Partnership denied GST credits

The AAT has found that a partnership was not carrying on an enterprise and was not entitled to input tax credits claimed in respect of the relevant period.

Background

The taxpayers (a husband and wife couple) were registered as a partnership for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The key issue between the Commissioner and the taxpayers was whether the partnership was carrying on an enterprise in the tax periods between 1 April 2007 and 31 March 2011 (the relevant period). The Commissioner argued that the activities engaged by the partnership were not in the form of a business within the meaning of s 9-20(1)(a) of the GST Act. In addition, the Commissioner that argued the activities of the partnership were conducted without reasonable expectation of profit, thereby enlivening the exclusion in s 9-20(2)(c) of the GST Act.

The Commissioner had cancelled the GST registration of the partnership with effect from 31 March 2011, but later reinstated it with effect from 24 February 2012. The Commissioner had formed the view that the partnership was not carrying on an enterprise during the relevant period, and was therefore not entitled to claim input tax credits (ITCs) on acquisitions made. However, the Commissioner argued that the partnership was still liable to pay GST in the relevant period, relying on s 105-65 of Sch 1 to the Taxation Administration Act 1953 (TAA) (restrictions on GST refunds), and assessed the partnership on positive net amounts for the relevant tax periods.

The AAT noted that the background facts were "quite unusual". Broadly, one of taxpayers (Mr Naidoo) claimed that during the relevant period, the partnership provided certain services (understood to be maintenance and handyman work) to another entity, K Co, which owned and operated a hotel. K Co was previously owned by the couple's sons; however, the couple took over in mid-2007 after the sons decided they no longer wanted to be in the hotel business.

A key reason for the couple's interest in K Co was that they had provided a loan to K Co to acquire the hotel and there were no repayment terms for that loan. Mr Naidoo claimed he worked in the morning and evenings for K Co in his capacity as director and employee, and that during the middle of the day he worked as a partner of the partnership, providing contracted services to K Co.

Following an audit of the taxpayers' affairs, the Commissioner decided that the partnership was liable to pay GST totalling $19,011. The Commissioner also imposed an administrative penalty of 50% (totalling $17,686.50, which was calculated based on a shortfall amount of $35,373). Before the AAT, the Commissioner suggested that the partnership was put in place in order to reduce the taxpayers' personal taxable incomes (noting that for the 2007 to 2011 income years, the partnership reported losses), and to ensure that Mr Naidoo was paid for the long hours spent working at the hotel as an employee of K Co.

Decision

The AAT concluded that the partnership was not carrying on an enterprise during the relevant period. The AAT was not convinced that the partnership was an entity providing services to K Co. Rather, the AAT was of the view that the handyman work provided by Mr Naidoo was undertaken in his capacity as a director and employee of K Co. Accordingly, the AAT held that the partnership did not undertake an activity, or series of activities, in the form of a business in the relevant period (per s 9-20(1)(a)). In doing so, it also found that "the reasons for the existence of the [partnership] included to provide income tax benefits to [the couple]". In that regard, it also held that, even if there was an enterprise, the exclusion in s 9-20(2)(c) would apply because there was no reasonable expectation of profit or gain.

Therefore, the AAT decided that the Commissioner was required to cancel the GST registration of the partnership. (The AAT did raise the issue as to whether the GST registration should have been cancelled with effect from 1 April 2007, the beginning of the relevant period. However, the AAT did not address the question as it was not the subject of review.) The AAT also concluded that the partnership was not entitled to claim ITCs during the relevant period.

However, the AAT held that s 105-65 of Sch 1 to the TAA did not apply in the way the Commissioner contended and that the net amount in the relevant period was zero (ie not a positive net amount). It concluded that s 105-65 of Sch 1 to the TAA was not a provision that allowed the Commissioner to alter the net amount calculated under s 17-5(1) of the GST Act. The AAT said the Commissioner's assessment of the net amounts was based on GST amounts reported by the partnership in each of the tax periods, which were "incorrectly reported GST amounts". It held that the amount owed by the partnership to the Commissioner was instead the amounts that were overpaid by the Commissioner to the partnership for each of the relevant tax periods. (The partnership had reported negative net amounts for most of the tax periods in question.)

The AAT also affirmed the Commissioner's decision to impose an administrative penalty of 50% for "recklessness", but ordered that it only be applied to the tax shortfall in accordance with the AAT’s reasoning about s 105-65. It said the 50% penalty should be calculated in respect of amounts that were overpaid by the Commissioner to the partnership as GST refunds. This meant that a lower amount of penalty applied, being $8,438 (or 50% of $16,876). However, the AAT agreed with the Commissioner that there were no circumstances warranting remission of penalties.

Re Naidoo and FCT [2013] AATA 443, www.austlii.edu.au/au/cases/cth/AATA/2013/443.html.