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Ruling

Subject: GST and carrying on an enterprise

Question 1

Is the trustee for XYZ Trust (the Trust) eligible to be registered for GST?

All legislative references are to the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) unless stated otherwise.

Answer

No, the Trust is not eligible to be registered for GST.

Question 2

Is the Trust entitled to claim input tax credits on the legal and accounting expenses it incurred in the relevant financial years?

Answer

No, the Trust is not entitled to claim input tax credits on the legal and accounting expenses it incurred in the relevant financial years.

Relevant facts and circumstances

· The Trust is a discretionary investment trust and has not been registered for GST in the past.

· The Trust is a major shareholder of WWW Pty Ltd (WWW).

· The Trust is the sole shareholder of JJJ Pty Ltd (JJJ).

· As advised:

o the Trust's only sources of income are bank interest, as well as dividends which are received from shares it holds in WWW and JJJ.

o the Trust does not carry out any activities. It merely holds shares and has a bank account into which dividends earned from the ownership of shares are deposited and from which it earns interest.

o the Trust does not take any part in managing subsidiaries and it does not provide loans, guarantees, equipment or premises to its subsidiaries.

o the Trust does not provide any services.

o Paragraphs 9-20(d), (da) and (h) are not applicable.

· The Trust is not entitled to receive tax deductible gifts and is also not a superannuation fund.

· In the relevant financial years, the Trust incurred legal and accounting expenses in relation to a legal matter.

Relevant legislative provisions

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

Reasons for decision
Question 1
Is the Trust eligible to be registered for GST?

Who may be registered for GST

The basic rules of the GST Act apply such that you may be registered if you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold).

Of potential relevance are the following paragraphs to subsection 9-20(1):

An enterprise is an activity, or series of activities, done:


(a) in the form of a *business; or


(b) in the form of an adventure or concern in the nature of trade; or


(c) …; or


(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the Income Tax Assessment Act 1997 and to which deductible gifts can be made; or

(da) by a trustee of a *complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or


(e) …; or


(f) …; or


(g) …; or

(h) by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

However, we are advised that paragraphs 9-20(d), (da) and (h) are not applicable in this case. This is supported by the fact that the Trust is not entitled to receive tax deductible gifts and is also not a superannuation fund.

It is therefore relevant to consider whether the Trust carries on any activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides assistance on an entity's entitlement to an Australian Business Number (ABN) and in doing so, discusses the term enterprise.

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) provides that the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' for the purposes of the GST Act.

Relevantly, when discussing the activities of holding companies, paragraphs 192 and 193 of MT 2006/1 provide that:

192. A holding company or similar entity that merely:

o holds membership interests in other entities and is able to control those entities by virtue of that interest; and/or

o derives income from other entities because it holds membership interests or other securities in those entities

is not considered to be carrying on an enterprise.

193. There are a number of Australian and overseas cases which touch on the issue of whether holding entities are carrying on a business or enterprise. They each turn on their own facts, but in the course of their judgments the courts have discussed the issue of whether the company or other entity carries on a business or enterprise. Guidance may be found in those discussions.

The Australian and overseas cases referred to at paragraph 193 are briefly discussed at paragraphs 194 to 199 of MT 2006/1.

Paragraphs 205 to 209 of MT 2006/1 also contain two relevant examples concerning a holding entity not carrying on an enterprise and also investment activities that are not an enterprise.

Example 23 - holding entity not carrying on an enterprise

205. B trust is a holding entity for three companies. The trustee passively holds all shares, is not involved in the running of the companies and provides no services to the group. There are no headquarters of the group but each company provides its own business premises. The trustee for B trust distributes any dividends received to the unit holders. The trustee's activities are not done in the form of a business and it does not carry on an enterprise.

Example 24 - investment activities that are not an enterprise

206. A trust is set up in respect of 12,000 blue chip shares and term deposits of $100,000 from which dividends and interest are received. The total portfolio is worth $350,000 to be held for the benefit of the trustee's children and grandchildren. The trustee incurs expenses including bank fees, accountancy fees and brokerage associated with the management of the portfolio. The net income of the trust is distributed to the beneficiaries of the trust. The shares are held for investment purposes.

207. Once or twice a year small parcels of underperforming shares in one or two of the companies in the portfolio are sold and the proceeds reinvested in other shares or deposits. The trustee has no other activities.

208. The trustee for the trust is not entitled to an ABN. The activities undertaken are insufficient to amount to an enterprise. ⁷⁰

As the Trust does not carry out any activities but merely holds shares as well as a bank account into which dividends earned from the ownership of shares are deposited and from which it earns interest, our opinion is that the Trust does not carry on an enterprise for GST purposes.

Consequently, the Trust is not eligible to be registered for GST.

Question 2

Is the Trust entitled to claim input tax credits on the legal and accounting expenses it incurred in the relevant financial years?

Section 11-20 provides that you are entitled to the input tax credits for any creditable acquisitions that you make.

One of the requirements to making a creditable acquisition (amongst others) is that you are registered, or required to be registered for GST.

As the Trust is not eligible to be registered for GST, it would not have made creditable acquisitions when it incurred its legal and accounting expenses. The Trust is therefore not entitled to claim input tax credits on the legal and accounting expenses it incurred in the relevant financial years.