Preamble
Yes, when a partner in a partnership takes goods held as trading stock for private or domestic use there is a supply by the partnership to the partner in the course or furtherance of the partnership's enterprise. If the other elements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) [1] are satisfied, there will be a taxable supply by the partnership to the partner. Division 72 will apply where the partner provides no consideration or inadequate consideration for the supply. Division 130, which deals with goods applied solely to private or domestic use, does not apply.
The partnership is a separate entity to the partner who takes goods held as trading stock from the partnership for private or domestic use. [2] When a partner in a partnership takes goods held as trading stock from the partnership for private or domestic use, the partnership makes a supply of the goods to the partner. [3]
A supply of trading stock by a partnership to a partner will be a taxable supply under section 9-5 where: (a) the partnership makes a supply for consideration; (b) the supply is made in the course or furtherance of an enterprise that the partnership carries on; (c) the supply is connected with Australia; and (d) the partnership is registered, or required to be registered. However, the supply will not be a taxable supply to the extent that it is GST-free or input taxed.
The Commissioner takes the view that an in specie distribution of trading stock by a partnership to a partner is made for consideration. [4] The in specie distribution of goods held as trading stock by a partnership to one of its partners has the effect of proportionately reducing the partner's entitlement to a distribution of any surplus remaining after the realisation of assets, and payment of debts and liabilities of the partnership, on the winding up of the partnership. The Commissioner considers that the partner's entitlement or right to a proportion of the surplus after the realisation of the assets, and payment of the debts and other liabilities of the partnership, forms part of the partner's interest in the partnership. The consideration for the supply of the goods to the partner is the proportion of the partner's interest in the partnership, reflected by the value of the goods distributed and may be represented by: (a) an amount debited to the capital account of the partner; (b) an amount debited to the current account of the partner; or (c) a combination of amounts debited to both the partner's capital account and current account.
The supply of the goods held as trading stock by the partnership is a supply made in the course and furtherance of the enterprise carried on by the partnership. [5] The application of the goods held as trading stock in the enterprise carried on by the partnership establishes the necessary connection between the supply of the goods and the partnership's enterprise.
Therefore, where the partnership is registered or required to be registered and the supply of the goods is connected with Australia, [6] the supply of goods by a partnership to a partner by way of an in-specie distribution will be a taxable supply under section 9-5 to the extent that the supply is not GST-free or input taxed.
There may also be circumstances where a partnership supplies goods to a partner for the partner's private or domestic use other than by way of an in specie distribution, that is in the course of the partnership's activities. In these circumstances, if the supply is made to the partner for no consideration or for inadequate consideration, Division 72 will apply. [7]
In the circumstances described in paragraph 7 of this Determination, where a supply of goods is made to the partner for the partner's private or domestic use and for nil consideration Division 72 will operate to bring the supply within the GST system. The supply will be a taxable supply to the extent that it is not GST-free or input taxed. The value of the taxable supply will be the GST-exclusive market value of the supply. [8]
If a supply of goods is made to the partner for consideration less than the GST inclusive market value, the supply will be a taxable supply under section 9-5. Section 72-70 will apply and the value of the taxable supply will be the GST-exclusive market value of the supply.
Division 130 is an adjustment provision that can result in an increasing adjustment of an amount equal to the input tax credits to which you were entitled upon acquisition or importation of goods. You have an increasing adjustment under Division 130 if the goods were acquired or imported solely for a creditable purpose and you now apply them solely to private or domestic use.
Division 130 does not apply to a partnership. Subsection 130-5(1) requires, amongst other things, that 'you made a creditable acquisition or creditable importation of goods' and that 'you apply the goods solely to private or domestic use'. The use of the word 'you' in section 130-5 means that the Division only applies where the same entity that acquired or imported the goods also applies the goods to private or domestic use.
In the case of a partnership, the entity that acquired or imported the goods is different from the entity that applies the goods to private or domestic use. The partnership acquired or imported the goods but it is the partner in their individual capacity who applies the goods to private or domestic use.
Larry and Ralph are in partnership. The partnership is registered for GST and operates a hardware store in Australia. The partnership, as part of a distribution of partnership profits, supplies Larry, by way of an in-specie distribution, tools held as trading stock for Larry's own private and domestic use. The supply of the tools is for consideration [9] and is made in the course or furtherance of the enterprise carried on by the registered partnership. The in-specie distribution of the tools to Larry by the partnership is a taxable supply by the partnership to Larry .
