Ruling Compendium GSTD 2009/1EC
Status: not legally binding







The edited version of the Compendium of Comments is a Tax Office communication that is not intended to be relied upon as it provides no protection from primary tax, penalties, interest or sanctions for non-compliance with the law. | In accordance with PS LA 2008/3 it only affords level 3 protection. | This is a compendium of responses to the issues raised by external parties to draft GSTD 2008/D2 - Goods and services tax: is a supply by way of an in specie distribution of an asset that is applied or intended to be applied in an enterprise carried on by a discretionary trust to a beneficiary of the trust made 'in the course or furtherance of' the trust's enterprise? | This compendium of comments has been edited to maintain the anonymity of entities that commented on the draft ruling. | Tax Office Response/Action taken | Wished to confirm the operation of Division 72 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if the supply is made in the course or furtherance of the discretionary trust's enterprise. Agreed with the approach taken in GSTD 2008/D2. | It is noted that guidance on Division 72 in this context is provided in ATO Interpretative Decisions (ATO ID 2001/503, ATO ID 2001/504 and ATO ID 2001/505) and Goods and Services Tax Advice GSTA TPP 049 Goods and services tax: Is a trustee's in specie distribution to a beneficiary a taxable supply? | The potential application of Division 72 was discussed with the entity providing the comment. | Sought clarification on treatment of an in specie distribution of assets that are not applied in the enterprise carried on by the discretionary trust (for example shares). | Under this Determination, an in specie distribution of an asset that is not applied in the enterprise carried on by the trust will not be a supply made in the course or furtherance of the enterprise carried on by the trust. It will be a question of fact as to whether the asset has been applied in the enterprise carried on by the trust. See Example 2 in paragraphs 16 to 17 of this Determination. | Query as to whether the distribution of assets upon the winding up of the enterprise carried on by the discretionary trust would not be in the course or furtherance of the enterprise carried on by the trust as the enterprise will have ceased. | Paragraph 9-5(b) of the GST Act requires that the supply is made in the course or furtherance of an enterprise that you carry on. The term 'carrying on' an enterprise is defined in section 195-1 of the GST Act as including doing anything in the course of the commencement or termination of the enterprise (see paragraphs 120 to 121 and 140 to 148 of Miscellaneous Taxation Ruling MT 2006/1). It is therefore possible for a supply to be made 'in the course or furtherance of' an enterprise that terminates as a result of the supply. This is illustrated by the insertion of footnote 2 in paragraph 3 of this Determination. | Questioned whether the supply of an asset of the discretionary trust to a beneficiary as a result of a contractual or loan agreement between the trust and the beneficiary is subject to GST. | However, the principle that the supply of an asset that has been applied in an enterprise carried on by an entity will be a supply in the course or furtherance of the entity's enterprise will be applicable to such cases. | Advised that the entity providing the comment had always been under the impression that a net distribution by a trust to a beneficiary is excluded from GST and was not in the course or furtherance of the enterprise. | Paragraph 7 of this Determination has been amended to clarify that a supply may be made in connection with the relevant enterprise, and hence be made in the course or furtherance of the enterprise, without the supply furthering or achieving the goals of the enterprise. | Advised agreement with the position taken in GSTD 2008/D2. | The Tax Office notes that the comment agrees with the approach taken in the draft Determination. | Advised that Examples 2 and 3 in GSTD 2008/D2 are incorrect. This is because a beneficiary of a discretionary trust will often be either an employee of the discretionary trust or an associate of an employee. It is therefore likely that the operation of the Fringe Benefits Tax system will be triggered in the scenarios described in Examples 2 and 3. This would mean that the car and the boat in the examples will be applied in the enterprise carried on by the discretionary trust. Example 2 is therefore incorrect and the reasoning in Example 3 may be misleading. It may be preferable to remove these examples. | The examples have been altered to clarify that the in specie distributions are not made in respect of the employment of either the beneficiary or a person to whom the beneficiary is an associate. There are, therefore, no fringe benefit tax implications resulting from the supply. | The submission provides 4 examples to illustrate the inconsistent outcomes that arise from