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A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT REGULATIONS 2003 (NO. 1) 2003 NO. 37
EXPLANATORY STATEMENTSTATUTORY RULES 2003 No. 37
Issued by authority of the Assistant Treasurer
A New Tax System (Goods and Services Tax) Act 1999
A New Tax System (Goods and Services Tax) Amendment Regulations 2003 (No. 1)
Section 177-15 of the A New Tax System (Goods and Services Tax) Act 1999 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. Section 48-10 of the Act provides that the regulations may specify requirements to enable partnerships, trusts and individuals to join a group for goods and services tax (GST) purposes.
The purpose of these amending Regulations is to amend the A New Tax System (Goods and Services Tax) Regulations 1999 (the Regulations) to extend the current membership criteria for GST groups, so that a broader range of business structures will have access to the benefits of GST grouping, in a manner that is consistent with the general principles behind the original provisions. These amending Regulations also make some minor technical changes to ensure that the Regulations operate as intended.
The GST grouping provisions enable entities within the same business structure to effectively treat the structure as a single entity for many GST purposes. Being treated as a single entity for GST purposes reduces compliance and cash-flow costs associated with accounting for GST on transactions between closely related entities. Compliance costs are also reduced for members of a GST group because only one group member is responsible for GST payment and reporting obligations.
These amendment Regulations allow qualifying partnerships and trusts to access the benefits of GST group membership. The new structures that are entitled to group under these new rules include:
• fixed trusts that are members of the same 90% owned group;
• trusts with common family members as beneficiaries; and
• partnerships that share common partner relationships.
These extensions to the grouping eligibility rules are consistent with the general principle that only related businesses should be able to form a GST group. In the development of these regulations, business structures in the primary production, law, accounting, property and financial services industries were considered.
A detailed explanation of the amendments is attached.
The regulations would commence on 1 April 2003.
ATTACHMENT
Detailed notes of the amending regulations
Name of Regulations
Regulation 1 provides that the amending regulations are called the A New Tax System (Goods and Services Tax) Amendment Regulations 2003 (No. 1).
Commencement
Regulation 2 provides that the regulations would commence on 1 April 2003.
Amendment
Regulation 3 provides that Schedule 1 amends the A New Tax System (Goods and Services Tax) Regulations 1999 (the Regulations).
Policy changes
Groups of fixed trusts
Previously, the requirements for goods and services tax (GST) groups precluded the formation of a GST group with a membership consisting only of trusts. Item 13 inserts new Regulation 48-10.03A, which enables a group consisting only of fixed trusts to form a GST group.
Item 1 inserts a definition of a fixed trust into Regulation 48-10.01. A fixed trust is defined by reference to section 995-1 of the Income Tax Assessment Act 1997, which specifies that a fixed trust is one where persons have fixed entitlements to all of the income and corpus of a trust.
Item 8 replaces Subregulation 48-10.03(1) to specify that a fixed trust must satisfy the requirements set out in either Regulation 48-10.03 or in new Regulation 48-10.03A to be a member of a GST group.
New Subregulation 48-10.03A(1) stipulates that Regulation 48-10.03A outlines the requirements that a fixed trust can satisfy to be a member of a GST group consisting only of fixed trusts. A fixed trust will satisfy the requirements of Regulation 48-10.03A if that trust is a member of the same 90% owned group as all of the other fixed trusts in the group (new Subregulation 48-10.03A(2)).
A '90% owned group' is defined in new paragraph 48-10.03A(3)(a) for the purposes of new Regulation 48-10.03A. Two fixed trusts will qualify as being members of the same 90% owned group if the trustee of one of the trusts has at least a 90% stake in the other trust (new subparagraph 48-10.03A(3)(a)(i)). Two fixed trusts will also be members of the same 90% owned group if the trustee of a third fixed trust has at least a 90% stake in each of the two trusts (new subparagraph 48-10.03A(3)(a)(ii)).
New paragraph 48-10.03A(3)(b) defines 'at least a 90% stake' for the purposes of new Regulation 48-10.03A. The trustee of one fixed trust (called the 'head trust') will have at least a 90% stake in another fixed trust (the 'sub-trust') if the trustee of the head trust:
• owns at least 90% of the issued units in the sub-trust (new subparagraph 48-10.03A(3)(b)(i)); and
• has the right to receive at least 90% of any distribution of income or capital of the sub-trust (new subparagraph 48-10.03A(3)(b)(ii)).
