Edited version of your written advice

Authorisation Number: 1012963868399

Date of advice: 29 April 2016

Ruling

Subject: Whether carrying on an enterprise

Question 1

For the purposes of paragraph 9-20(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) was the Trust carrying on an enterprise from the date the Trust was established?

Answer

No.

Question 2

If the Trust was carrying on an enterprise from the date the Trust was established, and assuming that the Trust registers for GST with effect from the date the Trust was established, did the Trust make any taxable supplies within the meaning of section 9-5 of the GST Act?

Answer

No, as the Trust was not carrying on an enterprise from the date the Trust was established, the Trust did not make any taxable supplies.

Relevant facts and circumstances

A claim was lodged with the relevant Tribunal in accordance with the related Title Act 1993.

The Federal Court determined that the People were the common law holders of the related title in the area which was the subject of the Claim.

Pursuant to the Trust Deed the Trust can accept monies which must be held and applied exclusively for the benefit of the beneficiaries of the Trust.

A company and the Trust entered into an agreement which records the terms and conditions upon which the fund is to be administered for the purposes of the Trust Deed.

Quarterly payments calculated in accordance with the agreement will be paid by the company to the Trust.

Activities to date:

To date, the Trust has administered a large fund which has been invested in term deposits. The fund was invested in term deposits while the Trust attended to administrative and regulatory tasks required to be undertaken in the first years of operation. When those tasks are completed the Trust will engage an investment adviser in accordance with the Trust Deed and invest the funds in more sophisticated investments.

Relevant legislative provisions

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

Reasons for decision

Question 1

Paragraph 11 of Goods and Services Tax Determination 2006/6 (GSTD 2006/6) states:

11. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider 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.

It was submitted that 'in the form of a business' is not the same as 'carrying on a business' and that there is no requirement for the Trust to satisfy the indicators of carrying on a business in TR 97/11 in order to be carrying on an enterprise under paragraph 9-20(1)(a) of the GST Act.

We agree with that submission, but we consider that the Trust is not engaged in an activity, or series of activities, done in the form of a business.

Our view is based on a Federal Court decision referred to in Edgewater, State Superannuation Board (NSW) v FCT 88 ATC 4382 (State Superannuation Board) where the issue was whether the Board, a body corporate responsible for administering the State Superannuation Fund, was exempt from bank accounts debits tax in respect of the account from which the board made fortnightly pension payments. The Board contended that the account was an 'exempt account', being an account in respect of which an exemption certificate had been issued on the basis that all debits to that account were 'excluded debits' as defined in subsection 3(1) of the Bank Account Debits Tax Administration Act 1982:

'excluded debit' means a debit -

(a) made to an account kept with a bank in the name of -

...

(vii) any of the following:

…

(B) an authority of the Commonwealth or of a State or Territory;

…

other than such a Department, authority, corporation or body the sole or principal function of which is to carry on an activity in the nature of a business (whether or not for profit), not being a debit made in relation to a transaction or transactions entered into by or on behalf of the Department, authority, corporation or body in connection with the carrying on of an activity in the nature of a business (whether or not for profit);

Sheppard J stated (p. 4384):

The central question which the appeal raises for decision is whether the applicant is an authority whose sole or principal function is to carry on an activity in the nature of a business.

Sheppard J found that the sole or principal function of the Board was the administration of a superannuation scheme for government employees and described how the Board administered the State Superannuation Fund (i.e. received contributions from employers and employees, managed and invested the assets of the Fund, ascertained entitlements and paid benefits and provided information and services to Fund members), noted that in one year the Fund's investment income was almost 40% of the Fund's total revenue (exceeding both employer contributions and employee contributions) (p. 4385) and involved a wide spread of investments, the management of some of which required active participation by the Board (p. 4386). Sheppard J stated (p.4391):

