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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012376472534

Ruling

Subject: GST and input tax credits of an incapacitated entity

Question 1

Does the Trustee have entitlements to input tax credits (ITCs), as a 'representative' under section 58-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The Trustee has entitlements to ITCs, as a 'representative' under section 58-10 of the GST Act.

However, the Trustee is not able to claim any ITCs as it has not made any acquisitions within the scope of its responsibility or authority for managing the Company's affairs.

Question 2

Is the Company entitled to ITCs on distributions made to the Trustee for services rendered?

Answer

No. The Company is not entitled to ITCs on distributions made to the Trustee for services rendered.

The Administrators of the DOCA are entitled to ITCs on distributions made to the Trustee.

Question 3

Is the Company entitled to ITCs on distributions made to the Administrators, as individuals, for service rendered?

Answer

No. The Company is not entitled to ITCs on distributions made to the Administrators, as individuals, for services rendered.

The Administrators of the DOCA, in its capacity as a representative of the incapacitated entity, is entitled to ITCs on distributions made to the Administrators as individuals.

Question 4

Is the Company, as an incapacitated entity, entitled to ITCs on distributions made to Creditors?

Answer

Yes. The Company, as an incapacitated entity, is entitled to ITCs on distributions made to Creditors.

Relevant facts and circumstances

The incapacitated company (the Company) has at all relevant times been registered for GST and carrying on an enterprise.

At all relevant times, the company was accounting on a cash basis.

The Company went into financial hardship

Two individuals (the individuals) were appointed as Administrators of the Company. By a resolution passed at a meeting of Creditors convened pursuant to section 438E of the Corporations Act, the individuals were retained as the Administrators of the Company for the purposes of Part 5.3A of the Act.

The creditors resolved that the Company execute a deed of company arrangement (DOCA). The individuals were retained as Administrators of the DOCA.

The DOCA contemplated the establishment and management of a trust fund, resulting from contributions by the Company, to enable payment of the claims of creditors, all of which arose because of circumstances, arrangements and contracts entered into by the Company before the appointment of Administrators (excluding amounts to be applied for the benefit of the Administrators or trustee).

Following the execution of the DOCA, the Administrators of the DOCA, entered into a deed establishing the Trust. The individuals, who were acting as Administrators of the DOCA, were also appointed as Trustees of the Trust.

Under the Trust Deed, the trustees appointed provided claim adjudication and fund distribution services, as well as related rights, to the Company.

The DOCA shall terminate immediately after Completion

All of the claims of the creditors were paid in full from the Trust Fund and the company remains operational for present purposes.

The individuals who had been appointed both as Administrators and Trustees under the DOCA and Trust Deed received distributions, being payments for the services they rendered.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 58-10,

A New Tax System (Goods and Services Tax) Act 1999 section 58-20,

A New Tax System (Goods and Services Tax) Act 1999 section 195-1,

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-1(3),

A New Tax System (Goods and Services Tax) Act 1999 section 11-20,

Corporations Act 2001 Division 2, Part 5.3A and

Corporations Act 2001 section 9.

Reasons for decision

Question 1

Summary

The Trustee has entitlements to ITCs as a 'representative' under section 58-10 of the GST Act. However, the Trustee is not able to claim any ITCs as it has not made any acquisitions, within the scope of its responsibility or authority for managing the Company's affairs.

Detailed reasoning

Division 58 of the GST Act sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes.

In particular, paragraph 58-10(1)(b) of the GST Act states that a representative of an incapacitated entity is entitled to any ITCs that the incapacitated entity would, but for this section or section 48-45, be entitled to in respect of a creditable acquisition to the extent that the making of the acquisition to which the ITCs relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

An incapacitated entity is defined in section 195-1 of the GST Act and includes, amongst other things, an entity that has a representative. The term 'representative' is also defined in section 195-1 of the GST Act to include:

The appointment of the Administrators of the Company satisfies the definition of representative, under paragraphs (d) and (e) above. On the establishment of the DOCA, the individuals, in their capacity as Administrators of the DOCA also satisfy the definition of representative under paragraph (f) as they are Administrators of a DOCA executed by the entity.

At the execution of the DOCA, the individuals were also appointed as Trustees of the Trust. The appointment of the Trustees will satisfy the definition of representative under paragraph (ca) as the Trustees are considered as a controller (within the meaning of section 9 of the Corporations Act 2001).

The term 'controller', in relation to property of a corporation, is defined in section 9 of the Corporations Act 2001 to mean:

and has a meaning affected by paragraph 434F(b) (which deals with 2 or more persons appointed as controllers).

The individuals, in their capacity as Trustees of the Trust were appointed to have control of the Trust Fund for the purpose of enforcing, amongst other things, a security interest.

The Administrators of the DOCA and the Trustees of the Trust are the same legal persons acting in two different capacities. Under subsection 184-1(3) of the GST Act, a legal person can have a number of different capacities. In each of these capacities, the legal person is taken to be a different entity for GST purposes.

Each entity is entitled to ITCs for creditable acquisitions that are made within the scope of that entity's responsibility or authority for managing the incapacitated entity's affairs.

Therefore, it is established that the Trustee has entitlements to ITCs, as a 'representative' under section 58-10 of the GST Act. However, the amount of ITCs in which it may claim will need to be determined.

Subsection 58-10(3) of the GST Act provides an exception to the general rule in paragraph 58-10(1)(b) of the GST Act. Under subsection 58-10(3) of the GST Act, the incapacitated entity is entitled to ITCs where the consideration for the acquisition is provided before the representative became a representative of the incapacitated entity.

