GST Group Registration of Trusts (July 2004)
QB (Jul 2004) provides an overview of the rules that relate to the GST group registration of trusts.
- The purpose of this item is to provide an overview of the rules that relate to the GST group registration of trusts.
- Section 55 of the Goods and Services Tax Act 1985 (GST Act) provides for the group registration of registered persons. In grouping, a registered member of a group of entities is nominated to be its representative member. This member will pay GST on behalf of the entire group. In effect, the entire group is treated as one entity. Section 55(1) allows the grouping of 2 or more companies, which are each registered for GST, and satisfy the requirements of section IG 1 of the Income Tax Act 1994.
- Section 55(8) of the GST Act provides the rules for determining the group registration of 2 or more registered persons, which are not each companies. The entities can be natural persons, bodies corporate, or trusts, among other things.
- Subsection (8) refers to the phrase "not each being companies", which means that not all (or indeed any) members of the group need be companies. For example, a trust and a company can be registered as a group of persons. This subsection applies to groups without companies, and also applies to groups that include one or more companies as well as other entities.
- "Control" is a necessary element in deciding whether a group exists. One of the following conditions must be met:
- One of them controls each of the others;
- One person controls all of them; or
- Two or more persons carrying on a taxable activity in partnership control all of them.
How has "control" been interpreted by the Courts?
- The principal issue is how widely the term should be interpreted. In particular, does it mean legally enforceable, formal control, or can it include some type of de facto control?
- Case K54 (1988) 10 NZTC 444 involved three cases stated to the Taxation Review Authority. Each case involved an entity applying for group registration under section 55(8) of the GST Act. The issue was whether the Commissioner had correctly exercised his discretion in declining the taxpayers' application for group registration for GST purposes.
- Case K54 discussed the meaning of "control" in the context of section 55(8). As Bathgate DJ explained at page 453: "I conclude that 'control' or 'controls' in the context of sec 55 means discernable, legal control".
- His Honour rejected de facto control because there is no yardstick to determine what is or is not control. For example, de facto control includes assuming control of an entity by reason of age, family ties, family seniority, or business acumen . His Honour, at page 452, added that Parliament's intention was that control, in terms of section 55, should mean "discernible and effective legal control". This description of "control" is more certain than de facto control. Accordingly, "control" is taken to refer to an identifiable legal power vested in a particular person or persons external to the entity, eg the power to vote in respect of company shares. As His Honour suggests, de facto control in the context of group registration is too wide. Parliament could not have contemplated such a wide interpretation. There would be nothing to indicate when that sort of control "stops or starts".
- In Case L42 (1989) 11 NZTC 1,261, a partnership applied for group registration under section 55(8) of the GST Act. The Commissioner declined the application. Bathgate DJ affirmed Case K54 at page 1,262, "namely that there must be discernible legal control". The Taxation Review Authority held for the Commissioner.
- Therefore, "control" is of the same character applied to companies before they obtain group registration, ie based on holding a majority of the shareholder decision-making rights under the Income Tax Act 1994. In general, legal powers will be reviewed against normal commercial (including accounting) practices.
When does a person have "discernible legal control" of a trust?
- Generally, a trust is an equitable obligation, which comprises four elements: a trustee, trust property, a beneficiary, and an obligation to deal with the trust property. Trusts can be classified into express trusts or those arising by operation of law.
- A trust is unlike a company, as it does not have the equivalent of shareholders. The beneficiaries, subject to the terms of any deed constituting the trust, do not have the power to direct the trustees. The deed permits the trustees to exercise control of the trust assets via unanimous or majority voting. Trustees act under certain fiduciary obligations on behalf of the beneficiaries, and not in their own personal capacity. Each trust is different. Accordingly, the standard position is that no person controls the trustees, and a trust cannot be part of a GST group simply by virtue of it being under the trusteeship of the same person as another member of the group.
- There are statutory provisions that provide a mechanism for managing trusts, but these do not usually vest control in another person or trustee.
When does a trustee have "discernible legal control" of another person?
- The trustees have "discernible legal control" when the trust holds more than 50% of the voting power in respect of shareholder decision-making rights. This assumes that the trustees have the power to hold shares and vote at company meetings, in terms of the relevant trust deed.
- The terms of the agreement will indicate the degree of "discernible legal control" a trustee has in the partnership. Again, this will be generally be dictated by the level of voting power.
- In certain circumstances, a trustee is able to group with another trust under section 55(8). This includes situations involving trustees of subtrusts. Just as the trustee of the principal trust will have control of the trust because of the terms of the deed, where this power in respect of the subtrust is vested in the trustees of the principal trust then it may be considered to control the trustees of the subtrust. However, careful analysis of the terms of the relevant deed will normally be required before Inland Revenue will accept this.
A person controlling a trust
- Jim, Reginald, and Isa own 80% of the shares in Balloons Limited. In the deed forming the Azic Family Trust, they have been appointed as the trustees. Both Balloons Limited and the Azic Family Trust carry on taxable activities. The trust deed has given the trustees a wide discretion to exercise their powers. All the trustees have met to discuss the possibility of grouping with Balloons Limited, and unanimously agreed that it is in the interests of the trust to group. The trust deed provides the trustees with "discernible legal control" of the trust, and the same individuals control Balloons Limited.
- Despite this, in one case the three trustees act on their own behalf as members of Balloons Limited, and in the other they act in the capacity of trustees of the Azic Family Trust, and could be removed. Inland Revenue does not consider that the same persons control both entities. The trustees may not group the Azic Family Trust with Balloons Limited for the purposes of section 55(8).
A trust controlling a person
- Rupert is the sole trustee of the Knight Farming Trust. The Knight Farming Trust owns 60% of the shares in Eco-Building Limited. The trust instrument states that Rupert, as trustee, has the legal authority to deal with the trust property for the financial benefit of the beneficiaries. As the sole trustee of Knight Farming Trust, Rupert has "discernible legal control" of Eco-Building because of the trust's 60% share in that company. The Knight Farming Trust may be grouped with Eco-Building Limited.
A trust controlling a trust
- Healthy Living Limited manufactures organic products. The company decides to create a trading trust called Healthy Living Trading Trust. Healthy Living Limited is appointed as the trustee. The beneficiaries are the owners of the company. Healthy Living Limited acting as trustee decides to create a subtrust called Organo Trust under a power contained in the deed. The instrument settling the Healthy Living Trading Trust provides the trustee with the power to deal with Organo Trust for the financial betterment of the beneficiaries within the general purposes of the Healthy Living Trading Trust, including the power to appoint and remove trustees of the Organo Trust.
- As the trustee of Healthy Living Trading Trust, Healthy Living Limited has "discernible legal control" of Organo Trust because it is the trustee of both trusts, which are linked together beneficially in the principal deed and can control the subtrust for the benefit of the first trust. Therefore, both trusts may group for GST purposes.
- This reasoning will also apply where two or more independent trusts are governed by the same or similar trustees.
- If you would like to apply for group registration, please ask your local Inland Revenue office for a Goods and Services Tax Application for Group Registration (GST 4) form.