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This edited version has been archived due to the length of time since original publication.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 written advice

Authorisation Number: 1012928039105

Date of advice: 10 February 2016

Ruling

Subject: Goods and services tax General rules and concepts Enterprise

Question

Are you entitled to the input tax credits pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the cost of the specified legal fees?

Answer

No, you are not entitled to the input tax credits as the legal fees were not acquired for a creditable purpose.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A and B received financial advice in the form that they should invest in a Company through their family trust (Trust A or you). The advice included amongst other things:

Entity A and B signed the Shareholders agreement, a management agreement and elected to accept one or more strata titled units on the same day when the election was to be exercised on behalf of Trust A. The strata units were to be leased after they were constructed.

Under the share agreement Trust A acquired shares in the Company.

Trust A is currently registered for GST.

The Company

The Recitals of the Company set out that it is an investment vehicle and that the shareholder is not entitled to ownership of any part of the business owner, land owner, intellectual property or management agreement as defined herein.

Item 8 of the Items schedule provides that the business activity is to provide funding for the needs of the company for expansion of their business

Your operations

You were entitled to receive dividends and return of capital from this investment and on the payment of the final dividend or the return of capital whichever came last your shares were deemed to have been redeemed.

Under the Notice of Election you elected to return your shares to the company (redemption of shares) and accept a number of strata titled units based on the number of shares you acquired. These units were to have a commercial lease in place by the time you acquired them. The election form was never acted upon by the Company and you never received strata title to any unit.

You received returns from this investment only for a period and then no further returns were made. You made enquiries and were advised that the funds had been lost and no units were to be transferred to you at any time.

You then took legal action against your financial advisor for compensation for loss of monies from this failed investment.

You received a sum of in an out of court settlement of your claim.

You received a bill from your legal practitioner which included an amount of GST. You paid this amount and received a receipt.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

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

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

Reasons for decision

In this reasoning, unless otherwise stated,

Section 11-20 provides that you are entitled to the input tax credit on any credible acquisition that you make.

Sections 11-5 of the GST Act provides that your acquisition is a creditable acquisition when:

The supply was a taxable supply, you provided consideration for the legal services and you were registered for GST at the time of the acquisition. Therefore we need to consider whether the legal fees were acquired for a creditable purpose and whether you were entitled to be registered for GST.

Creditable Purpose

Section 11-15 of the provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisition relevantly does not relate to making supplies that would be input taxed.

'Enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business. The ATO considers that the activities of merely holding shares and receiving investment income does not constitute an enterprise. In particular ATO Interpretative Decision 2007/7 states that in relation to carrying on an enterprise, "In terms of trusts, a passive investment vehicle, for example a family discretionary trust (that merely holds shares and term deposits and receives investment income) will not be carrying on an enterprise. This is because it lacks the requisite actions to satisfy the enterprise test of activities done in the form of a business."

In your case you are not considered to be carrying out an enterprise as per 9-20 of the GST Act. Thus the GST on legal fees that were incurred as part of your "out of court" settlement cannot be claimed as they are not, a creditable acquisition.

You contended that because the units were to have a commercial lease, you were conducting an enterprise.

The fact that another entity conducts a leasing enterprise does not make the acquisition of shares by you, an enterprise. Even where the goal of the investment was to actually acquire the units which were then being leased out the goal was never achieved and that enterprise never commenced.

Who may be registered for GST?

Section 23-10 provides that you may be registered for GST if you are carrying on an enterprise or if you intend to carry on an enterprise. As set out above, the activities' of holding shares is not considered to be an enterprise. Therefore where your only enterprise is holding shares and earning investment income from those shares you were not entitled to be registered for GST. You will be required to cancel your GST registration except where you have other activities that amount to an enterprise.

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