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Ruling

Subject: GST and forestry managed investment scheme

Question 1

Are you carrying on an enterprise for GST purposes?

Answer

Yes.

Question 2

Are you entitled to an input tax credit for any GST imposed by the manager in relation to the amounts charged to you as a participant in respect of:

· the establishment services

· the grant of a specified right (the specified right)

· issue of land trust units, and

· various acquisitions paid for out of a trust account (the trust account)?

Answer

You are entitled to input tax credits in respect of the acquisitions of the establishment services and the specified right.

You are not entitled to an input tax credit in respect of the acquisition of the land trust units.

You are entitled to an input tax credit where the amount that you pay into the trust account is used as consideration for a creditable acquisition that you make.

Relevant facts and circumstances

You are registered for GST.

You have invested in 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 (project documents) with the manager of the project.

The project documents relevantly provide that:

· The manager, as the grantor, grants forestry rights to the participant for a specified amount payable by the participant.

· The forestry rights provide 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 the manager's recommendations.

· The participant engages the manager as an independent contractor to provide the establishment services.

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

· In consideration of the manager agreeing to carry out the establishment services, the participant agrees to pay the manager the establishment services fee set out in the project documents.

· The establishment services fee is inclusive of all costs and disbursements incurred in the provision of the establishment services.

· The establishment services fee is for the provision of the establishment services and is the only fee paid by the participant to the manager in return for the establishment services.

· Additional management fees are payable from time to time.

· Each participant enters into an agreement with the manager for the grant of the specified right and provides consideration for the grant of that right. The right relates to a specified supply to be made by a participant to the manager.

· Under the project documents a land trust is established. The trustee of the land trust acquires the land and leases the land to the manager.

· The participant is required to make specified payments for the purposes of meeting council rates and other charges relating to the forestry right land. The manager deposits those payments into a trust account. The trust account will also be used to pay the costs of the relevant insurance cover.

· Each participant may terminate the management agreement for breach.

You advised that the trustee of the land trust is legally liable to pay the council rates and other charges relating to the forestry right land. As the land is leased to the manager, the trustee of the land trust collects these amounts from the manager. The manager, in turn, under the project documents collects these amounts from the participants.

You advised that the participants are liable to pay the insurance premiums as they take out the insurance cover.

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

The manager is registered for GST.

The trustee of the land trust will be registered for GST at the time of the supply.

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 Paragraph 9-5(a).

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(b).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(c).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(d).

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

Reasons for decision

Question 1

Summary

We consider that you are carrying on a series of activities 'in the form of a business' for the purposes of paragraph 9-20(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). As none of the activities carried out by you fall into the exceptions listed under subsection 9-20(2) of the GST Act, we conclude that you are carrying on an enterprise under section 9-20 of the GST Act.

Detailed reasoning

An entity may be registered for GST if it is carrying on an enterprise. 'Enterprise' is defined in paragraph 9-20(1)(a) of the GST Act to include an activity, or series of activities, done in the form of a business.

The Commissioner considers 'an activity or series of activities' are essentially any act or series of acts that an entity chooses to do, and that the acts can range from a single transaction to groups of related transactions or to entire operations of the entity.

Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on.

Paragraph 170 of Miscellaneous Taxation Ruling MT 2006/1 states, amongst other things, that the phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

MT 2006/1 further states at paragraphs 175 and 176:

175. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997.

176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 178 of MT 2006/1 sets out the indicia of business referred to in paragraph 13 of TR 97/11 as follows:

· a significant commercial activity;

· a purpose and intention of the taxpayer to engage in commercial activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

· activity is systematic, organised and carried on in a businesslike manner and records are kept;

· the activities are of a reasonable size and scale;

· a business plan exists;

· commercial sales of product; and

· the entity has relevant knowledge or skill.

Whether a participant in an agricultural managed investment scheme is carrying on an enterprise under section 9-20 of the GST Act is discussed in ATO Interpretative Decision ATO ID 2010/197.

There are a number of factors which we consider will support a finding of an enterprise being carried on in the form of a business. As expressed in ATO ID 2010/197, the features of a scheme that are relevant include:

· the participants intend to make a profit from their participation in the scheme

· the continued operation over an extended period of time

· the repetitive nature of the work involved in farming each timber lot (to be paid for on a regular basis)

· the ownership by the participants of the trimmings and final harvest, and of the proceeds from their sale

· each applicant may terminate the management agreement for breach or, in company with other participants, resolve to dismiss the manager

· each applicant has an ongoing commitment to pay the manager to do what is necessary in order to facilitate commercial production of timber over a lengthy period of time.

In your case, viewing the arrangement set out in the Project documentation as a whole, we consider that the Project displays the features required to support a finding that an enterprise is being carried on by you in the form of a business.

Therefore, we conclude that you are carrying on an enterprise in respect of your participation in the Project unless those activities fall into the exclusions listed under subsection 9-20(2) of the GST Act.