The question to be decided is whether the applicant was an Authority, the sole or principal function of which, was to carry on an activity in the nature of a business (whether or not for profit). Although the applicant was apparently not a trustee (sec. 4A of the Act), the evidence establishes that in substance its sole or principal function was to act as the administrator of a substantial trust, the objects or beneficiaries of which were the employees of the New South Wales Government and the other statutory or semi-Government bodies who were members of the Fund. In order to discharge its function the applicant was obliged to collect and receive contributions from both the employers and the employees. These were invested by it in a variety of ways which have been earlier described. The income of the applicant and thus the trust consisted of the contributions and the investment income which it received from time to time. Out of this income were paid the entitlements to superannuation of the employees determined in accordance with the provisions of the Act. All this activity plainly involved the applicant engaging in a regular and systematic course of conduct. What was, however, absent from its activities was the conduct of a commercial enterprise in the sense in which that expression is understood in ordinary language. The applicant was an organ of Government. Although it invested moneys and received interest and dividends and also surpluses on the sale of investments, it was not intended to make a profit. Nor, so it seems to me, was it intended ordinarily to be competitive although, no doubt, those responsible for its administration kept an eye on the amount of superannuation benefits being received by employees of other governments or in the private sector. But for there to be any substantial increase of benefits, an amendment to the Act would have been necessary so that the applicant was perforce obliged to act within the confines of its Act.

However large a trust may be, it does not necessarily follow that the trustee administering it is carrying on a business. In most cases they will not be unless there are amongst the assets of the trust, specific assets which themselves may be described as businesses. If the question were whether the applicant were carrying on a business, using that expression in the sense indicated by the dictionaries and authorities to which reference has been made, I would have reached the conclusion that the question should be answered in the negative. But one needs to bring into account the omission of profit as a determining or necessary factor and, more importantly, the fact that the question is whether the authority has as its sole or principal function the carrying on of an activity in the nature of a business.

Sheppard J concluded (p. 4392):

In the end, as is usually the case in these matters, one has to take the evidence and go to the statute in question and endeavour to determine whether the particular activity falls within the Act or not. A starting point for that exercise is to bear in mind that Parliament did intend the tax to be payable by a wide range of government and semi-government authorities and bodies. The fact that a particular authority might be an instrument or agency of the Crown was not of relevance. This is made clear by the Act itself and confirmed, if confirmation were necessary, by what was said by the Minister in the second reading speech made to Parliament in relation to the 1984 amending Act. Then there are the two factors already mentioned, namely, the immateriality of profit making and the careful use of the words ``activity in the nature of a business''. To me the use of those words indicates an intention on the part of the draftsman to cast his net much more widely than would have been the case if he had limited the expression to the carrying on of a business. It would have been understandable if he had limited the language of the Act in this way because many government instrumentalities, whether offshoots of the Crown or not, do carry on business in the ordinary sense of that expression. But the draftsman, in my opinion, had a wider purpose.

All these considerations have led me, not without a deal of hesitation, to conclude that the sole or principal function of the applicant was to carry on an activity, namely, the provision of superannuation benefits to relevant employees, which was in the nature of a business. In my opinion the opposite conclusion would not make sufficient allowance for the language which has been used, the overall purpose and object of the Act and the fact that the provision of superannuation benefits by means of collection of contributions and the earning of income from a wide range of investment has many of the hallmarks of business activity.

In State Superannuation Board Sheppard J described the Board's activities as involving the Board engaging in a regular and systematic course of conduct, but concluded that if the question was whether the Board was carrying on a business, that question should be answered in the negative. In the present case the Trust objects stated in the Trust Deed are to accept payments into the Trust Fund, to hold the Trust Fund for the beneficiaries and to distribute the Trust Fund to the beneficiaries in accordance with the Trust Deed. That involves a regular and systematic course of conduct, but Sheppard J's reasoning suggests that it does not amount to carrying on a business, however large the Trust may be.

The relevant facts and Sheppard J's reasoning in State Superannuation Board also support the view that the Trust is not engaged in an activity, or series of activities, done in the form of a business. In relation to the relevant facts, Sheppard J noted that the Board had more extensive powers of investment than those conferred by the Trustee Act 1925 (NSW) and that the investment of employer and employee contributions involved the Board becoming a large land holder and employing property managers to manage the buildings in which contributions had been invested (p.4384), included building and running a shopping complex as a going concern and entering into joint ventures (and having representatives on the boards of joint venture companies) in relation to a number of projects including an amusement park and a coal mine (p.4386). In the present case the Trust may only invest all or part of the Trust Fund as permitted under the State Trustees Act, in accordance with the Investment Policy, in consultation with the Investment Advisor, in accordance with the agreement and subject to the unacceptable investments restriction in the Trust Deed (i.e. the Trustee must not invest any part of the Trust Fund in an investment unless the Trustee is satisfied that, having regard to the portfolio of investments as a whole over the period of the investments, the capital base of investments is likely to be preserved and the estimated rate of return on all investments is likely to be at least equal to the percentage change in the CPI).