The trustee of the head trust may have at least a 90% stake in the sub-trust either directly or indirectly through one or more interposed trusts or companies.
Example: A property investor owns and operates three shopping centres through a fixed trust structure. Each of the three shopping centres is held in a separate fixed trust (Trusts A, B and C). There is another fixed trust in the property investor's business structure (Trust X). The trustee of Trust X owns all of the units in Trusts A, B and C and has the right to receive 100% of any capital or income distributions of these trusts. For the purposes of new paragraph 48-10.03A(3)(b) Trust X is the head trust and Trusts A, B and C are the sub-trusts.
Trusts X, A, B and C meet the requirements of Regulation 48-10.03A because they are members of the same 90% owned group. This is because the trustee of Trust X has more than a 90% stake in each of the three sub-trusts as Trust X's trustee owns 100% of the issued units and is entitled to receive 100% of any distribution of capital or income from Trusts A, B and C.
Trust X also receives distributions from another trust (Trust Q that owns and operates a hotel. Trust Q has five beneficiaries, each holding 20% of the units in Trust Q. Trust X does not meet the requirements to form a GST group with Trust Q because a trustee of Trust X does not have a 90% stake in Trust Q under new Subregulation 48-10.03A(3).
Other trust groups
These amending Regulations will also allow GST groups to be formed by other groups of trusts. These rules will extend to all trusts, not just fixed trusts.
Subregulation 48-10.03(2), as previously drafted, allowed a trust to be a member of a GST group in two circumstances. Item 9 replaces this subregulation with new Subregulation 48-10.03(2), which specifies two additional circumstances in which a trust may become a member of a GST group.
The first new circumstance where a trust can become a member of a GST group is where that trust is the sole beneficiary of another trust that is a member of a GST group (new paragraph 48-10.03(2)(c)). To meet this requirement, distributions may be made to the trust either directly or indirectly through one or more interposed trusts or companies (see new Regulation 48-10.01 A).
Item 10 inserts new paragraph 48-10.03(3)(e) to ensure that a trustee of a trust that is a member of a GST group will be a permitted beneficiary in order to make new paragraph 48-10.03(2)(c) effective.
New paragraph 48-10.03(2)(d) outlines the second new circumstance under which a trust can become a member of a GST group. Under this paragraph, a trust will satisfy the requirements of the grouping regulations if the trustee of that trust and the trustee of another trust that is a member of a GST group only distribute income or capital of the trusts to family members of the same individual. These distributions may be made either directly to those persons or indirectly through one or more interposed trusts or companies.
Example: Jennifer and her husband Michael run their property development business through a unit trust (Trust X), with the only unit holders being Jennifer and Michael. They also run a related landscape business through a discretionary trust (Trust Y). The only beneficiaries of Trust Y are Jennifer and Michael and their children Ellen, James and Tom. Trust X and Trust Y meet the requirements of new paragraph 48-10.03 (2)(d) because distributions are made by the trustees of the two trusts only to the members of the same family.
Jennifer is also involved in a business of leasing commercial properties. This business is also conducted through a trust (Trust Z), the beneficiaries of which are Jennifer and Sharyn, Jennifer's business associate. Trust Z does not meet the requirements of new paragraph 48-10.03(2)(d) to join the GST group consisting of Trust X and Trust Y because Sharyn is not a member of Jennifer's family.
Groups of partnerships
Previously, for a partnership to become a member of a GST group, it was required to satisfy a specified relationship with either a company, trust or individual that was a member of the group. These amending Regulations now enable a partnership to become a GST group member by reason of its relationship with another partnership.
Item 4 replaces Subregulation 48-10.02(2) with new Subregulation 48-10.02(2) which specifies that for GST groups or proposed GST groups that include non-partnership entities, partnerships can satisfy a specified relationship with either a company, individual, trust or another partnership that is a member of the GST group.
Item 4 also inserts new Subregulation 48-10.02(2A) which stipulates that for a GST group consisting only of partnerships, one partnership will not be required to satisfy any further requirements in the regulations (new paragraph 48-10.02(2A)(a)). New paragraph 48-10.02(2A)(b) specifies that each other partnership in the group must satisfy the requirements set out in new Subregulation 48-10.02(5).
New Subregulation 48-10.02(5) outlines the relationship that one partnership (the 'candidate partnership') must satisfy in relation to another partnership that is a member of a GST group (the 'member partnership') (item 7).
