Part I: Goods and Services Tax (GST)

Introduction
Legislative Basis:
 The legislative framework of the GST is governed by:
o a New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”) and
o a number of other related legislative enactments.

 The GST Act came into force on 1 July 2000

NOTE: Most new GST Rulings issued have an effective start date on 1 July 2000. Taxpayers who have not sought a Private Ruling
are ultimately at risk if a subsequent Public Ruling with a retrospective date is issued which contradicts the taxpayer’s position.

 The tax is imposed at a rate of 10%

 GST is payable on:
o taxable supplies; and
o taxable importations
Read Woellner 27-000 and 27-045

Introduction of GST
 GST replaced sales tax and other 9 taxes levied by the States
 On introduction it produced a once-only jump in the CPI
 As the first new tax for many years, the Commonwealth Government faced public resistance, and exempted health, education,
childcare services, hospitals and nursing homes, local government rates, water and sewerage charges, certain fresh food and exports
from the GST system.

GST – Key Features

 It is a broad-based tax
 It applies to the consumption of goods and services
 It is paid at every level through the supply chain (a multi-stage value added tax)
 GST is remitted by suppliers who make supplies in carrying on their enterprise but, because of the input tax credit system it is borne
by the consumer
 Importers of goods pay GST to the Australian Customs Service – But are entitled to an input tax credit on what they import for the
purpose of their enterprise
 Goods acquired or imported for private consumption do not qualify for an input tax credit
 The effect of the GST system therefore is that the tax is effectively borne by consumers
 There is no GST charged on exports

Overview - GST

Some key concepts:

(1) Enterprise
What is an enterprise?
 Definition in sec 9-20(1) GST Act
 Commercial activities of businesses & npo’s

What is not an enterprise?

Transactions by private individuals
 Garage sale
 Private recreational pursuits or hobby
 Activities undertaken as an employee OR in connection with earning payments from which PAYG tax is liable to be withheld.
Key concepts: Woellner 27-055
(2) Registration for GST
Significance: Central to: (a) the imposition of 10% GST on supplies, (b) entitlement to “input tax credits” for GST paid
 Who can register for GST?
o Any entity carrying on an enterprise, or intending to carry on an enterprise, can choose to register for GST. This includes
individuals, bodies corporate, unincorporated association....
 Obtaining an Australian Business Number (ABN) & Registering for GST
 Registration rules in Div 23 -- Woellner 27-065
 Optional Registration
o An entity carrying on an enterprise may register for GST (s 23-10)
o If an entity chooses not to register, it cannot charge GST on its supplies or claim input tax credits for GST paid on its
acquisitions
 Mandatory Registration
o An entity carrying on an enterprise must register if its annual turnover exceeds the registration turnover threshold
o The registration turnover threshold is $75,000 --- but $150,000 for non-profit bodies
o Annual turnover (Div 188) is defined for both current and projected GST turnover (does not include the value of “input
taxed supplies) – must register if projected turnover is expected to exceed the threshold
o Taxi or hire car operators MUST register regardless of the amount of their turnover

Supply
A “supply” is “any form of supply whatsoever”, including:
 a supply of goods;
 a supply of services;
 a provision of advice or information;
 a grant, assignment, or surrender of real property;
 a creation, grant, transfer, assignment, or surrender of any right;
 a “financial supply”;
 an entry into, or release from, an obligation:
 To do anything;
 To refrain from an act; or
 To tolerate an act or situation;
 any combination of two or more matters referred to above.
Source : sec 9-10 of the GST Act

Connection with Australia

To be liable to GST (that is, 10% GST is added), the supply must be “connected with Australia” (s 9-25). The required connection with
Australia --
 Supplies (sale) of goods will be connected with Australia if the goods are:
o delivered or made available to the purchaser in Australia
o imported into, assembled in, or installed in Australia
 Supply (sale) of real property situated in Australia
o Supply of items other than land or goods (e.g., know how) -- the supply takes place in Australia or through an enterprise
that the supplier carries on in Australia