In this case, the Trustee makes the following distributions from the Trust Fund:

Distributions made to the Administrators, as individuals

The supply for which the consideration was provided by the Trustee was the supply of services rendered by the Administrators, as individuals. This supply occurred while the Administrators acted for the Company in the course of the administration of the DOCA. Therefore, the Trustee will not be entitled to ITCs for distributions made to the Administrators, as individuals.

Distributions made to the Trustees

Similarly, the supply for which the consideration was provided by the Company was the supply of services rendered by the Trustees. This supply also occurred while the Administrators acted for the Company in the course of the administration of the DOCA. Therefore, the Trustees will not be entitled to ITCs for distributions made to themselves, as Trustees.

Distributions made to Creditors

In this case, the Company made creditable acquisitions from creditors prior to the appointment of the Administrators. As the acquisitions were made by the Company prior to the appointment of the Trustee, the making of the acquisitions clearly did not fall within the Trustee's responsibility or authority for managing the Company's affairs.

The mere subsequent payment by the Trustee of the consideration for the acquisition that was made by the Company before the appointment of the Trustee does not have the effect of bringing the 'making' of the acquisition within the scope of the representative's responsibility or authority for managing the Company's affairs.

Therefore the Trustees are not able to claim any ITCs for any distributions made through the Trust Fund, as the Trustees have not made any acquisitions, within the scope of the their responsibility or authority for managing the Company's affairs.

Question 2

Summary

The Company is not entitled to ITCs on distributions made to the Trustees for services rendered.

The Administrators of the DOCA are entitled to ITCs on distributions made to the Trustees.

Detailed reasoning

Under subsection 58-10(3) of the GST Act, the incapacitated entity is entitled to ITCs where the consideration for the acquisition is provided before the representative became a representative of the incapacitated entity.

This supply in this instance is the supply of services rendered by the Trustees in managing the Company's affairs. The Company did not provide any consideration for the acquisition prior to the appointment of any representatives.

This acquisition occurred while the Administrators acted for the Company in the course of the administration of the DOCA. Further, the Company can be said to have provided consideration for the acquisition by the establishment of the Trust Fund and the payment of funds into the Trust Fund, giving priority to the Administrators and Trustees for services rendered.

Therefore, under paragraph 58-10(1)(b) and consistent with subsection 184-1(3) of the GST Act, the Administrators of the DOCA are entitled to the ITCs under paragraph 58-10(1)(b) of the GST Act in relation to the fees paid to the Trustees of the Trust.

Question 3

Summary

The Company is not entitled to ITCs on distributions made to the Administrators, as individuals, for services rendered.

The Administrators of the DOCA are entitled to ITCs on distributions made to the Administrators, as individuals.

Detailed reasoning

Under subsection 58-10(3) of the GST Act, the incapacitated entity is entitled to ITCs where the consideration for the acquisition is provided before the representative became a representative of the incapacitated entity.

The supply for which the consideration was provided by the Company was the supply of services rendered by the Administrators, as individuals, in their capacity as Administrators of the DOCA.

This supply occurred while the Administrators acted for the Company in the course of the administration of the DOCA. For similar reasons as outlined in question 2, the Company can be said to have provided consideration for the acquisition by the establishment of the Trust Fund and the payment of funds into the Trust Fund, giving priority to the Administrators and Trustee for services rendered.

Therefore, under paragraph 58-10(1)(b) and consistent with subsection 184-1(3) of the GST Act, the Administrators of the DOCA are entitled to the ITCs under paragraph 58-10(1)(b) of the GST Act in relation to the fees paid to the Administrators, as individuals. The fees are paid for a creditable acquisition of the Administrators' services that is within the scope of the Administrators.

Question 4

Summary

The Company, as an incapacitated entity, is entitled to ITCs on distributions made to Creditors.

Detailed reasoning

Under section 58-20 of the GST Act, a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered. The effect of section 58-20 of the GST Act is that a representative of an incapacitated entity is only liable for GST, entitled to ITCs and has adjustments, in respect of supplies and acquisitions which the representative makes, in its capacity as such, while representing the incapacitated entity.

Accordingly, supplies and acquisitions that occurred prior to the appointment of a representative remain with the incapacitated entity. Therefore, when the representative pays a creditor for acquisitions that were made by the incapacitated entity prior to the appointment of the representative, the ITCs remain with the incapacitated entity. To the extent that the acquisitions were creditable by the incapacitated entity, the incapacitated entity will be entitled to ITCs, in proportion to the dividend payment.

PS LA 2012/1 (GA) - Practice Statement law Administration (General Administration) - How to calculate input tax credits and bad debt adjustments when a dividend is paid to creditors (PS LA 2012/1 (GA)) refers to incapacitated entities accounting on a cash basis. Paragraph 55 of the PS LA 2012/1 states:

You stated that the Company made creditable acquisitions prior to the appointment of the Administrators or Trustees. As the acquisitions were made by the Company prior to the appointment of the Administrators or Trustees, the making of the acquisition clearly did not fall within the Administrators or Trustees' responsibility or authority for managing the Company's affairs, at the time the acquisitions was made.

The mere subsequent payment by the Trustees of the consideration for the acquisition that was made by the Company before the appointment of the representative does not have the effect of bringing the 'making' of the acquisition within the scope of the Administrators or Trustees' responsibility or authority for managing the Company's affairs.

Accordingly, because the acquisition was not within the scope of authority of the Administrators or the Trustee, the Administrators or the Trustee is not entitled to the ITCs on the creditable acquisitions under subsection 58-10(1) of the GST Act, despite the fact that the Trustees paid all of the consideration for the supply.

Instead, where the acquisitions satisfy the requirements of section 11-20 of the GST Act, the Company will be entitled to the ITCs where the acquisitions satisfy the requirements of section 11-5 of the GST Act.

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