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Ruling

Subject: GST and enterprise

Question

Is Entity X required to be registered for GST?

Answer

Yes, Entity X is required to be registered for GST.

Relevant facts and circumstances

· Entity X is a unit trust.

· Entity Y, a non-resident company, holds all of the units in Entity X.

· Entity X holds shares in an Australian resident company (Entity Z).

· Entity X and Entity Y entered into an interest bearing loan agreement (Loan 1).

· Entity X and Entity Z entered into an interest bearing loan agreement (Loan 2).

· Loan 1 and Loan 2 are for the same amount and on the same terms (including interest rate).

· Entity Y intends to recharge transaction costs that it has incurred in relation to its indirect acquisition of Entity Z to Entity X. Entity X will not recharge those costs to Entity Z.

· Entity X is not involved in the management of Entity Z and does not provide any equipment premises or rights to intellectual property to Entity Z.

· Entity X does not provide any management services to Entity Z and is not the head company of a tax consolidated group.

· Entity X is not a managed investment scheme for purposes of the Corporations Law.

Reasons for decision

Division 23 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides the general GST registration rules. Under section 23-5 of the GST Act, an entity is required to register for GST if it is carrying on an enterprise and its annual turnover meets the registration turnover threshold.

Entity X has advised that its GST turnover will exceed the registration turnover threshold for the purposes of paragraph 23-5(b) of the GST Act. Hence the issue at hand is if Entity X is carrying on an enterprise.

Enterprise is defined in section 195-1 of the GST Act to have the meaning given by section 9-20 of the GST Act. The definition of Enterprise in the GST Act is broad and whether an entity's activities are sufficient to be regarded as an enterprise is a question of fact and degree, having regard to all the circumstances of the case.

Section 9-20 of the GST Act provides that an enterprise is an activity, or a 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)       …………….

The meaning of 'enterprise' under the GST Act includes carrying on a business, as well as an activity or series of activities in the form of a business. The Tax Office view of what is an enterprise is contained in 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).

Goods and Services Tax Determination 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.

Paragraph159 of MT 2006/1 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree, having regard to all the circumstances of the case.

Paragraph 170 of MT 2006/1 states as follows in relation to "in the form of a business":

170. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in detail by Australian courts. 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. This occurs in the case of non-profit entities. In such instances the Commissioner considers that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business. …………..

An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

Paragraphs 191 to 208 of MT 2006/1 discuss the activities of a holding company or similar entity and states at paragraph 192 the following:

192. A holding company or similar entity that merely:

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

· 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.

In discussing the activities of a holding company, MT 2006/1 draws on the principles of a number of Australian and overseas cases which are outlined in paragraphs 193 to 199. Further paragraph 200 outlines a range of indicators as guidance in deciding if a holding company or other entity is carrying on an enterprise.

Paragraphs 194, 195 and 200 states as follows:

194. In Esquire Nominees Ltd (Trustee of Manolas Trust) v. Federal Commissioner of Taxation Menzies J, while not being required to decide upon the issue, made the following observation:

A dividend is payable out of the profits of the company paying it, and, in the case of a holding company, this profit-making business may merely be the receipt of a dividend from another company. It is, for instance, well known that Utah Mining Australia Ltd is presently a holding company and not an operating company. The fact, however, that it simply holds shares in Utah Development Co., an operating company from which it receives dividends which it distributes to its shareholders, does not signify that it does not itself carry on a profit-making business in Australia.

195. In FC of T v. Total Holdings (Australia) Pty Ltd the holding company did more than passively own the shares in its subsidiary, it was also involved in borrowing and on-lending funds to its subsidiary. In this case the Commissioner conceded that the activities of the holding company constituted carrying on a business.

200. From this range of cases the following indicators may give some useful guidance when deciding whether a holding company or other entity is carrying on an enterprise:

· Active involvement in the management of subsidiaries.

· Providing loans, guarantees or indemnities to subsidiaries.

· Providing equipment, premises or rights to intellectual property to subsidiaries. Providing specific management services to its group such as secretarial, financial, legal, taxation, information technology or recruitment and human resources expertise.

In this case, Entity X holds shares in Entity Z. As part of its activities Entity X has also entered into a loan with Entity Y. Entity X has advised that the purpose of the loan between the two parties is for Entity X to provide funding to Entity Z.

Entity X submits that they do not carry on an enterprise for the purpose of section 23-5 of the GST Act. That is, Entity X considers it is merely a 'passive conduit vehicle' used to hold the shares in Entity Z on trust for Entity Y, and to 'pass through' loans from Entity Y to Entity Z. This is based on the fact that the loan provided by Entity X to Entity Z is on the same terms as that money borrowed from Entity Y. That is, Entity X does not make any margin or profit on the lending activities.

In addition, it is submitted that Entity X does not carry on an enterprise as it is not the head company of a tax consolidate group, does not provide management services to Entity Z, nor does it provide any equipment, premises or rights to intellectual property to Entity Z.

In this case we do not agree with the submission that Entity X does not carry on an enterprise. In particular when we consider the functions of a holding entity outlined in MT 2006/1, Entity X's function is similar to a holding entity carrying on an enterprise.

Consistent with paragraphs 195 and 200 of MT 2006/1, Entity X provides loans, guarantees or indemnities to other entities. Therefore we consider that the level of activity by Entity X with respect to the loan agreements they enter into is sufficient to amount to an enterprise being conducted.

Further, the fact that Entity X has not made a profit (or margin) does not necessarily mean that they do not carry on an enterprise. Consistent with paragraph 170 of MT 2006/1, the use of the phrase "in the form of" indicates a wider meaning than the word "business" on its own. Hence not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

Consequently, upon considering the overall circumstances of this case, the Commissioner considers that Entity X is carrying on an enterprise for GST purposes. As such, Entity X will satisfy the requirements of section 23-5 of the GST Act and is required to be registered.