GST and agricultural managed investment scheme - investor carrying on an enterprise

Is the entity, an individual who is a participant in an agricultural managed investment scheme, carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Yes. The individual who is a participant in the agricultural managed investment scheme is carrying on an enterprise under section 9-20 of the GST Act.

The scheme: • is a 'forestry managed investment scheme' as defined in subsection 394-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997); • is a managed investment scheme under the Corporations Act 2001 ; and • involves the establishment and tending of trees for felling in Australia.

Investors become participants in the scheme by entering into the scheme constitution and associated agreements with the responsible entity.

The constitution provides the responsible entity of the scheme is to be appointed as manager of the scheme ('the manager').

The scheme agreements relevantly provide that: • each participant leases a timber lot from the manager; • the lease agreement provides the participant with the right to enter the land; the right to establish, maintain and harvest a crop of trees on the land; the right to construct and use buildings, works and facilities as may be necessary for the participant to establish, maintain and harvest a crop of trees on the land; • the participant owns all the trees on their leased land and all plantation produce produced by or derived from those trees; • the participant is entitled to all harvest proceeds from the sale of plantation produce; • the participant controls what agricultural activities take place on the plantation and has the capacity to implement activities which differ from the recommendations of the manager; • the participant appoints the manager as an independent contractor to provide forestry services; • each participant may terminate the management agreement for breach or, in company with other participants, resolve to dismiss the manager; and • the forestry services include site preparation; planting, fertilising, replanting, managing and maintaining the plantation; maintenance of roads and other necessary infrastructure; harvesting and rehabilitation of the plantation land; • in consideration of the manager agreeing to carry out forestry services, the participant agrees to pay to the manager a management fee; • management fees are payable over the period of the scheme; • the participant intends to make a profit from the scheme and enters into it for a commercial purpose.

The management fees and the lease payments are the only payments made by the participant.

An entity may be registered for GST if it is carrying on an enterprise. 'Enterprise' is defined in section 9-20 of the GST Act.

Paragraph 9-20(1)(a) of the GST Act provides that enterprise includes an activity, or series of activities, done in the form of a business.

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) explains the Commissioner's views on when an entity is carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Paragraph 159 of MT 2006/1 states that whether or not an activity, or series of activities amounts to an enterprise is a question of fact and degree, having regard to all of the circumstances of the case. Paragraph 160 of MT 2006/1 states it is therefore important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on.

Paragraph 170 of MT 2006/1 states (amongst other things) the phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business.

MT 2006/1 further states at paragraphs 175 and 176: 175. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997. 176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 178 of MT 2006/1 sets out the indicia of business referred to in paragraph 13 of TR97/11 as follows: • 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.

The Commission's Decision Impact Statement for Hance v Federal Commissioner of Taxation ; Hanneberry v. Federal Commissioner of Taxation 2008 ATC 20-085, (2008) 74 ATR 644 states: ... [the] retention of ownership by individual members, of the produce of the scheme, was of critical importance in this matter, and it will be necessary to ensure that this feature is present in order to reach the same conclusion as that reached by the Court.

Having regard to the indicia listed above, and the essential feature that the Decision Impact Statement states must be present (before the Commissioner will conclude the participants in such schemes are carrying on a business), we conclude each participant is carrying on a business.

Specifically, we consider the relevant features of the scheme are: • the participants intend to make a profit from their participation in the scheme • the continued operation over an extended period of time • the repetitive nature of the work involved in farming each timber lot (to be paid for on a regular basis) • the ownership by the participants of the trimmings and final harvest, and of the proceeds from their sale • each applicant may terminate the management agreement for breach or, in company with other participants, resolve to dismiss the manager • each applicant has an ongoing commitment to pay the manager to do what is necessary in order to facilitate commercial production of timber over a lengthy period of time.

Therefore the participant, in carrying out activities in the form of a business, will be carrying on an enterprise, unless those activities fall into the exclusions listed under subsection 9-20(2) of the GST Act. In this case, none of the activities carried out by the participant fall into the exceptions listed under subsection 9-20(2) of the GST Act.

Therefore, the participant is carrying on an enterprise under section 9-20 of the GST Act.