common intent of the partners was to derive residential rent from the existing residential premises situated on the site. The partners of the partnership agreed to construct two residential properties on the site, subdivide the title, and immediately sell the two properties. The partnership registered for GST (as required under Division 188 of the GST Act).

The two residential properties were constructed, and the site was subdivided (as intended). Input tax credits were claimed in relation to all creditable acquisitions relating to the construction of both properties on the basis that those acquisitions were made in relation to future supplies of new residential premises (s40-75 of the GST Act).

The first of the two new residential premises was sold under a contract executed in xxx and settlement was effected in xxx. GST was accounted for and remitted to the ATO under the margin scheme (Division 75 of the GST Act).

Due to adverse market conditions, the second property was retained by the partnership. It is no longer actively being marketed for sale and is now occupied privately by some partners of the partnership. The occupying partners moved into the secondary property at approximately the same time as the first property was sold.

Due to some occupying partners residing in the second property, and this property no longer being marketed for sale, it is contended that the partnership is no longer conducting an enterprise and is also no longer required to be registered for GST.

We have been informed that:

•                    upon deregistration for GST the partnership should apply Division 138 of the GST and make an increasing adjustment equal to the input tax credits previously claimed in relation to the second property;

•                    if full ownership of the property was subsequently transferred to the occupying partners, this would have no impact on the application of the GST Act: The partnership is no longer conducting an enterprise, the property is held for private use, and an increasing adjustment is made pursuant to Division 138 of the GST Act.

Other info:

It is contended that the partnership is no longer conducting an enterprise (under s9-20) due to property now being resided in by the occupying partners. The partnership is no longer required to be registered for GST as its projected GST turnover is below the GST registration turnover threshold (under Division 188).

Upon deregistration of GST, the partnership will make an increasing adjustment under Division 138 of the GST Act. The increasing adjustment will be equal to the input tax credits claimed in relation to all previous creditable acquisitions made with respect to the second property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 subsection 138-5(1)

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

Reasons for decision

Summary 1

The Commissioner considers that the partnership's enterprise terminated when the occupying partners moved into the secondary property and the property was used purely for a private purpose.

Detailed reasoning 1

Section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

MT 2006/1 is about the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number. Paragraph 142 of MT 2006/1 states the following:

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.

Goods and Services Tax Ruling (GSTR 2004/6) explains how the GST Act applies to transactions involving tax law partnerships. Paragraph 60 of this ruling provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of an enterprise.

The following paragraphs from GSTR 2004/6 state:

Termination of an enterprise partnership

219. An enterprise partnership terminates if the association of persons is no longer in receipt of income jointly. Circumstances that may lead to the termination of a tax law partnership include:

•                    the sale of an income producing property that is the sole source of income;

•                    the property or properties are no longer used for an income producing purpose; and

•                    a change of persons comprising the association of persons in receipt of income jointly.

150. However, if the property or a part of the property is applied for a private purpose on a permanent basis, the property, or that part, ceases to be used for income producing purposes and ceases to be an asset of the partnership. The application of the property, or a part, for private purposes may not be a supply in the course or furtherance of the partnership's enterprise. In this case, an adjustment under Division 129 may be more appropriate.

151. Alternatively, if the application of the property for private purposes leads to the termination of the partnership (on the basis that there is no longer any receipt of income jointly), an increasing adjustment under Division 138 may be required upon cancellation of the partnership's registration.

In this case we were informed that due to adverse market conditions, the second property was retained by the partnership. It is no longer actively being marketed for sale and is now occupied privately by the occupying partners of the partnership. The occupying partners moved into the secondary property at approximately the same time as the first property was sold.

Therefore, in this case we consider that the partnership's enterprise terminated when the occupying partners moved into the secondary property and the property was used for a private purpose and no longer for an income producing purpose.

Summary 2

Yes. In relation to the second property the partnership will need to make an increasing adjustment under Div. 138 of the GST Act.

Detailed reasoning 2

The following paragraphs from GSTR 2004/6 state:

GST consequences of termination of an enterprise partnership

226. A tax law partnership that is registered for GST at termination must apply for cancellation of its registration and may have an increasing adjustment under Division 138 to cancel particular input tax credits.

Division 138

228. A tax law partnership that has its registration cancelled may still have acquisitions and importations for which entitlements to input tax credits have arisen. Division 138 provides for an increasing adjustment to cancel those input tax credits.

229. The partnership will have an increasing adjustment if its GST registration is cancelled and, immediately before the cancellation of registration takes effect, the assets of the partnership include anything in respect of which the partnership was, or is, entitled to an input tax credit.

230. The registration of an enterprise partnership may be cancelled by the partnership because its GST turnover falls below the registration turnover threshold, or because the co-owners cease to carry on the enterprise but retain the property for private purposes. In these circumstances, there may still be things acquired by the partnership in respect of which the partnership was or is entitled to input tax credits. An increasing adjustment under section 138-5 may arise to cancel those input tax credits.

Therefore, when the partnership cancels its registration, it will still have an asset on hand for which it has previously claimed input tax credits. The partnership is required to make an increasing adjustment under subsection 138-5(1) of the GST Act, in respect of the asset on hand, to cancel those input tax credits.

The reason for the adjustment is that the asset is being taken out of the GST system. As the asset is not being used in the GST system, there is no entitlement to an input tax credit for the asset. The adjustment operates to take back any input tax credits already given in respect of things acquired that are included in the asset.

Summary 3

No. The answer to questions 1 or 2 will not change if, full ownership of the second property was transferred to the two individual partners after deregistration and termination of the partnership.

Detailed reasoning 3

In this case we have been informed that the partnership's registration will be cancelled, the property will be used for private purposes. When all this happen the partnership's enterprise will terminate. Therefore, if full ownership of the second property was subsequently transferred to the two individual partners after deregistration and termination of the partnership then the answer to questions 1 or 2 will not change.