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Ruling

Subject: GST and enterprise

Questions

Is it the Trust or is it the beneficiary that is carrying on an enterprise for GST purposes when a commercial property is purchased from an unrelated vendor?

When the Trust purchases a leased commercial property from an unrelated vendor which is registered for GST, which entity (Trust or beneficiary) should be registered for GST in order to satisfy the taxable supply of 'going concern' exemption?

Is the Trust or beneficiary carrying on an enterprise for GST purposes when the commercial property is leased to an unrelated third party?

During the lease of the commercial property which entity (Trust or beneficiary) should voluntarily register for GST?

When legal ownership of the commercial property is transferred from the Trust to the beneficiary is this a taxable supply for GST purposes?

If yes to question 5, should the Trust be registered for GST in order to satisfy the taxable supply 'going concern' exemption?

Answers

It is the beneficiary that is carrying on an enterprise for GST purposes when a commercial property is purchased from an unrelated vendor.

When the Trust purchases a leased commercial property from an unrelated vendor which is registered for GST, the beneficiary should be registered for GST in order to satisfy the taxable supply 'going concern' exemption.

It is the beneficiary carrying on an enterprise for GST purposes when the commercial property is leased to an unrelated third party.

During the lease of the commercial property, the beneficiary may voluntarily register for GST.

When legal ownership of the commercial property is transferred from the Trust to the beneficiary, it is not a taxable supply for GST purposes.

N/A.

Relevant facts and circumstances

The entity, a complying self managed superannuation fund (SMSF) has two individual trustees/members who are residents of Australia.

The SMSF voluntarily registered for Goods & Services Tax (GST).

Neither trustee is registered for GST.

SMSF owns a residential unit and an office from which it has been deriving rental. It also owns listed securities on the Australian Stock Exchange from which it derives small amounts of dividend income.

The trustees have determined that the SMSF would acquire another commercial property as part of its investment strategy. This acquisition is for the purpose of generating an additional net income stream towards the member's retirement benefits.

The commercial property would be purchased from an unrelated vendor.

The commercial property would be bought with an existing lease or if not leased, would be leased after the acquisition. The lease would be on commercial terms and leased to an unrelated third party.

The combined rental received from the existing office and the commercial property would be expected to be less than $75,000 per year.

The SMSF intends to borrow the funds from a related party lender (the trustees/members of the SMSF) using a limited recourse borrowing arrangement (LRBA) to acquire the commercial property. The related parties co-own a property outside of the superannuation system and would obtain an investment loan from a financial institution secured by that property. This borrowing would be used to on lend to the SMSF.

Prior to the acquisition, a separate Holding/Bare Trust (Trust) would be created to hold legal ownership of the commercial property only on behalf of the SMSF (the sole beneficiary) until the loan is paid in full.

The Trust is similar to a `transparent trust' defined in PS LA 2000/2 at paragraph 3 'In this practice statement, a 'Transparent Trust' is a trust in which the beneficiary of the trust estate has an absolute, indefeasible entitlement to the capital and the income of the trust'.

The trustee of the Trust will have either an individual trustee (i.e. a member of the SMSF) or a corporate trustee (members of the SMSF would be the directors).

The SMSF will be the sole beneficiary of the Trust.

The commercial property will not be subject to any charge or encumbrance apart from the mortgage registered by the LRBA.

A signed written contract of sale to acquire the commercial property would be in the name of the Trustee for the Holding/Bare Trust.

Whilst the Trust owns the commercial property, the SMSF (the sole beneficiary) conducts all transactions in relation to the borrowing arrangement and the lease arrangement as the beneficial owner of the commercial property. This includes but not limited to following financial transactions:-

· pay the documentation cost to create the Trust for the LRBA

· pays the costs to set up corporate Trustee for the Trust and pay ongoing annual ASIC fees

· obtains the loan

· pay the deposit when a contract is signed to purchase the commercial property

· pay the solicitor's conveyance/legal costs

· pay periodic loan repayments during the term of the loan & loan fees

· pay stamp duty

· pay ongoing council rates

· pay ongoing water rates

· pay ongoing insurance premiums

· pay other ongoing costs incurred in deriving the rental income (e.g. body corporate fees, etc.)

· pay any ongoing land tax

· pay agent's collection fees

· pay letting fees to agent

· pay fees to prepare lease documents

· bank the rental income from the commercial property.

· the SMSF bank account is used to deposit the rental income and pay the periodic fees, loan repayments, costs relating to the commercial property.

The SMSF will engage an independent agent to collect the rental income from the commercial property or one of the SMSF trustee's will attend to rent collection.

Documentation to satisfy the superannuation legislation and as covered by ATO Interpretative Decisions ATO ID 2010/172 and ATO ID 2010/169 will be provided by a SMSF specialist that tailors the LRBA from the related parties described in paragraphs 11 to 19.

Essentially the Trust acts are passive in nature (GSTR 2008/3 paragraphs 12 & 37) as a holding trust for the purpose of holding the legal title to the commercial property to satisfy the superannuation legislation.

When the SMSF repays the LRBA loan, legal ownership of the commercial property would be transferred from the Trust to the SMSF (the sole beneficiary).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 23-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1.

