Tony Ince, Mostyn Consulting

There have been a spate of cases recently where the Commissioner has disallowed input tax credits of purported acquisitions from related entities because these entities have not been “carrying on an enterprise”.
In its simplest form, the arrangement goes like this. The taxpayer has an entity (Company A) that is registered for GST on an accruals basis. Another entity (Company B) is set up which is registered for GST on a cash basis. Company B purports to make substantial supplies to Company A, and issues the appropriate tax invoices. Company A claims GST input tax credits. Company B does not report any GST sales as it has not yet been paid.
A more complicated version of this was the subject of the decision in Harland v FCT, in which the taxpayer sought to claim a one-off refund of GST of $5,359,891 (yes, $5.3m!!) and wondered why he got audited and shut down before the refund issued.
These schemes have a number of weaknesses. Apart from any possible Division 165 application (the GST general anti-avoidance provision), there is the question as to whether or not the purported supplier is “carrying on an enterprise” and, even if they are, whether or not there has been any real supply.
Finally, there is the application of little known section 21-15 of the GST Act which deems any acquisition not paid for within 12 months to be a bad debt for which an increasing adjustment applies. In other words, if you have claimed an input tax credit but have not paid the tax invoice after 12 months, you have to give the GST input tax credit you claimed back to the Commissioner.