Edited version of your private ruling

Authorisation Number: 1012359911001

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: GST and creditable acquisition

Question 1

Is the acquisition of the Property a creditable acquisition?

Answer

No

Relevant facts and circumstances

You are registered for goods and services tax (GST).

THE BARE TRUST DEED

You entered into a bare trust deed.

Under the Deed:

· The parties of the Deed:

o you are the Beneficiary of the bare trust

o the trustee is A. The trustee is registered for GST.

o the name of the trust.

· The trustee agreed to hold a property or has acquired or agreed to acquire the property on behalf of you, the Beneficiary.

· The trustee has at all relevant times agreed to act as a trustee for the Beneficiary on the terms set out in the Deed.

· The Property the real property is a commercial property located in Australia.

· No part of the Property will ever revert to or to be held in trust for any person other than the Beneficiary.

· Nothing in the Deed entitles the trustee to beneficial ownership of the Property or deprive the Beneficiary of the rights of beneficial ownership (including the right of possession) of the Property.

· Exercise of rights

o The trustee must comply with the instruction or directions of the Beneficiary in relation to the Property.

o Trustee must not sell, encumber or otherwise use the Property or any part of it as security for any obligation without the consent of the Beneficiary in all instances.

THE ACQUISITION OF THE ASSET

Recently, the trustee entered into a contract to acquire the Property a real property situated at in Australia.

At the time of the contract date, there was a lease between the vendor and a third party. The term of the lease expired after the settlement date

The sale contract provides:

· For GST purposes, the supply is not a taxable supply and is a GST-free because the sale is a supply of going concern under section 38-325.

· Going concern clause

o the vendor will continue to carry on the enterprise of leasing of the Property until completion and shall use its best endeavours to supply to the purchaser at completion all of the things that are necessary for the continued operation of the leasing enterprise from the vendor on completion

o the purchaser warrants that it is (or will on completion) be registered under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the purchaser agrees to acquire all of the things that are necessary for the continued operation of the leasing enterprise from the vendor on completion.

o the vendor and the purchaser agree that the sale of the Property comprises a supply of a going concern.

In the Settlement statement, an amount of $xxxx was paid to the vendor representing the monthly rent accrued to the settlement..

On the Settlement date the vendor's solicitor sent a letter to the tenant advised that the lessee are hereby directed that from the date of the next due rental payment to make all payments under the Lease to the purchaser or as they may direct.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999

Section 38-325

Section 11-5

Section 11-15

Reasons for decision

Summary

The acquisition of the Property situated in Australia is not a creditable acquisition because the supply to you is a GST-free supply of a going concern under Subdivision 38-J of the GST Act.

Detailed reasoning

Under subsection 7-1(2) of the GST Act, entitlements to input tax credits arise on creditable acquisitions.

The term' creditable acquisition' is defined in section 11-5 of the GST Act as follows:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

*An asterisk denotes a defined term in the GST Act

If your acquisition of the Property meets all of the requirements in this section, the acquisition is a creditable acquisition and you are entitled to an input tax credit on the acquisition.

The bare trust arrangement

You and the trustee of the bare trust have entered into a bare trust deed. What are the GST implications on supplies and acquisitions made by you or the trustee of the bare trust are discussed below.

Goods and Services Tax Ruling 2008/3 was issued by the Tax Office to explain how the GST Act applies to supplies of real property involving bare trusts and similar trust where the trustee has limited active duties and acts solely at the direction of the beneficiary.

The key characters of a bare trust are as follows:

· An entity that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is to be used in its enterprise to be acquired by another entity to hold on a bare trust for the entity - that is subject to an obligation to transfer legal title to the asset to the entity, or to a third party if the entity so directs and with no other active duties to perform.

· The trustee is required to act at the direction of the beneficiary in dealing with title to the trust property. The trustee has no independence role in the trust property.

In your circumstances, the arrangement between you and the trustee is a bare trust arrangement as discussed above (See Trust Deed).

Paragraphs 37 to 40 of GSTR 2008/3 provide the view of the Tax Office on the issue of carrying on an enterprise by the bare trust:

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

38. On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. For instance, in the example at paragraph11 of this Ruling, despite legal title to the property being held by T, the property is used by B in carrying on its enterprise.