On the facts provided by you, none of the activities carried out by you fall into the exclusions, therefore we conclude you are carrying on an enterprise under section 9-20 of the GST Act.

Question 2

Summary

You are entitled to input tax credits in respect of the acquisitions of the establishment services and the specified right as these are creditable acquisitions.

You are not entitled to an input tax credit in respect of the acquisition of the land trust units as the acquisition is not a creditable acquisition.

You are entitled to an input tax credit where the amount that you pay into the trust account is used as consideration for a creditable acquisition that you make from either the manager or a third party supplier.

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, you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose if you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or the acquisition is of a private or domestic nature.

As expressed above, we consider that you are carrying on an enterprise in respect of your activities as a participant in the project. The acquisitions in question are for a creditable purpose as they are acquired solely for use in that enterprise. The acquisitions do not relate to making input taxed supplies nor are they of a private or domestic nature. Therefore, the acquisitions meet the requirements of paragraph 11-5(a) of the GST Act.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply.

Section 9-5 of the GST Act defines what is a taxable supply. Section 9-5 provides that an entity makes a taxable supply if:

(a) it makes the supply for consideration

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

(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.

Establishment services and the specified right

The supplies of the establishment services and the specified right to you meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· the supplies are made for consideration

· the supplies are made in the course or furtherance of an enterprise that the manager carries on

· the supplies are connected with Australia, and

· the manager is registered for GST.

Furthermore, the supplies of the establishment services and the specified right are not input taxed or GST-free. Therefore, the supplies are taxable supplies as they meet all the requirements of section 9-5 of the GST Act. As such the acquisitions of the establishment services and the specified right meet the requirement of paragraph 11-5(b) of the GST.

The acquisitions of the establishment services and the specified right also meet the requirements of paragraphs 11-5(c) and 11-5(d) of the GST Act as you will provide or are liable to provide consideration for the supplies and are registered for GST.

Therefore, the acquisitions of the establishment services and the specified right meet all the requirements of section 11-5 of the GST Act. Hence, you are making creditable acquisitions and are entitled to input tax credits under section 11-20 of the GST Act in respect of these acquisitions.

Land trust units

The supply of the land trust units to you is an input taxed financial supply. As such, the supply does not meet the requirements of section 9-5 of the GST Act and therefore is not a taxable supply. Consequently, the acquisition of the land trust units does not meet the requirement of paragraph 11-5(b) of the GST Act.

As the acquisition of the land trust units does not meet all the requirements of section 11-5 of the GST Act, the acquisition is not a creditable acquisition. Therefore, you are not entitled to an input tax credit under section 11-20 of the GST Act in respect of the acquisition of the land trust units.

Various acquisitions paid for out of the trust account

The project documents provide that the trust account is a deposit account held in the name of the manager for the purposes of meeting the costs of council rates and other applicable statutory charges in relation to the forestry right land of the participant.

The project documents provide that the trust account will also be used to pay the cost of the insurance cover.

Goods and Services Tax Ruling GSTR 2000/37 deals with agency relationships and the application of the law.

Paragraph 45 of GSTR 2000/37 provides that a transaction is considered to be made by the principal through the agent, if the agent is authorised to undertake the transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction.

Paragraph 28 of GSTR 2000/37 outlines the factors that indicate that an agency relationship exists. This paragraph states:

29. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

Paragraphs 48 and 49 of GSTR 2000/37 deal with agency relationship and disbursements and state:

48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client.

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

Accordingly, the entitlement to an input tax credit would depend on the circumstances of each acquisition that is made using the funds in the trust account.

Where the manager makes an acquisition from a third party as your agent, thereby binding you to the legal effects of the transaction with the third party, you are the recipient of the supply made by the third party. In this situation the manager is not making a supply to you as they are merely acting as a paying agent.

If the supply by the third party to you is a taxable supply, and your acquisition of the thing meets the other requirements of section 11-5 of the GST Act you are entitled to an input tax credit on that acquisition under section 11-20 of the GST Act.

For example, you advised that the participants are liable to pay the insurance premiums as they take out the insurance cover. In this situation, if the manager merely arranges the insurance cover on your behalf and pays for the insurance using the funds in the trust account as a paying agent, the reimbursement does not form part of the consideration that you pay to the manager for a supply that the manager makes to you. The insurance company is making the supply to you. You are entitled to an input tax credit under section 11-20 of the GST Act if the supply of the insurance cover by the insurance company to you is a taxable supply and your acquisition of the insurance cover meets the other requirements of section 11-5 of the GST Act.

Where the manager makes an acquisition in its capacity as a principal in the course of its enterprise, the manager is the recipient of the supply. If you reimburse the manager, the reimbursement forms part of the consideration that you pay to the manager for the supplies that the manager makes to you under the project documents. As the supplies that the manager makes to you meet all the requirements of section 9-5 of the GST Act the requirements of paragraph

11-5(d) of the GST Act is met. You are entitled to an input tax credit under section 11-20 of the GST Act as the acquisition also meets all the other requirements of section 11-5 of the GST Act.

