Issue
Is the entity, a partnership, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it makes a cash distribution of partnership profit to one of its partners that is not registered for goods and services tax (GST)?
Decision
No, the entity is not entitled to an input tax credit under section 11-20 of the GST Act when it makes a cash distribution of partnership profit to one of its partners that is not registered for GST.
Facts
The entity is a partnership. The entity makes a cash distribution of a portion of the partnership profit to one of its partners.
The entity (the partnership) is registered for GST. The partner is not registered nor required to be registered for GST, nor does it carry on any enterprise in addition to its duties as partner in the partnership.
Reasons for Decision
Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act explains that an entity makes a creditable acquisition if: • the entity acquires anything solely or partly for a creditable purpose; and • the supply of the thing to the entity is a taxable supply; and • the entity provides, or is liable to provide, consideration for the supply; and • the entity is registered or required to be registered for GST.
Accordingly, as one of the requirements for a creditable acquisition is that the supply to the entity is a taxable supply, it must be determined whether the partner is making a taxable supply to the entity (the partnership).
Under section 9-5 of the GST Act, an entity makes a taxable supply if: • the entity makes the supply for consideration; and • the supply is made in the course or furtherance of an enterprise that the entity carries on; and • the supply is connected with Australia; and • the entity is registered or required to be registered for GST.
In this case, the entity (the partnership) is carrying on an enterprise and is registered for GST. However, the partner is not carrying on an enterprise in its own right nor is it deemed to be doing so by virtue of being a partner in a partnership that is carrying on an enterprise. Furthermore, the partner is not registered for GST or required to be registered for GST. Therefore, any supply that the partner makes, as a partner to the partnership, is not a taxable supply under section 9-5 of the GST Act (even where made for consideration), because the partner does not make the supply in the course or furtherance of an enterprise that it carries on.
Accordingly, as not all of the requirements in section 9-5 of the GST Act are satisfied, the partner is not making a taxable supply to the entity (the partnership). As a result, the entity is not making a creditable acquisition as defined in section 11-5 of the GST Act. As the entity is not making a creditable acquisition, it is not entitled to an input tax credit under section 11-20 of the GST Act. [Note: Depending on the terms of the partnership agreement, it is possible for a partner, acting in another capacity, to make a taxable supply to the partnership, provided that the requirements in section 9-5 of the GST Act are satisfied.]