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Edited version of your written advice

Authorisation Number: 1051210257301

Date of advice: 10 April 2017

Ruling

Subject: GST and enterprise

Question

Do the Trust's activities of collecting currency for their value, and works of art (collectively referred to as 'investment items'); form part of the Trust's enterprise for GST purposes?

Answer

No.

Relevant facts and circumstances

The Trust is registered for GST. The Trust commenced to carry on several investment activities (investment activities) as listed in the application.

Additionally the Trust has recently commenced to accumulate currency for their value; and works of art; (collectively referred to as 'investment items') as a part of a long term investment plan. This decision evolved over time as the Trust commenced its investment activities. The motivation for entering these fields was to make long term investments in these fields.

The Trust does not have any time frame to dispose of these items. The purchases of the investment items are funded by the funds received from the other activities of the Trust. The art collection is displayed at the residential premises of the Trustee Company's Director.

The Director of the Trustee Company has knowledge base and experience in the field of the investment items. The Trust is aiming for the investment items to double in value over a X year period.

The Trust intends to undertake the investment activities indefinitely, that is, there is no time limit contemplated at this stage. The Trust plans to spend $Y a year on purchases.

The breakdown of expenditure between the currency and artwork will be totally dependent on the opportunities that present themselves. 

The investment strategy of the Trust is broadly to hold approximately A% of its total investments in artwork and currency. It is expected that the number of items will be small in volume but of high quality with an expectation that these will deliver greater capital growth. The position will be subject to on-going review and monitoring.

The investment items are disclosed in the balance sheet of the Trust as fixed assets and valued on an annual basis.

No items have been sold, since this is a long term investment strategy that has only recently commenced.

The Trust at the moment has not considered policy of selling investment items if they have not gone up by a certain percent in a certain amount of time and replacing them with better performing items, but may consider this policy in the future.

A loan is used to fund the investment activities in addition to money generated by other activities of the Trust. All investment items are insured. 

The Trust may decide to sell investment items dependant on the market for these items. If there is a sell which generates a profit to the acquisition price, the Trust may sell.

The director of the Trustee Company has skills or expertise in the field as a long term investor and collector.

The Trust engage experts to give advice on what items/categories of investment items they think are likely to go up in value significantly over time to assist the plan to buy those items.

The Trust may test the market by placing pieces with various auction houses with a set reserve.  However, given the early stage of the overall investment strategy, it is anticipated that it will be several years before this occurs.

The Trust has prepared budgets in relation to investment items, which include projected income and expenses.

The Trust currently has a bank loan, that is used to fund a range of investment activities including the collecting of investment items.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

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

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

Reasons for decision

Summary

The Trust activities in purchasing investment items do not form part of the Trust's enterprise of investment activities.

Detailed reasoning

Are the Trust activities in purchasing investment items form part of the Trust's enterprise of investment activities?

It will depend on the facts of each case to determine whether the activities conducted by an entity relate to an identified enterprise.

The term enterprise is explained in subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and includes an activity or series of activities done:

a) in the form of business or,

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

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in the ruling and the determination have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction.

In the form of business:

“Business” is defined in section 195-1 of the GST Act to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

The courts have determined that the question of whether an activity constitutes a business or hobby depends upon an assessment of the relevant facts and involves matters of fact and degree. No one factor is decisive and many elements may have to be considered in combination and on what the 'large or general impression gained' is (Ferguson v. FC of T (1979) 79 ATC 4261 and Martin v. FC of T (1953) 90 CLR 470).

In determining whether the purchase of the investment items would form part of the activities of the Trust's enterprise of carrying on investment activities, we took into consideration factors which the courts have held to be relevant in determining whether an activity is an enterprise. Miscellaneous Tax Ruling MT 2006/1 paragraph 178 refers to Taxation Ruling TR 97/11 which states the main indicators of carrying on a business.

Paragraph 176 of MT 2006/1 provides that the meaning of business is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 178 of MT 2006/1 refers to TR 97/11 and lists the factors to be considered when determining if a business is being carried on include:

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on, the determination is generally the result of a process of weighing all the relevant indicators.

Paragraph 181 of MT 2006/1 provides that activities are excluded from the definition of enterprise if they are carried on by an individual without a reasonable expectation of profit or gain. Further, activities are excluded if they are done as a private recreational pursuit or hobby.

We have determined that the Trust's activities in purchasing investment items do not form part of the Trust's enterprise of investment activities for the following reasons:

Although the Trust may meet some of the above criteria in paragraph 178 of MT 2006/1, the specific indicators that disprove the Trust's activities in purchasing investment items forming part of the Trust's carrying on an enterprise of investment activities are:

An intention to make a profit from the activity as well as a prospect of profit

When the Trust sells the investment items, the Trust hopes to make a profit because of an increase in value in the time between the purchase and the sale. The investment items are disclosed in the balance sheet of the Trust as fixed assets and valued on an annual basis. The above would indicate that the investment items are held for capital gain.

