Edited version of your written advice

Authorisation Number: 1013121233553

Date of advice: 28 November 2016

Ruling

Subject: Goods and Services Tax (GST): Enterprise and GST registration

Issue 1

GST and Enterprise

Question 1

Is M Co, as trustee for the Family Trust, carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

Yes. M Co, as trustee for the Family Trust, is carrying on an enterprise under section 9-20 of the GST Act.

Issue 2

GST Registration

Question 1

Is M Co, as trustee for the Family Trust, entitled to be GST registered under section 23-10 of the GST Act?

Answer

Yes. M Co, as trustee for the Family Trust, is entitled to be GST registered under section 23-10, subject to the 4 year rule under section 23-20 of the GST Act.

Relevant facts and circumstances

In an application for private ruling, the applicant provided the following facts and information:

● The Family Trust is a discretionary trust which was established in the 1970s. M Co acts as the trustee for the Family Trust. The directors of M Co are family members, who collectively control and manage the various entities in the ABC group (collectively referred to as the ABC group).The ABC group represents a family business which has operated since the 1970s.

● M Co provides management services to the members of the ABC group by way of monthly meetings held by the directors of M Co to discuss management, business and investment decisions in respect of the ABC group.

● M Co also provides guarantees and short term financing to members of the ABC group.

● Historically, the Family Trust, through majority ownership of E Co controlled many of the entities in the ABC group.

● E Co and its subsidiaries collectively formed a food processing related export business, servicing both Australian and international customers. Among the wholly owned subsidiaries of E Co is AB Pty Ltd, the primary operating entity of the ABC group.

● Recently, M Co, as the trustee of the Family Trust, proposed to divest some or all of its interest in E Co and its subsidiaries. M Co engaged various professional advisors and consultants to advise on the divestment of E Co. M Co, as the trustee of the Family Trust, subsequently divested a 100% interest in E Co to a third party. However, a small percentage has been retained by the ABC group.

● Post divestment of E Co, the family members remain involved in these businesses by way of its retained ownership.

● The role and activities of M Co are further explained as per below.

1. Management services

The directors of M Co hold monthly meetings to discuss management, business and investment decisions of the ABC Group. Additionally, M Co has served as the vehicle from which its directors make certain resolutions for members of the ABC group. For example, M Co, as the trustee of the Family Trust, was directly involved in making the management decisions which ultimately led to the divestment of the Family Trust's interest in E Co.

2. Provision of guarantees

M Co has also been party to different agreements made involving the members of the ABC group. In those agreements, M Co has acted as guarantor or co-guarantor on behalf of the members of the ABC group. As guarantor, M Co has agreed to guarantee the performance of the obligations of the members of the ABC group provided for under the relevant agreements.

3. Short term financing

M Co, as trustee for the Family Trust, acts as a short term financier for the purposes of providing loans to related parties where required. Historically, M Co has provided small, temporary loans to various members of the ABC group, albeit on an interest-free basis.

The applicant provided further information and factual background:

● The Family Trust is not part of a GST group and still maintains an ABN. M Co is acting as trustee for the Family Trust, which had been GST deregistered since September 2007 to present.

● M Co, as the trustee of the Family Trust, has incurred recent costs and expenses which include legal fees, corporate advisory fees and other charges in the course of the enterprise. No supplies were made for a profit.

● The applicant requested that the GST registration for the Trust be backdated for 6 to 12 months prior to the present day since there have been no acquisitions made for some years under the Trust.

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 Paragraph 9-5(d)

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 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-20

A New Tax System (Goods and Services Tax) Act 1999 Section 25-1

A New Tax System (Goods and Services Tax) Act 1999 Section 25-5

A New Tax System (Goods and Services Tax) Act 1999 Section 25-10

A New Tax System (Goods and Services Tax) Act 1999 Section 25-15

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

A New Tax System (Goods and Services Tax) Act 1999 Division 23

A New Tax System (Goods and Services Tax) Act 1999 Division 25

ATO view documents

The 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

Goods and Services Tax Ruling GSTR 2006/3, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies

Taxation Ruling TR 97/11 - Income Tax: am I carrying on a business of primary production?

Reasons for decision

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), unless otherwise stated.

Carrying on an enterprise

GST is payable on any taxable supply you make. Section 9-5 states:

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

(*denotes a term defined in section 195-1)

One of the key requirements for making a taxable supply is under paragraph 9-5(b) which requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

Section 195-1 (the Dictionary) states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

In relation to the term enterprise, section 9-20 states:

(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

…

The question of whether an entity is carrying on an enterprise is further examined in 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.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Commencement of an enterprise

MT 2006/1 states at paragraphs from 123 to 204 (in part):

123. In the Commissioner's view the term, 'doing anything in the course of the commencement....of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

124. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated.

125. An enterprise must start somewhere and the first step or steps may be minor. In Ferguson v. Federal Commissioner of Taxation Bowen CJ and Franki J expressed the point in this way:

Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business.

…

In the form of a business

170. An enterprise includes an activity, or series of activities, done in the form of a business.56 The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

…

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

● a 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 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.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states 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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business

Example 22 - provision of services by a holding entity that is an enterprise

202. A unit trust is a holding entity for three wholly owned companies that conduct enterprises in Australia. The trustee of the trust involves itself directly and indirectly in the management of the companies. The trustee also provides accounting services to the companies without prejudice to its rights as a shareholder in the companies.

