ATO ID 2002/524: GST and grouping of partnership with companies
Date of decision: 31 July 2001
Business line: Indirect Tax

Issue
Do the entities, a partnership and two companies the shares in which are held by the individuals in the partnership, satisfy the membership requirements of a GST group under section 48-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision
No, the entities do not satisfy the membership requirements of a GST group under section 48-10 of the GST Act.

Facts
The entities, a partnership, company A and company B have jointly applied to the Commissioner, in the approved form, for approval to operate as a GST group. Three individuals are partners in the partnership. Each partner has a 1/3 interest in the partnership. The partnership is registered for goods and services tax (GST). The above individuals are also shareholders in company A and company B. Each individual owns a 1/3 interest in both company A and company B. These interests exist in respect of entitlement to all income, capital and voting power. The individual partners, not the partnership, own the companies.

Reasons for decision
Summary: Section 48-5 of the GST Act outlines the conditions that must be satisfied for the Commissioner to approve two or more entities as a GST group. In particular, paragraph 48-5(1)(b) of the GST Act requires that each of the entities applying to be part of the GST group must satisfy the membership requirements for that GST group. The general membership requirements that an entity must satisfy, to be part of a GST group or proposed GST group, are outlined in section 48-10 of the GST Act. These include requirements that each member is registered for GST, has the same tax periods as the other members, accounts for GST on the same basis as the other members, is not a member of any other GST group, and does not have any branches that are registered under the GST rules for branching. Where the members of a proposed GST group include a partnership and two or more companies, the entities must satisfy the membership requirements for: First, it must be determined whether the partnership meets the membership requirements of the proposed GST group. Subparagraph 48-10 (1)(a)(ii) of the GST Act provides that if the entity is a partnership, it must satisfy the specifications in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Regulation 48-10.02 of the GST Regulations outlines the requirements that must be satisfied for a partnership to be a member of a GST group. In particular, subregulation 48-10.02(2) provides that a partnership must satisfy the requirements of subregulation 48-10.02(3), (3A) or (4) of the GST Regulations, to form part of a GST group. Sub-regulation 48-10.02(3) is the relevant requirement where the only other members of the proposed GST group are companies. This requirement has to be satisfied in relation to only one company if there is more than one company in the proposed GST group. Sub-regulation 48-10.02(3) is satisfied if the partnership has at least a 90% stake in at least one of the companies in the proposed GST group (sub-regulation 48-10.02(3)(a)). In the alternative, sub-regulation 48-10.02(3) is satisfied if, for at least one of the companies (being a company with more than one member (shareholder)), the membership of the company consists only of partners in the partnership, or family members of the partners, in a way that ensures that at least two partners are represented, either personally or by a family member. The partnership in the proposed GST group satisfies the above mentioned requirement in relation to each company because all of the shareholders of each company are partners in the partnership and at least two of the partners are also members of each company. Next, it must be determined whether company A and company B satisfy the membership requirements to group with the partnership. Section 48-15 provides additional requirements where a company and a non-company wish to form a GST group. Paragraph 48-15(1)(c) of the GST Act outlines the requirements for a company to GST group with a partnership that does not have at least a 90% stake in it. The membership of the company must consist only of partners in the partnership, or family members of the partners, in a way that ensures that at least two partners are represented, either personally or by a family member. Company A is owned by all three individual partners in the partnership. Company B is also owned by all three individual partners in the partnership. Therefore, both company A and company B satisfy the membership requirements of having only partners of the partnership as members and at least two of the partners of the partnership being members of each company. Under paragraph 48-10(1)(b) of the GST Act, a company has to be of the same 90% owned group as all other members of the GST group or proposed GST group that are also companies. Section 190-1 of the GST Act provides that two companies are members of the same 90% owned group if one of the companies has at least a 90% stake in the other company or a third company has at least a 90% stake in each of the two companies. Section 190-5 of the GST Act provides that a company (the holding company) has at least a 90% stake in another company (the subsidiary company) when it: Company A is owned by the individual partners in the partnership. Company B is also owned by the individual partners in the partnership. Therefore, neither company A nor company B have a 90% stake in each other. Therefore, the companies do not belong to the same 90% owned group. The fact that company A and company B have individuals, as common shareholders, does not satisfy the membership requirement of a GST group. Therefore, the proposed GST group does not meet the membership requirements outlined in subparagraph 48-10(1)(b) of the GST Act. Accordingly, the entities do not satisfy the membership requirements to form a GST group under section 48-10 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 48-5 section 48-10 subparagraph 48-10(1)(a)(ii) paragraph 48-10(1)(b) paragraph 48-10(1)(f) subparagraph 48-15(c)(i) subparagraph 48-15(c)(iii) section 190-1 section 190-5
Subject references: Goods & services tax GST special rules GST groups