GST: Grouping of Partnerships and Trusts

The Government is today announcing the requirements for partnerships and trusts that wish to use the GST grouping arrangements.

After consultation, rules have been developed to allow a broad range of entity arrangements to use the GST grouping rules for partnerships and trusts. Regulations incorporating these rules are expected to be gazetted on Wednesday, 19 April 2000.

The Government will also allow individuals to use the GST grouping provisions.

These changes will help many small and medium businesses to substantially reduce their GST compliance costs by removing the need to charge GST and claim input tax credits, as well as create tax invoices for supplies between related entities. This will mean that the cash flow implications arising from the differences in the timing of payment of GST and claiming an input tax credit are removed on transactions between grouped entities.

In developing the grouping rules, entity arrangements relating to primary production businesses, small family businesses, medical practices and professional services organisations (such as accounting and legal firms) were considered. The family connections that often exist in these arrangements were also taken into account. Trusts will include superannuation funds that operate through a trust structure.

The details of the requirements for partnerships and trusts that wish to use the GST grouping provisions are outlined in the attachment to this press release. Affected entities will be able to decide how they can structure their organisations for GST purposes. Each entity that wishes to use the GST grouping rules must separately register for GST as a precondition of grouping.

ATTACHMENT

Partnerships:

A partnership can be a member of a GST group if it meets any of the following tests:

1. 1. the partnership has at least a 90% stake in a company who is a member of the GST group or proposed GST group; or
   2. all of the shareholders of a company which is a member of the GST group or proposed GST group are:

• for a single shareholder company – a partner in the partnership or a family member of that partner;
• for a company with more than one shareholder – partners or family of partners, in a way that at least two partners are represented, either personally or by a family member; or

1. 3. at least one of the trusts that is a member of the GST group or proposed GST group (ie a trust that meets the requirements below), has beneficiaries that include partners in the partnership, or family members of those partners, in a way that at least two partners are represented:

• either personally or by a family member; and
• either directly or indirectly through one or more interposed trusts.

Trusts:

A trust (whether that trust be a fixed (unit) trust, discretionary trust, hybrid trust or a superannuation fund operated through a trust structure) can be a member of a GST group if it meets either of the following tests:

1. 1. it has at least a 90% stake in a company that is a member of a GST group or proposed GST group; or
   2. it does not distribute any income or capital of the trust to a beneficiary that is not a permitted beneficiary.

The following are beneficiaries that will be a permitted beneficiary:

9. 1. a company that is a member of the GST group or proposed GST group;
   2. shareholders or family of shareholders of a company that is a member of the GST group or proposed GST group if:

• for a single-shareholder company – that shareholder, or a family member of that shareholder is a beneficiary of the trust, either directly, or indirectly through one or more interposed trusts;
• for a company with more than one shareholder – at least two of the shareholders of the company are represented as beneficiaries:
  • either personally or by a family member; and
  • either directly or indirectly through one or more interposed trusts.

9. 3. partners or family of partners in a partnership that is a member of the GST group or proposed GST group if at least two partners of the partnership are represented as beneficiaries:

• either personally or by a family member; and
• either directly or indirectly through one or more interposed trusts;

9. 4. a charitable institution, a trustee of a charitable fund, or a gift-deductible entity.

‘Family’

‘Family’ of the relevant individual will be any parent, grandparent, brother, sister, nephew, niece, child, or child of a child of either the individual or the individual’s spouse. Family of the individual will also include the individual’s spouse and the spouses of any person mentioned in the previous sentence.

Examples:

The company satisfies the membership requirements of a GST group in section 48-10 of the GST Act. The partnership will be able to join in a GST group with the company as more than one of the partners are shareholders in the company, and all of the shareholders of the company are either partners or family of partners. The trust will also be able to join the GST group, as it only makes distributions to permitted beneficiaries.

The company satisfies the membership requirements of a GST group in section 48-10 of the GST Act. Because the shareholders of the company are the same as the partners in the partnership, the partnership will be able to join a GST group with the administration company. Trust A will also be able to join the GST group, as it only makes distributions to permitted beneficiaries (the 3^rd partner and his/her family are indirect beneficiaries through an interposed trust). Trust B will not be able to join the GST group as it distributes to only one partner and their family.

1. A primary production business is run by a husband and wife partnership. A company, whose shareholders are the husband and wife and their two children, own the business assets. The business also has a discretionary trust, which only makes distributions to the business company, the husband and wife, their two children and the siblings of the husband and wife. All of the entities are GST registered, account on the same basis, have the same tax periods and are not members of other GST groups.
    
2. Three people carry on an accounting business in partnership. An administration company, whose shareholders are the three partners, pays the partners their salaries and superannuation. A service trust (‘trust A’) distributes income directly to the spouses of the first two partners. Its only other distributions are made to the family trust of the third partner (‘trust B’). Trust B has the third partner, plus that partner’s spouse and child as the only objects to which it distributes. All of the entities are GST registered, account on the same basis, have the same tax periods and are not members of other GST groups.
    
3. A small business is run by a husband and wife partnership. A service trust distributes income to the husband and wife. The service trust owns 100% of a company that owns the assets of the business. This company also has a wholly-owned subsidiary company. All of the entities are GST registered, account on the same basis, have the same tax periods and are not members of other GST groups.
   
   The companies meet the membership requirements of a GST group, including the requirement to be companies in the same 90% owned group. The trust will be able to join this GST group as it has a 100% stake in both of the companies, one directly, the other indirectly through an interposed company. The partnership can also be a member of this GST group as both of the partners receive distributions from the trust.