203. No fees are received by the trust for the services provided to the subsidiaries which if provided to an arm's length party would have been capable of being charged for.

204. Although no fees are received, the activities still have a commercial basis underlying them. The trust's activities are done in the form of a business. The trustee is carrying on an enterprise by providing management and accounting services to the group and is entitled to an ABN.

In relation to the trust and trustee relationship, MT 2006/1 states at paragraphs 72 to 73:

72. The Act does not create two separate entities - the trust and trustee - but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. A consequence of this is that there will only ever be one ABN registration for the trust and only one ABN issued irrespective of the number of trustees for the trust.

73. As stated, rights and obligations cannot be placed directly upon a trust. Therefore, the trustee is the legal person who may create rights and have obligations in relation to the trust property. The trustee is the legal person who is taken to be the trust entity and holds the ABN for the trust or superannuation fund. In addition the trustee is obliged to meet obligations under the ABN Act such as the obligation to provide information under section 15.

From the information and facts provided, M Co, as trustee for the Family Trust provides various management services to the ABC group but does not directly profit from its management services.

The profit motive is one factor to consider. However, other factors under paragraph 178 of MT 2006/1 need to be considered in determining if M Co is carrying on an enterprise for GST purposes. 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. Example 22 under MT 2006/1 suggested that though there are no fees received by an entity, the activities conducted through provision of accounting and management services can point to an enterprise being carried on.

The management services conducted by M Co, through the meetings of its directors, constitute significant commercial activities for the purposes of the beneficiaries of the Family Trust. The directors of M Co make management decisions for the members of the ABC group through M Co, as trustee for the Family Trust, with a purpose and intention to engage in commercial activities on behalf of, and to advance the profits of, the ABC group. The commercial advancement of the ABC group will in turn benefit the beneficiaries of the Family Trust, of which M Co is the trustee. It can be considered that M Co's regular and business like activities will have an indirect impact on the profit expectations of related entities and that of the ABC group.

M Co also provides guarantees and short term financing to members of the ABC group. M Co has also been party to different agreements made involving the members of the ABC group. In those agreements, M Co has acted as guarantor or co-guarantor on behalf of the members of the ABC group. As guarantor, M Co has agreed to guarantee the performance of the obligations of the members of the ABC Group provided for under the relevant agreements.

M Co, as trustee for the Family Trust, acts as a short term financier for the purposes of providing loans to related parties where required. Historically, M Co has provided small, temporary loans to various members of the ABC group, albeit on an interest-free basis.

In weighing up all the relevant indicators, we note that M Co's activities display most of the indicators of a business. On this basis, we consider M Co, as trustee for the Family Trust, to be carrying on an enterprise for the purposes of section 9-20.

GST registration

Paragraph 9-5(d) requires that the supply is made by an entity that is registered, or required to be registered.

Under section 23-5 you are required to be registered if:

(a) you are carrying on an enterprise; and

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

However, if the taxpayer's GST turnover is less than the registration turnover threshold of $75,000, the taxpayer can choose to register for GST if the taxpayer is carrying on an enterprise (section 23-10).

In this case, M Co, as trustee for the Family Trust, is carrying on an enterprise whereby the GST turnover may or may not exceed the registration turnover threshold of $75,000. If M Co's threshold exceeds $75 000, M Co is required to be GST registered under section 23-5.

However, if M Co's GST threshold as trustee for the Family Trust is under $75 000, M Co can choose to be GST registered under section 23-10 since M Co is carrying on an enterprise for GST purposes.

From the information and facts provided, M Co, as trustee for the Family Trust, has been GST deregistered since September 2007 to present. The Family Trust is not part of a GST group and still maintains an ABN. The applicant requested that the GST backdating for M Co, as trustee for the Family Trust, can occur 6 to 12 months prior to the present day since there were no acquisitions made for that period by the Trust.

In this case, M Co, as trustee for the Family Trust, can backdate its GST registration from the date M Co commenced carrying on enterprise activities pursuant to Division 23 and 25 (see also sections 25-1, 25-5, 25-10 and 25-15). M Co is entitled to be GST registered under section 23-10, subject to the 4 year rule under section 23-20.

Creditable acquisitions

Section 11-20 explains that you are entitled to the input tax credit for any creditable acquisition you make.

The term creditable acquisition is defined in section 11-5 which 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.

* Terms with an asterisk are defined in section 195-1 of the GST Act.

The first requirement of a creditable acquisition is that you acquire anything solely or partly for a creditable purpose. The meaning of creditable purpose is defined in section 11-15 which states:

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

Goods and Services Tax Ruling GSTR 2006/3, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies explains when an acquisition is made in 'carrying on your enterprise'.

Paragraph 51 of this ruling states:

When is an acquisition or importation made in 'carrying on your enterprise'

51. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. The acquisition must be made in the course of the activities that constitute your enterprise. An acquisition is made 'in carrying on your enterprise' if it is made for the purposes of that enterprise, but not if it is made for some other purpose.

Based on the facts and information, the costs and expenses incurred by M Co, as trustee for the Family Trust, are required to be creditable acquisitions under section 11-5 in order for M Co to be eligible to claim input tax credits on behalf of the Family Trust.