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Ruling

Subject: GST and forestry managed investment scheme

Question 1

Is the forestry services fee that you charge a participant consideration for a taxable supply that you make?

Answer

Yes.

Question 2

Is the grant of the put option a taxable supply?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You are the manager of a forestry managed investment scheme (the Project).

The Project:

· 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 in the Project by entering into the Project Constitution and associated agreements with the responsible entity.

The Constitution provides that the responsible entity of the Project is to be appointed as the manager of the Project.

The Project documents relevantly provide that:

· each participant is granted a forestry right over a timber lot

· the forestry right provides the participant 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 participant to establish, maintain and harvest a crop of trees on the land

· the participant owns all the trees on their timber lot and all plantation produce produced by or derived from those trees

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

· the participant controls what forestry activities take place on the plantation and has the capacity to implement activities which differ from recommendations of the manager

· the participant appoints you as an independent contractor to provide forestry services

· the forestry services includes, among other things, site preparation, provision of cuttings or seedlings, planting, fertilising, replanting, managing and maintaining the plantation, harvesting, assist the participants to secure markets for plantation produce, maintenance of roads and other necessary infrastructure rehabilitation of the plantation land, and so on

· each participant may terminate the management agreement for breach

· in consideration of you agreeing to carry out forestry services, the participant agrees to pay you a forestry services fee

· additional management fees are payable from time to time

· each participant enters into a put option agreement with you and provides consideration for the grant of the option

· the put option requires you to purchase an interest in the rights and benefits of the participant under the Project documents

· you, in your capacity as a trustee, issue to the participant units in the land trust fund.

In respect of the forestry services fee the Project documents provide that

· you are engaged by the participants as an independent contractor to perform the forestry services

· in consideration of you agreeing to carry out the forestry services, the participant agrees to pay you the forestry services fee set out in the Project documents

· the forestry services fee is inclusive of all costs and disbursements incurred in the provision of the forestry services

· the forestry services fee, is for the provision of the forestry services and is the only fee paid by the participant to you in return for the forestry services.

The information provided in relation to the Project demonstrates that a participant will make a profit over the life of the Project.

You advised that all the participants will be registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(1).

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-5(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-5(2).

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation

40-5.09(1).

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation

40-5.09(3).

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation

40-5.09(4)

A New Tax System (Goods and Services Tax) Regulations 1999 Regulation

40-5.12.

Reasons for decision

Question 1

Summary

The forestry services fee that you charge a participant is consideration for a taxable supply of the forestry services that you make to the participant.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines what is a taxable supply. Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

(d) you are 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.

Paragraph 9-5(a) of the GST Act requires that the supply is made for consideration.

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 of the GST Act, in connection with the supply or acquisition.

Subsection 9-15(1) provides that 'consideration' includes:

· 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.

A number of GST public rulings discuss critical 'nexus' requirement that must be satisfied to establish the 'supply for consideration' relationship. These include, Goods and Services Tax Ruling GSTR 2001/4 at paragraphs 89 to 96 and Goods and Services Tax Ruling GSTR 2001/6 at paragraphs 64 to 72.

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. 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.

In your case, the Project documents provide that:

· you are engaged by the participants as an independent contractor to perform the forestry services

· in consideration of you agreeing to carry out the forestry services, the participant agrees to pay you the forestry services fee set out in the Project documents

· the forestry services fee is inclusive of all costs and disbursements incurred in the provision of the forestry services and is the only fee paid by the participant to you in return for the forestry services, and

· the forestry services fee, is for the provision on the forestry services.

Accordingly, in your case, the terms of the Project documents specifically provide that the forestry services fee is consideration for the provision of the forestry services as set out in the project documents. Further, having regard to the fact that each participant is allocated a specific parcel of land in respect of which they have the right to establish, maintain and harvest a crop of trees on the forestry right land, we consider that the true character of the transaction is one of a supply of forestry services to a participant for a fee.

Therefore, we conclude that there is a sufficient connection between the supply of the forestry services and the forestry services fee, such that the fee is consideration for the supply of the services.

The supply of the forestry services satisfies all the other requirements of section 9-5 of the GST Act. Therefore, you make a taxable supply when you supply the forestry services to a participant.

In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2010/196 Goods and services tax - GST and agricultural managed investment scheme - supply of forestry services.

Question 2

Summary

Based on the facts of your case, the grant of a put option to a participant is a supply of an option to receive a taxable supply. Therefore, the supply is excluded from being an input taxed financial supply by the operation of item 7 of regulation 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 all the requirements of section 9-5 of the GST Act.

Detailed reasoning

The supply of the put option meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· the supply is for consideration

· the supply is in the course of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered for GST.

The grant of the put option is not a GST-free supply under a provision of the GST Act or a provision of another Act. Therefore, what is left to consider is whether the supply is input taxed.

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 subregulation 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.

Regulation 40-5.12 of the GST Regulations provides a table of items that are not financial supplies. The supply of a put option to make or receive a taxable supply is specifically excluded from being a financial supply by the operation of item 7 of regulation 40-5.12 of the GST Regulations.

In your case, the transfer of all or part of a participant's interest in their enterprise to a buyer meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

· the supply is for consideration

· the supply is in the course or furtherance of an enterprise that the participant carries on, on its particular plantation land

· the supply is connected with Australia, and

· you advised that the participant will be registered for GST.

Additionally, the supply of the interest in the participant's enterprise is neither GST-free nor input taxed. Therefore, the participant will be making a taxable supply when they sell their interest in the enterprise.

As the supply of the participant's interest is a taxable supply, the supply of the put option is excluded from being an input taxed financial supply pursuant to item 7 of regulation

40-5.12 of the GST Regulations. Furthermore, the supply of the put option is not input taxed under any other provisions of the GST or a provision of another Act. Therefore, the supply of the put option is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.