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01 Jul 13 Partnership not carrying on enterprise – Naidoo

The Administrative Appeals Tribunal has decided that a partnership which ostensibly provided services to a hotel was not carrying on an enterprise for GST purposes in the relevant tax periods. The Tribunal found that the Commissioner was correct in cancelling the partnership’s GST registration, and denying input tax credits. However, the Tribunal decided that the Commissioner was incorrect in his application of s 105-65 of Schedule 1 of the Taxation Administration Act 1953 (TAA): Re Naidoo and FCT [2013] AATA 443 (G Lazanas, Senior Member, 28 June 2013).

The partnership consisted of a husband and wife, Mr and Mrs Naidoo. They were also the shareholders and directors of a company which owned and operated a hotel. Mr Naidoo was a full-time salaried employee of the company, managing the hotel. He claimed that the partnership carried on an enterprise supplying services to the company. The Tribunal found, however, that the partnership was not carrying on an enterprise for the purposes of the GST Act in the relevant period as the activities engaged in by Mr Naidoo were not done by him in his capacity as a partner of the partnership or otherwise on behalf of the partnership, but in his capacity as employee of the company. The Tribunal observed that the reasons for the existence of the partnership included to provide income tax benefits to Mr and Mrs Naidoo.

The Commissioner was therefore correct in denying input tax credits to the partnership, and in cancelling its GST registration.

The Commissioner had, however, assessed the partnership to a positive net amount for each tax period, even though the Commissioner contended that the partnership was not carrying on an enterprise. It appeared that what the Commissioner was trying to do by issuing an assessment of net amounts based only on incorrectly reported GST amounts, was to require the partnership to repay the entirety of refunds paid while at the same time requiring the partnership to pay the incorrectly reported GST amounts, notwithstanding that, on the Commissioner’s view, the partnership never made any taxable supplies in the relevant period. The Commissioner claimed that his decision under s 105-65 of Schedule 1 to the TAA not to pay a refund of the incorrectly reported GST amounts was properly reflected by inclusion of those amounts in the partnership’s net amounts.

The Tribunal held that, as the partnership was not carrying on an enterprise during the relevant period, the net amount could only be zero for each of the tax periods in the relevant period.

Section 105-65 gives the Commissioner a discretion not to refund overpaid GST amounts. The Tribunal concluded that, contrary to the Commissioner’s approach, s 105-65 is not a provision which allows the Commissioner to alter the net amount calculated under s 17-5(1) of the GST Act. There is nothing in either the GST Act or the TAA which produces the result that the Commissioner contended for, nor do any of the authorities to which he referred compel such a conclusion. Indeed, none of the cases expressly canvass the operation of s 105-65 with respect to the net amount. Accordingly, in the face of the statutory provisions, s 105-65 cannot be taken into account in the determination of the net amount for a tax period. Section 105-65 operates after the net amount for a tax period is calculated under the GST Act.

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