For example, you advised that the trustee of the land trust as the owner of the plantation land is the entity that is legally liable to pay the council rates and other applicable statutory costs in relation to the land. As the land is leased to the manager, the trustee of the land trust collects these amounts from the manager. The manager, in turn, under the project documents collects these amounts from you.

Goods and Services Tax Determination GSTD 2000/10 explains when the landlord's outgoings payable by a tenant form part of the consideration for the supply of the premises by the landlord.

Paragraphs 7 to 10 of GSTD 2000/10 state:

Supply to landlord is not a taxable supply

7. If a single supply is made under the lease we do not consider that the payment of outgoings by the tenant is a payment for a supply that has the same character as the supply made by a third party to the landlord. The payment is made by the tenant for the supply by the landlord of the premises and not for the particular supply made to the landlord to which the outgoings relates. Therefore if the landlord is making a taxable supply, it will not matter whether the outgoing, when incurred by the landlord, was a taxable supply to the landlord. For example, the landlord's cost of acquiring a GST-free supply in order to supply the premises becomes a business cost of the landlord. This has implications where the supply made to the landlord is not subject to GST (e.g., because of Division 81 of the GST Act) or is a GST-free supply (e.g., because of Subdivision 38-I of the GST Act).

Supply to landlord is not subject to GST

8. Payment by the landlord of local council rates, land tax or water charges may not be subject to GST because of the operation of Division 81. If the tenant is required under the terms of the lease to reimburse the landlord's expenditure on an 'Australian tax, fee or charge' listed in the determination made by the Treasurer under subsection 81-5(2) of the GST Act, this is not the 'payment of [an] Australian tax, fee or charge' by the tenant and Division 81 does not apply to the tenant's reimbursement of the rates, land tax or other charges.

9. If the tenant makes payment directly to the entity levying the tax, fee or charge, this payment will be consideration for the supply of the premises not payment for a supply that the entity levying the tax, fee or charge makes to the tenant. Therefore Division 81 does not apply to payments for the supply by a landlord under a lease and the payment of the tax, fee or charge by the tenant forms part of the consideration for the supply of the premises.

Supply to landlord is GST-free

10. Supplies of water and sewerage services to the landlord may be GST-free. Where the supply under the lease to the tenant involves an incidental provision of water this will not be a supply of water for the purposes of the GST Act. Unless the lease agreement specifies that the landlord will make a separate supply of water to the tenant, any contribution by the tenant to the landlord's expenditure on water will not be consideration for a GST-free supply of water. Where a single supply is made by the landlord, the amount payable by the tenant in respect of water or sewerage will be subject to GST if the supply of the premises is a taxable supply.

In your case, the trustee of the land trust as the owner of the plantation land is legally liable to pay the council rates and other applicable statutory costs in relation to the land. These are business costs of the trustee of the land trust. As the land is leased to the manager, the trustee of the land trust collects its business costs from the manager.

When the manager pays the council rates and other applicable statutory costs for which the trustee of the land trust is legally liable, the manager is reimbursing the trustee of the land trust's business expenses. These payments (reimbursements of the trustee of the land trust's business expenses) form part of the consideration for the lease of the land by the trustee of the land trust to the manager.

As explained in GSTD 2000/10, where a supply made to the trustee of the land trust is not subject to GST because of the operation of Division 81 of the GST Act or because it is a GST-free supply, the payments/reimbursements that the manager makes towards these supplies are not for the particular supplies made to the trustee of the land trust. These supplies lose their character as a GST-free supply or a tax, fee or charge to which Division 81 applies, and become business costs of the trustee of the land trust. As stated above, the payments that the manager makes towards these expenses are consideration for the lease of the land to the manager. This is the case even if the Manager makes the payments directly from the trust account to the relevant authorities.

The manager, in turn, as the grantor of a supply of forestry rights to the participants (under the project documents) is reimbursed for its business costs by the participants. The manager as the agent under the project documents, pays the council rates and other applicable statutory costs from the trust account. These payments (reimbursements of the manager's business costs by the participants) from the trust account form part of the consideration for the supply of the forestry rights made by the manager to the participants under the project documents.

The supply of the forestry rights is not input taxed or GST-free. The supply is a taxable supply as it meets all the requirements of section 9-5 of the GST Act. As such the acquisition of the forestry rights meets the requirement of paragraph 11-5(b) of the GST.

The acquisition of the forestry rights meets the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act as you acquire the forestry rights in carrying on your enterprise, you provide or are liable to provide consideration for the supply and are registered for GST.

Therefore, the acquisition of the forestry rights meets all the requirements of section 11-5 of the GST Act. Hence, you are making a creditable acquisition and are entitled to an input tax credit under section 11-20 of the GST Act in respect of this acquisition.

In summary, you are entitled to an input tax credit where the payment made into the trust account is consideration for a creditable acquisition that you make.