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Ruling

Subject: GST, timeshares and maintenance fees

Question 1

Are annual ownership costs paid to Entity A by timeshare owners in the Complex A owned by Entity A consideration for a supply made by Entity A?

Answer

Yes, annual ownership costs paid to Entity A by timeshare owners in the Complex A owned by the Entity A are consideration for a supply made by Entity A.

Question 2

If the answer to Question 1 is yes, is the supply a taxable or input taxed?

Answer

The supply is input taxed.

Question 3

Are the annual ownership costs paid to Entity A by timeshare owners in Complex B owned by Entity B consideration for a supply made by Entity A?

Answer

Yes, the annual ownership cost is consideration for Entity A making a supply to Entity B of providing use of their amenities to Entity B's timeshare members.

Question 4

If the answer to Question 3 is yes, is the supply taxable or input taxed?

Answer

Refer to question 3.

Question 5

If the answer to either Question 1 or 3 is no has GST been incorrectly paid and hence overpaid by Entity A?

Answer

Yes, GST has been incorrectly paid and hence overpaid by Entity A.

Relevant facts and circumstances

Two timeshare schemes operate as one resort.

The relevant entities are Entity A and Entity B. Entity A is registered for GST, however, Entity B is not registered for GST.

Although two separate and legally unrelated schemes exit - Complex A owned by Entity A and Complex B owned by Entity B.

Entity C created the timeshares which were transferred to Entity A and marketed to the general public by Entity C. Entity C granted to long term lease of Complex A to Entity A at the peppercorn rental. Entity A has since acquired title to the property.

Whilst Entity B is a unit based scheme Entity A is more in the nature of a right to use scheme.

The Articles of Association provides:

Owner means every person named as an owner on a current Timeshare Certificate issued by Entity A or a current unit Certificate issued Entity B,

Timeshare programme means a programme or plan of timesharing for the time being established by Entity A or by Entity B.

An agreement has been provided that was entered into between Entity A and Entity B. this provides for the annual ownership costs to be paid for Complex B to Entity A in return for Entity A providing access to Entity A's amenities.

Also provided by Entity A was an exemption from being registered for licensing purposes for the operation of the timeshare scheme.

Relevant legislative provisions

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

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

Reasons for decision

Question 1

Summary

The annual ownership costs paid to Entity A by timeshare owners in Complex A owned by Entity A are consideration for a supply made by Entity A.

Detailed reasoning

The supply of the timeshare interest is a supply for a continuous period and was created and supplied by Entity A, with Entity C marketing them to the public.

Consideration for GST purposes is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition'.

Section 9-15 of the GST Act expands on the meaning of 'consideration for a supply'. Under subsection 9-15(1) of the GST Act, a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply of anything.

In determining whether a payment is consideration under subsection 9-15(1) of the GST Act, the test is whether there is a sufficient nexus between the supply and the payment made [see paragraphs 64 to 72 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration].

In Berry v. Federal Commissioner of Taxation (1953) 89 CLR 653 the High Court considered the meaning of consideration 'for or in connection with' in the context of former section 84 of the Income Tax Assessment Act 1936, a provision which included consideration for or in connection with goodwill in a lease premium. In this case, Kitto J. held that 'in connection with' was a broader test than 'for'. At page 659, his Honour commented that consideration will be in connection with property where:

the receipt of the payment has a substantial relation, in a practical business sense, to that property.

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction.

There is a sufficient nexus between the supply of the interest in or under the time-sharing schemes and the annual ownership costs paid by the member for the annual ownership costs to be characterised as consideration for the supply of an interest in or under the timesharing scheme.

As the payment of the annual ownership costs confers no rights, goods or services to members other than the ability to exercise the entitlement and maintain the member's continuing interest in or under the timeshare scheme. The payment of that fee is an essential part of the member's ability to participate in the timesharing scheme and therefore consideration for a supply made by Entity A to the timeshare owners in relation to the timeshare scheme.

Question 2

Summary

The annual ownership costs paid Entity A by timeshare owners in Complex A owned by Entity A are consideration for a supply made by Entity A and input taxed as they are financial supplies.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

· the supply is for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· 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.

The supply by Entity A is made for consideration in the course or furtherance of their enterprise carried on by Entity A. The supply of the interest is connected with Australia and Entity A is registered for GST. Hence, the supplies are not taxable to the extent they are GST-free or input taxed.

There are no provisions that would result in the supply being GST-free, however, consideration needs to be given to whether it will be input taxed. Of particular relevance in this circumstance is subsection 40-5(1) of the GST Act. This subsection provides that a financial supply is input taxed. The term financial supply is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (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 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 supply of the interest.