applying GSTD 2008/D2 and GSTR 2003/6. | It further states that the focus of the test in GSTR 2003/6 is on the determination made by the trustee to distribute assets consistent with the Family Law Act order whereas the focus of the test in GSTD 2008/D2 is on the distribution. | It is considered that the principle articulated in GSTR 2003/6 is limited to situations that fall within the scope of that Ruling and does not have broad application. Paragraph 12 of this Determination has been inserted to address this issue. | Guidance is required on the GST implications arising from in specie distributions made by a company to a shareholder by way of dividend or made in the course of winding up a company. | Please see Question 20 from the Tax and Insolvency Practitioners Issues Register which discusses whether an in specie distribution by a representative of an incapacitated entity (company) to the entity's shareholders is a taxable supply. | The test under the GST Act is not whether or not the trust property, which has been distributed to the beneficiary, was 'applied or intended to be applied in the [trust's] enterprise'. The test under section 9-5(b) is whether or not 'the supply [was] made in the course or furtherance of an enterprise' carried on by the taxpayer [emphasis added]. | There is no authority for the Commissioner to introduce, or substitute, a new test. | The principle articulated in this Determination is that an asset that has been applied in an enterprise carried on by the discretionary trust will have a sufficient connection with the enterprise for its supply to be made in the course or furtherance of the enterprise carried on by the trust. | The question of when a thing is applied in carrying on an entity's enterprise is discussed in further detail in paragraphs 33 to 38 of GSTR 2008/D5: Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose. | Whilst the specific facts of each case must be taken into consideration when applying the test in paragraph 9-5(b) of the GST Act, that test specifies a legal requirement that the supply made by an entity have the requisite connection to the enterprise that the entity is carrying on. In the Commissioner's view that legal requirement is satisfied so long as some connection between the supply and the enterprise is established. | The draft Determination does not address the importance of having to identify the 'enterprise' of the trust and the need to consider all relevant facts when identifying the exact parameters of a trust's enterprise. | Identifying the 'enterprise' of the trust is required so that the test in section 9-5 can be applied appropriately. This point is highlighted in this Determination through the examples in this Determination where an asset has been applied in an enterprise and where an asset has not been applied in an enterprise. | The draft Determination does not correctly address the required nexus which must be established between the supply of the particular asset and the enterprise of the trust. It will not infrequently be the case that a distribution of trust property will not be a supply made in the course or furtherance of that trust's enterprise. | This Determination refers to the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 ('Explanatory Memorandum') and the context of section 9-5 to support the view that the phrase 'in the course or furtherance of' should be given a broad meaning so as to encompass supplies made in connection with the relevant enterprise. The application of the asset in the enterprise being carried on by the discretionary trust establishes a sufficient connection for the supply of the asset to be made in the course or furtherance of the enterprise carried on by the trust. | There is no basis in paragraph 9-5(b) for the Commissioner to treat a supply as taxable where an asset has not been used in the enterprise, but is only intended to be used in the enterprise. | It is noted that in this situation, the discretionary trust may have been eligible to claim input tax credits under Division 11 of the GST Act in relation to the acquisition of the asset. | However, since issuing the draft Determination the Tax Office has published draft Goods and Services Tax Ruling GSTR 2008/D5 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose. The position taken in this draft Ruling is that a thing held in connection with an enterprise and which is devoted to or put to use in an entity's enterprise will have been applied in the enterprise. Therefore, for example, the holding of trading stock for the purpose of sale in an entity's enterprise will be an application of the trading stock in the course or furtherance of the entity's enterprise (see paragraph 38 of GSTR 2008/D5). For this reason, the references to a thing being 'intended to be applied' in an entity's enterprise are considered no longer necessary in the context of this Determination and have been removed in its finalisation. The Tax Office notes, however, that the position stated in GSTR 