Edited version of private ruling

Authorisation Number: 1011605528679

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Ruling

Subject: Forestry managed Investment Scheme

Question 1

Is Entity A entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for acquisitions made to set-up and promote the forestry managed investment scheme prior to the establishment of the Scheme?

Answer

Yes. Entity A is entitled to input tax credits, for acquisitions made to set-up and promote the forestry managed investment scheme prior to the establishment of the Scheme.

Question 2

Is Entity A as the responsible entity entitled to input tax credits under section 11-20 of the GST Act, for acquisitions made in relation to the management of the participants' interests in the Scheme?

Answer

No. Entity A as the responsible entity is not entitled to input tax credits, for acquisitions made in relation to the management of the participants' interests in the Scheme.

Question 3

Is Entity A entitled to input tax credits under section 11-20 of the GST Act, for acquisitions made in relation to the management of the plantation and the selling of the produce?

Answer

Yes. Entity A is entitled to input tax credits, for acquisitions made in relation to the management of the plantation and the selling of the produce.

Relevant facts and circumstances

The Scheme:

§ is a 'forestry managed investment scheme' as defined in subsection
394-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997);

§ is a registered managed investment scheme under the Corporations Act 2001 (Corporations Act); and

§ involves the establishment and tending of trees for felling in Australia.

The Scheme Constitution establishes the Scheme and operates as a deed binding all participants and the responsible entity (RE).

The Scheme Constitution in relation to the participants provides:

§ the consideration payable by the participants of the Scheme is to acquire an interest in a managed investment scheme;

§ the consideration payable by the participants for the interest includes an initial contribution (which can be paid as a single payment or as regular contributions), and additional contributions to meet the costs of harvest and after-harvest activities;

§ the participant's interest in the scheme entitles the participant to receive a proportional amount of the income of the Scheme, after deduction of all amounts the RE is entitled to deduct from that income; and

§ the participant has no interest in the product of the Scheme.

Under the Scheme documents the participants do not acquire an interest in the land and do not enter into an agreement for the management of the plantation.

The contributions of money by the participant to the scheme, and the property acquired (directly or indirectly) with the contributions of money, are 'scheme property' as defined in Corporations Act. Under subsection 601FC(2) of the Corporations Act, the RE holds such scheme property on trust for the participants.

A trust (and therefore a trust entity) logically comes into existence when subsection 601FC(2) of the Corporations Act operates to create a trust over the scheme property. The scheme's documentation does not provide for a trust coming into existence at an earlier point in time, and therefore there is a trust entity established at the time there is scheme property (as defined in the Corporations Act).

The Constitution provides:

§ for the appointment of the entity as the RE to carry out the activities for the Scheme, including establishing the plantation, and the harvest and after-harvest activities. The RE also has sole authority to market and sell the product;

§ the RE is entitled to be paid out of scheme property for activities carried out for the Scheme; and

§ the RE may engage the services of suitably qualified, experienced and reputable consultants in the field of silviculture, to provide the RE with all such advice and assistance that the RE requires to carry out management, harvest and after harvest activities.

Prior to there being scheme property (as defined in the Corporations Act), the RE makes acquisitions to set up and promote the Scheme, including acquisitions of:

§ accounting services;

§ advice in respect of income tax Product Ruling preparation;

§ legal services; and

§ services to prepare the PDS and other marketing documentation.

After there is scheme property (as defined in the Corporations Act) the RE makes acquisitions that relate solely to the management of the participants' interests in the Scheme, including the necessary accounting and legal services.

The RE also makes acquisitions (after the scheme is established) that relate solely to carrying on the agricultural enterprise, including:

§ plantation management services (for example planting, thinning, harvesting services); and

§ product distribution services (for example transport, sale and marketing services).

Reasons for decision

Question 1

Summary

At the time of the relevant acquisitions Entity A only exists in its corporate capacity as it is yet to be appointed as RE of the Scheme, as fully explained below. As such, the acquisitions can only be made by Entity A in its corporate capacity (as no other GST entity exists in respect of which it can act as trustee). The acquisitions are for a fully creditable purpose as Entity A makes no input taxed supplies in relation to the acquisitions.

Detailed reasoning

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

(a) the entity acquires anything solely or partly for a creditable purpose; and

(b) the supply of the thing to the entity is a taxable supply; and

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered or required to be registered for GST.

'Creditable purpose' is defined in section 11-15 of the GST Act as follows:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) explains the Commissioner's approach to determining whether an acquisition relates to the making of supplies that would be input taxed. GSTR 2008/1 states at paragraph 119:

For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Paragraph 128 of Miscellaneous Tax 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 states that activities undertaken to establish an entity, for example drawing up a trust deed and the settlement of trust property, are not commencement activities (of the entity being established). This is because the trust cannot commence activities until it is in existence.

By reason of the Scheme documentation, the Corporations Act and paragraph 184-1(1)(g) of the GST Act, there is scheme property held on trust, and therefore a trust entity for the GST Act, at the time the trust relationship is established under subsection 601FC(2) of the Corporations Act.

Consequently, for the purposes of section 11-5 of the GST Act, any acquisitions made prior to there being a trust entity can only be made by the entity in its corporate capacity, that is, the acquisitions cannot be made by the entity in its capacity as trustee of the trust entity, as the trust entity does not yet exist.

