Edited version of your private ruling

Authorisation Number: 1012445359826

Ruling

Subject: GST and carrying on an enterprise

Question

Are you carrying on an enterprise pursuant to subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as a result of entering into an agreement and undertaking all of the obligations and activities contemplated by the agreement?

Answer

Yes, you are carrying on an enterprise pursuant to subsection 9-20(1) of the GST Act as a result of entering into the agreement and undertaking all of the obligations and activities contemplated by the agreement.

Relevant facts and circumstances

You entered into an agreement with a representative of a joint venture.

You operate in the form of an unincorporated association of persons.

Under the agreement, each party agrees to undertake various obligations and activities.

In return for your agreement to carry out these activities and obligations you receive monetary and non-monetary benefits.

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 paragraph 9-5(b)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

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 paragraph 9-20(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

A New Tax System (Goods and Services Tax) Act 1999 paragraph 184-1(f)

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

Income Tax Assessment Act 1936 subsection 6(1)

Reasons for decision

Summary

Yes, you are carrying on an enterprise pursuant to subsection 9-20(1) of the GST Act as a result of entering into the agreement and undertaking all of the obligations and activities contemplated by the agreement. This is because these obligations and activities when considered as a whole satisfy the definition of enterprise under paragraphs 9-20(1)(a) and 9-20(1)(b) of the GST Act.

Detailed reasoning

Section 9-5 of the GST Act provides that:

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

Note: * denotes terms defined under section 195-1 of the GST Act.

The word 'you' used in the GST legislation applies to entities (individuals, partnerships, unincorporated associations of persons, etc) generally.

Section 184-1 of the GST Act provides the meaning of 'entity' and paragraph 184-1(f) of the GST Act provides that an entity includes 'any other unincorporated association or body of persons'. You operate in the form of an unincorporated association of persons.

In relation to a taxable supply, paragraph 9-5(b) of the GST Act provides that one of the requirements for a supply to be a taxable supply is that it must be made in the course or furtherance of an enterprise that you carry on. The term 'enterprise' has the meaning given by section 9-20 of the GST Act.

So far as is relevant to your case, subsection 9-20(1) of the GST Act defines an enterprise as 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) on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property; or

(d) …

…

Section 195-1 of the GST Act further provides that carrying on an enterprise includes anything done in the course of the commencement or termination of the enterprise.

Miscellaneous Tax Ruling MT 2006/1 provides the Commissioner's views on the meaning of an enterprise for the purpose of the A New Tax System (Australian Business Number) Act 1999. Goods and Services Tax Determination GSTD 2006/6 provides that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes.

Paragraphs 153 to 169 of MT 2006/1 explain the meaning of 'activity, or series of activities'.

An activity is essentially an act or series of acts that an entity does. An entity can undertake a wide range of activities with varying degrees of interrelationship. For an entity to be considered as carrying on an enterprise, it is necessary to identify one activity or a series of activities that amounts to an enterprise.

If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be considered to be carrying on an enterprise.

Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. All activities need to be taken into account including activities from the commencement to the termination of the enterprise.

You have entered into the agreement and under the agreement, you will engage in a series of activities.

As outlined in paragraph 9-20(1)(a) of the GST Act, the term 'enterprise' includes an activity, or series of activities, done in the form of a business.

The use of the phrase 'in the form of', indicates a wider meaning than the word 'business', on its own. That is, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria for being regarded as a business, do have some of the appearance or characteristics of these activities. An example of this is 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. In other words, while a profit making purpose would normally be a feature of a business this is not necessarily always the case.

A non-profit club or association might, therefore, conduct activities that are in the form of a business. What is relevant is the nature of the businesslike activities of the organisation, rather than its non-profit status or who it trades with (paragraph 223 of MT2006/1).

Section 195-1 of the GST Act defines 'business' to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 175 of MT 2006/1 confirms that the above definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Therefore, an entity that is carrying on a business for income tax purposes will be carrying on an enterprise for GST purposes, subject to an important qualification discussed further below.

