Edited version of private ruling

Authorisation Number: 1011584339452

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Ruling

Subject: GST and transfer of a commercial property.

Questions

Is the transfer of the property by the trust to the beneficiaries a taxable supply?

Does division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act -anti-avoidance provisions) apply to the arrangement described in your private ruling request and accompanying documentation?

Answers

No, the transfer of the property by the trust to the beneficiaries is not a taxable supply. Therefore no GST is payable by the trust on this transaction.

No, this particular arrangement does not attract the application of Division 165. 

Relevant facts and circumstances

The Trust is a discretionary trust. L and T are the beneficiaries of the trust. T is the trustee and guardian of the trust.

The trust is a conventional discretionary trust established by a deed of settlement between a settlor and the trustee. The trust deed provides, in the usual way of discretionary trusts, for the trustee to pay or apply (that is, make distributions of) income derived by the trust in each year or capital of the trust to one or more of the beneficiaries as the trustee in its discretion determines.

L and T are also the two members of a self managed superannuation fund (SMSF). Both the SMSF and the trust are registered for GST.

The trust's asset comprises of a commercial property that consists of many retail showrooms. All showrooms are currently leased to long term tenants who carry on a business on these premises. The trust derives rents from the property. The annual rent of the property totals $XXX, XXX.

On Day 1, the trustee T will exercise her discretion and distribute in-specie the property to the beneficiaries as joint tenants for no consideration. The beneficiaries will be registered for GST on Day 1. The beneficiaries will be deriving the equivalent of one day's rent. Such rent will be calculated as a proportion of the annual rent received in relation to the property. 

A market valuation of the property will be made. On the next day, the beneficiaries will then transfer the property to the GST-registered SMSF in the following manner:

Make an in specie contribution of part of the property to the SMSF (the contribution amount will be the full limit of non-concessional contribution amount); and

The SMSF will purchase the remainder of the property at the market value.

The SMSF will acquire the commercial property for the purpose of leasing.

You state that under superannuation contribution rules, a member of a self managed superannuation fund must make non-concessional contributions to the superannuation fund personally; therefore the sole purpose of the above scheme is to plan for the beneficiaries' retirement by transferring the property into the SMSF.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-10

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 184

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-15

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 72-5

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 165

Income Tax Assessment Act 1936 (ITAA 1936) section 318

Reasons for the decisions

in specie distribution from the trust to its members

A supply will be taxable and subject to GST where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply *is connected with Australia; and

· you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

An in specie distribution means a distribution in kind of goods or natural produce instead of money

Whether the trustee makes a supply in respect of the distribution?

Section 184-1 of the GST Act defines 'Entity' to include a trust. Subsection 184-1(2) also provides that the trustee of a trust is taken to be an entity consisting of person(s) or legal person who is the trustee at any given time. This is because the right and obligation cannot be conferred on an entity that is not a legal person and a trust is not a legal entity. The trust and the trustee are one and the same, with the trustee providing a legal personality for the entity (paragraph 72 of the Miscellaneous Taxation Ruling MT 2006/1).

Supply is defined broadly in section 9-10 of the GST Act to include a grant, assignment or surrender of real property.

Therefore, a supply is made by the trust in respect of any distribution made to a beneficiary. For GST purposes, the trustee's decision in respect of the trust distribution is a supply made by the trust. Whether the supply is a taxable supply is a matter that will be considered next.

The supply is made in carrying on an enterprise

Based on the information provided, we consider that the trust is carrying on an enterprise of leasing a commercial property. The question is whether the in-specie distribution, in itself, amounts to an activity done in the course or furtherance of an enterprise.

Paragraph 13 of Goods and Services Tax Determination GSTD 2009/1 states that a supply by way of an in specie distribution of an asset that is applied in the enterprise carried on by the discretionary trust is a supply made in the course or furtherance of that enterprise. Therefore, the in specie distribution is made in the course of the trust's enterprise. Hence paragraph 9-5(b) of the GST Act is satisfied.

In addition, the property is located in Australia so the supply is connected with Australia and the trust is registered for GST. Hence paragraphs 9-5(c) and 9-5(d) of the GST Act are satisfied. Now we need to consider paragraph 9-5(a) of the GST Act.

Supply without consideration to an associate

Although a supply is not made for consideration, a distribution made by a trust may still be a taxable supply where Division 72 of the GST Act applies. Division 72 removes the requirement for consideration from section 9-5 of the GST Act in certain circumstances where the recipient is an associate.

Therefore, it must be determined if there is any consideration, or payment, for the supply of the commercial property to the beneficiaries. 

Subsection 9-15(1) of the GST Act provides that consideration includes any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything.

Although the beneficiaries do not provide any monetary consideration for the commercial property, a 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form as described in paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6.

The creation, grant, assignment or surrender of a right can be a supply under paragraph

9-10(2) (a) of the GST Act. However, in the case of a discretionary trust, a beneficiary does not have vested interest in either the income or the assets of the trust. The beneficiary merely has their right to demand that the trustee administers the trust according to the trust deed. As such, when the trustee makes a distribution, the beneficiary has no right to surrender and gives no consideration within the meaning of section 9-5(a) of the GST Act.

Goods and Services Tax Advice GSTA TPP 049 provides that a distribution made by a trust to a beneficiary does not involve consideration in the form of the surrender to the trust of any rights held by the beneficiary.

However, section 72-5 of the GST Act provides that the fact that a supply to your associate is without consideration does not stop the supply being a taxable supply if: 

· your associate is not registered or required to be registered, or

· your associate acquires the thing supplied otherwise than solely for a creditable purpose.  

Therefore, it needs to be determined whether the beneficiaries are your associates. 

Pursuant to section 195-1 of the GST Act, associate has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

Where the entity is a trustee (in this subsection called the "primary entity"), subsection 318(3) of the ITAA 1936 provides a list of what the legislation considers to be associates of this entity. An associate of a trustee includes an entity that benefits under the trust. Hence under paragraph 318(3) (a) of the ITAA 1936, the beneficiaries are the trust's associates. 

In this instance, the associates (L and T) will be registered for GST prior to the transfer of the property.

In addition, the associates acquire the property to carry on an enterprise of leasing commercial property; therefore they acquire it for a creditable purpose (section 11-15 of the GST Act). The acquisition is not of a private or domestic nature or relates to making input taxed supplies. Hence section 72-5 of the GST Act will not apply to this supply.  

As there is no consideration for the supply, paragraph 9-5(a) of the GST Act is not satisfied. Hence, we do not need to discuss whether the supply is GST-free or input taxed. In summary, the trust is not making a taxable supply under section 9-5 of the GST Act when it makes an in specie contribution to the beneficiaries.

Division 165 of the GST Act

The application of Division 165 of the GST Act, which contains the general anti-avoidance provision, requires a careful weighing of the individual circumstances of each case. It is considered that this particular arrangement does not attract the application of Division 165.