Types of Supply
 Taxable Supplies
 GST-Free Supplies
 Input Taxed Supplies
 Supplies by Unregistered Entities
 Mixed Supplies

Taxable Supply
For a supply to be a “taxable supply”, 6 elements must be present (s 9-5):
1. There is a supply (of goods, services or anything else);
2. A payment or some other consideration is received for the supply;
3. The supply is made by an entity that is registered or required to be registered for GST;
4. The supply is made in the course of an enterprise that the supplier carries on;
5. The supply is connected with Australia;
6. The supply is NOT a GST-free or input-taxed supply.
Anyone making a taxable supply has a liability to charge GST on that supply.
Source : sec 9-5 of the GST Act
GST-free Supply
GST-free supplies include (Div 38):
a) Basic Food – (not processed food);
b) Health goods and health services;
c) Educational material and educational services;
d) Child care services;
e) Goods exported from Australia;
f) Services for consumption outside Australia;
g) Religious services;
h) Supplies by charitable institutions;
i) Water, sewerage, and drainage services;
j) Sale of going concerns;
k) Supplies of transport services to, from, or outside Australia;
l) Supplies or precious metal a for the first time after the refinement of that precious metal;
m) Sale made by inwards duty-free shops;
n) Grants of land by government;
o) Sale of cars for use by disabled people; and
p) International mail.
q) Online purchases GST limit
Woellner 27-135

Tax Implications:
 No GST is payable on these supplies
 However, a credit (ie – input tax credit) is available for tax paid on acquisitions (- inputs) made in carrying on the enterprise that
relates to making GST-free supplies
Source : Division 38 of the GST Act
 Entities making GST-free supplies need to lodge a BAS to claim input tax credit
Entities supplying GST-free supplies should consider registering for GST and lodging their BAS on monthly
basis in order to bring forward the receipt of their input tax credits.

Input taxed supply

The following supplies are input taxed (Div 40):
a) financial services such as making loans, dealings in money and issuing securities;
b) residential rent;
c) the sale of residential prdemises (excluding sales of new residential premises);
d) the supply of precious metal (except where that supply is the first supply after the refinement of that precious metal);
e) the sale of food at school canteens; and
f) sales made in connection with fund-raising activities conducted by charitable institutions.

Tax consequences of input taxed supplies (s 40-1):

 no GST is payable on the supply; but
 there is no entitlement to an input tax credit for anything acquired or imported to make the supply (although in some cases,
acquisitions relating to financial supplies can attract a Reduced Input Tax Credit).
Woellner 27-145

Two special cases

Deposits (Div 99)
 a deposit held as security for the performance of an obligation (e.g., the purchase of a house) is not consideration for a supply -
unless the deposit is forfeited
Supplies to associates (Div 72)
Despite the definition of “taxable supply” in s 9-5:
 a supply to an associate without (or for inadequate) consideration may be a taxable supply if: (i) the associate is not registered or
required to be registered for GST, or (ii) the associate does not acquire the thing wholly for its enterprise,
 the value of the supply is its GST exclusive market value.

Creditable Acquisitions
An entity makes a creditable acquisition (s 11-5) where:
a) it acquires something for a “creditable purpose”;
b) the supply to the entity is a taxable supply;
c) the entity provides, or is liable to provide, consideration; and
d) the entity is registered, or is required to be registered, for GST.
A “creditable purpose” means (s 11-15) the purpose of carrying on an enterprise, except where the thing that is acquired:
a) relates to making supplies that would be input taxed; or
b) is of a private or domestic nature.
Similar rules apply to imported goods (Div 13).
Registered entities are able to recover GST paid on creditable acquisitions by claiming an input tax credit – s 11-20
Woellner 27-085
 Certain creditable acquisitions, which represent expenditure non-deductible for purposes of income tax, are denied input tax credits.
Creditable acquisitions that are denied input tax credits are:
a) Penalties Section 26-5 ITAA97
b) Relative’s travel expenses Section 26-30 ITAA97
c) Family maintenance Section 26-40 ITAA97
d) Recreational club expenses Section 26-45 ITAA97
e) Expenses for a leisure facility or boat Section 26-50 ITAA97
f) Entertainment expenses Division 32 ITAA97
g) Non-compulsory uniforms Division 34 ITAA97
h) Non-deductible non-cash benefits Section 51AK ITAA36
Source: Division 69 of the GST Act

