Edited version of private ruling

Authorisation Number: 1011649571618

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Ruling

Subject: GST and Forestry Managed Investment Scheme

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 managed investment scheme under the Corporations Act 2001; and

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

Investors become participants ('Growers') in the Scheme by entering into the Scheme Constitution and associated agreements with the responsible entity (RE).

The Constitution provides the RE of the Scheme is to be appointed as manager of the Scheme ('the Manager').

The Scheme agreements relevantly provide that:

· each Grower leases a timber lot from the Manager;

· the lease agreement provides the Grower with the right to enter the land; the right to establish, maintain and harvest a crop of trees on the land; the right to construct and use buildings, works and facilities as may be necessary for the Grower to establish, maintain and harvest a crop of trees on the land;

· the Grower is entitled to all harvest proceeds from the sale of plantation produce;

· the Grower owns all the trees on their leased land and all plantation produce produced by or derived from those trees;

· a Grower controls what agricultural activities take place on the plantation and has the capacity to implement activities which differ from the recommendations of the Manager;

· the Grower appoints the Manager as an independent contractor to provide forestry services;

· the forestry services include site preparation; provision of cutting or seedlings; fertilising; replanting; managing and maintaining the plantation; weed and pest control; hazard reduction; maintenance of roads, firebreaks, fences, gates and related infrastructure; fire prevention, harvesting; and rehabilitation of the plantation land;

· in consideration of the Manager agreeing to carry out forestry services, the Grower agrees to pay to the Manager the management fee; and

· additional management fees may be payable from time to time.

Each Grower enters into a Put Option Deed with the Manager in respect of which they provide consideration for the grant to the Grower of the option to require the manager to purchase an interest in the rights and benefits of the Grower under the Scheme documents for a set amount.

Each Grower enters into a Land Rights Agreement with the manager in respect of which they provide consideration for the grant to the Grower of the rights to require the manager to distribute the Plantation Land Proceeds or Incremental Increase amount to a Grower.

The Land Rights Agreement defines the terms as follows:

Incremental Increase means the independent valuation of the Plantation Land less any selling costs, legal costs associated with the sale and the costs of acquisition of the Plantation Land incurred by the Manager (including the purchase cost of the land, stamp duty and legal costs incurred in acquiring the land), ownership holding costs (such as rates and taxes) less any costs associated with Rehabilitation of the Plantation Land.

Plantation Land means the Forestry Right Land of all Growers in the Plantation, all Adjacent Land and all other land involved in the Plantation, as identified in each Timberlot Agreement. Plantation Land may include separate areas within the one geographical area as determined by the Manager.

Plantation Land Proceeds means the gross sale proceeds arising from the sale of the Plantation Land less any selling costs, legal costs associated with the sale and the costs of acquisition of the Plantation Land incurred by the Manager (including the purchase cost of the land, stamp duty and legal costs incurred in acquiring the land), ownership holding costs (such as rates and taxes) less any costs associated with Rehabilitation of the Plantation Land.

Questions

1. Is the payment of the establishment services fee by participants in the Scheme consideration for a taxable supply under Division 9 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes

2. Is the grant of the put option by the Manager an input taxed supply under Subdivision 40-A of the GST Act?

Answer: No

3. Is the grant of the land rights by the Manager an input taxed supply under Subdivision 40-A of the GST Act?

Answer: No

Question 1

Summary

There is sufficient nexus between the supply of the forestry services and the establishment services fee, such that the fee is consideration for the supply of services. Given the other requirements of section 9-5 of the GST Act are satisfied, we conclude the Manager makes a taxable supply of forestry services to the Grower.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a. the supply is for consideration; and

b. the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c. the supply is connected with Australia; and

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

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

Section 195-1 of the GST Act defines 'consideration' for a supply or acquisition as meaning any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition. Subsection 9-15(1) defines 'consideration' as including:

· any payment, or any act or forbearance, in connection with a supply of anything; and

· any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (paragraphs 49, 64-72), Goods and Services Tax Ruling GSTR 2000/11 Goods and services tax: grants of financial assistance (paragraphs 76-81) and Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees (paragraphs 98-99) explain the Commissioner's views on determining whether there is a sufficient connection between a payment and a supply. In determining whether there is a sufficient connection, regard needs to be had to the true character of the transaction. And an arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into, and the circumstances in which the transactions are made.

