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?

Yes. Paragraph 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (the 'GST Act') is satisfied.

In this Determination: 'in specie distribution' means a supply of trust property other than money where the recipient is entitled to the property because the recipient is a beneficiary of the trust, and not because of any contractual relationship with the trustee. For example, an in specie distribution would not include a supply of property by the trustee to a beneficiary in lieu of repayment of an amount of money the beneficiary had loaned to the trustee.

A discretionary trust may supply an asset that is applied or intended to be applied in an enterprise carried on by the discretionary trust to a beneficiary of the trust as a consequence of the trustee's resolution to make an in specie distribution under a power contained within the relevant trust deed.

An issue that arises is whether the in specie distribution of the asset is a 'taxable supply' within the meaning of section 9-5 of the GST Act. One of the requirements for a supply to be a taxable supply is that 'the supply is made in the course or furtherance of an enterprise that you carry on'. [1]

The phrase 'in the course or furtherance of' is not defined in the GST Act. The phrase forms part of the requirements that must be satisfied in order for a taxable supply to be identified for the purpose of establishing a liability to GST. In Sterling Guardian Pty Ltd v. Commissioner of Taxation [2] , the Full Federal Court commented on the policy of the GST system as follows: The burden of GST is progressively passed down the chain of persons who make taxable supplies as for example, in the case of goods, from manufacturer to wholesaler to retailer. At each transaction the price includes GST, which the supplier pays to the Commissioner. The acquirer gets an input tax credit for the amount of GST included in the price which he has paid and includes GST in the price he charges the next person in the chain. Finally, the ultimate consumer pays a price which includes the GST paid by the previous person in the chain (in this example, the retailer). The ultimate consumer does not get any input tax credit because he is not registered or required to be registered. [3]

The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Explanatory Memorandum) supports a broad meaning of the phrase 'in the course or furtherance of': [4] In the course or furtherance is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. In the course or furtherance does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

Having regard to the context in which the phrase 'in the course or furtherance of' appears and the above statement from the Explanatory Memorandum, the phrase should be given a broad meaning so as to encompass supplies made in connection with the relevant enterprise.

As illustrated by the reference in the Explanatory Memorandum to a car dealer selling his or her own private car, that connection does not exist in the case of a supply of private commodities. A supply of private commodities is a supply by an entity as an ultimate consumer. By contrast, the supply of an asset that is applied or intended to be applied in the supplier's enterprise is not a supply by the entity as ultimate consumer. It occurs at a point along the chain before the asset has reached anyone as an ultimate consumer. Nothing has previously happened to the asset to make it a 'private commodity'; it has not been previously supplied to a private consumer nor applied wholly for the supplier's private purposes.

The application, or intended application, of an asset in an enterprise establishes the necessary relationship between the supply of the asset and the relevant enterprise. The fact that the supply in question was made by way of an in specie distribution rather than by sale does not alter the analysis. Entities can dispose of assets in a number of ways. The method of itself is not relevant to whether the supply is in the course or furtherance of the enterprise.

It is not relevant to consider the use or intended use of the asset by the recipient of the supply or any other party who later receives it (although this will of course affect whether those entities are entitled to an input tax credit for their acquisition of the asset). That a supply is made for the private purposes of the recipient cannot affect whether the supply is made in the course or furtherance of the supplier's enterprise; the purpose of the GST is to impose a tax on final private consumption. The burden of GST would never fall on anyone if the fact that a supply was made for the private purposes of the recipient prevented the supply from being made in the course or furtherance of the supplier's enterprise.

Also, the GST Act does not require that the asset must be applied primarily or principally in carrying on the enterprise for the supply of the asset to be in the course or furtherance of an enterprise. Accordingly, a connection between the supply of the asset and the enterprise carried on by an entity exists even if, at the time of the supply, the asset is applied or intended to be applied in carrying on the enterprise to a minor or secondary extent. [5]

Therefore, a supply by way of an in specie distribution of an asset that is applied or was intended to be applied in the enterprise carried on by the discretionary trust is a supply made in the course or furtherance of that enterprise.

Trustee Pty Ltd (Trustee) is the trustee of XYZ Discretionary Trust (XYZ). XYZ is carrying on an enterprise of property development. One particular project that XYZ is undertaking as part of its enterprise is the construction of a new commercial office building. After the construction of the commercial office building is completed, the Trustee resolves to distribute, in specie, the building to John who is one of the beneficiaries of XYZ. The in specie distribution of the building is a supply made by XYZ.

The in specie distribution of the building by XYZ is connected to the enterprise carried on by XYZ as the office building was intended to be applied [6] in the enterprise it carries on of property development. As part of that enterprise XYZ will sell, dispose of or transfer buildings it has constructed. The in specie distribution is therefore a supply made in the course or furtherance of an enterprise for the purposes of paragraph 9-5(b) of the GST Act .

Jack is the trustee of Jack Family Discretionary Trust (JFDT). JFDT is carrying on an enterprise of selling furniture. JFDT also owns a boat that it makes available to selected beneficiaries of the trust. The boat does not form part of the assets of JFDT's enterprise as it is not applied or intended to be applied in the enterprise to any extent. Later, Jack resolves to distribute, in specie, the boat to Phil who is one of the beneficiaries of JFDT. The in specie distribution of the boat is a supply made by JFDT .

The in specie distribution of the boat by JFDT is not connected to the enterprise carried on by JFDT as the boat was not applied or intended to be applied in the enterprise it carries on. The in specie distribution is therefore not a supply made in the course or furtherance of an enterprise for the purposes of paragraph 9-5(b) of the GST Act .

Michelle is the trustee of Michelle Family Discretionary Trust (MFDT). MFDT is carrying on an enterprise supplying architectural services. A car is acquired on 1 July 2006 by MFDT and applied 20% for a creditable purpose and 80% for the private use of selected beneficiaries of the trust. The car forms part of the assets of MFDT's enterprise. Later, Michelle resolves to distribute, in specie, the car to Bob who is one of the beneficiaries of MFDT. The in specie distribution of the car is a supply made by MFDT .

The in specie distribution of the car by MFDT is connected to the enterprise carried on by MFDT as the car was applied in the enterprise it carries on. The fact that, in this particular case, the asset was only applied 20% for a creditable purpose does not prevent the in specie distribution of the car being connected to the enterprise carried on by MFDT. The in specie distribution is therefore a supply made in the course or furtherance of an enterprise for the purposes of paragraph 9-5(b) of the GST Act .

This draft Determination represents the preliminary, though considered, view of the Australian Taxation Office. When the final Determination is officially released, it will explain our view of the law as it applies both before and after its date of issue.

The final Determination will be a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953 and may be relied upon, after it is issued, by any entity to which it applies. Goods and Services Tax Ruling GSTR 1999/1 explains the GST rulings system and our view of when you can rely on our interpretation of the law in GST public and private rulings.

We invite you to comment on this draft Goods and Service Tax Determination. Please forward your comments to the contact officer by the due date. (Note: the Tax Office prepares a compendium of comments for the consideration of the relevant Rulings Panel or relevant Tax officers. The Tax Office may use a version (names and identifying information removed) of the compendium in providing responses to persons providing comments. Please advise if you do not want your comments included in the latter version of the compendium.) Due date: 25 July 2008 Contact officer details have been removed following publication of the final determination.