Edited version of private ruling

Authorisation Number: 1011658160136

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Ruling

Subject: GST and forestry managed investment scheme

The Scheme:

• is a 'forestry managed investment scheme' as defined in subsection 394-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997);
• is an unregistered managed investment scheme under the Corporations Act 2001; and
• involves the establishment and tending of trees for felling in Australia.

Investors become participants (Growers) in the Scheme by entering into the Scheme Constitution and associated agreements with the responsible entity and paying the application price. The application price comprises separate amounts for the management fee, the grant of a put option and the grant of the land rights.

The Constitution provides the responsible entity of the Scheme is to be appointed as manager of the Scheme (the manager).

The Scheme agreements relevantly provide that:

• each Grower is granted a Forestry Right, as contemplated by Division 4 of Part 6 of the Conveyancing Act 1919 (NSW), over one-half a hectare (Timberlot)
• the Forestry Right provides the Grower with the right to enter the land; the right to establish, maintain and harvest a crop of trees on the land; the right to construct and use buildings, works and facilities as may be necessary for the Grower to establish, maintain and harvest a crop of trees on the land;
• the Grower is entitled to all harvest proceeds from the sale of plantation produce;
• the Grower owns all the trees on their Timberlot and all plantation produce produced by or derived from those trees;
• a Grower controls what agricultural activities take place on the plantation and has the capacity to implement activities which differ from the recommendations of the Manager;
• the Grower appoints the Manager as an independent contractor to provide forestry services;
• the forestry services include site preparation; provision of cutting or seedlings; fertilising; replanting; managing and maintaining the plantation; weed and pest control; hazard reduction; maintenance of roads, firebreaks, fences, gates and related infrastructure; fire prevention; harvesting; and rehabilitation of the plantation land;
• in consideration of the Manager agreeing to carry out forestry services, the Grower agrees to pay to the Manager the management fee (which is paid on application); and
• additional management fees may be payable from time to time.
• the Manager grants to the Grower a Put Option which requires the Manager to purchase an undivided 50% interest of the rights and benefits of the Grower under the Scheme Documents as they relate to Trees and Harvest Proceeds.
• the Manager grants to the Grower Land Rights which require the manager to distribute the Plantation Land Proceeds or Incremental Increase amount to a Grower

The Scheme provides participants with the financing options.

The information provided in relation to the Scheme demonstrates that a participant will make a profit over the life of the Scheme.

An income tax product ruling has issued in respect of the Scheme that states that the Growers are not carrying on a business of primary production.

Question 1

Are you carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by carrying out (or appointing a manager to carry out) activities consistent with your rights and obligations arising under the Scheme documents?

Answer

Yes. In respect of your activities as a participant in the Scheme you are carrying on an enterprise under section 9-20 of the GST Act.

Question 2

Are you entitled to an input tax credit under section 11-20 of the GST Act in respect of the application price which comprises separate amounts for:

§ the establishment services fee;

§ the grant of a put option; and

§ the grant of the land rights?

Answer

Yes. If you register for GST you are entitled to an input tax credit in respect of any taxable supplies that you acquire in carrying on your enterprise as a participant in the Scheme.

Question 1

Summary

In analysing the factors set out above we consider that you are carrying on a series of activities 'in the form of a business' for the purposes of paragraph 9-20(1)(a) of the GST Act. As none of the activities carried out by you fall into the exceptions listed under subsection 9-20(2) we conclude you are carrying on an enterprise under section 9-20 of the GST Act.

Detailed reasoning

An entity may be registered for GST if it is carrying on an enterprise. 'Enterprise' is defined in paragraph 9-20(1)(a) of the GST Act to include an activity, or series of activities, done in the form of a business. The Commissioner considers 'an activity or series of activities' are essentially any act or series of acts that an entity chooses to do, and that the acts can range from a single transaction to groups of related transactions or to entire operations of the entity.

Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on.

Paragraph 170 of MT 2006/1 states (amongst other things) the phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

Support for the Commissioner's view may be found in the judgment in Federal Commissioner of Taxation v. Swansea Services Pty Ltd 2009 ATC 20-100: 72 ATR 120 (Swansea) at paragraph 68 which states:

68. The GST Act definitions of "enterprise" and "carrying on an enterprise" appear on their face (consistently with the Explanatory Memoranda) to be substantially broader than the notion of "carrying on a business" for the purposes of income tax regulation. It would have been a simple matter for Parliament to confine registration to those entities "carrying on a business" in the income tax sense had that been its intention. It follows that those income tax cases determining whether there has been a carrying on of a business may need to be considered with some caution in the present analysis.

