Edited version of private ruling

Authorisation Number: 1011608947096

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Ruling

Subject: Goods and Services Tax and profit distribution

Question

Is A, in its capacity as controller of B (an incapacitated entity), liable to pay to the Tax office any amount for GST in respect of profit distributions made by C pursuant to the Management Agreement binding entity B and C and received by entity A in its capacity as controller of assets of B?

Answer

No. A is not liable to pay to the Tax office any amount for GST in respect of the profit distributions made by C pursuant to the Management Agreement.

Relevant facts

B is registered for GST and entered into an agreement with D and C in regards to the development and operation of a resort.

D contributed half the cost of the purchase of the land for the resort and B contributed the other half.

C was appointed the manager of the resort.

The managers obligations are amongst other things to:

· operate the Management Rights for the benefit of B and D

· distribute all of the profits and other income received by the Manager pursuant to the operation of the Management Rights.

The Management Agreement sets out that unless otherwise unanimously agreed after payment of expenses and the fees and disbursements to D in accordance with Schedule 1, which the parties acknowledge are an expense of the Business, the total net profit received from the Business will be distributed equally to B and D.

The distribution to B is not a dividend for the purposes of the Corporation Act 2001 (Cth).

B granted a fixed and floating charge to A over all of B's assets held in its own right and as trustee of a Trust in exchange for entering into a Commercial Loan facility agreement.

The assets of B included an interest in the management rights to the holiday resort and a right to profit distributions.

Following default by B, A took possession and control of all of the rights of B arising out of the Management Agreement.

A is in the process of registering for GST in its capacity of controller.

A copy of ASIC form 504 Notification of Appointment of Controller was attached to the application for the ruling.

A's control was limited to that interest of B under the Management Agreement; the control did not extend to all property or assets of B.

A Notice of control was also issued to B whereby A took possession and control of B's interest in the Management Agreement including but not limited to any right to profit distributed under the Management Agreement.

A, in its capacity as controller, received, during its period of control, profit distribution payments made by or on behalf of C pursuant to the Management Agreement. The profit distribution payments received by A were for profits of the management rights business derived by C being after the date of appointment of A as controller. (Note these are not the future profit distributions assigned to entity E who purchased the management rights)

A notice of Assignment was issued to C on behalf of A assigning all of the future rights and entitlements of B including the entitlement to distributions of profits derived from the management rights business in accordance with the Management Agreement along with the management rights to E.

Two Chartered Accountants were appointed liquidators of B by a creditors resolution.

A also sold B's rights under the Management Agreement. A continues to be controller pending the resolution of these GST issues and final reporting as required under the Corporations Act.

A copy of the 'Deed of Assignment of Management Agreement Rights' (Sale Agreement) pursuant to which the sale of B's interest in the management rights was effected by A is attached to the application. It should be noted that A intends paying to the ATO the relevant GST received by it on completion of the sale.

Detailed Reasoning

Section 58-5 of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act) explains the general principle for the relationship between incapacitated entities and their representatives and what each entity is responsible for.

A representative is defined in the GST Act to include amongst other things a controller and therefore you meet the definition of a representative. An incapacitated entity is defined amongst other things to include an entity that has a representative. Therefore you are the representative of B, an incapacitated entity.

Section 58-5 of the GST Act provides that any supply, by an entity in the capacity of a representative of another entity that is an incapacitated entity is taken to be a supply by the other entity.

Specifically it provides in paragraph 58-10 (1)(a) of the GST Act that a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40 of the GST Act be liable to pay on a taxable supply to the extent that the making of the supply, is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The key issue in section 58-10 of the GST Act is that there must be a supply in connection with the consideration before it can be ascertained that there is a taxable supply.

Entity A received the profit distribution after making a demand to C requiring payment of the outstanding profit distributions in accordance with the Management Agreement.

Goods and Services Tax Ruling 2006/9 Goods and services tax: supplies. (GSTR 2006/9) examines the meaning of supplies. It uses 16 propositions to assist in characterising supplies. Proposition 5 and 6 provide that:

5 To 'make' a supply an entity must do something and

6 'Supply' usually but not necessarily, requires something to be passed from one entity to another.

Paragraph 72 to 75 discusses the situation of a judgement creditor and provides the following explanation:

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw')^F29 in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.^F30

74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done:^F31

It seems to me that different considerations arise when considering the meaning of 'supply' in the Act. Notwithstanding the statutory compulsion, the liquidator's disposition in St Hubert's Island Pty Ltd (in liq) was something that was 'made' by him and for that reason would be likely to be considered a supply within the meaning of the Act. This is quite a different situation from the matter at hand, for the release of the obligation to pay a judgment sum by the payment of that sum will occur regardless of whether the judgment creditor makes or does any act at all. It was held in Databank Systems Ltd v. Commissioner of Inland Revenue (NZ) (1987) 9 NZTC 6213 that 'supply' means 'to furnish or provide'. Application of that proposition to the word 'supply' as enacted in the Act, s9-10 reinforces the concept that there is a legislative intention not to include in the word 'supply' the release of an obligation that occurs independently of the act of the releasor.

75. Underwood J considered the disposition by the liquidator would have been a supply under the GST Act because it was something 'made' by the liquidator. His Honour did not find a supply in relation to the release of the obligation to pay a judgment sum because the release occurred upon payment and not as a result of the judgment creditor doing something. However, an entity may do something and make a supply by agreeing to refrain from an act or to tolerate an act or situation.

In your case you are similar to the judgement creditor who 'did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt' as set out in paragraph 73.

Proposition 6 is expounded in paragraphs 92 to 94 and it provides in paragraph 92 that generally a supply requires something to be passed to another entity. Although it goes on to give an example of where there is a supply even though nothing is passed the example does not fit your situation.

Under the GST legislation, GST is payable on taxable supplies. In the case of B, prior to it becoming incapacitated, the profits distributed to it were never for any supply it made but originated from the management rights. Therefore in the hands of A, as controller, the same principle applies.

Your demand for the profit distribution does not meet the definition of supply as nothing was passed to C and therefore you do not meet the criteria for a taxable supply as set out in section 9-5 of the GST Act.

Therefore as there is no taxable supply there is no GST payable.