Edited version of your written advice

Authorisation Number: 1051309618254

Date of advice: 20 November 2017

Ruling

Subject: GST and input tax credits

Question

Is the Trust entitled to the input tax credits on the acquisition of legal services in the furtherance of pursuing its objectives under the deceased’s Will (the Will)?

Answer

No. The Trust is not entitled to the input tax credits on the acquisition of legal services in the furtherance of pursuing its objectives under the Will.

Relevant facts and circumstances

● The deceased died. Probate was granted on their Estate on a particular date.

● The deceased was the sole beneficiary of a life insurance policy owned by their spouse.

● The spouse died before the deceased and probate was granted on his Estate on a particular date.

● Entity AAA is the appointed executor pursuant to the Will of the deceased. A copy of the Will has been submitted to the ATO.

● The Will states that the estate is to be distributed for their children.

● Entity AAA (as the appointed trustee) held their respective share of the deceased's estate on separate trusts.

● Following the death of the deceased's spouse, the deceased lodged a claim with the life insurance company. The life insurance company refused to pay out the life insurance proceeds due to the deceased without the coronial inquest being finalised. The deceased died before the coronial inquest was issued.

● Following the death of the deceased, Entity AAA continued with their pursuit of the claim against the life insurance company. The life insurance company continued to refuse to pay out on their policy. Entity AAA, acting in good faith, initially sought legal advice on how it should proceed with the life insurance company's failure to pay out the proceeds due to the estate. This eventually led to Entity AAA seeking directions from the Court. The Court agreed with Entity AAA's suggestion to proceed with its legal claim against the life insurance company.

● Entity AAA engaged a specialist solicitor and barrister to act on its behalf in this matter. The case was referred to a Court which ultimately resulted in a trial. Entity AAA took part in settlement conferences before the trial.

● At trial, Entity AAA was successful in its case against the life insurance company. The life insurance company subsequently appealed. Entity AAA eventually reached a settled position with the life insurance company.

● Legal fees incurred by Entity AAA formed part of the settlement agreement (the Agreement). A copy of the Agreement has been submitted to the ATO. Entity AAA has outstanding invoices relating to legal services incurred. Entity AAA has the right to be indemnified for payment of all legal fees in its capacity as executor and trustee.

● The assets of the deceased at their date of death included cash at bank, personal furniture and effects, a motor vehicle, a boat, two trailers and the life insurance policy.

Additional information

● The Trust is not registered for GST.

● As advised, the Trust is not required to be registered for GST as its turnover is less than $75,000. Registering for GST will be on a voluntary basis depending on the outcome to this private ruling.

● The Trust does not have an ABN and has advised that an ABN will be applied for depending on the outcome of this private ruling.

● The ‘legal services’ which are the subject of this private ruling includes the ‘legal advice on how to proceed with the life insurance company’s failure to pay out proceeds’ as well as ‘engaging a specialist solicitor and barrister’. That is, such services includes all legal advice where GST has been paid including initial advice on the prospects of recovery from the insurer from a legal firm and Barrister specialising in this area and then continued use of those providers throughout negotiations, mediation, pre-trial and trial process and then to the appeal process. A description of the nature of such legal services was provided to the ATO.

● As advised, for GST purposes the Trust would account on a cash basis and the legal services acquired by the Trust would be attributable to certain tax periods.

● With regard to the types of activities and supplies that the Trust makes, the Trust is primarily engaged in investment activities. The funds which have been held on trust for the minor children have been invested prudently by Entity AAA in accordance with an investment strategy and with input from their guardians (where appropriate).

Relevant legislative provisions

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

Reasons for decision

Is the Trust entitled to the input tax credits on the acquisition of legal services in the furtherance of pursuing its objectives under the Will?

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (all further references are to this act unless stated otherwise) provides that:

You are entitled to the input tax credit for any creditable acquisition that you make.

The requirements for a creditable acquisition are set out in section 11-5 of the GST Act and provide 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.

While it is not contested that the requirements to paragraphs 11-5(b) and (c) could be satisfied in this case, the requirements to paragraphs (a) and (d) are not considered satisfied and are discussed in further detail below.

The requirements at paragraph 11-20(d)

With regard to the requirement that an entity is ‘required to be registered’, section 23-5 provides that you are required to be registered under the GST Act if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

Section 188-10 concerns whether your GST turnover meets, or does not exceed, a turnover threshold. Relevantly, subsection 188-10(1) provides that:

(1) You have a GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

*Asterisked terms (namely ‘current GST turnover’ and ‘projected GST turnover’) are defined in the Dictionary at section 195-1 by reference to section 188-15 and 188-20 respectively, and which are not reproduced in full here.

As advised, the Trust is not required to be registered for GST as its turnover is less than the relevant turnover threshold of $75,000. Additionally, available information does not sufficiently evidence the Trust’s current or projected GST turnover being at or above $75,000 which further supports the conclusion that the Trust is not required to be registered for GST.

It is noted that the Trust is not registered for GST and has not been registered for GST previously.

In light of the above, the requirements at paragraph 11-20(d) are not considered satisfied and therefore the acquisitions of the legal services by the Trust would not be creditable acquisitions. As such, the Trust is not entitled to the input tax credits on the acquisition of the legal services in the furtherance of pursuing its objectives under the Will.

Further discussion

The Trust has considered the relevant issue in this case to be whether the legal services were acquired for a creditable purpose which is predicated on the view that the Trust carries on an enterprise and that such services were acquired in carrying on that enterprise and not acquired in relation to the making of supplies that would be input taxed.

Notwithstanding the decision and reasoning discussed above, we include as below further discussion for completeness.

Under subsection 184-1(3), a legal person may act in a number of different capacities, and in each of those capacities the person is taken to be a different entity. The trustee of a trust may therefore be registered in its capacity as trustee of a trust (which can also be referred to as ‘the trust’), and also in its own right (commonly referred to as its corporate capacity).

In support of its view that it carries on an enterprise the Trust contended that various indicators of a business mentioned 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 (MT 2006/1) are present in this case having regard to the trustee’s activities discussed in the private ruling application. Furthermore, the Trust has contended that legal services acquired should not be denied creditable purpose as the supplies to which the legal services are related, are not input taxed but rather, supplies in respect of the activities discussed. Those activities are not reproduced in full here but notably, it is apparent that such activities have been described to be, and should appropriately be the activities of the trustee in carrying out the role of a trustee (that is, in its corporate capacity) as opposed to being activities of the Trust.

Consequently, in this case, it cannot be concluded that activities of the Trust, which primary consist of investing, amount to an enterprise being carried on by the Trust.

Paragraphs 205 to 208 of MT 2006/1 contain two relevant examples concerning a holding entity not carrying on an enterprise and also investment activities that are not an enterprise.

Example 23 - holding entity not carrying on an enterprise

205. B trust is a holding entity for three companies. The trustee passively holds all shares, is not involved in the running of the companies and provides no services to the group. There are no headquarters of the group but each company provides its own business premises. The trustee for B trust distributes any dividends received to the unit holders. The trustee's activities are not done in the form of a business and it does not carry on an enterprise.

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. ⁷⁰

As such, our opinion based on the circumstances of this case is that the Trust does not carry on an enterprise for GST purposes and therefore the requirements at paragraph 11-5(a) are not satisfied.

On a separate matter, it is also noted that potential application of Division 139 concerning adjustments for distributions from deceased estates, has not been considered in this private ruling.