A partnership in a group that includes non-partnership entities may be a member of a GST group by way of its relationship with a group company, individual or trust (see Subregulations 48-10.02(3), (3A) and (4) respectively). Any partnership that is a member of a GST group under these Subregulations can be a member partnership against which a candidate partnership can satisfy the relationship test (new subparagraph 48-10.02(5)(a)(i)).
For a group consisting only of partnerships, the first partnership to become a member of the group will be the partnership for which no other requirements need to be satisfied (paragraph 48-10.02(2A)(a)). This partnership will be the member partnership against which the next candidate partnership can satisfy the relationship test. If a candidate partnership then satisfies this test, then that partnership may also be a member partnership against which candidate partnerships can be related (new subparagraphs 48-10.02(5)(a)(i) and (ii)).
Example: Partnership A is a member of a GST group under paragraph 48-10.02(2A)(a). Partnership B meets the relationship criteria in relation to Partnership A and also becomes a member of the GST group. Partnership C may meet the relationship criteria in relation to either Partnership A or C to also become a member of the group.
New paragraph 48-10.02(5)(b) specifies that to meet the requirements of new Subregulation 48-10.02(5) the partners of the candidate partnership must comprise of only individuals or family companies or family trusts of individuals. New Subregulation 48-10.02(6) defines a 'family trust' and a 'family company' for the purposes of Regulation 48-10.02. Under Regulation 48-10.02 a family trust of an individual is a trust that distributes income or capital of the trust to the individual or family members of the individual (new paragraph 48-10.02(6)(a)). For the purposes of Regulation 48-10.02 a family company of an individual is a company whose shareholders only comprise of the individual or family members of the individual (new paragraph 48-10.02(6)(b)).
To meet the requirements of new Subregulation 48-10.02(5), each partner in the candidate partnership must relate to at least one partner in the member partnership. Further, at least two partners in the candidate partnership must relate to different partners in the member partnership (new paragraph 48-10.02(5)(d)).
New paragraph 48-10.02(5)(c) outlines the relationships that must exist between partners in the candidate partnership and partners in the member partnership. A partner in the member partnership is related to a partner in the candidate partnership (who is an individual, a family trust of an individual or a family company of an individual), if the partner in the member partnership is either:
• the individual;
• a family trust of the individual;
• a family company of the individual;
• a family member of the individual;
• another individual for whom the first individual is a family member (this provision ensures that aunts and uncles are included because the definition of family in Regulation 48-10.01 includes nieces or nephews but not aunts and uncles);
• a family trust of a family member or another individual for whom the first individual is a family member; or
• a family company of a family member or another individual for whom the first individual is a family member.
Example: A business dealing in cricket memorabilia is run through a group structure that consists of 2 partnerships. The partners of the first partnership (Partnership A) are Linda and Nigel, who also run the business. The partners of the second partnership (Partnership B) are Linda's family trust and Nigel's family company. Linda's family trust only makes distributions to Linda and to her two nieces. The shareholders of Nigel's family company are Nigel and his wife Melissa.
Partnership A and Partnership B meet the relationship requirements under Subregulation 48-10.02(5).
Nigel is also a partner in a partnership that runs a golf course (Partnership C). His only partner in that partnership is Ron, (who is not related to either Nigel or Linda). Since Ron is not a partner in Partnership A or Partnership B and is not a family member of either of the individual partners, Partnership C cannot join the GST group consisting of Partnership A and B.
Interposed companies
One way a trust may meet the membership requirements of a GST group is if its trustee only makes trust distributions to permitted beneficiaries (new paragraph 48-10.03(2)(b)). In most cases these distributions could be made either directly or indirectly through one or more interposed trusts.
The amending Regulations allow a trustee of a trust to make distributions to permitted beneficiaries through interposed companies, as well as interposed trusts. This is achieved by inserting new Regulation 48-10.01A which specifies that if a trustee of a trust makes distributions to an entity indirectly through one or more interposed trusts or companies, that entity is taken to be a beneficiary of the trust (item 3). New Regulation 48-10.01A also has the effect that the trustee of a trust can make indirect distributions to those permitted beneficiaries listed in Subregulation 48-10.03(3).
Items 6, 11, 12 and 15 amend Subregulations 48-10.02(4), 48-10.03(4), 48-10.03(5) and 48-10.04(5) respectively, which previously allowed distributions to be made through interposed trusts, but not interposed companies.
