Edited version of private ruling

Authorisation Number: 1011656081992

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Ruling

Subject: GST and Registration of a Responsible Entity For A Managed Investment Scheme (MIS)

Question 1

Is an entity, in its capacity as Responsible Entity (RE) of a Separately Managed Accounts scheme (SMA), an 'entity' for the purposes of Division 184 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Do the activities of the SMA, carried on by the entity in its RE capacity, constitute an 'enterprise' for the purposes of section 9-20 of the GST Act?

Answer

Yes.

Question 3

Is the entity in its capacity as RE of the SMA entitled to register for GST under Division 23 of the GST Act?

Answer

Yes.

Question 4

Are the acquisitions relating to all of the fees for services provided by the entity to the SMA reduced credit acquisitions under item 23(d) in the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) 1999 Regulations (GST Regulations) (Item 23(d))?

Answer

Yes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The SMA is a proposed managed investment scheme (MIS) that is intended to be registered with the Australian Securities and Investments Commission as an MIS.

The SMA will allow investors to invest in a number of professionally constructed and managed investment portfolios.

Each investor will have an absolute beneficial interest in the assets forming part of the investor's profile.

A registered MIS is required under the Corporations Act 2001 to have a RE to operate the MIS and perform functions pursuant to the MIS's constitution.

Subsection 601FC(2) of the Corporations Act 2001 creates a statutory trust relationship between the RE and the members of the MIS in relation to scheme property.

The entity is a public company, and is to be appointed the RE and Operator of the SMA.

The entity will operate the SMA and perform the functions conferred on it by the constitution, which broadly provides that the RE is responsible for the day-to-day management of the SMA.

Clause X of the constitution states that 'the Responsible Entity will hold each Client's Portfolio on separate trust for the Client and each Client is absolutely entitled to the Portfolio held on their behalf as against the Responsible Entity. A Client does not have any interest in another Client's Portfolio.'

Each investor will have their distinct portfolio of investments kept separately identifiable in the records of the RE.

Cash of individual investors is pooled together to provide the SMA with the practical means by which the activities of the MIS can be facilitated.

The RE is entitled to remuneration in relation to the proper performance of its duties as the RE of the SMA. This includes entry and exit fees, administration fees, commission fees, and other fees as authorised in the constitution. Payment of fees, including remuneration of the entity, is made by apportioning the liabilities between investors.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 184,

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

A New Tax System (Goods and Services Tax) Act 1999 Division 11,

A New Tax System (Goods and Services Tax) Act 1999 Section 23-10 and

A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 70-5.02 .

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Entity

For GST purposes, the term 'entity' is defined by section 195-1 of the GST Act to have the meaning given by section 184-1 of the GST Act. The meaning given includes relevantly, at paragraph 184-1(1)(g) of the GST Act, a trust.

MT 2006/1 sets out the ATO View on the meaning of 'entity' carrying on an enterprise for the purposes of entitlement to an ABN. Paragraphs 71 to 73 cover the application of the entity concept to trusts:

71. Trusts and superannuation funds are given statutory status as entities in themselves under subsection 184-1(1) of the GST Act. Some superannuation funds are trusts. At law, a trust is not a legal person. It is a collection of rights, duties and powers arising from the relationship to property held by the trustee for the benefit of the beneficiaries. The trust itself cannot be a party to legal proceedings nor have other obligations placed upon it. The trustee is the appropriate party. This is recognised in subsection 184-1(2) which provides that the trustee in that capacity is taken to be the trust entity. Consequently a trust entity is identified both by the trust relationship itself (the trust) and by reference to one of the necessary legal persons to that relationship (the trustee).

72. The Act does not create two separate entities - the trust and trustee - but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. A consequence of this is that there will only ever be one ABN registration for the trust and only one ABN issued irrespective of the number of trustees for the trust.

73. As stated, rights and obligations cannot be placed directly upon a trust. Therefore, the trustee is the legal person who may create rights and have obligations in relation to the trust property. The trustee is the legal person who is taken to be the trust entity and holds the ABN for the trust or superannuation fund. In addition the trustee is obliged to meet obligations under the ABN Act such as the obligation to provide information under section 15.