39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

40. The definition of 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T transfers legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

Paragraph 45 of GSTR 2008/3 provides a summary of the outcomes of a bare trust arrangement:

Outcome 1

The beneficiary (B) of a bare trust may carry on an enterprise involving the use or exploitation of real property even though title to the property is registered in the name of a bare trustee (T).

Outcome 2

B may make supplies and acquisitions of real property in the course or furtherance of its enterprise even though title to the property is transferred or received by T.

Outcome 3

B may make supplies in the course or furtherance of its enterprise for consideration even though the consideration is received by T who is bound to pay the consideration to B or at B's direction. Therefore B, not T, has the liability for GST if the supply is a taxable supply.

Likewise, B may make acquisitions in the course or furtherance of its enterprise for consideration even though T provides the consideration (furnished to T by B) to the supplier. Therefore B, not T, has the entitlement to an input tax credit if the acquisition is a creditable acquisition

Outcome 4

A bare trust involving a trustee holding real property on behalf of a beneficiary does not carry on an enterprise, merely by the trustee dealing with the property at the direction of the beneficiary.

Therefore, in your circumstances:

· The leasing enterprise is carrying on by the Beneficiary, you. The obligation to report transactions relating to the Property is your responsibility, not the trustee.

· The term 'you' discussed below refers to the Beneficiary of the bare trust, not the trustee.

Creditable purposes

The term 'creditable purpose' is defined in section 11-15 of the GST Act, of relevance to your circumstances, the term means:

1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

You acquired the Property to carry on a leasing enterprise. The underlying property of the enterprise is a commercial property and therefore you are not making an input taxed supply in relation to the Property and the supply is not of a private or domestic nature.

For consideration

Although the corporate trustee is the legal owner of the Property, it does not provide the consideration. You, the Beneficiary of the bare trust is liable to provide the consideration to acquire the Property.

GST Registration

You, the Beneficiary of the bare trust are registered for GST.

Therefore, you would be entitled to an input tax credit arising from the acquisition if the supply to you is a taxable supply.

Taxable supply

Section 9-5 of the GST Act provides the requirements that all must be met for a supply to become taxable. This section states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

You, in the context of the supply of the Property to the Beneficiary, are the vendor. The supply was made by the vendor to the Beneficiary for monetary consideration stated in the contract.

The Property was leased by the vendor to a third party, evidenced by a registered lease contract. The lease expired after the settlement date of the contract. It is considered the vendor was carrying on a leasing enterprise in relation to the Property.

Paragraph 3.10 of the Explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 explains the meaning of the term 'in the course or furtherance of an enterprise":

In the course or furtherance' is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

It is considered that the supply of the Property is made in the course or furtherance of the leasing enterprise that the vendor was carrying on.

Connected with Australia

Under section 9-5 of the GST Act, the supply of the Property is connected with Australia because the underlying real property locates in Australia.

GST registration

The vendor is registered for GST.

Therefore, the purchaser will be entitled to an input tax credit if the supply is not GST-free or input taxed. The supply of commercial premises is not input taxed under Division 40 of the GST Act or any other Acts.

However, the supply can be a GST-free supply of a going concern under Subdivision 38-J of the GST Act.

Section 38-325 of Subdivision 38-J of the GST Act provides that if certain conditions are satisfied, a 'supply of a going concern' is GST-free.

The first thing to consider is whether the supply in question is a supply of a going concern pursuant to subsection 38-325(2) of the GST Act. That is, for subsection 38-325(1) of the GST Act to apply (to determine whether a supply of a going concern is GST-free supply), the prerequisite is that the supply must be a supply of a going concern.

Consequently, the requirements under subsection 38-325(1) of the GST Act will only be considered further if the supply in question is a supply of a going concern.

The term 'supply of a going concern' is a statutory term which is defined in subsection 38-325(2) of the GST Act. It states:

A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

For the purposes of the definition, it is not a supply itself that must satisfy the conditions in paragraphs 38-325(2)(a) and (b) of the GST Act but the arrangement under which the supply is made.

The Australian Taxation Office's (ATO) view of the application of section 38-325 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2002/5.

Paragraphs19 and 20 of GSTR 2002/5 state:

19. …the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to paragraphs 38-325(2)(a) and (b) ('the identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

It is considered that the supply of the Asset is a supply made under a sale contract and therefore is a supply under an arrangement for the purposes of section 38-325 of the GST Act.

