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Ruling

Subject: GST and forestry managed investment scheme

Question 1

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

Answer

Yes.

Question 2

Is the grant of a specified right (the specified right) a taxable supply?

Answer

Yes.

Question 3

Are the specified payments that you charge a participant consideration for a taxable supply that you make to the participant?

Answer

The specified payments form part of the consideration for a taxable supply that you make to the participant to the extent that the payments are a reimbursement of outgoings you incur. Please refer to Detailed reasoning for Question 3.

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 (project documents) with you.

The project documents relevantly provide that:

· You, as the grantor, grant 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 your recommendations as the manager.

· The participant engages you 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 you agreeing to carry out the establishment services, the participant agrees to pay you 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 you in return for the establishment services.

· Additional management fees are payable from time to time.

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

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

· The participant is required to make specified payments for the purposes of meeting council rates and other charges relating to the forestry right land. You deposit 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 you, the trustee of the land trust collects these amounts from you. You, in turn, under the project documents collect 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.

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 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 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) Act 1999 Division 81.

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

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 establishment services fee that you charge a participant is consideration for a taxable supply of the establishment 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.

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 establishment services

· in consideration of you agreeing to carry out the establishment services, the participant agrees to pay you 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 and is the only fee paid by the participant to you in return for the establishment services, and

· the establishment services fee, is for the provision of the establishment services.

Accordingly, in your case, the terms of the project documents specifically provide that the establishment services fee is consideration for the provision of the establishment 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 the establishment services to a participant for a fee.

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

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

· in the course or furtherance of an enterprise

· 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 right 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 specified supply that the participant will make 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 their particular plantation land

· the supply is connected with Australia, and

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

Additionally, the specified supply is neither GST-free nor input taxed. Therefore, the participant will be making a taxable supply.

As the specified supply that the participant will make is a taxable supply, the grant of the specified right to a participant is a supply of a right to receive a taxable supply. Therefore, the supply of the specified right 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 specified right is not input taxed under any other provisions of the GST Act or a provision of another Act. Therefore, the supply of the specified right is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Question 3

Summary

The specified payment deposited in the trust account is consideration for a taxable supply that you make to the participant to the extent that it represents reimbursement of expenses incurred by you in respect of the forestry right land.

The specified payment deposited in the trust account is not consideration for a supply that you make to the participant to the extent that it represents payment for supplies made to the participant by a third party.

Detailed reasoning

Whether the specified payments deposited in the trust account are consideration for a taxable supply that you make to the participants depends on the circumstance of each transaction to which the funds are to be applied.

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:

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.

Where you make an acquisition from a third party as an agent of the participants, thereby binding the participants to the legal effects of the transaction with the third party, the participants are the recipients of the supply made by the third party. In this situation you are not making a supply to the participants as you are merely acting as a paying agent. When you pay the third party supplier using the money in the trust account, that payment does not form part of the consideration for a supply that you make to the participants. In this situation, you are not liable to pay GST on these payments.

For example, you advised that the participants are liable to pay the insurance premiums as they take out the insurance cover. Where the participants take out the insurance cover and you as an agent arrange for the insurance cover on behalf of the participants and pay the premiums from the trust account, you are not making a taxable supply for which the payments are consideration. In this situation, the payments do not form part of the consideration for a supply that you make to the participants. You are therefore not liable to pay GST on these payments.

However, where you make an acquisition as a principal in the course of your enterprise, you are the recipient of the supply made by the third party. When you pay the third party supplier using the money in the trust account, that payment forms part of the consideration for a supply that you make to the participants. You are liable for GST equal to 1/11 of the payment.

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 you, the trustee of the land trust collects these amounts from you. You, in turn, under the project documents collect these amounts from the participants.

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 you, the trustee of the land trust collects its business costs from you.

When you pay the council rates and other applicable statutory costs for which the trustee of the land trust is legally liable, you are 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 you.

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 you make 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 you make towards these expenses are consideration for the lease of the land to you. This is the case even if you make the payments directly from the trust account to the relevant authorities.

You, in turn, as the grantor of a supply of forestry rights to the participants, are reimbursed for your business costs by the participants. You as the agent under the project documents, pay the council rates and other applicable statutory costs from the trust account. These payments (reimbursements of your business costs by the participants) from the trust account form part of the consideration for the supply of the forestry rights made by you to the participants under the project documents.

The supply of the forestry rights is a taxable supply as it meets all the requirements of section 9-5 of the GST Act. Therefore, the payments (reimbursements of your business costs) are consideration for a taxable supply that you make to the participants. You as the grantor are liable for GST equal to 1/11 of the payments.