ATO ID 2002/11: GST and input tax credits for legal expenses incurred in recovering equity from a dissolved partnership
Date of decision: 2 November 2001
Business line: Indirect Tax

Issue
Is the entity, a sole trader, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for legal expenses incurred in recovering its equity from a dissolved partnership, in which it was a partner?

Decision
No, the entity is not entitled to an input tax credit under section 11-20 of the GST Act for legal expenses incurred in recovering its equity from a dissolved partnership, in which it was a partner.

Facts
The entity carries on an enterprise in its current capacity as a sole trader and is registered for goods and services tax (GST). The entity was a partner in a partnership. The entity resigned from the partnership and incurred legal expenses to recover its equity from the dissolved partnership. The supply of the legal services to the entity was a taxable supply under section 9-5 of the GST Act.

Reasons for decision
Summary: Under section 11-20 of the GST Act, an entity is entitled to the input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if: The first requirement in section 11-5 of the GST Act is that the entity makes the acquisition solely or partly for a creditable purpose. Subsection 11-15(1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. Therefore, the acquisition of the legal services is for a creditable purpose if the entity acquires the services in carrying on its enterprise. The entity currently carries on an enterprise in its capacity as a sole trader. The entity did not acquire the legal services in carrying on this enterprise. However, it is necessary to determine whether the legal expenses were acquired by the entity in carrying on any other enterprise. In this case, the entity resigned from the partnership and incurred the legal expenses for the purpose of recovering its equity from the dissolved partnership. For GST purposes, the partnership is the entity that carries on the enterprise of the partnership and not the partners themselves. In addition, the entity's activities as a partner in a partnership do not amount to carrying on an enterprise in its own right. Therefore, the entity itself was not carrying on an enterprise when it was a partner in the partnership. Accordingly, the legal expenses were not incurred in the course of carrying on an enterprise and as such, the requirement in paragraph 11-5(a) of the GST Act is not satisfied. As the entity is not making a creditable acquisition, it is not entitled to any input tax credits for the legal expenses incurred in recovering its equity from a dissolved partnership, in which it was a partner.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 11-5 paragraph 11-5(a) subsection 11-15(1) section 11-20
Subject references: Goods & services tax GST supplies & acquisitions Creditable acquisition Creditable purpose