Technical changes
Look-through approach
Previously, the Regulations provided that the trustee of a trust could, in most cases, make distributions to permitted beneficiaries 'either directly or indirectly through one or more interposed trusts'. However, the interposed trust or company is not itself a permitted beneficiary, so strictly speaking, the trustee should not be able to make distributions to these entities, even though the distribution will at some time flow through to the final beneficiary, who is the permitted beneficiary.
An amendment was required to clarify that the intention of these provision was to 'look-though' interposed trusts, and now interposed companies, to the final beneficiary.
New Regulation 48-10.01A (item 3), has been inserted to clarify that income and capital distributions may be made through interposed trusts or companies where the final beneficiaries of the interposed trusts or the shareholders of interposed companies are permitted beneficiaries in Subdivision 48-A. It achieves this by specifying that if a trustee of a trust makes distributions to an entity indirectly through one or more interposed trusts or companies, the trustee is taken to have made that distribution to the other entity.
Natural persons
Previously, the Regulations made references to partners of a partnership, beneficiaries of a trust and members of a company that could have been interpreted to mean that those partners, beneficiaries or members must be natural persons. For example, Subregulation 48-10.03(5)(a) referred to partners being represented 'personally' or by a 'family member'.
It was not intended that partners, beneficiaries or members be limited to natural persons. To clarify this, item 2 inserts a definition of a representative in relation to a partner in a partnership and in relation to a shareholder of a company in Regulation 48-10.01. Items 5, 6, 11 and 12 replace the words outlining that partners, beneficiaries and members (shareholders) may be represented personally or by a family member with the defined terms.
Use of the term 'member'
Previously, the Regulations used the term 'member' in three different contexts:
1) a member of a company;
2) a member of a family; and
3) a member of a GST group.
This has been the cause of some confusion. Items 5, 11 and 14 change the word 'member' when used in the first context to 'shareholder' to help reduce this confusion.
Item 2 inserts a definition of a shareholder of an unincorporated association to clarify that it was intended that these members be encompassed by the term shareholder.
REGULATION IMPACT STATEMENT
Policy objective
The objective of the goods and services tax (GST) grouping provisions is to enable entities within the same business structure to effectively treat the business structure as a single entity for many GST purposes.
Businesses often operate through a structure involving two or more entities. Entities within such an arrangement regularly make supplies to, or acquisitions from other members of the arrangement, operating as though they were a single entity. Being treated as a single entity for GST purposes reduces compliance and cash-flow costs associated with accounting for GST on transactions between closely related entities.
Implementation options
Only one option is for consideration. It involves extending the current membership criteria so that a broader range of business structures will have access to the benefits of GST grouping.
The changes extend the criteria for GST grouping so that certain business structures including:
• trusts with common family members as beneficiaries;
• fixed trusts that are members of the same 90% owned group; and
• partnerships that share common partners and/or family members of those partners,
will now be able, if they meet certain eligibility requirements, to apply to the Australian Taxation Office (ATO) to be approved as a GST group.
Assessment of impacts
Impact group identification
Entities now eligible to form GST groups
The ATO has estimated that there could be up to 10,000 new or varied groups as a result of this measure. The changes to the GST grouping rules are expected to result in an increase mostly to the numbers of small and medium enterprises forming GST groups, with a small impact on businesses that exceed the $20 million turnover threshold.
In particular, this measure is expected to benefit businesses in the primary production, law, accounting, property and financial services industries.
Australian Taxation Office
The changes are expected to have a minor impact on ATO resources, with the majority of resources required for the implementation of the changes rather than for their ongoing administration.
Analysis of costs/benefits
Benefits of forming a GST group
Forming a GST group gives eligible entities access to a variety of benefits. When a GST group is formed, one group member (the 'representative member') will deal with all of the GST liabilities and entitlements (except for GST on most taxable importations) for the group. This means that the non-representative members of the group are no longer required to complete the GST return section of the Business Activity Statement (BAS), reducing the GST compliance costs to the group.
Further, almost all intra-group transactions between entities that are members of a GST group are excluded from the GST. This largely eliminates the need to determine the GST treatment for these transactions and the need for group members to issue or hold tax invoices in relation to them. It also reduces the cash-flow problems created from the differences in timing between one group entity paying GST on an intra-group supply and the acquiring entity claiming the corresponding input tax credit.
