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Edited version of your written advice
Authorisation Number: 1013112428011
Date of advice: 6 February 2017
Ruling
Subject: Enterprise
Question 1
Is Entity A carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore entitled to be registered for GST?
Answer
Yes. Entity A is carrying on an enterprise for the purposes of the GST Act and therefore entitled to be registered for GST
Question 2
Is Entity B carrying on an enterprise for the purposes of the GST Act and therefore entitled to be registered for GST?
Answer
Yes. Entity's current and continued intended role as financier for the group means it will be carrying on an enterprise from a particular date and therefore is entitled to be registered for GST.
Relevant facts and circumstances
● Entity A and Entity B are a part of a group of entities that were established for the purpose to acquire an enterprise.
● Both entities were registered for GST.
● In relation to the newly acquired enterprise, Entity A's activities include managing and setting the overall strategic direction of the enterprise. Its directors and officers play an active role in activities of the enterprise including:
● developing the business plan;
● acquiring relevant insurances for the enterprise;
● procuring legal, taxation and accounting and audit services for the enterprise;
● holding regular meetings to discuss business and investment decisions; and
● meeting with key stakeholders in the running of the enterprise.
● Entity A does not charge its group members a fee for its management services.
● Entity B's principal activity is providing financing to members of the group.
● Entity B obtained finance from a third party to acquire the enterprise. It used some of the borrowed funds to acquire the equity of one of the business structure of the enterprise. It on-lent some of the borrowed funds to Entity A to acquire the equity of another business structure of the enterprise.
● The conditions of loan agreement between Entity A and Entity B included that the loan was interest free, repayable at maturity but that Entity B can demand repayment at any time.
● Entity B entered into agreements with a third party to hedge its risk against interest rate rises from the borrowed funds.
● It is anticipated the Entity B will act as financier of the group and when the enterprise expands in the near future, Entity B will be involved in obtaining the financing for the expansion.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act Section 9-20.
A New Tax System (Goods and Services Tax) Act Section 23-10.
Reasons for decision
Question 1
Section 23-10 of the GST Act provides who may be registered for GST and provides that an entity may register for GST if it is carrying on an enterprise or intends to carry on an enterprise from a particular date regardless of its GST turnover.
The meaning of 'enterprise' is defined in section 9-20 of the GST Act. 'Enterprise' is defined broadly in the GST Act and includes an activity, or series of activities, done in the form of a business1.
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 provides guidance on whether holding companies are carrying on an enterprise for the purposes of GST registration.2
Paragraph 200 of MT 2006/1 provides the following indicators (based from case law) on whether a holding company is carrying on an enterprise:
● Active involvement in the management of subsidiaries.
● Providing loans, guarantees or indemnities to subsidiaries.
● Providing equipment, premises or rights to intellectual property to subsidiaries.
● Providing specific management services to its group such as secretarial, financial, legal, taxation, information technology or recruitment and human resources expertise.
Paragraph 201 of the ruling goes on to explain that although these indicators may give guidance as to whether an entity's activities are sufficient for it to be considered to be carrying on an enterprise, however, ultimately the question whether an entity is carrying on an enterprise is a matter of fact having regard to the scale of the activities undertaken, the form of operation of the corporate group and the commercial context in which it occurs.
For example, a holding company that merely
● holds membership interests in other entities and is able to control those entities by virtue of that interest; and/or
● derives income from other entities because it holds membership interest or other securities in those entities
is not considered to be carrying on an enterprise.
We consider that Entity A's activities or series of activities are sufficient to amount to a business, alternatively, in a form of a business. These activities include Entity A's directors and officers providing management and administrative services to its group:
● developing the business plan;
● acquiring relevant insurances for the enterprise;
● procuring legal, taxation and accounting and audit services for the enterprise;
● holding regular meetings to discuss business and investment decisions; and
● meeting with key stakeholders in the running of the enterprise.
It does not matter Entity A does not charge other members of its group a fee for its services. Example 22 of MT 2006/1 explains so long that the activities have a commercial basis underlying them, it does not matter that a holding entity does not charge its subsidiaries for the services it provides. As Entity A is carrying on an enterprise for purposes of the GST Act, it is entitled to be registered for GST.
Question 2
MT 2006/1 cited the taxpayer in FC of T v. Total Holdings (Australia) Pty Ltd3 as an example of a holding company that was involved in borrowing and on-lending its subsidiary as carrying on an enterprise for GST registration purposes. The case bears many similarities with Entity B's circumstances including on-lending funds to a related entity on similar terms. It is anticipated that Entity B will act as a financier for the group for its planned expansion. Therefore, Entity B satisfies section 23-10 of the GST Act which provides that an entity may register for GST if it is carrying on an enterprise or intends to carry on an enterprise from a particular date regardless of its GST turnover.
1 See paragraph 9-20(1)(a) of the GST Act
2 See paragraph 191 of the ruling.
3 79 ATC 4279; 9 ATR 885.
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