Reasons for decision

1. Is the Trust or is it the beneficiary that is carrying on an enterprise for GST purposes when a commercial property is purchased from an unrelated vendor?

The ATO view on GST and bare trusts is contained in Goods and Services Tax Ruling GSTR 2008/3 (GSTR 2008/3). Paragraphs 11 and 12 of GSTR 2008/3 state:

11. An entity (B) that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is to be used in its enterprise to be acquired by another entity (T) to hold on a bare trust for B - that is, subject to an obligation to transfer legal title to the asset to B, or to a third party if B so directs, and with no other active duties to perform.³

12. Alternatively, the trust may not strictly be a bare trust, because the trustee has minor active duties to perform, but nevertheless the trustee is required to act at the direction of the beneficiary in dealing with title to the trust property. Where this Ruling refers to 'bare trusts' it should also be taken to refer to trusts of this kind which may not strictly fall within accepted definitions of bare trusts but share similar features. The key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings⁴ in the trust property and has no independent role in respect of the trust property.

In your case, the Trust is a bare trust as it was created to hold the legal ownership of the commercial property on behalf of the beneficiary until the loan is paid in full and the trustee has no independent role in respect of the trust property.

Paragraphs 35 to 37 of GSTR 2008/3 state:

35. Subsection 184-1(1) treats a trust as an entity. Subsection 184-1(2) goes on to note that the trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time. Subsection 184-1(3) confirms that a legal person can have a number of different capacities in which the person does things and in each of those capacities the person is taken to be a different entity.

36. These provisions do not create two separate entities for GST purposes - the trust and the trustee - but rather the relevant entity is the trust, with the trustee standing as that entity when a legal person is required.¹⁸ However, it is necessary to distinguish between the entity that is the trustee acting in that capacity and that entity acting in its own right which are treated as separate entities for GST purposes.

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.¹⁹

In your case, as the Trust is a bare trust, the Trust does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property. Accordingly, it is the beneficiary that is carrying on an enterprise when the commercial property is purchased from an unrelated vendor.

2. When the Trust purchases a leased commercial property from an unrelated vendor which is registered for GST, which entity (Trust or beneficiary) should be registered for GST in order to satisfy the taxable supply of 'going concern' exemption?

Section 23-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity may be registered for GST if the entity is carrying on an enterprise or intends to carry on an enterprise from a particular date.

Enterprise is defined in the Dictionary to the GST Act (section 195-1) to have the meaning given by section 9-20, and carrying on an enterprise is defined to include doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act provides that an enterprise is an activity, or a series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the ITAA 1997 and to which deductible gifts can be made; or

(da) by a trustee of a *complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund,

(e) by a charitable institution or by a trustee of a charitable fund; or

(f) by a religious institution; or

(g) by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

(h) by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

The activities that concern us in this case are those activities that constitute the acquisition and leasing (and subsequent disposal, should it occur) of the real property. It is clear enough from paragraph 9-20(c) above, those activities done on a regular or continuous basis in the form of a lease constitute an enterprise. Further, acquisition of the property to be leased would (in the absence of compelling evidence to the contrary) be a thing done in the course of the commencement of the enterprise.

It is also clear from paragraph 9-20(da) above that the beneficiary is by definition carrying on an enterprise. This is consistent with the facts provided whereby the beneficiary conducts all transactions in relation to the borrowing and leasing arrangements and pay all the relevant expenses and received the rental income.

As it is the beneficiary that is carrying on an enterprise of leasing of the commercial property, it is the beneficiary that should be registered for GST in order to satisfy the taxable supply of 'going concern' exemption if it purchases a leased commercial property from an unrelated vendor who is registered for GST.

3. Is the Trust or beneficiary carrying on an enterprise for GST purposes when the commercial property is leased to an unrelated third party?

As discussed in question 2 above, the beneficiary is carrying on an enterprise for GST purposes when the commercial property is leased to an unrelated third party.

4. During the lease of the commercial property which entity (Trust or beneficiary) should voluntarily register for GST?

As discussed in question 2 above, an entity may be registered for GST if the entity is carrying on an enterprise or intends to carry on an enterprise from a particular date under section 23-10 the GST Act.

In this case the trustee of the bare trust does not carry on an enterprise. It is the beneficiary that carries on the enterprise on behalf of the trust. Consequently, it is the beneficiary that should voluntarily register for GST if it is under the registration turnover threshold during the lease of the commercial property.

5. When legal ownership of the commercial property is transferred from the Trust to the beneficiary, is this a taxable supply for GST purposes?

Paragraph 64 of GSTR 2008/3 states:

64. T does not make a taxable supply by transferring legal title to the remaining trust property (that is, the unit to be retained by B) to B. This is because the transfer is not made in the course of an enterprise carried on by T in relation to the trust property.

In your case, when legal ownership of the commercial property is transferred from the Trust to the beneficiary, the Trust will not make a taxable supply to the beneficiary, because the transfer is not made in the course of an enterprise carried on by the Trust in relation to the trust property.

6. If yes to question 5, should the Trust be registered for GST in order to satisfy the taxable supply 'going concern' exemption?

N/A.

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