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Ruling

Subject: GST and Entity

Question 1

Does a management group which is governed by Contracts, constitute an entity for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act); specifically as an "other unincorporated association"?

Answer

Yes. The management group which is governed by Contracts will constitute an entity for the purpose of the GST Act as an "other unincorporated association".

Relevant facts and circumstances

Entities A, B and C (participants) enter into Contracts with each other for the administration and management of shared facilities in a Complex of which they are the owners.

The Complex comprises residential apartments, a hotel, a substantial retail lot and car parks.

The purpose of the Contracts is to provide for and manage the supply of utility services, access, support, shelter, insurance arrangements and a range of administrative matters in relation to the Complex. In particular the Contracts set out the rights and obligations in relation to:

· the sharing and use of specific areas and facilities;

· the repairs and maintenance of these areas and facilities;

· coordination of the operation of the Complex;

· management and voting rights of the management group; and

· contribution to the costs of maintaining, sharing and usage of the shared areas and facilities.

Each participant is registered for GST and operates completely autonomously in all respects except as to the interaction required by the Contracts.

Each participant owns their respective areas themselves, but due to the physical layout/architectural design of the development, there are physical areas, facilities and services that need to be shared and jointly managed.

The Contracts create a governing body or management group to make decisions and administer the rights and obligations of each participant.

The Contracts provide that the initial membership of the management group will be the owners of the properties and subsequently for one or more new members to be admitted to the management group.

The Contracts require that each participant must appoint a representative to represent that participant on the management group.

The Contracts set out the functions of the management group which include amongst other things:

· to fulfil the obligations and duties given to it under the Contracts;

· administer and manage the Complex and shared facilities;

· operate and effect maintenance and repair to the Complex and shared facilities;

· appoint and control service contractors necessary to effect maintenance and repair to the utility services, utility infrastructure, the complex and shared facilities;

· prepare budgets and accounts as required; and

· effect insurances as required by the Contracts.

The powers of the management groups include doing the following on behalf of the owners:

· enter into service contracts;

· employ service contractors;

· carry out the work required to effect maintenance and repair to the utility services, utility infrastructure, the complex and shared facilities;

· modify, substitute or extend the shared facilities;

· close down or remove the shared facilities;

· delegate any of its functions to the manager, secretary or treasurer;

· supervise the manager;

· simultaneously with the manager, carry out any of the functions delegated to the manager;

· open and operate a bank account; and

· do anything else authorised by the Contracts

The Contracts provide that the management group may appoint a manager and the manner in which this appointment is to be made. The management group is to continue until the extinguishment of the Contracts.

The Contracts also provide that the management group may appoint a secretary and the manner in which this appointment is to be made and sets out the rules in relation to holding meetings, electing the chairperson, quorum and voting rights. The management group is also required to maintain accurate minutes of meetings, agendas, motions, financial records and other records and to make these records available for inspection.

The Contracts require the management group to make rules and security arrangements in relation to the Complex which the owners are required to comply with. The management group can take any action to ensure that the utility services, utility infrastructure, the complex and shared facilities are maintained to a high standard.

Under the current system, a joint bank account has been set up in the names of the three participants to the Contracts to manage the requirements as set out in the Contracts. The bank account is funded by the three participants based on each participant's share of the budgeted expenditure for maintenance for a determined period. Any maintenance expenditure subject of the Contracts is then paid for from the joint bank account.

The interest income earned on the bank account is retained in the bank account. Each of the three participants is advised of its respective percentage entitlement for inclusion in its own income tax return.

Currently, where acquisitions are made by the management group, suppliers are required to issue invoices for the goods/services they provide in the name of all the participants.

Invoices are reviewed by the management group to determine which share area or facility the acquisitions relate to. A spread sheet is then prepared by the management group for the relevant cost to be allocated to the participants. The payment is then made from the joint bank account.

All payments processed through the bank account are GST inclusive. GST is claimed by the participants to the Contracts in respect of their share. All deposits from the participants into the joint bank account are treated as financial supplies, that is, GST is not claimed by the payers on these fund transfers.

Accounting records are maintained by the management group in respect of the joint bank account with detailed reconciliations of the total expenditure carried out throughout the relevant periods. Details of any funds on hand for each of the participants at the end of the period are maintained. The GST included in payments is ultimately included proportionately in the business activity statements (BAS) of each individual participant.

Going forward, the Owners propose to set up the management group as an "entity"; specifically as an "other unincorporated association" for GST purposes. This will enable the Owners to put in place a change in operations such that:

· the entity will apply for an Australian Business Number (ABN) and apply to be registered for GST;

· on being registered for GST the entity, being a legitimate GST registered entity, would lodge its own activity statements;

· all suppliers will then invoice the entity;

· the entity will claim the GST on these invoices in its own activity statements;

· each participant and hence member of the entity, will pay contributions (levies) to the entity. These contributions will be subject to GST and the entity will include the GST inclusive levies in its own activity statements;

· the registration of the entity for GST will result in a change of bank account from the existing one which is in the name of the three Owners, to an account in the name of the entity;

· any income earned in the bank account will be retained in the account and applied for the purposes of the entity; and

· there will be no legal change in ownership of the shared areas on the entity being registered.