Tax invoice
 A purchaser must be issued with a tax invoice by the seller, within 28 days after the purchaser of the supply requests it - (s 29-70).
 A tax invoice must show the following information:
 description “Tax invoice” prominently;
 date of issue of the tax invoice;
 name and ABN of the supplier;
 a brief description of what was supplied;
 the GST inclusive price of what was supplied;
Generally, an input tax credit cannot be claimed unless the taxpayer holds a tax invoice (s 29-10(3)).
 But there is no obligation to hold a tax invoice if the value of the supply (excluding GST) is $75 or less (s 29-80).
Woellner para 27-125

How much GST is payable?

The GST payable on a taxable supply is 10% of the value of the supply (s 9-70), where the “value” (s 9-75) is:
GST inclusive Price x 10/11

In effect, the GST payable is:

GST inclusive Price x 1/11
or GST exclusive Price (“Value”) x 1/10

“Price” means not only consideration received in money but also consideration received in-kind. These must be stated as their GST-
inclusive value.
Example from s9-25 ----- You make a taxable supply by selling a car for $22,000 (the “price”) in the course of carrying on an enterprise.
The “value” of the supply is: $20,000 ($22,000 x 10/11).
The “GST payable” on the supply is $2,000, which is calculated as: (a) 10% x $20,000 , or (b) $22,000 x 1/11.

How much input tax credit?

 An entity that makes a creditable acquisition is entitled to an input tax credit on the acquisition (sec 11-20).
 The amount of the input tax credit is the amount of the GST payable on the thing that is acquired (s 11-25).
 ITC = 10% x Price x 10/11
 Apportionment: The amount of the input tax credit is reduced if the acquisition is “only partly creditable”, e.g., because it is used only
partly in the enterprise, and partly for private purposes (s 11-30).

Calculating the Net Amount of GST

S 17-5

Adjustments
 The net amount of GST payable or refundable calculated under s 17-5 is increased or decreased for any adjustment: sec 17-10.
Entities can make an adjustment to their GST obligations on supplies and acquisitions when there is an “adjustment event” (Div 19).
 Events that give rise to adjustments include:-
 a customer returns defective goods
 a business makes change to the price of a supply or acquisition (e.g. a discount, trade rebate); or
 A supply or acquisition stops being a creditable acquisition – (e.g.- goods are consumed for private purposes;
 bad debts.
Woellner 27-095

In all these cases, the entity must adjust its claims for input tax credits – see diagram in sec 19-5.
 Example: An entity pays $1,100 for equipment that it intends to use in its business. It claims an input tax credit for $100 when it lodges its
BAS, but then decides not to use the equipment in its enterprise. This requires an “increasing adjustment” when the entity next lodges
its BAS because it has over-claimed its input tax credits. Its net amount will need to be adjusted upwards as a result.

In many cases the need for an entity to adjust its claims arises because the supplier issues an adjustment note to the purchaser (s 29-
75), e.g., changing the price.

An adjustment note is not required if the GST-exclusive value of the increasing or decreasing adjustment does not exceed $75

Accounting for GST

Enables registered entities to work out how to account for GST

There are two methods of accounting for GST

 the cash basis; or
 the accrual basis. Woellner 27-125

Accounting for GST: Cash Accounting

The cash accounting method is optional. Entities that account for GST on a cash basis do so by choice (s 29-40).

An entity may choose to account on a cash basis if:

 the entity is a small business entity (Woellner 15-100), or
 the entity is not operating a business (e.g. a charitable institution) and its GST turnover (as defined in s 188-10) does not exceed
$2 million, or
 the entity uses the cash basis for income tax purposes, or
 each of the enterprises carried on by the entity have been approved by Commissioner as being able to account on a cash basis.
The Commissioner may, in appropriate cases, permit an entity to account on a cash basis even if s 29-40 is not satisfied.

