Edited version of private advice

Authorisation Number: 1012654647739

Ruling

Subject: GST and supplies and acquisitions arising under a deed

Question 1

Are you, Receivers and Managers of a partnership (Receiver and Manager appointed) (In liquidation) (representative of incapacitated entity) entitled to input tax credits for acquisitions arising under a Deed?

Answer

No

Question 2

Is Entity A in its capacity as trustee of the Account making a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

The partnership is registered for GST.

The partnership decided to develop property which it owned.

Entity B provided the partnership with loans in connection with the development of the property.

The partnership (referred to as Lessor) entered into a Lease Agreement under which entity B (the Lessee) would lease these premises.

The partnership undertook the development of the property. The property comprises an office tower.

Receivers and Managers were appointed over the partnership's property.

Entity B (the Lessee) entered into a lease of the officer tower in the property.

You settled the sale of the property. The proceeds from the sale of the property were for an amount less than the amount owing to Entity B.

Prior to the settlement of the property sale proceeds, you and the Lessee agreed to preserve certain obligations that the partnership owed to entity B, as the Lessee.

This arrangement was formalised by the Deed. Under the Deed, the balance of the sale proceeds from the property, were paid into the Account. A Trustee (entity A) was appointed for this Account.

Entity B is paying the costs of the Trustee of the Account (entity A).

Relevant legislative provisions

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

Division 11

Division 9

Division 58

Section 195-1

Reasons for decision

Detailed reasoning

The GST payable on taxable supplies made by a Receiver and Manager during their term of appointment is dealt with under Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The Receivers and Managers meet the definition of 'representative' and the partnership meets the definition of 'incapacitated entity' under section 195-1 of the GST Act. Paragraph 58-5(2)(b) of the GST Act provides that the acts or omissions of the representative of the incapacitated entity are taken to be acts or omissions of the incapacitated entity for the purposes of whether an acquisition is a creditable acquisition.

Paragraph 58-10(1)(b) of the GST Act provides that the representative of an incapacitated entity is entitled to any input tax credits (ITCs) that the incapacitated entity would (but for this section or section 48-45) be entitled to, for a creditable acquisition to the extent that the making of the acquisition is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

In considering the entitlement to an input tax credit on any acquisitions which may arise under the Deed, we will consider whether the incapacitated entity would be entitled to an input tax credit in accordance with the requirements of section 11-5 of the GST Act.

Section 11-5 of the GST Act provides that 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.

Under section 11-15 of the GST Act, you acquire a thing for a creditable purpose if you acquired it in carrying on your enterprise and you did not acquire the thing in relation to making input taxed supplies or acquisitions of a private or domestic nature.

For there to be a creditable acquisition, you must satisfy all of the requirements of section 11-5 of the GST Act.

The questions to be resolved in this ruling are whether paragraphs 11-5(b) and (c) have been satisfied.

Are the payments from the account consideration that the representative of the incapacitated entity provides or is liable to provide, for the purposes of paragraph 11-5(c) of the GST Act?

As the deed provides for the funds to be held on trust for the benefit of certain beneficiaries, we will consider this legal arrangement further to determine which entity is providing consideration for the purposes of paragraph 11-5 (c) of the GST Act.

We consider that a trust has been created under the deed and the trustee holds a legal or equitable interest in the trust property for the benefit of beneficiaries.

The trustee's obligations under the deed will be examined to determine whether the trustee holds the trust property under a bare trust arrangement.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts provides guidance in respect of bare trust arrangements.

GSTR 2008/3 refers to the federal court decision Herdegen v. Federal Commissioner of Taxation (1988) 20 ATR 24; 88 ATC 4995, in which his Honour explained the meaning of a bare trust.

At ATR 32; ATC 5003, his Honour said:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party [emphasis added].

Paragraph 12 of GSTR 2008/3 explains that even though the trustee may have minor duties to perform, the trust may still be viewed as a bare trust.

12. Alternatively, the trust may not strictly be a bare trust, because the trustee has minor active duties to perform, but nevertheless the trustee is required to act at the direction of the beneficiary in dealing with title to the trust property. Where this Ruling refers to 'bare trusts' it should also be taken to refer to trusts of this kind which may not strictly fall within accepted definitions of bare trusts but share similar features. The key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property.

Having regard to the provisions in the deed, we consider that the Trustee has minor duties to perform and is acting at the direction of the beneficiaries in respect of the trust property in the Account. The Trustee does not have an independent role in respect of the trust property.

On the basis that the role of the Trustee is limited to certain duties, we are of the view that it is the beneficiaries who are controlling the use of the funds in the Account and not the Trustee or the representative of the incapacitated entity.

Therefore for the purposes of GST law it is the beneficiaries of the Account that would be making supplies or acquisitions in respect of their dealings with the funds in the Account.

Accordingly, the payments that are made out of the Account are not payments which the representative of the incapacitated entity is providing. Therefore these payments are not consideration that the representative of the incapacitated entity provides, for the purposes of Division 11 or Division 58 of the GST Act.

Whilst it is acknowledged that the deed ensures that payments are to be made to entity B, as Lessee under obligations that were entered into under former agreements, the payments are not being made by the incapacitated entity. The incapacitated entity did not provide the funds which are held in the Account, it does not have legal title to these funds and it does not have the use or control of these funds.

As one of the requirements of section 11-5 of the GST Act has not been satisfied, there is no need to consider whether paragraph 11-5(b) has been satisfied.

Accordingly, the incapacitated entity does not satisfy the requirements of section 11-5 of the GST Act, therefore the representative of the incapacitated entity is not entitled to an input tax credit under paragraph 58-10(b) of the GST Act.

Question 2

Detailed reasoning

In the reasoning to question 1, we established that the Account is a bare trust arrangement.

On this basis, the Trustee is not making supplies or acquisitions in respect of its dealings with the trust property in a trustee capacity.

We note that under the deed, entity A is paid in respect of costs incurred by the Trustee by entity B for discharging its obligations under the deed.

Accordingly the supplies that are made by the Trustee in its own right for consideration are taxable supplies provided all of the requirements of section 9-5 of the GST Act are met.