The ITAA 1936 meaning of business is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 12 of TR 97/11 makes the point that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. This means that there is no single test of whether a business is being carried on rather the activity needs to be considered against the indicators of a business as established by case law.

TR 97/11 discusses the main indicators of carrying on a business and these business indicators are also set out in paragraph 178 of MT 2006/1. These indicators include:

· a significant commercial purpose or character

· a purpose and intention of the taxpayer to engage in a commercial activity

· an intention to make a profit from the activity

· the activity is or will be profitable

· repetition and regularity of the activity

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade

· the activity is systematic, organised and carried on in a business like manner and records are kept

· the activities are of a reasonable size and scale

· a business plan exists

· commercial sales of product, and

· the entity has relevant knowledge or skill.

As stated previously, section 195-1 of the GST Act defines the meaning of 'carrying on an enterprise' to include doing anything in the course of the commencement or termination of the enterprise.

However, it is important to note that the business indicators listed above are based on income tax principles which exclude commencement and termination activities from the definition of a business. The extended meaning of carrying on an enterprise for GST purposes means that the test is broader than that under the income tax principles. This means preparatory activities such as conducting feasibility studies for a potential business might be seen as carrying on an enterprise for GST purposes.

In addition, the reference to 'the' enterprise (rather than 'an' enterprise) in the definition in section 195-1 of the GST Act appears to contemplate an enterprise actually coming into existence at some point and further that the activities undertaken should directly relate to the commencement of that specific enterprise.

Therefore, it will depend on the facts of each case as to whether the activities conducted by an entity relate to an identified enterprise and whether those activities can be said to be directly related to commencing that enterprise.

Furthermore, whether a business is being carried on depends on the large or general impression gained (Martin v FC of T (1953) 90 CLR 470 at 474) and the weighting given to each indicator will vary from case to case.

(i) Significant commercial purpose or character

This indicator is closely linked with a number of other indicators and broadly requires you to show that the activity is carried on for commercial reasons and in a commercially viable manner. This is closely linked to the other indicators such as the size and scale of the activity, the repetition and regularity of the activity and, the intention and prospect of profit.

(ii) Intention

Your intention in engaging in a particular activity is important and helps to determine whether there is a sufficient level of commitment to the activity for it to be regarded as a business. You should be able to show a clear purpose of how the activity will be able to succeed.

However, a mere intention to carry on a business is not enough. Your actions must show a sufficient level of commitment to the activity to demonstrate that you are carrying on a business (or commencing the business).

(iii) Prospect of profit

Whether an activity has a prospect of profit is a very important indicator. You should be able to demonstrate how a profit is likely to be made, for example, by conducting appropriate research to gauge the profitability of the activity. In other words, you must demonstrate that the expectation of profit is reasonable.

It is not necessary that a profit be made immediately and it may be that the activity experiences short term losses. In these cases, an activity could still be regarded as carrying on a business notwithstanding those losses.

Where you reasonably believe that a profit will eventually be made, but the objective evidence is that the activity will never make a profit, you would need to be able to show that the other indicators of a business are sufficiently present to outweigh the unprofitability of the activity. Otherwise, the absence of profit will most likely lead to a determination that your activities do not amount to a business.

(iv) Repetition and regularity

A common feature of a business is that activities are repeated on a regular basis. You should be able to show that you have at least undertaken the minimum level of actions required to maintain the activity at a commercial level.

(v) Activities characteristic of the industry

An activity is more likely to be a business if it is carried on in a similar manner to other participants in the same industry. Comparisons could be made to:

- volume of sales (taking into account the fact that at the commencement of a business sales would be relatively low)

- the types of customers for the activity

- the types of expenses incurred

- the level of capital investment, and

- previous experience.

(vi) Businesslike manner

Activities that are conducted in a systematic and organised manner are more likely to amount to a business than one which is conducted on an ad hoc basis. However, the lack of a proper system would not be sufficient on its own to conclude that there is no business being carried on. Further, the degree of record keeping required may vary depending on the type of activity being carried on.