Taxable Supplies:
 An entity will account for GST on a taxable sale that it makes in the same tax period in which it receives payment (or part payment) for
the sales.

Creditable Acquisitions:
 An entity will claim GST credits for its business purchases in the tax period that it pays for them: s 29-10.

Accounting for GST: Accrual Accounting

Entities that are not eligible to account on a cash basis must account for GST on an accruals basis.

Taxable Supplies:
 Remittances (GST payable) on taxable sales are attributed to the tax period in whichever of the following period comes first:
o Any of the consideration for the supply is received; or
o An invoice for the supply is issued
NOTE: Entities which supply on credit terms will have to account for GST payable before actually receiving payment for the supply

Creditable Acquisitions:
 The GST credit for creditable purchase made are attributed to the tax period in whichever of the following comes first:
o Providing any consideration for the supply; or
o Issuing a tax invoice for the acquisition

Lodgment & Remitting GST

When should a GST return be lodged and when should the net amount of GST be paid?
 Entities that are registered (or required to be registered) must lodge a GST return for each tax period. The GST return is incorporated
into the Business Activity Statement (BAS).

Tax Period:
 A tax period is the period for which a taxpayer should calculate the GST payable and the input tax credit claimable so as to arrive at the
net amount payable by (or refundable to) that taxpayer.
Source: sec 17-5 of the GST Act
 The reporting of these amounts is done through the BAS at the conclusion of each:
Quarterly
Tax Period
Monthly, or

Annual

Quarterly Payers:
 Entities whose turnover is less than $20 million have to account on a quarterly basis
Quarter Quarter Ending Due Date

1 30 September 28 October

2 31 December 28 February

3 31 March 28 April

4 30 June 28 July

NOTE : Quarterly payers also have the option of reporting their GST monthly.
 Businesses that elect to take up this option often do so:
 for cash flow reasons, as it allows them to more quickly recoup the GST component of taxable acquisitions (purchases)
 as it allows them to keep a better track of their true cash position by paying GST amounts to the ATO on a regular basis.

Monthly Payers:
 Entities whose turnover is in excess of $20 million must report their GST on a monthly basis.
For monthly payers, the BAS is due 21 days after the end of each month. For example, the BAS for the month of
August is due on 21 September

Annual Payers:
 Entities that voluntarily register for GST can report and pay their GST annually if:
 their projected annual turnover is less than $75,000;
 they are not required to be registered for GST for any other reason; and
 instalments as advised by the ATO

For entities that are annual reporters, their GST reporting and payment is due at the same time as their tax return.
For entities that do not lodge tax returns, their GST due date is 28 February.

GST Group
 Companies within a 90% owned group, and, in some cases, other entities such as non-profit bodies can be approved by the
Commissioner as a GST group.
 One member of the GST group deals with most of the GST liabilities and entitlements of the GST group.
 In most cases, transactions between members of the GST group are excluded from the ambit of GST.
Division 48

Reconciliation issues
Income tax
 GST is disregarded when calculating assessable income or exempt income (s 17-5 ITAA1997).
 GST collected from customers upon sale of a taxable supply is non-assessable non-exempt income.
 a deduction is not allowed to the extent that a loss or outgoing includes an amount that the taxpayer can claim as an input tax credit (s
27-5 ITAA1997).
Fringe Benefits Tax

Revision Questions 
 – Goods and Services Taxation

Students are advised to read the following questions from ATSM (27th edn):
Enterprise: 280
Supply:
Types: 276
Taxable Supply: 273, 275
GST Free Supply: 282, 284, & 288
Input Taxed: 286
Registration, etc…: 274
Creditable Acquisitions: 277
GST Adjustments: 278, 283
Accounting issues: 279, 281
Miscellaneous
Sale of business, payment of deposit 288
Importer, exporter, various 289
Non-Profit Organisations – various issues 294
 Part II: Partnerships

TAXATION OF PARTNERSHIPS 
 (sec. 90 to 94 ITAA 36)

General law definition of a partnership:
 The contractual relationship that exists between persons who are “carrying on a business in common with a view to profit” (State
Partnership Acts)

Partnerships for tax purposes (s 995-1(1) ITAA97):

Either:
 relationships within the general law definition – (above); or
 an association of persons in receipt of income jointly.