Another benefit of forming a GST group is that the group may have an increased ability to recover input tax credits as a result of intra-group supplies that are usually input taxed being taken out of scope of the GST.
Compliance costs
To be eligible to form a GST group, entities must meet certain eligibility criteria including the requirement that all members of the proposed GST group must have the same tax periods and accounting basis for GST purposes. Therefore, some entities may incur compliance costs to update their accounting systems to implement changes to their tax periods or accounting basis so that they are consistent with the other members of their particular GST group.
When a GST group is formed, annual turnover for GST purposes is calculated for the group as a whole, rather than for individual entities. As a result, the group may exceed turnover thresholds that individual entities in the group would otherwise not exceed. For example, the group may have to account for GST on an accruals rather than a cash basis and report and remit GST monthly and by electronic means rather than quarterly and by non-electronic means. Some entities may also exceed the financial acquisitions threshold or lose their entitlement to use the instalment system. Thus, entities may need to assess whether the benefits of GST grouping outweigh the restrictions imposed by an increased turnover threshold.
To apply to form a GST group, members of the proposed group will need to complete an application form from the ATO. The representative member will also be required to notify the ATO of any subsequent changes to the GST group. These requirements are only expected to incur very minor compliance costs.
Due to a lack of data the actual cost of compliance for affected entities is unquantifiable. However, it is expected that this measure will result in reduced on-going compliance costs for businesses that choose to form a GST group under the rules.
Administrative costs
The changes to the GST grouping rules are expected to have a minor impact on ATO resources, with the majority of resources required for the implementation of the changes rather than for their ongoing administration.
No new information technology systems or software will be required to implement the changes. However, existing systems need to be updated.
Procedural and training manuals will also need to be updated to reflect the modified rules. Personnel involved in processing GST grouping applications and those involved in making technical decisions in relation to GST groups will require training.
Resources will also be needed to manage and process additional GST grouping applications to form new GST groups and applications to alter the structure of existing GST groups. The ATO will also need to process any notification of changes that entities make in order to meet the membership requirements under the GST grouping rules, for example, notification of changes to an entity's accounting basis or tax periods.
However, it is expected that there will be a minor reduction in resources required to process BASS since non-representative members will no longer submit the GST return section of the BAS as a result of becoming a GST group member.
Resources will also be required to manage inquiries and provide education and advice to entities regarding the GST grouping provisions and the requirements that must be satisfied.
The ATO has estimated that there could be between 5,000 new to 10,000 new or varied groups as a result of this measure, comprising mostly small and medium enterprises. It is expected that while some applications will occur progressively over time, many applications for new and varied groups will occur at approximately the same time as entities take advantage of tax cycle opportunities to restructure entities and groups.
However, this figure should be treated with some caution as the proposed rules are optional and the ATO has no means to estimate the potential eligible trust and partnership participants.
ATO resources will also be required to monitor the implementation of the new GST grouping rules.
The ATO estimates that the average direct labour cost of preparing an average grouping with three entities is approximately $29. This is based on an average grouping with three entities that takes approximately 40 minutes to complete and assumes that there are no difficulties with the application.
Due to a lack of data, system and other implementation costs are difficult to quantify - however, they are expected to be minimal.
Government revenue
This measure is expected to have a small negative impact on the revenue, resulting from intra-group supplies that would usually be input taxed being taken out of scope of the GST. The revenue cost of this proposal is thought to be negligible but due to the lack of data, the actual cost is difficult to quantify.
Economic impact
This measure is not expected to have any significant economic impact, rather the changes to the GST grouping provisions are expected to reduce the costs of GST compliance.
Consultation
This proposal was developed after consultation with various industry and small business representatives and the major accounting bodies. Business structures considered for inclusion in the grouping rules included those found in the primary production, law, accounting, property and financial services industries.
Many of the suggestions made in submissions provided during the consultative process have been incorporated in the policy for this measure. Other changes advocated in submissions were not adopted in these regulations because they were outside of the scope of the regulation-making power, were inconsistent with the current rules, or posed a substantial risk to the revenue.
Conclusion
This measure will give eligible entities the choice of forming a GST group, which will allow them to reduce the compliance and cash-flow costs of the GST.
Any compliance costs incurred by entities that choose to form a GST group will be offset by the benefits that result from GST grouping, otherwise entities would be unlikely to choose to form a GST group.