(vii) Size and scale

In general, the larger the scale of the activity, the more likely it will be that a business is being carried on. However, you may still be carrying on a business even if the activities are small. For example, a taxpayer who undertakes proper research, invests significant capital, has a reasonable expectation of profit, conducts the activity on a regular basis may still be regarded as carrying on a business despite the scale of the activity.

However, the smaller the scale of the activity, the more important these other indicators become in determining whether you are carrying on a business.

The agreement sets out obligations specific to the parties to the agreement.

It is noted that some of the obligations imposed on you under the agreement are commonly found in commercial dealings and agreements.

In return for you agreeing to undertake the above obligations, you receive monetary and non-monetary benefits.

In your case, we consider that the outcome of the agreement constitutes a businesslike arrangement and the facts show that the obligations imposed on you will be systematically implemented and will be managed in a businesslike manner.

Most importantly, the facts show that there is an intention by you to carry on an enterprise and the monetary payments received by you pursuant to the agreement could represent a profit to you. Even if you do not have a profit making intention, it should be noted that whilst a profit making purpose would normally be a feature of a business, it is not always necessary.

Moreover, not all the 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. MT 2006/1 provides that non-profit associations can be considered to run an enterprise although their objective is not to derive profits for distribution but merely to cover expenditure and apply any surplus directly or indirectly for the benefits of their members or non-members. What is relevant is the nature of the businesslike activities of the organisation, rather than its non-profit status or who it trades with.

Further, the facts show that some of the obligations and activities that you have agreed to undertake demonstrate business characteristics.

In addition, as outlined in MT 2006/1, if the activities are business in nature, an entity may still be carrying on a business even if the activities are small in scale. In these situations, the other business indicators become more important in determining whether an entity is carrying on a business.

In light of the above, the Commissioner considers that the obligations and activities that you have agreed to undertake amount to the conduct of a business. Accordingly, the Commissioner considers that you are carrying on an enterprise in the form of a business for the purpose of section 9-20 of the GST Act.

There is no definition of 'in the form of an adventure or concern in the nature of trade' in the GST Act.

Ordinarily, 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 but which has the characteristic of a business deal.

MT 2006/1 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

It is necessary to examine the facts and circumstances of each particular case to determine if an adventure or concern in the nature of trade is being carried on. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Some of the indicators or 'badges of trade' which have been identified in MT 2006/1 are:

· the subject matter of realisation - considered the form and the quantity of the acquisition

· the length of the period of ownership

· the frequency or number of similar transactions

· supplementary work on or in connection with the asset to be sold

· the circumstances that were responsible for the realisation, and

· motive.

As stated earlier, an adventure and concern in the nature of trade includes commercial activities that do not amount to a business but which have the characteristics of a business deal. In determining the nature of the activities, it is necessary to examine the facts and circumstances surrounding your situation.

We consider that some of the activities undertaken or to be undertaken by you pursuant to the agreement have the characteristics of a commercial deal.

In other words, most of the obligations and activities under the agreement will be managed in a businesslike manner which you are directly involved with.

The repetitive and regular conduct of activities as they progress to different stages all lead to a conclusion of a commercial deal or undertaking. In fact, the extent of your involvement and the business nature of your obligations clearly show that the 'badges of trade' are present.

Accordingly, the Commissioner considers that even if it was determined that your obligations and activities under the agreement are not in the form of a business, the business nature of these things are such that the Commissioner considers that they would fall within the wider, well established concept of 'an adventure or concern in the nature of trade' which constitutes an enterprise in its own right..

Paragraph 9-20(1)(c) of the GST Act includes in the definition of an 'enterprise' an activity or a series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of interest in the property.

The term 'lease, licence or other grant of an interest in property' encompasses all activities that are directed to the exploitation of property rights.

To be an enterprise the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

Based on the information provided, the requirements of paragraph 9-20(1)(c) of the GST Act are not satisfied.