Secondly, in State Superannuation Board Sheppard J reasoned (p.4392) that, as many State authorities do carry on business, the reference in the 'excluded debit' definition to a State authority the sole or principal function of which is to 'carry on an activity in the nature of a business' indicated an intention to 'cast the net much more widely' than would have been the case if the expression had been limited to carrying on a business. That reasoning does not apply to paragraph 9-20(1)(a) of the GST Act and Federal Court and AAT have interpreted 'activities in the form of a business' as extending the reach of 'enterprise' to activities which are either in the form of a business (Swansea, Para 99) or carried on in a business-like way (Edgewater, Para 37). Given Sheppard J's view that in most cases a trust, however large, is not carrying on business unless the assets of the trust include specific assets which may be described as businesses and the views stated in Swansea and Edgewater, we consider that the Trust is not engaged in an activity, or series of activities, done in the form of a business.

Although it was submitted in the ruling request that the Trust has carried out significant commercial activity, being administrators of the Trust Fund, all of the activities referred to relate to the three Trust Objects.

It was also submitted that the Trust's objectives include providing benefits to the beneficiaries and it is inherent in those objectives that the Trust will seek to invest the Trust Fund in a manner that will maximise investment gains and the Trust therefore has an intention to profit from its operations. As noted above, however, the Trust Objects are to accept payments into the Trust Fund, hold the Trust Fund for the benefit of the beneficiaries and distribute the Trust Fund to the beneficiaries in accordance with the Trust Deed and the unacceptable investments restrictions in the Trust Deed does not allow the Trustee to simply invest in a manner that will maximise investment gains.

It was further submitted that the Trust's activities are carried out in a commercial or business-like manner and reference was made to the requirement to consult a decision-making committee and undertake administrative and operational tasks through an executive office. We consider that such requirements are understandable given the size of the Trust Fund and the number of beneficiaries and are not necessarily an indicator that the Trust is carrying on an enterprise.

MT 2006/1 contains Example 24:

Example 24 - investment activities that are not an enterprise

206. A trust is set up in respect of 12,000 blue chip shares and term deposits of $100,000 from which dividends and interest are received. The total portfolio is worth $350,000 to be held for the benefit of the trustee's children and grandchildren. The trustee incurs expenses including bank fees, accountancy fees and brokerage associated with the management of the portfolio. The net income of the trust is distributed to the beneficiaries of the trust. The shares are held for investment purposes.

207. Once or twice a year small parcels of underperforming shares in one or two of the companies in the portfolio are sold and the proceeds reinvested in other shares or deposits. The trustee has no other activities. There is no business plan, the activities are not systematic and are less organised than would be typical for a business.

208. The trustee for the trust is not entitled to an ABN. The activities undertaken are insufficient to amount to an enterprise.

Example 24 appears in a section of MT2006/1 which considers whether holding companies and holding entities can carry on an enterprise. MT2006/1 refers to a number of court decisions which have considered whether a holding entity carries on a business and states:

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.

201. While these indicators may give guidance as to whether an entity's activities are sufficient for it to be considered to be carrying on an enterprise, deciding that question is ultimately a matter of fact having regard to the scale of the activities undertaken, the form of operation of the corporate group and the commercial context in which it occurs.

The Trust Objects are relatively simple, i.e. to accept payments into the Trust Fund, hold the Trust Fund for the benefit of the beneficiaries and distribute the Trust Fund to the beneficiaries in accordance with the Trust Deed.

The Trust Deed does require an Investment Policy, Annual Plan, Strategic Plan and Distribution Policy and the ruling request referred to certain administrative requirements imposed by the Trust Deed in relation to the Trust's decision-making processes, i.e. establishment of a decision-making committee for the purposes of reviewing the Trust's compliance with its obligations under the Trust Deed, the Trustee's obligation to develop appropriate mechanisms for participation, consultation and information dissemination with the beneficiaries and the Trustee's obligation to consult with the beneficiaries before making certain decisions. The ruling request also referred to the Trustee's investment powers (which require the Trust to prepare a written Investment Policy for the investment of the Trust Fund in consultation with the Investment Adviser and the decision-making committee), the requirement to hold an amount in an operating account to meet costs and expenses and the Trust's ongoing obligation to consult with the decision-making committee each financial year on the investment performance of the Trust Fund and whether changes are required to the Investment Policy. However all of this relates to the three Trust Objects of the Trust. As at November 2015 the Trust had not prepared an Investment Policy and, as at March 2016, the Trust has invested significant funds in term deposits without engaging an Investment Adviser.