2008/D5 is yet to be finalised. | Having regard to the points made in issues 10 to 14 above, the Tax Office should either revise its position in GSTD 2008/D2 or abandon altogether the proposal to publish its views on the application of section 9-5(b) of the GST Act to in specie distributions of trust property. | For the reasons provided in response to issues 10 to 14 above, the Tax Office considers the principle contained in this Determination has been correctly articulated. | For instance, in an income tax context, an in specie distribution of property held by a partnership as trading stock is generally treated as having been disposed of 'outside the ordinary course' of a business under section 70-90 of the ITAA 1997. Yet despite this, the Commissioner says that the same in specie distribution would be 'in the course or furtherance' of an enterprise for GST purposes. | It was submitted that a more consistent approach would see the Commissioner applying the change of creditable purpose provisions in Division 129 of the GST Act to an in specie distribution of property by a partnership to a partner rather than applying section 9-5 of the GST Act and making it a taxable supply. | Reference was made to a paper prepared by Justice Hill on the Creation of rights: dividends and trust distributions (ATAX UNSW - 14 th Annual GST & Indirect Tax Weekend Workshop, 2002) in which he concluded that the declaration of a dividend or the exercise of a power of appointment over income by a trustee would not be in the course of or furtherance of an enterprise so that they do not result in a taxable supply, irrespective of other arguments as to consideration or financial supply. | While the GST system does utilise adjustment provisions, the position adopted in this Determination is conceptually consistent with the framework of the GST legislation when considering the interaction between section 9-5 and Subdivision 72-A. Subdivision 72-A interacts with section 9-5 to ensure that supplies made to associates without consideration are brought within the GST system. An interpretation that an in specie distribution from a discretionary trust to a beneficiary cannot be in the course or furtherance of an enterprise carried on by the trust would result in the supply to the associate not being brought within the GST system and therefore contrary to the underlying policy framework. | Section 70-90 of the Income Tax Assessment Act 1997 (ITAA 1997) refers to the expression 'outside the ordinary course of a business' - a concept that is different from a supply made 'in the course or furtherance of' an enterprise. | Paragraph 71 of Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? states that in some cases an acquisition can be made in carrying on an enterprise, even if the relevant outgoing is not 'necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income for income tax purposes'. | This position highlights a contextual difference between the GST and income tax legislation. Example 18 of GSTR 2008/1 (paragraphs 212 to 214) refers to acquisitions of legal and brokerage services acquired in borrowing funds to pay a dividend being made in carrying on an enterprise. | As mentioned above, it is considered that a supply made outside the ordinary course of a business for income tax purposes may still be made 'in the course or furtherance of' an enterprise for the purposes of GST. | Refers to an example of an in specie distribution of a jet plane that is not supplied in the course or furtherance of the enterprise carried on by the trust but does result in an adjustment under Division 130 of the GST Act. | GSTD 2008/D2 does not address the issue of whether 'consideration' has been provided where a discretionary trust makes a distribution to a beneficiary and the interaction with Division 72 of the GST Act. | The Explanatory Memorandum uses the circumstance of an act done for the purpose of furthering the enterprise to illustrate the breadth of the phrase. Paragraph 3.10 of the Explanatory Memorandum specifically recognises that an act done in the furtherance of an enterprise may not always be in the course of that enterprise. Equally it could be said that an act can be done in the course of an enterprise but not necessarily in the furtherance of that enterprise. This is illustrated by the situation where a supply causes the termination of an enterprise - such a supply is made in the course of the enterprise but not necessarily in the furtherance of that enterprise. | The principle contained in this Determination is the preferred Tax Office view. On that view the in specie distribution would be a supply in the course or furtherance of the trust's enterprise and Division 130 of the GST Act will not apply. | See response to Issue 1. ATO IDs 2001/503, 2001/504 and 2001/505 set out the Tax Office view that a beneficiary does not provide consideration in relation to an in specie distribution received from a discretionary trust. Refer also to footnote 3 in this Determination.