Illustrative Cases:
FCT v McDonald 87 ATC 4541 – Krever p 282
Yeung and Anor v FCT 88 ATC 4193 - Krever p 283

CREATION OF A PARTNERSHIP
Partnership Indicators (Taxation Ruling TR 94/8 ):

Intention of the parties**

 Conduct:
o joint ownership of business assets;
o registration of business name;
o joint business account and the power to operate it;
o extent to which the parties are involved in the conduct of the business
o extent of capital contributions
o entitlement to a share of net profits **
o business records
o trading in joint names and public recognition of the partnership
 NOTE :
1. This list is not exhaustive and the weight given to each factor will depend on the individual circumstances.
2. Although no single factor is decisive the asterisked items (**) are essential

TAXATION OF PARTNERSHIP INCOME


Calculation – Partnership Net Income or Loss

ENTITY LEVEL:
 A partnership is not taxable as such and does not pay tax on its income.
 Even so a return of the partnership income must be lodged each year (sec 91).
 The return is simply an information return. It provides the basis for determining the partners' respective shares of the net partnership
income or net partnership loss.

 The ''net income'' of a partnership = its ''assessable income'' less ''allowable deductions'' (sec 90).
 In calculating the net income or loss of a partnership, the partnership is treated as if it were a resident taxpayer.
 The partnership net income flows through to the individual partners on the basis of their “share” of the partnership income (s 92).
 In calculating the net income or loss of a partnership, the following are excluded:
o CGT: Any capital gain or loss arising from the disposal of an asset of the partnership is reflected in the returns of the
individual partners – not in the partnership return.
o Deductions for prior year losses and
o Deductions for superannuation contributions for partners

 A partnership loss arises if the ''allowable deductions'' of the partnership exceed its ''assessable income'‘.
 Flow through of losses (s 92)
o A partnership loss flows through to the partners on the basis of their share of the loss as provided by the partnership
agreement
o It is then claimable as a deduction in the partner's personal tax return
o A partnership loss is never retained in the partnership.
Non-resident partner is only liable to tax on their share of partnership income or entitled to their share of a partnership loss from an
Australian source

Timing Issues – Recognition of Income

INDIVIDUAL PARTNER LEVEL:
 Partners do not derive their share of the net partnership income until it has been ascertained.
 This will be at the end of the relevant accounting period as accounts cannot be taken for that purpose until then.
 Galland 1986: Krever p 268
 Partner’s Share of Income or Loss:
 Partners are assessed to tax in their individual capacities on their share of the net partnership income regardless of whether that
share has been distributed.(sec 92).
o Australian resident partners include their share of the net income in their assessable income.
o Each non-resident partner will only include their share of Australian sourced income in their assessable income (sec
92(1))
 Scenario 1
 Scenario 2

 Partnership income or loss retains its character in the hands of the individual partners – so if the amount is exempt income when
derived by the partnership, it is also exempt income for the partner
 Each individual partner is entitled to claim a share of tax offsets (e.g. for franking credits on dividends received by the partnership) and
credits (e.g. for tax withheld when interest is earned overseas) that relate to the partnership income
 Losses can be carried forward indefinitely by the partner for deduction in later income years until absorbed.

INTERNAL TRANSACTIONS
Salaries
 A partnership is not a separate legal entity for income tax purposes, therefore a partner cannot be an employee of a partnership.
 Strictly speaking, the payment of a “salary” to a partner is simply an advance to the partner of income that may be earned that
year or in a future year.
 It is not deductible to the partnership.
 Exception: Where a partner is entitled to a “salary” under the terms of the partnership agreement.

