ATO Interpretative Decision

ATO ID 2007/16

Goods and Services Tax

• This ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. This ATO ID continues to apply in relation to the remade Regulations.

  A comparison table which provides the replacement provisions in the A New Tax System (Goods and Services Tax) Regulations 2019 for regulations which are referenced in this ATO ID is available.

  With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Issue

Is the entity, a business operator, making an input taxed supply of an interest in a debt under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it grants a right to a share of the net profit from its business to another entity in return for the contribution of an amount of money?

Decision

No. The entity is not making an input taxed supply of an interest in a debt under subsection 40-5(1) of the GST Act when it grants a right to a share of the net profit from its business to another entity in return for the contribution of an amount of money.

Facts

The entity is a business operator and enters into an arrangement with another entity (the financier). Under the terms of the arrangement, in return for the contribution of an amount of money by the financier, the entity grants the financier a right to receive a share of the net revenue from its business at a certain rate up to the extent of the contribution amount and thereafter at a lesser rate. In the event that the enterprise operator makes a loss, the entity will receive nothing.

There is no separate obligation of the enterprise operator to repay any of the contribution amount to the entity.

The entity is registered for goods and services tax (GST) and the arrangement entered into is connected with Australia.

Reasons for Decision

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a)

the provision, acquisition or disposal of that interest is:

•

for consideration; and

•

in the course or furtherance of an enterprise; and

•

connected with Australia, and

(b)

the supplier is:

•

registered or required to be registered for GST, and

•

a financial supply provider in relation to the supply of the interest.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit.

The term 'debt' is defined in the Glossary of Terms, in Goods and Services Tax Ruling GSTR 2002/2 Goods and Services Tax: GST treatment of financial supplies and related supplies and acquisitions, as:

an amount due from one entity to another or a presently existing obligation to pay an ascertainable amount at a future time.

Under the terms of the arrangement there is no presently existing obligation for the entity to repay the amount contributed by the financier, either now or in the future. Where the business makes a loss, the entity has no obligation to pay any amount to the financier. Where the business generates a profit, the share of the net profit which the financier is entitled to receive may be much greater than the amount that it originally contributes.

An interest in a debt includes an interest in a contingent debt which is a debt, based on an existing obligation, that will or might arise at a future time or if a future event occurs. However, the entity does not provide an interest in a contingent debt to the financier. Although contingent in nature, the amount that the financier may receive under the arrangement is just a percentage share of the actual net revenue from the entity's business.

The arrangement therefore does not involve the provision by the entity to the financier of an interest in or under a debt under item 2. The supply that the entity makes to the financier is a right to a share of the net proceeds (if any) from the operation of the entity's business. The amount contributed by the financier is consideration for the supply of that right and not for the provision of any interest in a debt.

As the requirements of subregulation 40-5.09(1) of the GST Regulations are not satisfied, the entity does not make an input taxed financial supply of an interest in a debt under subsection 40-5(1) of the GST Act.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   subsection 40-5(1)
   subsection 40-5(2)

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2002/2

Related ATO Interpretative Decisions
ATO ID 2007/15
ATO ID 2007/17
ATO ID 2007/18

Keywords
Goods and services tax
GST regulations
GST supplies & acquisitions
GST supply
Input taxed supplies
GST financial supplies
GST debt, loan and credit

Siebel/TDMS Reference Number:  5135312

Business Line:  Indirect Tax

Date of publication:  25 January 2007

ISSN: 1445-2782