Identifying the enterprise

The arrangement between the vendor and the Purchaser under the Contract provides that the legal and beneficial ownership of the Land and the leasing business are being transferred to the Purchaser. Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by you, the supplier (the identified enterprise). This is the enterprise, which the vendor must supply for it to be a supply of a going concern. 'Enterprise' is defined in subsection 9-20(1) of the GST Act. This subsection states:

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

(a) in the form of a *business; or

(b) …

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or …

It has been considered above that the vendor was leasing the Asset. and therefore is considered to carry on a leasing enterprise under paragraph 9-20(1)(c) of the GST Act.

All the things necessary

Paragraphs 72 to 74 of GSTR 2002/5 provide the ATO's view on the term 'necessary'

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. This will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all the necessary' does not refer to every conceivable thing, which might be used in the 'identified enterprise'.

73. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing…

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

Land/Building

Under the Contract, the Land comprised in the registered plan lot xx in strata plan yyy, folio Identifier zzz is to be sold to the Purchaser. This is the Land on which the leasing business is being carried on.

The Contract has provided that the main asset, the Land, necessary for the conduct of the enterprise is to be transferred by the vendor to the Purchaser.

Leasing business

The vendor was operating a leasing business on the Property. Under the Contract, there was no provision of assignment of the lease agreement to the Purchaser. However, as the lease agreement has not expired at the time of the settlement and the lessee continues to pay rent to the Purchaser as the new owner. On the settlement date, the vendor has sent a letter advised the lessee that they are directed from that date to make rental payments under the Lease to the Purchaser or as they may direct.

The Contract provides that

· The vendor will continue to carry on the enterprise of leasing of the Property until completion and shall use its best endeavours to supply to the purchaser at completion all of the things that are necessary for the continued operation of the leasing enterprise from the vendor on completion

· the purchaser warrants that it is (or will on completion) be registered under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the purchaser agrees to acquire all of the things that are necessary for the continued operation of the leasing enterprise from the vendor on completion.

Pursuant to paragraphs 64 to 70 of GSTR 2002/5, it is considered that the vendor has provided all the things that are necessary for the continued operation of your leasing business as required under paragraph 38-325(2)(a) of the GST Act.

The supplier carries on the enterprise until the day of the supply

In the Settlement statement, an amount of $xxx was paid to the vendor representing the monthly rent accrued to the settlement date. This indicates that the vendor will continue to operate the leasing business until the day of the supply.

The requirement under paragraph 38-325(2)(b) of the GST Act is met.

As both paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied, the supply of the leasing business including the Land is the supply of a going concern for GST purposes.

GST-free supply of a going concern

The supply of the leasing business including the Land/Building will be a GST-free supply of a going concern pursuant to subsection 38-325(1) of the GST Act if:

· the supply is for consideration (see above)

· the recipient is registered or required to be registered, and

· the supplier and the recipient have agreed in writing that the supply is of a going concern.

GST registration

Both the vendor and the purchaser are registered for GST.

Agreed in writing as the supply of a going concern

The Contract provides that the vendor and the Purchaser acknowledge and agree that the supply is a supply of a going concern.

Please note that the agreement was made between the vendor and the trustee of the bare trust (not the beneficiary of the bare trust) in relation to the agreement in writing that the supply is a supply of a going concern.

Paragraphs 82 and 83 of GSTR 2008/3 provide the view of the Tax Office that where the agreement is made by the trustee of the bare trust (legal owner), the trustee does so on behalf of the beneficial owner of the property. This paragraph states:

82. For a supply to be GST-free as a supply of a going concern, the supplier and the recipient must agree that the supply is a supply of a going concern.

83. In accordance with the principles discussed in this Ruling, a supply or acquisition may be made in the course of an enterprise carried on by the beneficiary, such that the beneficiary is liable for any GST or entitled to any input tax credit, notwithstanding that title to the relevant property is conveyed by or to a bare trustee for the beneficiary. In those circumstances, if the trustee agrees in writing that the supply is a supply of a going concern, it does so on behalf of the beneficiary. The requirement for the supplier or recipient, as the case may be, to agree to the supply being a supply of a going concern is satisfied in those circumstances.

Therefore, all of the requirements of section 38-325 of the GST Act are met. The supply of the leasing business including the Asset to you is a GST-free supply of a going concern.

In conclusion, as not all of the requirements under section 11-5 of the GST Act are satisfied, you are not entitled to any input tax credit arising from the acquisition of the Assets as the supply to you is a GST-free supply of a going concern.