While the terms 'trust' and 'trustee' are not defined in the GST Act, the Commissioner considers that a trust will necessarily exist where the following elements are evident in a particular relationship:

§ there is an intention to create a trust

§ there is a beneficiary

§ there is a trustee

§ there is property capable of being held on trust, and

§ there is personal obligation on the trustee annexed to particular property.

In this case, an entity as RE of the SMA is the custodian of the assets in the SMA. Clause X of the constitution provides that the RE will hold each Client's Portfolio on separate trust for the Client and each Client is absolutely entitled to the Portfolio held on their behalf as against the RE. This therefore indicates that there is a collection of individual trusts between the RE and each investor in the MIS.

However, through the MIS, investors are collectively provided with benefits such as access to wholesale investments, consolidated reporting and the expertise of the responsible entity. Additionally, cash of individual investors is pooled together to provide the SMA with the practical means by which the activities of the MIS can be facilitated.

The existence of a pool of funds together with the above mentioned collectively provided benefits indicates the existence of a single overall trust for carrying out the SMA managed investment scheme purposes. This single overall trust co-exists with the collection of individual trusts.

In form, a MIS can be characterized as a collection of separately declared trusts, each of which is likely to be an entity for the purposes of the GST Act. However, in substance, the individual trusts co-exist with an overall trust relationship that practically facilitates the MIS activities.

Both the single overall trust and the individual trusts within the SMA fall within the meaning of the term 'entity' under paragraph 184-1(1)(g) of the GST Act.

Therefore the entity in its capacity as RE of the SMA is an 'entity' for the purposes of Division 184 of the GST Act.

Question 2

Enterprise

In order to be registered for GST, an entity must be carrying on an enterprise. 'Enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business.

In this regard, 'an activity or series of activities' are essentially any act or series of acts that an entity chooses to do. The acts can range from a single transaction to groups of related transactions or to entire operations of the entity. With regard to the words 'in the form of', they have the effect of extending the meaning of 'enterprise' beyond entities carrying on a business. Accordingly, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria of being regarded as a business, have the appearance or characteristics of business activities.

In terms of trusts, a passive investment vehicle, for example a family discretionary trust (that merely holds shares and term deposits and receives investment income) will not be carrying on an enterprise. This is because it lacks the requisite actions to satisfy the enterprise test of activities done in the form of a business. However, a public unit trust will satisfy the enterprise test of activities done in the form of a business, notwithstanding that it may follow a passive investment mandate. The rationale in this case is that the public unit trust is established for commercial reasons and therefore exhibits the necessary business like activities to satisfy the stated enterprise test.

As indicated above, there is an overall trust relationship facilitating the operation of the MIS activities. In the context of this overall trust relationship, the responsible entity necessarily undertakes activities, in exercising its investment discretions, managing the pooled monies and associated activities, that are of a commercial nature and therefore done in the form of a business.

As such, the activities of the overall trust relationship are considered to satisfy paragraph 9-20(1)(a) of the GST Act so as to be considered an enterprise.

Question 3

GST Registration

Section 23-10 of the GST Act provides that an entity may be registered for GST if the entity is carrying on an enterprise (whether or not the entity's turnover is at, above or below the registration turnover threshold) or intends to carry on an enterprise from a particular date.

In this case it is the entity as the RE of the SMA that should be registered for GST purposes in respect of the overall trust relationship.

On being registered, the entity as the RE will be liable for GST in respect of taxable supplies it makes in its capacity as trustee, and it will also be entitled to input tax credits or reduced input tax credits (RITCs) (as the case may be) in respect of its creditable acquisitions.

Question 4

Reduced Credit Acquisitions

Division 11 of the GST Act deals with the entitlement to input tax credits. Section 11-20 provides for an entitlement to an input tax credit for any creditable acquisition made by an entity. Section 11-5 provides that an entity makes a creditable acquisition if:

a) it acquired anything solely or partly for a creditable purpose; and

b) the supply to it is a taxable supply; and

c) it provides, or is liable to provide, consideration for the supply, and

d) it is registered or required to be registered for GST.