Internal Loans
 Interest paid on money lent to a partnership by a partner is deductible to the partnership provided the loaned amount is used by
the partnership in producing its assessable income, - (i.e. as working capital).
 Interest received by, or credited to, the partner is assessed as income derived by the partner (in their capacity as a lender and
not as a partner).
 Interest paid to partners on capital contributed to the partnership is treated the same as salary –
o Neither assessable to the partner;
o Not deductible to the partnership in calculating its net income
Read: Woellner, para 16-260.

RECONSTITUTION (Variation or dissolution) of a Partnership - Tax Consequences

 Reconstitution – brought about by changes in composition of a partnership, - (e.g. death, retirement or admission of a new partner).
 The old partnership is dissolved and a new partnership comes into existence, unless the partnership agreement provides otherwise.
 If a partnership is reconstituted during the year:
o Accounts are drawn at the date of the change
o If the partnership continues after the change, partnership accounts are taken at that date and at the end of the financial year
o ATO exempts large partnerships from the need to lodge multiple partnership returns in a year where there are minor partner
variations.
 The reconstitution of a partnership affects the respective interests of its members in the partnership's assets. This may have important
consequences for old and new members in relation to:
o trading stock
o depreciating assets
o work in progress
o CGT assets
 Read and make your own short notes Woellner 27th edn 16-400 to 16-440

INCOME SPLITTING USING PARTNERSHIPS

a) Everett Assignments:
 A partner may be able to assign a portion of their interest in the partnership
o Everett (1980): Krever p 294-5
 partner in a firm of solicitors assigned to his wife (also a solicitor) 6/13 th of his share in the partnership, plus the
income on that share – the wife, rather than the partner, assessable on the assigned share
 Post 1985: a partner’s interest in a partnership is a CGT asset
o An assignment of partnership interest constitutes – CGT Event A1
 Because of the CGT implications, most professional partnerships today use service trusts and not Everett assignments.
b) Uncontrolled Partnership Income (sec 94):
 It operates where a partner does not have real or effective control over their share of the partnership income.
Revision Questions – ATSM 27th Edition
 PARTNERSHIPS:
o The nature of a partnership: 185, 187
o Net partnership income: 188
o Salary and interest: 183, 194
o Distribution of partnership income: 192, 196
o Uncontrolled Partnership Income: 184
o Disposal of Partner’s Interest in Partnership: 195

CASE STUDIES

Scenario 1
A (a resident) and B (a non-resident) are equal partners in the XYZ Partnership.

For the year ended 30 June 2016, the XYZ Partnership derived net income under sec 90 ITAA 36 of $100,000. 80% of this net income was
attributable to Australian sources and 20% was attributable to foreign sources.

A and B must include the following amounts in their assessable income under sec 92 ITAA 36:
A : $50,000 = $100,000 x 50%
B : $40,000 = $80,000 x 50%

The remaining $10,000 attributable to B will not be taxed in Australia

Scenario 2
If the XYZ Partnership had made a partnership loss under sec 90 ITAA 36 of $100,000 for the year ended 30 June 2016; and …

70% of the loss was attributable to Australian sources and 30% attributable to foreign sources, …

Then A and B would be entitled to the following deductions under sec 92 ITAA 36:
A : $50,000 = $100,000 x 50%
B : $35,000 = $70,000 x 50%

Example: Uncontrolled Partnership Income

Mr and Mrs Jones operate a business in their joint names but all assets are in the name of Mrs Jones with all of the expenses and income
going through her individual bank account.

Mr Jones is not involved in running business at all.

In this case, the real and effective control of the partnership (assuming that it existed) is solely with Mrs Jones.

Section 94 will apply to Mr Jones share of partnership net income

The tax imposed under sec 94 is 47% less the tax already paid by the taxpayer on that partnership income. (i.e. - the effective
overall tax paid by the partner is 47%)

Note: sec 94 does not apply to minor children. Penalty tax rates already apply to children under the age of 18 years: Div 6AA ITAA
1936