GST and supplies of an interest in a time-sharing scheme to non-residents overseas

Is the supply of an interest in a time-sharing scheme that the scheme makes to a non-resident overseas, a supply that is GST-free under section 38-190 of the Goods and Services Tax (A New Tax System) Act 1999 (GST Act)?

No, the supply of an interest in a time-sharing scheme that the scheme makes to a non-resident overseas, is not GST-free under section 38-190 of the GST Act.

The scheme meets the definition of a time-sharing scheme under the Corporations Act 2001 (Corporations Act) and is a registered managed investment scheme under the Corporations Act.

The time-sharing scheme is a trust which is an entity for GST purposes. As the trust is not a legal entity, a company in its capacity as responsible entity and trustee of the scheme is registered for GST and is taken to be the scheme entity. This entity will be referred to as 'the scheme'.

The scheme holds a portfolio of Australian holiday resorts, and a smaller portfolio of overseas holiday resorts. The scheme is registered as a managed investment scheme under the Corporations Act. The scheme carries on its enterprise in accordance with its constitution of the scheme.

A Product Disclosure Statement (PDS) for the scheme sets out the rights to benefits produced by the scheme that a participant can expect to enjoy over the period of their participation in the scheme. The PDS indicates that the primary benefit of participation is being able to choose from a range of scheme accommodation, and to stay in the chosen accommodation, free of charge. The accommodation is subject to availability. A booking fee may be payable.

The scheme is expected to run for several decades. The rights and benefits of participation can be passed to a participant's heirs in the case of the participant's death. Upon expiry of the scheme, a person who is a participant at that time is entitled to a share of the liquidated net assets of the scheme.

The scheme is expressly not designed to provide financial returns. The PDS indicates that upon the eventual windup of the scheme, any remaining scheme assets are to be sold and net proceeds distributed to participants. However, the windup of the scheme is not anticipated until many years into the future. There is no identifiable quantum of benefit to a new participant in relation to liquidation of scheme property.

A new participant acquires an interest in the scheme by purchasing a specified minimum number of timeshare points. A participant may subsequently apply for a further interest in the scheme by purchasing additional timeshare points. The number of timeshare points each participant holds reflects the extent of their interest in benefits produced by the scheme.

The year to year allocation of benefits produced by the scheme is regulated by way of an 'annual points' account established for each participant. The scheme determines an annual points value for each night's accommodation. This value depends on the location of the resort, the time of year (peak or off-peak), and the size and quality of the accommodation.

A participant's account is credited once a year with annual points equal to the number of timeshare points the participant holds in the scheme. The participant can apply for scheme accommodation up to the points value available in their annual points account. Unused annual points may be deferred for a maximum period of one year and, if still unused, are cancelled.

The scheme attempts to satisfy booking requests made by participants on a best-fit basis for all participants, and subject to the rules of the scheme. Accordingly, on some occasions a participant will be allocated their second choice of hotel or booking dates.

A non-resident of Australia who is overseas acquires timeshare points from the scheme.

The supply of an interest in a time-sharing scheme that the scheme makes to a non-resident overseas, is not GST-free under section 38-190 of the GST Act because the essential character of an interest in a time-sharing scheme is rights over real property as defined in the GST Act, and section 38-190 does not apply to the extent that supplies are of real property. These reasons are set out in detail in the following paragraphs.

The supply of the interest in the scheme is made in the context of, and subject to the requirements of, the Corporations Act. A time-sharing scheme is defined in the dictionary (section 9) of the Corporations Act, as follows: time - sharing scheme means a scheme, undertaking or enterprise, whether in Australia or elsewhere: (a) participants in which are, or may become, entitled to use, occupy or possess, for 2 or more periods during the period for which the scheme, undertaking or enterprise is to operate, property to which the scheme, undertaking or enterprise relates; and (b) that is to operate for a period of not less than 3 years.

Section 9 of the Corporations Act provides that 'managed investment scheme' means, amongst other things, a 'time-sharing scheme'. Section 9 of the Corporations Act defines an interest in a managed investment scheme as follows: 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).

Section 9 of the Corporations Act provides that 'securities' has the meaning given by section 92 of the Corporations Act. Interests in a managed investment scheme appear in subsection 92(1) of the Corporations Act at paragraph (c).

Although the predominant type of benefit a new participant can be expected to request and receive from the time-sharing scheme is annual accommodation in scheme property, what is actually supplied to the new participant for their initial payment to participate in the scheme is a complex set of rights. This is an interest in the time-sharing scheme, which is a managed investment scheme, which is a form of security.

This grant of rights is made by the scheme in Australia in response to an application form lodged by a new participant. The scheme approves the application and grants an interest in the scheme. The grant of the interest in the scheme is done in Australia. It is considered to be a supply connected with Australia under subsection 9-25(5) of the GST Act.

If the interest is granted on or after 20 December 2000, the supply of the interest to the new participant is a financial supply as the supply meets the requirements of Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Item 10 in the table in subregulation 40-5.09 of the GST Regulations refers to 'securities'. 'Securities' are defined in the dictionary in the GST Regulations as having the meaning given by subsection 92(1) of the Corporations Act.

Under section 40-5 of the GST Act, a financial supply is input taxed.

It is also necessary to consider whether section 38-190 of the GST Act might apply to make the supply GST-free. Subsection 9-30(3) of the GST Act relevantly provides that to the extent a supply would otherwise be both GST-free and input taxed, it is GST-free.

Subsection 38-190(1) of the GST Act sets out the supplies of things for consumption outside Australia that are GST-free. Subsection 38-190(1) only applies to supplies of things that are not supplies of goods or real property such as services or various rights. As stated at paragraph 15 of Goods and Services Tax Ruling GSTR 2003/7, in determining whether a supply is properly characterised as a supply of goods or real property or a thing other than goods or real property, it is necessary to consider all of the circumstances of the transaction to ascertain its essential character.

A time-sharing scheme is different from other forms of securities in that it expressly provides for benefits to be provided in the form of accommodation. The PDS for the time-sharing scheme states that the scheme is not designed to provide financial returns.

By definition, an interest in a time-sharing scheme must provide an entitlement 'to use, occupy or possess, for 2 or more periods during the period for which the scheme, undertaking or enterprise is to operate, property to which the scheme, undertaking or enterprise relates'. These rights are set out in the Constitution of the scheme and agreed to by each new participant in the scheme. Therefore, the essential character of an interest in a time-sharing scheme based on accommodation assets is contractual rights in relation to land. Contractual rights to land or accommodation fall within the extended definition (paragraph (c)) of 'real property' in section 195-1 of the GST Act. The definition of real property in section 195-1 of the GST Act is as follows: real property includes: (a) any interest in or right over land; or (b) personal right to call or to be granted any interest or right over land; or (c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

The third column of the table to subsection 38-190(1) of the GST Act states 'These supplies are GST-free (except to the extent that they are supplies of *real property)'.

As the character of the supply of the interest is contractual rights to land or accommodation, subsection 38-190(1) of the GST Act does not apply, and the supply of the interest in a time-sharing scheme that the scheme makes to a non-resident overseas, is not GST-free.