Of relevance in this ruling is the concept of creditable purpose. What is a creditable purpose is provided for in section 11-15. Relevantly, that section provides that:

1.An entity acquires a thing for a creditable purpose to the extent that entity acquires it in carrying on its enterprise.

2.However, an entity does not acquire the thing for a creditable purpose to the extent that:

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

The entity in its RE capacity will acquire services from the entity in its own capacity for the purposes of carrying on the MIS enterprise. These acquisitions that the entity makes in its RE capacity are related to financial supplies that are input taxed, namely dealings with an interest in MIS that is mentioned in item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.

As a consequence, most acquisitions made by the entity in its capacity as the RE of the SMA would be denied a creditable purpose and no input tax credits would arise under Division 11 of the GST Act.

However, in some cases, acquisitions that relate to making financial supplies may attract a reduced input tax credit if these acquisitions are listed, relevantly, in regulation 70-5.02 of the GST Regulations. These acquisitions are termed reduced credit acquisitions. In the case of these acquisitions, the entity in its capacity as the RE of the SMA is entitled to claim RITCs equivalent to 75% of the GST included in them.

You submit that the entity in its capacity as the RE of the SMA makes reduced credit acquisitions from the entity in its own capacity, which are characterised as either single responsible entity services or investment portfolio management functions which include acting as a single responsible entity.

You further submit that the acquisitions to which all of the fees relate are in respect of the single responsible entity services or investment portfolio management functions provided by the entity in its corporate capacity to the SMA and these acquisitions are reduced credit acquisitions under section 70-5 of the GST Act.

On the understanding that the entity in its RE capacity is acquiring investment portfolio management functions from the entity in its own capacity, it is our view that it is item 23(d) that best characterises this acquisition as the acquisition is made to enable the entity in its RE capacity to discharge its RE responsibilities.

Support for this view can be found in paragraphs 520 to 528 of GSTR 2004/1. The paragraphs are in the following terms (with footnotes omitted):

521. The explanation for single responsible entity in the glossary to GSTR 2002/2 directs readers to the explanation of responsible entity which is:

Relates to managed investment schemes. The RE role, established in the Managed Investments Act 1998, combines the functions of both the trustee and fund manager, with the RE directly responsible for the fiduciary duties and responsibilities previously held by the trustee.

522. The expressions single responsible entity and responsible entity are interchangeable: the former highlighting the historical merging of the manager and trustee entities into one entity. Both terms relate to managed investment schemes.

523. While the operator of an investor-directed portfolio service (IDPS) is exempted from certain obligations under chapter 5C of the Corporations Act, their role equates to that of a single responsible entity. Consequently, for the purposes of item 23(d), the operator of an IDPS is a single responsible entity.

524. Narrowly viewed, the phrase acting as a single responsible entity may refer only to the service of agreeing to perform portfolio management services for a managed investment scheme. However, because item 23(d) refers to funds management services, the paragraph has a broader scope that extends to the acquisition of ongoing funds management and trustee services.

525. The funds management aspect of acting as a single responsible entity equates, in part, to the role of an investment manager as discussed in items 23(a) and 23(b). The funds management role in item 23(d) includes duties associated with the administration of the managed investment scheme. These services typically include the services outlined in item 24 with the exception of paragraph 24(g).

526. The trustee duties that relate to acting as a single responsible entity are the fiduciary obligations owed by an entity as a consequence of having scheme property vested in them, on behalf of the scheme members.

527. A single responsible entity can act in a number of capacities (such as, funds manager, administrator or trustee). The services of the single responsible entity acting in each capacity may be acquired as a separate and distinct service. In reality, the entity may act in all of these capacities within a single supply of services.

528. Consequently, a fee charged for acting as a single responsible entity need not be broken down into the parts relating to funds management, administration or trustee services for the purpose of determining an entitlement to reduced input tax credits under item 23. However, where the services rendered by the single responsible entity are beyond the scope of funds management, administration and trustee services, the acquirer must objectively determine whether the services are ancillary, incidental or integral to those of acting as a single responsible entity.

As such, the entity in its capacity as the RE of the SMA is entitled to claim reduced input tax credits on responsible entity services provided by the entity in its own capacity, in respect of fees paid as remuneration.