We do not accept that a distinction can be made between the Trust and the trust in Example 24 on the basis of organisation and systematic activities. Although the activities of the trust in Example 24 are described in MT 2006/1 as not systematic and less organised than a typical business, it is stated that the trust holds the shares for investment and it appears that the trustee regularly reviews the performance of shares held by the trust as underperforming shares are sold and the proceeds reinvested once or twice a year.

Swansea and Edgewater:

In the ruling request it was submitted that the commercial character, structures, plans and activities of the Trust go beyond those of the taxpayer in Swansea and that, given that the Trust has a profit-making intention, Swansea support the view that the Trust is carrying on an enterprise.

In relation to Swansea the evidence given before the AAT was that all of the 312 acquisitions made over 8 years were made for the purpose of eventual sale at a profit and that there was a 'rule' that acquisitions must double in value every 7 years or beforehand and the AAT concluded (Case 4/2008 2008 ATC 1-003 Para 147):

The Tribunal finds that in both an income tax and GST context there is no doubt that the activities of Swansea constitute the activities of a business.

The AAT also rejected the submission that the taxpayer's activities were a private recreational pursuit or hobby (Para 163):

On the contrary, the evidence shows that the business and commercial activities of the applicant are conducted in accordance with a pre-formulated policy, coupled with a carefully devised investment strategy. The applicant retains specialist art consultants. It keeps detailed records. It uses a database of records. It has an annual budget and banking facilities. It purchases valuable property, which is insured and properly stored and housed. All its activities are characterised by system, repetition and regularity. Such activities are in the Tribunal's opinion consistent only with the carrying on of a business and the conduct of an enterprise.

On appeal the Federal Court concluded in Swansea (Para 78) that there was ample evidence to support a finding that the taxpayer was acquiring a collection of saleable art in order to turn it to account profitably. We therefore consider that whilst the structures, plans and activities of the Trust are extensively documented in the Trust Deed they limited to the fulfilment of the three Trust Objects and that the commercial character, plans and activities of the taxpayer in Swansea go beyond those of the Trust.

We note that the main issue in Edgewater was whether the body corporate was a separate entity to its members. The AAT found that the taxpayer, as a body corporate was a separate entity which provided services to the lot owners (Para 28).

There is clearly a supply within the meaning of the Act. The applicant is obliged to perform a variety of tasks in the course of administering the common property and assets. The body corporate must clean, mow and tend to the gardens, change the light bulbs and repair damage resulting from wear and tear or accidents: see regulation 109, for example. It is the lot-owners who pay for these tasks to be performed, and the tasks are performed for their benefit: ss 87 and 114 of the BCCM Act. The lot-owners are in that sense the recipients of the service provided by the applicant. It makes no difference whether the entity discharges the obligation through servants or agents, as it is the entity's obligation.

The taxpayer in Edgewater made supplies and received payment for those supplies. It entered into contracts and engaged in trade with the lot owners in a business-like manner, albeit without a profit making intention.

Whilst it is accepted that the Trust operates in a professional manner, its operations are not business-like. The Trust does not provide goods or services to anyone. The Trust Objects are to accept payments into the Trust Fund, hold the Trust Fund for the beneficiaries and distribute the Trust Fund in accordance with the Trust Deed. To date, the Trust has not undertaken any significant investment activities, having only placed funds in term deposits. This can be contrasted to the taxpayer in Edgewater which purchased goods and services from third parties and then on-supplied those things to the lot owners. The only missing business indicator was the profit-making intention.

Question 2

As the Trust is not carrying on an enterprise, the requirement in paragraph 9-5(b) of the GST Act that a supply is made in the course or furtherance of an enterprise that the Trust is carrying on is not met. Therefore, the Trust has not made a taxable supply.