Edited version of your written advice

Authorisation Number: 1012668794761

Ruling

Subject: GST and in-specie distribution

Question 1

Is goods and services tax (GST) payable by you in respect to the transfer of land to XXX?

Answer

No

Relevant facts and circumstances

• You are the trustee of a Trust and are registered for GST.

• You previously sought and obtained a Private Binding Ruling (PBR) from the Tax Office (ATO) in relation to certain land (the Land) which has been intended as the subject matter of a donation to XXX.

• The PBR found that the relevant Land (Land) is not trading stock in the Trust and has not been trading stock from the time of formation of the intent to transfer to XXX.

• The PBR provided that the subject land was a capital asset of the Trust.

• In relation to XXX we note as follows:

(a) Correspondence from the ATO shows that the XXX is endorsed as a charitable institution. Its constitution dedicates its purposes to those of a charitable and religious nature.

(b) Searches of the ATO website confirm that XXX has tax exempt status on the basis that it is a Charitable Institution.

• XXX is registered for GST.

• You now propose to transfer the land to XXX as a distribution in-specie via the following mechanism:

(a) XXX has been added or will be added as a (non default) beneficiary of the Trust.

(b) The Land will be re-valued to its market value and the amounts of revaluation increment (the Revaluation Amount) recognised as corpus.

(c) You (as trustee) will pass resolutions ensuring that capital gain in respect of the land is not "Income" for the purposes of the Trust Deed, and making XXX entitled to a capital distribution.

(d) The capital distribution to XXX will comprise the Revaluation Amount (plus an amount equal to the Cost Base) and will be distributed to XXX on the basis that the entitlement to corpus is satisfied by the distribution in-specie of the Land.

(e) XXX will be duly notified of its entitlement once the resolutions are passed.

(f) The Land will be transferred from you to XXX in satisfaction of the entitlement of XXX.

• Land

The whole of the land has development approval by way of a master precinct plan for the YYY Council with the permission uses being residential dwellings (townhouses and apartments), retirement village, community centre, primary school and childcare centre. This approval was obtained to facilitate the intended transfer of the Land to XXX to carry out its missions and purposes.

• The parties have obtained a private ruling from the relevant State Office of State Revenue concerning the proposed transfer granting duty relief.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 72-5

Reasons for decision

Question

Summary

You are not making a taxable supply under section 9-5 of the GST Act when you make an in-specie distribution to a beneficiary that is registered and the distribution is used solely for a creditable purpose.

As your in-specie distribution is not a taxable supply, you will not have a GST liability.

Detailed reasoning

In your situation, the trust deed provides the trustee with the appointment and distribution power to pay or to apply income derived by the trust in each year or capital of the trust to one or more of the beneficiaries as the trustee in its discretion determines. The trustee then resolves to make an in-specie distribution of the asset in satisfaction of the beneficiary's entitlement.

The PBR obtained by you provided that the subject land was a capital asset of the Trust.

You further contend that the land was always held for the purpose of gifting or donating to XXX. In this case we do not consider that the in-specie distribution of the land to XXX constitutes a gift or a donation. We consider that it is a distribution from the Trust and the GST consequences should be considered under that premise.

Whether the supply is subject to GST

Whether "in specie" distribution from a discretionary trust is a taxable supply will depend on the nature of what being distributed and the beneficiary's situation.

A supply is subject to GST if it is a taxable supply under the GST Act. A taxable supply is a supply that all of the following elements of section 9-5 of the GST Act are satisfied, subject to special rules. Therefore, the following points should be considered whether:

1. there is a supply

2. the supply is made for consideration

3. the supply is connected with Australia

4. the supply is made by an entity that is registered or required to be registered for GST

5. the supply is GST-free or input taxed under Division 38 and 40 respectively of the GST Act.

Whether the trustee makes a supply in respect of the distribution?

Section 37 of the A New Tax System (Australian Business Number) Act 1999 ('the ABN Act') defines an entity to include a trust. Section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) also provides that the trustee of a trust is taken to be an entity consisting of person(s) or legal person who are the trustee at any given time. This is because the right and obligation cannot be conferred on an entity that is not a legal person and a trust is not a legal entity.

Supply is defined broadly in section 9-10 of the GST Act to include a grant, assignment or surrender of real property.

Therefore, a supply is made by you in respect of the distribution. For GST purposes, your decision in respect of the in-specie distribution is a supply made by you. Whether the supply is a taxable supply is a matter that will be considered next.

