GST and agriculture: managed investment scheme - supply of an interest in the managed investment scheme

Are payments made by the participants consideration for an input taxed supply of an interest in a forestry managed investment scheme by reason of item 10 in the table to subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Yes. The payments made by the participants are consideration for an input taxed supply of an interest in a forestry managed investment scheme by reason of item 10 in the table to subregulation 40-5.09(3) of the GST Regulations.

The Scheme, a 'forestry managed investment scheme' as defined in subsection 394-15(1) of the Income Tax Assessment Act 1997, involves the establishment and tending of trees for felling in Australia.

The Scheme Constitution establishes the Scheme and, in relation to the participants, provides: • the consideration payable by the participants of the Scheme is to acquire rights to the benefits produced by the Scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not); • consideration payable by the participants includes the initial contribution (which can be paid as a single payment or as regular contributions), a harvest activities contribution, an after-harvest activities contribution, a deferred contribution and a carbon revenue contribution. • the additional contributions are calculated having regard to the participant's proportional interest in the Scheme and are payable to the Responsible Entity (RE) by way of deduction from the product sale proceeds, insurance proceeds (if any) or other plantation income. • a participant will receive a proportional amount of the income of the Scheme, after deducting all amounts the RE is entitled to deduct from that income, by reason of the participant's interest in the scheme. • the participant has no interest in the product of the Scheme.

Under the Scheme documents the participants do not acquire an interest in the land and do not enter into an agreement for the management of the plantation.

In relation to the RE the Constitution provides: • the appointment of the RE to carry out the activities for the Scheme including establishment services, harvest services and after harvest services. The RE also has sole authority to market and sell the product. • the RE is entitled to be paid out of scheme property for activities carried out on behalf of the Scheme. • the RE may engage the services of suitably qualified, experienced and reputable consultants in the field of silviculture to provide the RE with all such advice and assistance that the RE requires to carry out management, harvest and after harvest activities.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act), an entity makes a taxable supply if: (a) the supply is for consideration; and (b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and (c) the supply is connected with Australia; and (d) the entity is registered or required to be registered for GST.

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

Section 40-5 of the GST Act provides that financial supplies are input taxed and that these supplies have the meaning given by the GST Regulations.

Under subregulation 40-5.09(1) of the GST Regulations, the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or 40-5.09(4) is a financial supply if the provision, acquisition or disposal is: • for consideration, • in the course or furtherance of an enterprise and • connected with Australia; and

the supplier is: • registered or required to be registered for GST and • a financial supply provider in relation to supply of the interest.

Item 10 in the table in subregulation 40-5.09(3) of the GST Regulations includes an interest in or under securities. Securities are defined in the GST Regulations to take the meaning provided in subsection 92(1) of the Corporations Act 2001 ( Corporations Act).

Paragraph 92(1)(c) of the Corporations Act provides that 'interests in a managed investment scheme' (MIS) are securities for the purposes of that Act. Section 9 of the Corporations Act provides that 'interest' in a managed investment scheme means a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not); 'benefit' includes any benefit, whether by way of payment of cash or otherwise; and 'managed investment scheme' means: (a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

In this case: • the participants in the Scheme contribute money to acquire rights to the benefits produced by the Scheme; • the benefits acquired are rights to receive a pro-rata distribution of the Scheme profit in accordance with scheme documents; • contributions are pooled for use in the Scheme for the common enterprise of forestry; and • participants do not have day to day control of the operation of the Scheme.

Therefore, the supply of a forestry interest under the Scheme is the provision of an interest in or under a security for the purposes of item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.

Amounts payable by participants of the Scheme are set out in the Constitution. Application monies can be paid as a single payment or as regular contributions. After the initial application monies a participant must also pay to the RE the: • harvest services fee; • after harvest services fee; • deferred management fee; and • carbon revenue fee.

These fees are calculated having regard to the participant's proportional interest in the Scheme; and are payable to the RE by way of deduction from the product sale proceeds, insurance proceeds (if any) or other plantation income.

Where the other requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied, the provision of the interest in the item 10 security is an input taxed financial supply if the above application monies and fees are consideration for the provision of that interest.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration ( paragraphs 64-72), Goods and Services Tax Ruling GSTR 2000/11 Goods and services tax: grants of financial assistance ( paragraphs 76-81) and Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees ( paragraphs 98-99) contain the Commissioner's views on determining whether a payment is consideration for a supply. The relevant principles repeated in these paragraphs are that in determining whether a payment is consideration under subsection 9-15(1) of the GST Act, the test is whether there is a sufficient nexus between the supply and the payment made; in determining whether a sufficient nexus exists, regard needs to be had to the true character of the transaction; an arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made; and whether there is a sufficient nexus is an objective test.

The Scheme documentation provides that a participant will receive a proportional amount of the income of the Scheme (after deducting all amounts the RE is entitled to deduct from that income); and makes it clear that the participant does not acquire an interest in the plantation land or the product. What the participants acquire is the right to share in the net proceeds of the Scheme.

On an objective determination, having regard to the true character of this transaction and all the circumstances mentioned above, the participant's contributions have a sufficient nexus to the provision of the interest in the item 10 security.

Consequently, all of the participant's contributions are regarded as consideration for the supply of the interest in the Scheme. Where the supply of the interest in the scheme meets the remaining conditions set out in subregulation 40-5.09(1) of the GST Regulations, the supply is an input taxed financial supply of an interest in a forestry managed investment scheme.