And at paragraphs 98 and 99:

98. There is no support for any suggestion that the Tribunal was prepared to approach the characterisation issue on a superficial basis. However, the words "in the form of" cannot be ignored. The Commissioner has also expressed the view (in Good and Services Tax Determination GST 2000/8 at) that:

"The words 'in the form of' have the effect of extending the meaning of enterprise beyond entities carrying on a business. An enterprise will include entities that carry out activities that have ... the appearance or characteristics of business activities." (emphasis added)

99. Rather than these words supporting a suggestion that form alone may prevail over substance, they have the effect of extending the reach of "enterprise" to those activities which are in the form of a business but would not, in the ordinary meaning of "business" be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. That this is so is clear from the exclusions to s 9-20 of the GST Act which, relevantly, rules out private recreational pursuits or hobbies or, in the case of individuals, (other than a charitable trustee) an activity or activities done without a reasonable expectation of profit or gain.

Although the phrase 'in the form of a business' is broad it requires a focus on and understanding of the concept of a business. MT 2006/1 states at paragraphs 175 and 176:

175. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997.

176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 178 of MT 2006/1 sets out the indicia of business referred to in paragraph 13 of TR97/11.

There are a number of factors that need to be taken into account in determining whether an investor is carrying on an enterprise 'in the form of a business' - some support such a finding whist others do not. The factors that support a finding of an enterprise being carried on in the form of a business are:

§ the continued operation over an extended period of time;

§ the repetitive nature of the work involved in farming each Timberlot;

§ the ownership of, and the return from, thinning and final harvest;

§ the fact that each applicant may terminate the management agreement for breach or, in company with other Growers, resolve to retire the manager; and

§ the fact that each applicant has an ongoing commitment to pay the manager to do what is necessary in order to facilitate commercial production of timber over a lengthy period of time.

Factors that do not support such a finding are:

§ the way that the investment is financed;

§ where purchased, the put option which limits the risk that investors bear; and

§ the significant upfront fees that investors are required to pay when they enter into these arrangements.

In analysing the factors set out above we conclude that you are carrying on a series of activities 'in the form of a business' for the GST. We reached this conclusion having regard to all of the circumstances of the case (as required by MT 2006/1) noting the extended definition of enterprise within the GST Act that will apply to activities carried on in the form of a business which is broader than the definition of business itself.

Therefore you, in carrying out activities in the form of a business will be carrying on an enterprise, unless those activities fall into the exclusions listed under subsection 9-20(2) of the GST Act.

On the evidence provided, none of the activities carried out by you fall into the exceptions listed under subsection 9-20(2) of the GST Act. Therefore we conclude the applicant is carrying on an enterprise under section 9-20 of the GST Act.

Question 2

Summary

The fees payable to the Manager of the Scheme comprising amounts for establishment services, the grant of a put option and the grant of land rights are consideration for supplies acquired by you in carrying on an enterprise. You will be entitled to claim an input tax credit for the GST payable on those supplies if you are registered, or required to be registered, for GST.

Detailed reasoning

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

a) the acquisition is solely or partly for a creditable purpose; and

b) the supply of the thing to the entity is a taxable supply; and

c) the entity provides, or is liable to provide, consideration for the supply; and

d) the entity is registered or required to be registered for GST.

For the purposes of paragraph 11-5(a) you acquire a thing for a creditable purpose if you acquire it in carrying on your enterprise but not to the extent that the acquisition relates to making input taxed supplies or acquisitions of private or domestic nature.

As expressed above, we consider you are carrying on an enterprise in respect of your activities as a participant in the Scheme. Further the acquisitions do not relate to making input taxed supplies nor are they of a private or domestic nature. Therefore, when you acquire the establishment services, the put option and the land rights from the Manager of the Scheme you are making creditable acquisitions as:

(a) the acquisitions are solely for a creditable purpose; and

(b) the supply of the establishment services, the put option and the land rights are taxable supplies; and

(c) you paid or are liable to pay the fees included in the application price; and

(d) you are entitled to register for GST under section 23-10 of the GST Act and if you register, or are required to register, you will meet this requirement.

Therefore, as you are making creditable acquisitions you will be entitled to an input tax credit under section 11-20 of the GST Act.

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