As stated in the facts, the clauses of Scheme agreements specifically provide that the Grower is granted a lease over a particular parcel of land that includes (amongst other things) the right to enter the land and establish, maintain and harvest a crop of trees; and that the Grower may appoint the Manager as an independent contractor to provide forestry services in relation to that land. The agreements also provide that in consideration of the Manager agreeing to carry out such services, the Grower agrees to pay to the Manager the management fee.

The terms of the Constitution and other scheme agreements therefore indicate the supply of the forestry services is for consideration. Further, having regard to the circumstances in which the transaction is made, we consider the true character of the transaction is one of a supply of forestry services to a holder of a lease over forestry land for a fee. Therefore, we conclude there is sufficient connection between the supply of the forestry services and the management fee, such that the fee is consideration for the supply of services for the GST. Given the other requirements of section 9-5 are satisfied, we conclude the Manager makes a taxable supply of the forestry services to the Grower.

Question 2

Summary

The supply of the Put Option is excluded from being an input taxed financial supply by the operation of item 7 of subregulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). The supply is a taxable supply as it meets the requirements of section 9-5 of the GST Act.

Detailed reasoning

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a) the provision, acquisition or disposal of that interest is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia, and

(b) the supplier is:

· registered or required to be registered for GST, and

· a financial supply provider in relation to the supply of the interest.

Subregulation 40-5.12 of the GST Regulations provides a table of items that are not financial supplies. The supply of a put option for consideration that gives the holder the right to make a taxable supply is specifically excluded from being a financial supply by the operation of item 7 of subregulation 40-5.12.

Each Grower carries on an enterprise on its particular Plantation Land. If an entity that is registered or required to be registered, for GST, transfers all or part of its interests in that enterprise to a buyer the four positive requirements of section 9-5 of the GST Act will be met and the supply will be taxable except to the extent, if any, it is GST-free or input taxed. The supply of 50 per cent of the interests in the enterprise will not be a GST-free or input taxed supply.

As expressed above a supply of an option to make a taxable supply is expressly excluded from being a financial supply. As the requirements in paragraphs (a) to (d) of section 9-5 of the GST Act are satisfied, and the supply is neither GST-free nor input taxed under the provisions of Divisions 38 and 40 of the GST Act respectively, the supply by the entity to the Grower of the Put Option is a taxable supply under section 9-5 of the GST Act.

Question 3

Summary

The supply of the Land Rights is not an input taxed financial supply as it does not satisfy the requirements of subregulation 40-5.09(1) of the GST Regulations. The supply is a taxable supply as it meets the requirements of section 9-5 of the GST Act.

Detailed reasoning

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a) the provision, acquisition or disposal of that interest is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia, and

(b) the supplier is:

· registered or required to be registered for GST, and

· a financial supply provider in relation to the supply of the interest.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit. Item 10 of the table in subregulation 40-5.09(3) of the GST Regulations (Item 10) lists an interest in securities, including the capital of a partnership or trust.

In this circumstance, the arrangement does not involve a supply made by the entity to the Grower that is an interest under Item 2. Further, the supply made under the arrangement is not the provision, acquisition or disposal of an interest in or under Item 10 or any of the other interests mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations.

The requirements of subregulation 40-5.09(1) of the GST Regulations are therefore not satisfied and the supply by the entity to the Grower is not a financial supply.

As the requirements in paragraphs (a) to (d) of section 9-5 of the GST Act are satisfied, and the supply is neither GST-free nor input taxed under the provisions of Divisions 38 and 40 of the GST Act respectively, the supply by the entity to the Grower of the right to a share of the Plantation Land Proceeds or Incremental Increase is a taxable supply under section 9-5 of the GST Act.