The bare necessities of tax
Marcel Vaarzon-Morel outlines how using a bare trust can help to minimise tax.
If your 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 a business may incur an unnecessary GST debt. This 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 then arises: how do you transfer a boat without having to deal with the GST tax implications? This situation arises when a specific asset of your business, such as a boat, is transferred to another entity but with the beneficial ownership of the asset not changing. 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 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 understanding the business structure that was proposed and the client’s expectations. 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 which is 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.
Understanding bare trust agreements
What then, you may ask, is a bare trust agreement? Put simply, it is a contractual agreement establishing a bare trust, sometimes romantically referred to as a naked trust. This refers to a situation in which a trustee or trustees hold 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. 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 will be lost.
A bare trust may arise in three situations:
- Where it is an express trust under which property is explicitly settled.
- Upon completion of the specified trustee duties enumerated in a trust deed.
- Where property is purchased with another’s money or a purported trust settlement is defective.
In the scenario outline above, it is 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 then is how can you use a bare trust to avoid the incurrence of any unnecessary GST when transferring a boat?
Avoiding unnecessary GST
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 the GST is applied. It is important to note that the GST law (A New Tax System (Goods and Services Tax) Act 1999 (Cth)) 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 for this is 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 instance, 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 any active duties or only 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 this point you need to take a breath and reflect on the importance of the wording and simple purpose of the agreement. For it is this simple purpose that makes the business test not applicable and thus not requiring GST registration.
The final step 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 sham and has been 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 with any relevant government bodies will be in the name of the owner of the vessel. If done correctly your boat restructure should not incur a GST debt.
About the authors
Marcel Vaarzon-Morel is the principal at Vaarzon-Morel Solicitors specialising in all marine business, insurance, yacht and shipping contracts, and litigation. Troy Martin is a solicitor at Vaarzon-Morel Solicitors. www.vaarzonmorelsolicitors.com.au.
This article first appeared in the June-July 2017 issue of Marine Business magazine.