Relevant legislative provisions

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

Reasons for decision

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business number (MT 2006/1) provides assistance to entities in determining their entitlement to an Australian Business Number (ABN). In doing this the Ruling considers the meaning of key words and phrases used to define "entity".

Section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines an entity as:

Entity means any of the following:

(a) an individual

(b)  a body corporate;

(c)  a corporation sole;

(d)  a body politic;

(e)  a *partnership;

(f)  any other unincorporated association or body of persons;

(g)  a trust;

(h)  a *superannuation fund.

* denotes a defined term under section 195-1 of the GST Act

The phrase "any other unincorporated association or body of persons" is not defined and takes its meaning from general law (paragraph 44 of MT 2006/1).

Paragraphs 45 to 58 of MT 2006/1 discuss the ATO view in relation to the meaning of "any other unincorporated association or body of persons". In particular, paragraphs 45 to 47 and 52 to 53 of MT 2006/1 states:

45. A useful starting point is the ordinary meaning of these terms. The Shorter Oxford English Dictionary defines the terms separately as follows:

Association 2 . A body of persons associated for a common purpose; the organisation formed to effect their purpose; a society; e.g. the British Association for the Advancement of Science, etc.

Body IV. 2 . A society, association, league, fraternity. 4 . (loosely) a collective mass of persons

46. Similarly, the Macquarie Dictionary has the following definitions:

association 1 . an organisation of people with a common purpose and having a formal structure.

body 18 . a number of things or people taken together: the student body

47. These concepts have arisen from United Kingdom law dating back to the early eighteenth century. Broadly, an unincorporated association or body of persons may be seen as consisting of a group of persons who associate to achieve a common aim or purpose and who are bound by mutual obligations and rights.

52. It has also been held that the contract between the members will be based on rules that set out obligations and confer rights on members. The rules can fall short of a legally enforceable contract between members.

53. An unincorporated association or body of persons is not a legal person. Unlike a body corporate it has no separate legal identity. It consists of the aggregate of its members at a particular moment in time and does not have perpetual succession. Because it is not a legal person, subject to specific legislation, it does not have the right to hold property, or to take or be subjected to legal proceedings in its own name.

Accordingly, an association or body of persons is seen to be an organisation of people with a common aim or purpose that is founded on contractual obligations undertaken by its members. An association or body of persons are not legal entities in their own right and do not have a separate legal identity. They consist of the aggregate of its members at the particular moment and do not have perpetual succession.

Further, paragraph 50 of MT 2006/1 sets out some of the characteristics of an unincorporated association or body of persons as follows:

50. In Conservative and Unionist Central Office v. Burrell (Inspector of Taxes ) the court considered some of the characteristics of an unincorporated association or body of persons as follows:

· there are members of the association;

· there is a contract binding the members amongst themselves;

· there is a constitutional arrangement for meetings of members and for appointing officers;

· the members will normally be free to join or leave the association;

· the association will normally continue in existence independently of any change to the composition of the association; and

· as a matter of history, there will have been a moment in time when a number of persons combined to form the association.

However, not all of these characteristics need to be present.

There are members of the association, there is a contract binding the members amongst themselves and there is a moment in time when a number of persons combined to form the association

At a particular point in time, the owners of the Complex became participants to the Contracts and members of a management group. The purpose of the Contracts and the management group is to provide for and manage the supply of utility services, access, support, shelter, insurance arrangements and a range of administrative matters in relation to the Complex.

The management group makes decisions and administer the rights and obligations of each member. The responsibilities, functions and powers of the management group are governed by and set out in the Contracts.

As such, the management group constitutes an organisation of people with a common purpose and who are bound by mutual obligations and rights. The common purpose in this case is the management of the shared facilities in the Complex and the setting out of the mutual obligations and rights of the members. The Contracts are the formal structure that binds the members amongst themselves in relation to their rights and obligations.

A constitutional arrangement for meetings of members and for appointing officers

The Contracts allow the management group to appoint and remove officers namely the manager and secretary. The Contracts also provide constitutional arrangements for meetings of members or their representatives and for the election of a Chairperson.

The members will normally be free to join or leave the association

The Contracts provides that the initial membership of the management group will be the owners of the properties that are the participants to the Contracts. The Contracts then allows for one or more new members to be admitted to the management group provided that they are owners of a lot in the Complex. As the basis of joining or leaving the management group is the ownership of lots in the Complex, it is understood that members are free to join or leave the management group on purchase of a lot in the Complex or on the sale of a lot in the Complex.

It is noted that paragraph 50 of MT 2006/1 does not require all of the characteristics listed in it to be present before a finding of "an unincorporated association or body of persons" is made.

It is our view that in these circumstances the management group satisfies most of the characteristics of "an unincorporated association or body of persons" as set in MT 2006/1. As such, the management group would constitute an unincorporated association or body of persons and would therefore meet the requirements of an entity for GST purposes as set out in section 184-1 of the GST Act.

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