Item 10 of the table in subregulation 40-5.09(3) (Item 10) of the GST Regulations lists an interest in or under securities. The term 'securities' is defined in the GST Regulations as having the meaning given by subsection 92(1) of the Corporations Act.

It should be noted that Item 10 of the table in subregulation 40-5.09(3) was amended by A New Tax System (Goods and Services Tax) Amendment Regulations 2000 (No. 6) with effect from 20 December 2000, so that an interest in or under a timesharing scheme was no longer excluded from being a security.

Something that is a security under the Corporations Act is therefore also a security for the purposes of Item 10 of the GST Regulations.

Paragraph 92(1)(c) of the Corporations Act provides that an interest in a managed investment scheme is a security for the purposes of that Act.

Section 9 of the Corporations Act provides that a timesharing scheme falls within the definition of a managed investment scheme. Section 9 of the Corporations Act further defines a timesharing scheme as a scheme, undertaking or enterprise, whether in Australia or elsewhere:

(a) participants in which are, or may become, entitled to use, occupy or possess, for 2 or more periods during the period for which the scheme, undertaking or enterprise is to operate, property to which the scheme, undertaking or enterprise relates; and

(b) that is to operate for a period of not less than 3 years.

Entity A's timeshare schemes satisfy this definition.

Accordingly, the provision of an interest in or under the timesharing scheme to a member on or after 20 December 2000 is a supply of an interest in or under a security under Item 10 of the GST Regulations. Furthermore, Entity A receives consideration, Entity A makes the supply in furtherance of an enterprise Entity A carries on and the supply is connected with Australia. Also, Entity A is registered for GST and in relation to the timeshares they manage they are a financial supply provider.

In relation to your contention that Entity A did not make the original supply and cannot be the financial supply provider the Commissioner disagrees as Entity A created the timeshares and provided them to Entity C to market to the public. Furthermore, the Articles of Association together with the fact that Entity A purchased title of the resort means that they have all of the rights, obligations and liabilities of the resort including the timeshares they created. This is case as the timeshares were provided on a continuous period.

Hence, the supply of the interest in or under the timesharing scheme is a financial supply by the Club because it satisfies all of the requirements in subregulation 40-5.09(1) of the GST Regulations. These supplies were taxable supplies from 1 July 2000 to 20 December 2000. From 20 December 2000 these supplies were input taxed supplies.

Question 3

Summary

The annual ownership cost is consideration for Entity A making a supply to Entity B of providing use of their amenities to Entity B's timeshare members.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

· the supply is for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· 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.

The supply of the timeshare interest is a supply for a continuous period and was created and supplied by Entity B, with Entity C marketing them to the public.

Consideration for GST purposes is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition'.

Section 9-15 of the GST Act expands on the meaning of 'consideration for a supply'. Under subsection 9-15(1) of the GST Act, a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply of anything.

There is a sufficient nexus between the supply of the interest in or under the time-sharing schemes and the annual ownership costs paid by the member for the annual ownership costs to be characterised as consideration for the supply of an interest in or under the timesharing scheme.

As the payment of the annual ownership costs confers no rights, goods or services to members other than the ability to exercise the entitlement and maintain the member's continuing interest in or under the timeshare scheme. The payment of that fee is an essential part of the member's ability to participate in the timesharing scheme and therefore consideration for a supply made by PDS to the timeshare owners in relation to the timeshare scheme.

Therefore, the supply by Entity B is made for consideration in the course or furtherance of their enterprise carried on by Entity B. The supply of the interest is connected with Australia but Entity B are not registered for GST. This is the case provided Entity B is not required to be registered for GST. Hence, the supplies are out of scope for GST as section 9-5 of the GST Act is not satisfied.

This is the case provided Entity B is not required to be registered for GST.

Furthermore, under an agreement entered into between Entity A and Entity B, Entity A agreed to make a supply of the use of amenities to Entity B to be provided to Entity B's timeshare members and in return Entity B has agreed that Entity B's timeshare members will pay the annual ownership cost to Entity A. Entity A supply will be taxable as there is a supply of the use of amenities to Entity B for consideration (Entity B's annual ownership cost from their timeshare members), Entity A makes the supply in course of their enterprise, the supply is connected with Australia and Entity A is registered for GST.

Question 4

Summary

The annual ownership costs paid for timeshare owners in the Complex B owned by Entity B are consideration for a supply made by Entity B to the timeshare owners but as previously mentioned are out of scope for GST.

Detailed reasoning

Refer to question 3 for a detailed explanation.

Question 5

Summary

GST has been incorrectly paid and hence overpaid by Entity A as it was treated as taxable regarding the annual ownership costs they receive from Complex A and underpaid by Entity A as it did not treat the supply of supplying its amenities to Entity B's timeshare members for Complex B as taxable.

Detailed reasoning

Please refer to question 2