Edited version of your private ruling

Authorisation Number: 1012587392078

Ruling

Subject: Goods and Services Tax and Enterprise

Question 1

Is Entity A carrying on an enterprise within the meaning of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) such that it is entitled to be, or required to be, registered for GST?

Answer

No, Entity A is not carrying on an enterprise within the meaning of section 9-20 of the GST Act.

Question 2

If the answer to Question 1 is in the affirmative, is Entity A making a creditable acquisition within the meaning of section 11-5 of the GST Act, such that it is entitled to claim input tax credits on acquisitions associated with the relevant court cases?

Answer

Entity A is not conducting an enterprise and as such is not entitled to claim input tax credits for its acquisitions.

Relevant facts and circumstances

Entity A was incorporated for the purposes of investing in and developing land.

Entity A is registered for GST on a cash basis.

Entity A has some directors ('Directors'), each owning shares in Entity A.

The Directors were also the directors and shareholders of Entity B.

Entity A held shares in Entity C until the shares were sold as part of a decision made by the Federal Court.

Entity A had no active involvement in the management of Entity C.

The Directors, in their capacity as shareholders and directors of Entity C, provided advice and consultancy services to Entity C for no charge.

Entity A did not receive any consideration for any advice or consultancy services that may have been provided by the Directors.

Entity A does not make any taxable supplies.

During its existence, the only income that Entity A has received is interest income and a dividend from Entity C. During its existence, the only expenses incurred by Entity A were interest, accounting, legal and professional fees and subscriptions.

Entity A claimed input tax credits in its business activity statement ('BAS') in relation to legal and professional fees.

Entity A is not a member of a GST Group and is not part of an income tax consolidated group.

Following a dispute between Entity A and related parties, The Federal Court held that costs would be awarded to Entity A. The Federal Court Registrar has ruled that Entity A is entitled to input tax credits, on the basis that it is registered for GST and therefore has awarded costs on a GST exclusive basis.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

Reasons for decision

The term enterprise is defined in subsection 9-20(1) of the GST Act which provides:

(1) An enterprise is 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, licence or other grant of an interest in property; or

(d) by the trustee of a fond that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the *ITAA 1997 and to which deductible gifts can be made: or

(da) by a trustee of a *complying superannuation fund or if there is no trustee of the fund, by a person who manages the fund: or

(e) by a charity; or

(f) [Repealed]

(g) by the Commonwealth, a State or a Territory, or Commonwealth, a State or a Territory; or

(h) by a trustee of a fund covered by item 2 of the table in section 30-15 of the 1TAA 1997 or of a fund that would be covered by that item if it had an ABN.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Division 23 of the GST Act provides who is required to be registered and who may be registered. Relevantly, sections 23-5 and 23-10 of the GST Act states:

You are required to be registered under this Act if:

(a)  you are *carrying on an *enterprise; and

(b)  your *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise)

(1) You may be *registered under this Act if you are carrying on an *enterprise (whether or not your *GST turnover is at, above or below the *registration turnover threshold).

(2) You may be *registered under this Act if you intend to carry on an *enterprise from a particular date.

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) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

We agree with the submission that the activities that Entity A has undertaken do not fall within paragraphs (b) to (h) of subsection 9-20(1) of the GST Act and accordingly it needs to be established whether its activities are in the 'form of a business' as contemplated by paragraph (a) of subsection 9-20 of the GST Act.

MT 2006/1 provides that the phrase 'in the form of a business' is broad and includes an activity, or series of activities, done in the form of a business. 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.

In order to determine whether an activity, or a series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law (Paragraph 177 of MT 2006/1).

Paragraph 178 of MT 2006/1 lists the main indicators of a business as follows:

· significant commercial activity;

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

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

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

· activity is systematic, organised and carried on in a businesslike manner and records 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.

Entity A has submitted that it has "done nothing else except hold shares in Entity C". In its submissions, Entity A notes that it has not:

· engaged in any regular acquisition or disposal of shares in Entity C or any other entities - suggesting that there has not been any significant or substantial commercial activity;

· engaged in any day-to-day activities of running Entity C - as found in the Federal Court's decision, it was the other shareholders and directors providing management and consulting services; or

· engaged in the sale of any products or services.

Further, Entity A submits that it could be seen to be a "holding company that is capable of carrying on an enterprise". It submits that it's activity of holding shares in Entity C is conducted in the form of a business as required by paragraph 9-20(1)(a) of the GST Act. It also submits that the acquisition or disposal of a membership interest in another entity would be considered to be 'doing anything' in the course of commencement or termination of an enterprise.

We disagree with this view. Whilst it is possible in some circumstances for a holding company to conduct an enterprise, it needs to be doing more than passively own shares in another entity. Similarly whilst there may be instances where buying shares could constitute the commencement of an enterprise, there needs to be further activity for there to be a conduct of an enterprise.

This view is expressed in paragraphs 192 and 200 of MT 2006/1 which state:

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.

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.

Entity A has submitted that it has not undertaken any of the activities identified in paragraph 200 of MT 2000/6. Infact, Entity A has submitted that it has not done anything else apart from hold shares in Entity C.

In these circumstances, it is our view that Entity A does not meet the requirements of paragraph 9-20(1)(a) of the GST Act and therefore is not conducting an enterprise. Accordingly it is not entitled or required to be registered for GST.

Question 2

Section 11-5 of the GST Act states:

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.

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

All the four requirements of section 11-5 of the GST Act need to be met before an acquisition is considered to be a creditable acquisition. It has been determined in Question 1 that Entity A is not carrying on an enterprise for the purposes of the GST Act. Accordingly it will not meet the requirements of section 11-15 and therefore is not entitled to claim input tax credits in respect of any of its acquisitions.