Edited version of private advice

Authorisation Number: 1051611109517

Date of advice: 22 November 2019

Ruling

Subject: GST and Supplies

Question

Is the payment received by Entity A from Entity B under the Call Option Deed consideration for a taxable supply under section 9-5(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The payment received by Entity A from Entity B under the Call Option Deed is consideration for a taxable supply.

This ruling applies for the following periods:

1 July 2019 - 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Entity A is registered for GST.

Entity A is a related entity to Entity Z.

Entity A owns commercial premises (Property 1) which it provides to Entity Z. Entity Z operates its business activity out of Property 1.

Entity A was established for the purpose of holding Property 1 as it was considered that this structure was prudent for asset protection purposes.

Adjoining Property 1 is another property (Property 2).

The owner of Property 2 (Entity B) entered into a Call Option Deed with Entity A. Under the terms of the Call Option Deed Entity A has the right to purchase Property 2 for a specified purchase price (Purchase Price). Alternatively the terms of the Call Option Deed also allow Entity A to nominate a purchaser (Nominee).

Where Entity A sources a Nominee the terms of the Call Option Deed provide that Entity B will pay Entity A the amount above the Purchase Price.

The terms of the Call Option Deed also provide that Entity A will procure Entity z to enter into a lease which is to be delivered to Entity B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5

A New Tax System (Goods and Services Tax) Act 1999 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 9-5(b)

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements for a taxable supply. It provides that you make a taxable supply where:

(a)     you make a supply for consideration,

(b)    The supply is made in the course or furtherance of an enterprise that you carry on; and

(c)     The supply is connected with the indirect tax zone; and

(d)    You are registered or required to be registered.

Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever.

GSTR 2006/9 examines the meaning of supply and discusses the concept of 'supply' in the GST Act and the meaning of 'supply' in section 9-10 of the GST Act. The ruling looks at how to identify and characterise supplies in the context of the transactions in which they are made and in paragraph 49 of GSTR 2006/9 it explains that there are a number of propositions that assist in analysing a transaction to identify the supply or supplied being made. These propositions include:

·        For every supply there is a supplier (Proposition 1);

·        Generally, for every supply there is a recipient and an acquisition (Proposition 2)

·        An entity will make a supply if it provides something to another entity (Proposition 5)

·        It is necessary to analyse the transaction that occurs, not the transaction that might have occurred (Proposition 10)

In addition GSR 2006/9 states:

Sufficient nexus

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

·        the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

·        regard needs to be had to the true character of the transaction; and

·        an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

In light of the terms given by the Call Option Deed and the circumstances in this case the Commissioner consider that there is a supply being made by Entity A. This supply is characterised as a service provided by Entity A to source an entity (the Nominee) with whom Entity B will subsequently enter into a contract for sale for Property 2. In addition that payment received by Entity A under the Call Option Deed arises in connection with this supply such that the payment is consideration for the supply for the purposes of the GST Act.

The second requirement for a taxable supply requires the entity to make the supply in the course or furtherance of an enterprise that you carry on.

In this case you have advised that Entity A was established for the purpose of holding Property 1as it was considered that this structure was prudent for asset protection purposes. Therefore what needs to be considered is whether Entity A is considered to be carrying on an enterprise for the purposes of the GST Act.

MT 2006/1 discusses activities of holding companies and states:

Activities of holding companies and other holding entities

191. Even though Corporations Act companies are automatically entitled to an ABN it is relevant to consider whether entities that have the same function as a holding company carry on an enterprise. The discussion may also be useful guidance for holding companies where it is necessary to be carrying on an enterprise to register for GST.

192. A holding company or similar entity that merely:

·        holds membership interests in other entities and is able to control those entities by virtue of that interest; and/or

·        derives income from other entities because it holds membership interests or other securities in those entities is not considered to be carrying on an enterprise.

In addition paragraphs 191 to 199 provides discussion and examples regarding activities of holding companies and other entities with paragraph 200 of MT 2006/1 stating:

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.

In this case, we consider that the activities of Entity A extend beyond that of a holding entity. This is demonstrated by the fact that Entity A provides Entity Z the property it holds and that according to the Call Option Deed Entity A will procure Entity Z to enter into a lease which is to be delivered to Entity B.

As the activities of Entity A go beyond those of a holding entity the Commissioner considers that the activities of Entity A amount to carrying on an enterprise for the purposes of the GST Act.

As the remaining requirements of section 9-5 of the GST Act are also met the Commissioner considers that Entity A has made a taxable supply.