For the purposes of 11-15(1) of the GST Act, these acquisitions are acquired by the entity in carrying on its enterprise.

Although the trust entity (once it exists) will make input taxed supplies to participants, the entity in its corporate capacity does not make input taxed supplies in relation to the establishment of the Scheme. Therefore, for the purposes of paragraph 11-15(2)(a) of the GST Act, the acquisitions made by the entity do not relate to making input taxed supplies.

Because the acquisitions made to set-up and promote the Scheme are made by the entity in carrying on its enterprise, and the acquisitions do not relate to the entity making input taxed supplies, the acquisitions are made for a creditable purpose.

Provided the other requirements of section 11-5 of the GST Act are met, the entity will be entitled to input tax credits under section 11-20 of the GST Act for such acquisitions.

Questions 2 and 3

Summary

We consider it is Entity A in its capacity as RE (that is, in its capacity as trustee of the trust) that makes the relevant acquisitions, and therefore the acquisitions are made by the trust entity for GST purposes. The acquisitions that relate solely to the ongoing management of participants' interests in the Scheme are not made for a creditable purpose. The acquisitions that do not relate to the participants' interests in the Scheme e.g. because they are acquisition that relate to the agricultural activities, are solely a creditable purpose. (Acquisitions that are partly creditable will require apportionment of input tax credits.)

Detailed reasoning

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes. Under paragraph 11-5(a) of the GST Act, an entity makes a creditable acquisition if (amongst other things) the entity acquires anything solely or partly for a creditable purpose.

GSTR 2008/1 explains the Commissioner's approach to determining whether an acquisition relates to the making of supplies that would be input taxed. GSTR 2008/1 states at paragraph 119:

For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Paragraph 184-1(1)(g) of the GST Act states that an entity includes a trust.

Subsections 184-1(2), (3) and (4) of the GST Act state:

(2) The trustee of a trust or of a *superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

(3) A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity.

(4) If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.

Entity A acts in two different capacities:

§ in its capacity as trustee of the trust established under subsection 601FC(2) of the Corporations Act (being a separate entity for GST purposes); and

§ in its own corporate capacity, making supplies of RE or trustee services to the trust.

The Private Binding Ruling request uses the expression 'Entity A in its role as RE' to mean 'Entity A in its capacity as trustee of the trust'. For the purposes of section 184-1 of the GST Act, this expression is therefore a reference to the trust entity, as distinct from a reference to Entity A in its corporate capacity (being a separate GST entity under section 184-1).

Therefore, for the purposes of paragraph 11-5(a) of the GST Act, the Entity A must determine whether the acquisitions it makes are:

§ acquisitions of the trust entity; or

§ acquisitions made in its corporate capacity.

Basis for determining which GST entity makes the acquisitions

We are of the view that the intention of the parties in question will determine whether an acquisition is made by an entity in its corporate capacity, or in its capacity as trustee of a trust. For the purposes of the GST Act, where an entity can demonstrate that it intended to make an acquisition in its corporate or personal capacity (rather than in its capacity as trustee of a trust), the acquisition is made by the entity in that personal or corporate capacity rather than by the trust entity for the purposes of the GST Act.

For instance, in meeting its requirements to account for financial, taxation or regulatory purposes, an entity may account for acquisitions from third parties as being affairs of the trust, rather than as being affairs of the entity in its corporate capacity (such accounting should not be inconsistent with the terms of the trust deed and the legal relationships between the entity and other suppliers). In such a case, we consider the fact the acquisitions are recorded for accounting, regulatory or income tax purposes as being affairs of the trust is evidence that the entity makes the acquisitions in its capacity as trustee of the trust (rather than in its corporate capacity). Such acquisitions are made by the trust entity for GST purposes.

Evidence of parties' intentions

In your submission to us you asked whether 'Entity A in its role as RE' will be entitled to input tax credits in respect of certain acquisitions made in relation to the Scheme. Pages 5-7 of the PBR submission indicate to us that the parties intend it is the trust the entity (that is, Entity A acting in its capacity as RE) that makes these acquisitions. Unless the financial, taxation, or regulatory reporting or accounting treatment for these acquisitions is inconsistent with that indication, we will accept the trust entity makes the acquisitions for the purposes of the GST Act.

Acquisitions made solely in relation to the ongoing management of the participants' interests in the Scheme relate solely to the making of input taxed supplies (of the Forestry Interests to the participants). These acquisitions are not for a creditable purpose, and therefore the trust entity is not entitled to input tax credits under section 11-20 of the GST Act in respect of them. The acquisitions include:

§ accounting services,

§ legal services.

Acquisitions that are not sufficiently connected to the input taxed supplies of the interest to the participants, for example those acquisitions that solely relate to carrying on the agricultural activities, do not relate to making input taxed supplies, and are therefore for a solely creditable purpose. The trust entity is entitled to input tax credits for these acquisitions, which include:

plantation management services (for example planting, thinning, harvesting services); and

product distribution services (for example transport, sale and marketing services)

Input tax credits for partly creditable acquisitions need to be apportioned in accordance with the principles set out in GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies. For instance, certain accounting services acquired by the trust entity may relate to the management of the participants' interests and also to the affairs of the trust. GSTR 2006/3 states that the input tax credits for such acquisitions needs to be apportioned on a fair and reasonable basis.

The trust entity makes taxable supplies of scheme produce (unless the supplies are GST-free).