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Difficulties in determining input tax credit entitlements

Last updated 11 April 2017

Input tax credits can be claimed for creditable acquisitions. An acquisition will not be creditable to the extent that it relates to making supplies that would be input taxed. M&A frequently involves both the purchaser and seller making input taxed financial supplies. In particular, both the sale and the purchase of shares are input taxed financial supplies, with the purchase of the shares being referred to as an acquisition-supply. Input tax credits may not be claimed on things acquired to the extent that they relate to making any input taxed financial supplies.

However, during the course of M&A it can sometimes be difficult to assess to what extent the acquisitions relate to making such input taxed supplies. Hence, it can be difficult for a prospective purchaser or seller to determine the extent to which they can claim input tax credits.

For example, there might be ongoing negotiations between a corporate group that owns a manufacturing operation and a prospective purchaser of that operation. Substantial costs may be incurred by both parties to undertake due diligence, conduct negotiations, consult lawyers, attend to regulatory requirements and so on. However, it may not be determined until late in this process whether a sale will occur at all and, if it does, whether it will take the form of either, say:

  • an input taxed sale of shares
  • a taxable supply of assets.

Because M&A transactions are often complex, and frequently involve a high degree of uncertainty and commercial sensitivity, we have developed guidelines to assist in determining the extent of creditable purpose on related acquisitions.

Instead of applying the advice provided here, you may choose to defer claiming any available input tax credits until after the M&A transaction is complete. If you adopt this approach, you may quarantine acquisitions related to an M&A activity. For example, if you set up a cost centre for the M&A activity, the creditable purpose for acquisitions needs to be judged by reference to your intention at the time of acquisition, even if input tax credit claims are delayed until after the M&A is completed. In effect, you may consider it easier to ascertain the purpose of an acquisition with the benefit of hindsight.

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