Alex and Tom are in partnership operating a corner store in Australia. During the tax period the partnership supplies Alex with bread, milk, soft drinks, confectionary and ice creams. Supplies of milk and bread are GST-free [10] and not taxable supplies. Supplies of soft drinks, confectionary and ice creams are taxable supplies. [11] The market value of the soft drinks, confectionary and ice creams is $330 (inclusive of GST). Alex pays consideration of $100. Division 72 applies to the supplies of the soft drinks, confectionary and ice creams because Alex is an associate of the partnership and has provided inadequate consideration. The GST exclusive market value of the taxable supplies is $300 (10/11 x $330) and the GST payable by the partnership is $30 ($300 x 10%).
This Determination applies [to tax periods commencing] both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Compendium
The ATO published responses to 17 submissions on this ruling in GSTD 2009/2EC. Outcome labels are heuristic — read the ATO response for the detail.
1There are continuing concerns with the Commissioner's approach to supplies by an entity to one of its members for the member's private use, and whether or not such supplies are in the course or furtherance of an enterprise. The approach exists in other public GST rulings, notably GSTR 2003/13 (Goods and services tax: general law partnerships), GSTR 2009/2 (Goods and services tax: partitioning of land) and GSTD 2009/1 (Goods and services tax: is a supply by way of an in specie distribution of an asset that is applied in an enterprise carried on by a discretionary trust to a beneficiary of the trust made 'in the course or furtherance of' the trust's enterprise?) The Commissioner's approach in the above public rulings products may alleviate some unintended consequences in the context of real property, and when real property is supplied by an entity to one of its members for private use. However in terms of an item removed from the shelf of a delicatessen, or other similar enterprise, the approach is: • Inconsistent with the operation of Division 11 and Division 129 where an application otherwise than in carrying on an enterprise, or for an input taxed purpose results in a denial of input tax credits for the item so applied or an adjustment for input tax credits claimed in the past; • Inconsistent with the legislative scheme of Australia's GST which adjusts input tax for non-enterprise use rather than taxing at market value the benefit of the use of assets enjoyed by owners; • Creates compliance complexities. The result of the ATO's interpretation is thought to be that GST is payable on the 'market value', being the same amount of GST being payable as would be the case if the item was sold to a customer.accepted
ATO response
It is agreed that Division 11 operates to deny an input tax credit to a partnership for something that is acquired for the sole private use of one of its partners. In these circumstances the acquisition is not connected with the partnership's enterprise, it does not form part of the partnership's enterprise assets, and is not intended for use in the partnership's enterprise. However where goods are acquired for use in a partnership's enterprise, but at some later time are provided to one of its partners for their sole private use, the good is an asset of the partnership's enterprise that is subsequently supplied to one of the partners in the partnership. We consider that the connection of the good with the partnership's enterprise means that the supply to the partner is connected with the partnership's enterprise, and is therefore made in the course or furtherance of the partnership's enterprise. For the purposes of Division 129 and Division 130 of the GST Act, a supply of goods, such as a supply from a partnership to a partner, represents an application of those goods. However, it is considered that it is not the use or intended use of the asset by the recipient of the in-kind distribution that is relevant to determining the nature of that application by the partnership. Adopting such a view would be contrary to the scheme of the GST Act. Every time a consumer acquired something for private consumption, the supplier would be taken to have applied the thing for private purposes and to have an adjustment under Division 129 or Division 130, as opposed to making a supply in the course or furtherance of their enterprise. Another consequence of adopting the position that Division 129 or Division 130 applies to goods taken by a partner in a partnership for their private use is that the acquisition of an asset by a partner through an in-kind distribution from the partnership will not be a creditable acquisition under section 11-5 even though the partner may have acquired the asset for a creditable purpose (that is, the partner intends to apply the asset in the course or furtherance of an enterprise). The GST Act does provide for adjustments to previously claimed input tax credits in circumstances where an entity ceases to apply an asset for a creditable purpose. However when considered in the context of Subdivision 72-A, we consider that it is not in accordance with the overall scheme of the GST Act to apply the adjustment provisions with respect to an in-kind distribution by a partnership to a partner.