If you’re business is registered for GST and you are looking to restructure, it is important to get the correct legal tax advice, as incorrectly restructuring assets in your business may incur an unnecessary GST debt, which may be costly as boats are generally expensive assets. Given that GST is payable at a rate of 10% on the value of a boat this debt is not something to sweep under the carpet.
So the question which then arises is: how do you transfer a boat without having to deal with the GST tax implications? This question arises when a specific asset, of your business, such as a boat, is transferred to another entity with beneficial ownership not changing. However, transferring the entirety of your business is a different story and not covered in this article.
Recently, our firm had a client based in the United Kingdom who wished to transfer a boat owned by a business into to a company structure based in the Cayman Islands, without the incurrence of GST. Although our office is based in Newcastle, we were able to provide our services as we utilise the most up-to-date technologies to keep in touch with our clients globally.
As a starting point, our team at Vaarzon-Morel Solicitors focused on the client’s expectations and understanding the business structure that was proposed. Significantly, this area of law is very specific and not easily understood, adding to this difficulty is the fact that the commentary on this area is extremely hard to understand. In these circumstances we were left with researching the Tax Department rulings where we found solace.
Following, our legal research into GST taxation law and consideration of our client’s specific situation, we soon discovered the perfect solution to the problem, which was to create a Bare Trust Agreement.
Bare Trust Agreements
You may then ask what is a Bare Trust Agreement? A Bare Trust Agreement is a contractual agreement establishing a Bare Trust. A Bare Trust is sometimes romantically referred to as a Naked Trust, and refers to a situation where a trustee or trustees holds property but have no interests in the property and no other duty except to do what the beneficiary tells them. That is, the trustee is a puppet of the beneficiary puppet master.
The wording of a Bare Trust Agreement needs to be very specific and in fact if the purpose is changed or other terms are added that conveys other duties to the trustee, then it may be that the tax department will construe the document in some other way and the tax benefit is lost.
A Bare Trust may arise in three situations:
(1) Where it is an express trust under which property is explicitly settled in the Bare Trust;
(2) Upon completion of the specified trustee duties enumerated in a trust deed;
(3) Where property is purchased with another’s money or a purported trust settlement is defective.
In the scenario that we commenced this article, its more likely than not that the trust would be formed by an express trust, which specifically sets up a simple arrangement between the original owner of the vessel/s and the new owner.
Naturally the next question would then be; how can you use a Bare Trust to avoid the incurrence of any unnecessary GST when transferring a boat?
In order to understand how you can use a Bare Trust to avoid having to pay unnecessary GST, the main factor to look for is when is the GST applied. The GST law (A New Tax System (Goods and Services Tax) Act 1999 (Cth)) deems that both a trust is a legal entity. It is important to note that the act does not distinguish between normal (discretionary trusts) and Bare Trusts. While this may make everything seemingly murkier, upon delving deeper into taxation law, it soon cleared up.
In essence, transferring an asset from the beneficiary to a trustee under a bare trust, is not a “taxable supply”. The reason behind this can be simply by the fact there is no supply of the yacht – only legal title is transferred the benefit of the yacht remains with the beneficiary.
However, should that yacht be sold to a third party the GST implication is to the beneficiary rather than the trustee (who technically owns the yacht).
Does a Bare Trustee need to be registered for GST
While it was possible to attach GST obligations onto a trustee as a legal person, another important question, in this quest, was whether a Bare Trust needs to be registered for GST? Diving deeper into taxation law, our team found that in order for an entity to be registered for GST, GST law states that the entity must be carrying on an enterprise in either:
(a) the form of a business; or
(b) the form of an adventure or concern in the nature of trade; or
(c) on a regular continuous basis, in the form of a lease, licence or other grant of an interest in property.
In our case, the Bare Trustee was not carrying on an enterprise in any of the above options. We concluded that, as the activities of a Bare Trustee are fairly passive in nature, that is either without active duties or minor active duties, a Bare Trustee is not considered to be carrying an enterprise for GST purposes and thus does not need to be registered.
It is at his point you need to take a breath and reflect on the importance of the wording and simple purpose of the agreement. For its this simple purpose that makes the business test not applicable and thus not requiring GST registration.
The final step and question of our quest was then the question of how to create a Bare Trust Agreement. A solicitor taking Instructions to create the trust should seek to clarify that the trust is not a shame and specifically drafted so that only legal title of the boat is transferred with the benefit of the yacht remaining with the beneficiary.
The only change will be is the name of the owner of the vessel to be changed with any relevant government bodies. If done correctly your boat restructure should not incur a GST debt.