GST and agricultural managed investment scheme - the capacity in which post-establishment acquisitions are made

For working out whether a trust or the trustee of the trust makes an acquisition for paragraph 11-5(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), how is the capacity in which a trustee acts determined?

The capacity in which the trustee acts is determined by having regard to the intention of the parties. Evidence of intention will include statements of the parties involved, the accounting treatment of the acquisitions in question and how such acquisitions have been classified for regulatory and taxation purposes.

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 registered managed investment scheme under the Corporations Act 2001 (Corporations Act); and • 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 an interest in a managed investment scheme (being an interest in security for the purposes of item 10 of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999); • the consideration payable by the participants for the interest includes an initial contribution (which can be paid as a single payment or as regular contributions), and additional contributions to meet the costs of harvest and after-harvest activities; • the participant's interest in the scheme entitles the participant to receive a proportional amount of the income of the scheme, after deduction of all amounts the 'responsible entity' (RE) is entitled to deduct from that income; and • 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.

The contributions of money by the participant to the scheme, and the property acquired (directly or indirectly) with the contributions of money, are 'scheme property' as defined in the Corporations Act. Under subsection 601FC(2) of the Corporations Act, the RE holds such scheme property on trust for the participants. Under paragraph 184-1(1)(g) of the GST Act such a trust is an entity for GST purposes ('trust entity').

A trust (and therefore a trust entity) logically comes into existence when subsection 601FC(2) of the Corporations Act operates to create a trust over the scheme property. The scheme's documentation does not provide for a trust coming into existence at an earlier point in time, and therefore there is a trust entity established at the time there is scheme property (as defined in the Corporations Act).

The constitution provides: • for the appointment of the entity as the RE to carry out the activities for the scheme, including establishing the plantation, and the harvest and after-harvest activities. 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 for the scheme; and • 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.

Prior to there being scheme property (as defined in the Corporations Act), the entity makes acquisitions to set up and promote the scheme, including acquisitions of: • accounting services; • advice in respect of income tax Product Ruling preparation; • legal services; and • services to prepare the PDS and other marketing documentation.

After there is scheme property (as defined in the Corporations Act), the entity makes acquisitions that relate solely to the management of the participants' interests in the scheme, including the necessary accounting and legal services.

The entity also makes acquisitions (after the scheme is established) that relate solely to carrying on the agricultural enterprise, including: • plantation management services (for example, planting, thinning and harvesting services); and • product distribution services (for example, transport, sale and marketing services).

The recording of the acquisitions for accounting and income tax purposes indicates the acquisitions are affairs of the trust entity, rather than affairs of the entity in its own capacity.

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes. Under paragraph 11-5(a) of the GST Act, an entity makes a creditable acquisition if (amongst other things) the entity acquires anything solely or partly for a creditable purpose.

Paragraphs 184-1(1)(g) and 184-1(1)(h) of the GST Act state that an entity includes: • A trust; • A superannuation fund.

Subsections 184-1(2), 184-1(3) and 184-1(4) of the GST Act state: (2) The trustee of a trust or of a *superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time. (3) A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity. (4) If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. * denotes a term defined in the Dictionary, starting at section 195-1 of the GST Act.

Thus, the entity acts in two different capacities for GST purposes: • in its capacity as trustee of the trust established under subsection 601FC(2) of the Corporations Act (being a separate entity for GST purposes); and • in its own corporate capacity, making supplies of RE or trustee services to the trust.

Therefore, for the purposes of paragraph 11-5(a) of the GST Act, the entity must determine whether the acquisitions it makes are: • acquisitions of the trust entity for which it is trustee; or • acquisitions made in its own corporate capacity.

We are of the view that the intention of the parties in question, being the entity and the scheme members, will determine whether an acquisition is made by the entity in its corporate capacity or in its capacity as trustee of the trust. Where the entity can demonstrate that its intention is to make an acquisition in its own capacity (rather than as trustee of the trust), the acquisition will be made by the entity in its corporate capacity rather than by the trust entity for the purposes of the GST.

For instance, in meeting its requirements to account for financial, taxation and regulatory purposes, the entity may account for third party acquisitions as acquisitions made by it in its capacity as trustee of the trust. (Such accounting should necessarily reflect the terms of the trust deed and the legal relationships between the entity and other suppliers of services in relation to the operation of the scheme.) Where this is the case, we would regard this as evidence of an intention that the acquisitions are made by the entity in its capacity as trustee of the trust, for the purposes of the GST.

Evidence that the entity makes the acquisitions in its capacity as trustee of the trust and not in its own corporate capacity, is the fact the acquisitions are recorded for accounting and income tax purposes as being affairs of the trust (and not as affairs of the entity in its personal capacity).