Significant commercial purpose or character

We do not consider that the Trust's activities in relation to the purchasing of investment items have significant commercial purpose or character. The Trust states that it is expected that there will be between A to B items of artwork purchased each year though this is dependent on opportunities that present themselves. No investment items have been sold, since this is a long term investment strategy that has only recently commenced. The Trust at the moment has not considered policy of selling investment items if they have not gone up by a certain percent in a certain amount of time and replacing them with better performing items, but may consider this policy in the future. The Trust may decide to sell investment items dependant on the market for these items. If there is a sell which generates a profit to the acquisition price, the Trust may sell.

Recurrent or regular nature of the activity

An indicator of whether or not an entity is carrying on a business is the repetition or regularity of the business. Miscellaneous Taxation Ruling MT 2006/1 states that an activity will be regarded as "regular" if the repetition of the activity is at reasonably proximate, but not necessarily fixed, intervals. The term "continuous" means there is no significant cessation or interruption to the activity.

There is repetition in the purchases but no regularity of sales. The Trust states that none of the investment items have been sold, while the artworks are stored at the Director of the Trustee company's home. It is not a priority at this moment to sell the investment items.

The Trust states the following: there is no set criteria as to the length of time for which investment items will be held or when to be sold.  The Trust is aiming for the investment items to double in value over a Z year period. Hence the Trust intends to hold the investment items for some time before selling them.

Reasonable size and scale

We have taken into account the recent decision in Federal Commissioner of Taxation v. Swansea Services Pty Ltd [2009] FCA 402 (Swansea case) and we do not consider that the Trust is engaged in the kind of activity carried out and on the scale and with the degree of sophistication of the Applicant in Swansea case.

You have provided the numbers of investment items purchased and their prices.

The investment strategy of the Trust is broadly to hold approximately T% of its total investments in investment items. It is expected that the number of items will be small in volume but of high quality with an expectation that these will deliver greater capital growth.  The position will be subject to on-going review and monitoring. 

Business plan

The Trust states there is an investment strategy but this is not currently documented. The Trust is aiming for the investment items to double in value over a Y year period.

The above is different from a typical business plan, which would normally contain defined strategies or plans which will be followed, or outline specific activities will be undertaken, on a regular, recurrent, or significant commercial basis. If the Trust has such a business plan that would deem the purchases of the investment items part of an enterprise as opposed to a small scale long term investment.

In summary, we agree with the Trustee that the Trust's activities in purchasing the investment items are not carried out in the form of a business.

In the form of an adventure or concern in the nature of trade

Further we considered whether your activities in purchasing the investment items are in the form of an adventure or concern in the nature of trade in accordance to s 9-20 (1)(b) of the GST Act.

Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

The activity should be of a commercial nature that is entered into for the purpose of profit-making, but is not part of the activities of an on-going business. It should have features which exhibit the characteristics of a business deal. It does not include private recreational pursuits or hobbies

Paragraphs 258 to 260 of MT 2006/1 state that assets that are purchased with the intention of holding them for a reasonable period of time, that are held as income producing assets, or held for the pleasure or enjoyment of the person are more likely not to be purchased for trading purposes.

The investment items were purchased with the intention of holding them for a reasonable period of time (five to ten years) in the hope that they would increase in value over that period. The artworks are also displayed in the home of the Trustee in a purposely built gallery space, which indicates that they may be held for personal enjoyment.

In this case, we consider the Trust bought the investment items for investment purposes. Therefore, when the investment items are sold at a later date, it will be considered to be a mere realisation of an investment asset.

For the same reasons considered against the indicators contained in TR 97/11, we conclude that the Trust's activities in purchasing investment items do not form part of the Trust's enterprise of investment activities, nor are the activities a separate enterprise in the form of an adventure or concern in the nature of trade in accordance to s 9-20 (1) (b) of the GST Act.

In summary, since the investment items assets are purchased with the intention of holding them for a reasonable period of time, and not to be purchased for trading purposes, the mere disposal of an investment asset does not amount to trade.

Conclusion:

The Trust's activities in regard to purchasing the investment items to hold for investment purposes are not part of the Trust's enterprise of carrying on investment activities. The purchasing of the investment items are not in the form of a business, or in the form of an adventure or concern in the nature of trade. Therefore, they do not satisfy section 9-20(1)(a) and (b) of the GST Act.

Note:

The nature of the activity may change where the frequency and volume of goods sold are more appropriately classified as trading stock and not the realisation of assets. We therefore reserve our right to change our classification of the activity in this ruling if the situation sufficiently develops later.

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