The supply is made in carrying on an enterprise

The term 'enterprise' is defined in section 9-10 of the GST Act. The definition is substantially the same as that used in the ABN Act. An enterprise is defined in terms of an activity or series of activities done in certain manner or by certain entities. The activities covered included those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or continuous basis.

The definition of 'business' in the GST Act is the same as that used for the Income Tax Assessment Act 1936 (ITAA 1936). The word 'in the form of' has the effect of extending the meaning of enterprise beyond entities carrying on a business. 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, have the appearance or characteristics of business activities.

It is obvious that you are carrying on an enterprise; the question is whether the in-specie distribution, in itself, amounts to an activity done in the course or furtherance of an enterprise.

Paragraph 3.10 of the Explanatory Memorandum to the GST Act states:

'in the course of furtherance is not defined, but is broad enough to cover any supply 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 be in the course of that enterprise.'

You are carrying on an enterprise in managing the trust. Whatever activities that you are required to do or pursuant to the powers granted under the trust deed are considered to be activities performed in the course or furtherance of an enterprise. This includes the distribution of trust income and/or capital.

The supply is connected with Australia

The supply of trust property is connected with Australia under subsection 9-25(4) of the GST Act as the land is in Australia.

The supplier is registered or required to be registered

You are registered for GST.

For consideration

In your situation, you propose to transfer the land to XXX as a distribution in-specie via the following mechanism:

(a) XXX has been added or will be added as a (non default) beneficiary of the Trust.

(b) The Land will be re-valued to its market value and the amounts of revaluation increment (the Revaluation Amount) recognised as corpus.

(c) You (as trustee) will pass resolutions ensuring that capital gain in respect of the land is not "Income" for the purposes of the Trust Deed, and making XXX entitled to a capital distribution.

(d) The capital distribution to XXX will comprise the Revaluation Amount (plus an amount equal to the Cost Base) and will be distributed to XXX on the basis that the entitlement to corpus is satisfied by the distribution in-specie of the Land.

(e) XXX will be duly notified of its entitlement once the resolutions are passed.

(f) The Land will be transferred from you to XXX in satisfaction of the entitlement of XXX.

The exercise of the power of appointment by you creates rights in XXX. XXX will have the right to call for the distribution to be made. (CIR v Ward [1970] NZLR1).

Section 9-15 defines 'consideration' to mean:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

The creation, grant, assignment or surrender of a right can be a supply under paragraph 9-10(2)(a) of the GST Act.

As XXX has no vested beneficial interest in either the income or capital of the trust, it is therefore incapable of providing any consideration for the supply of the Trust property. XXX is the beneficiary of the Trust. You are providing a distribution of the property in lieu of a monetary payment. XXX is not surrendering any rights and will provide no consideration for your distribution

Therefore, the supply fails to meet the requirement of paragraph 9-5(a) of the GST Act.

However, where a supply is made for no consideration subdivision 72-A of the GST Act will need to be considered.

However, while the supply is not being made for consideration, a distribution may still be a taxable supply where Division 72 of the GST Act applies. Under Division 72 supplies between associates without consideration are brought within the GST system and may still meet the requirements of a taxable supply.

Section 72-5 of the GST Act provides that a supply to an associate for no consideration will be a taxable supply if the associate is not registered or required to be registered, or the associate acquires the thing supplied otherwise than solely for a creditable purpose.

The term associate which is defined in section 318 of the Income Tax Assessment Act 1936 includes a beneficiary and the trustee of a trust.

In this case, you are making an in-specie distribution to a beneficiary that is registered for GST and advise that the land will be used solely for a creditable purpose. Therefore, section 72-5 of the GST Act is not applicable.

As section 72-5 of the GST Act is not applicable, the requirement for consideration under paragraph 9-5(a) of the GST Act is not satisfied. Therefore, you are not making a taxable supply under section 9-5 of the GST Act when you make an in-specie distribution to a beneficiary that is registered and the distribution is used solely for a creditable purpose.

As your in-specie distribution is not a taxable supply, you will not have a GST liability.

[Note: When a discretionary trust makes an in-specie distribution to a beneficiary that is not registered or not required to be registered, or where the distribution to a registered entity is not used solely for a creditable purpose, Division 72 of the GST Act applies to make the supply with no consideration between associates taxable under section 9-5 of the GST Act].