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ATO Interpretative Decision

ATO ID 2004/902

Goods and Services Tax

GST and convertible notes to raise capital - a financial supply consisting of a borrowing
FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

For the purpose of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is the entity, a company, making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise?

Decision

Yes. For the purpose of the GST Act, the entity is making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise.

Facts

The entity is a company that is registered for goods and services tax (GST). The entity raises capital in the course of its carrying on an enterprise by issuing convertible note securities. The entity's issue of the convertible notes is a financial supply under subsection 40-5(1) of the GST Act.

Under the terms of the issue, note holders have the right to redeem the note for cash or convert it into ordinary shares at a fixed price at a specified date. Coupons are payable annually. The convertible notes are only issued to Australian residents.

Reasons for Decision

A number of provisions in the GST Act refer to a 'financial supply consisting of a borrowing' (see paragraphs 11-15(5)(a) and 15-10(5)(a) of the GST Act and section 189-15 of the GST Act).

'Borrowing' is defined in section 195-1 of the GST Act as having the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 of the ITAA 1997 defines 'borrowing' as any form of borrowing, whether secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness.

Paragraph 62 of the Goods and Services Tax Ruling GSTR 2003/9 provides that the requirement for a document evidencing indebtedness leads to the conclusion that for the purposes of the GST Act, a borrowing must involve a debtor-creditor relationship.

The entity is issuing convertible notes to raise capital. Schedule 1 to Goods and Services Tax Ruling GSTR 2002/2 provides the following definition of convertible notes:

Unsecured notes issued to existing shareholders with the right to either redeem the note for cash or convert it into ordinary shares at a fixed price at certain specified dates. Notes carry a fixed interest rate based on the issue price known as the coupon rate.

Under the terms of the issue, note holders have the right to redeem the note for cash or convert it into ordinary shares at a fixed price at a specified date. This creates a debtor-creditor relationship between the entity and the holders of the convertible notes, allowing the issue of the entity's convertible notes to satisfy the definition of borrowing.

The entity's issue of the convertible notes is a financial supply under subsection 40-5(1) of the GST Act. As such, for the purpose of the GST Act, the entity is making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise.

Note. A convertible note, as that term is generally understood, fits the definition of a borrowing. However, there may be cases where an instrument is termed a convertible note but a close analysis of its terms reveals that there is no debtor-creditor relationship and no indebtedness-in which case the instrument will not fit the definition of a borrowing. An issue of such an instrument may be a financial supply but it will not be a 'financial supply consisting of a borrowing'.

Date of decision:  13 September 2004

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   paragraph 11-15(5)(a)
   paragraph 15-10(5)(a)
   subsection 40-5(1)
   section 189-15
   section 195-1

Income Tax Assessment Act 1997
   section 995-1

Related Public Rulings (including Determinations)
GSTR 2002/2
GSTR 2003/9

Keywords
Goods and services tax
Input taxed supplies
GST financial supplies
GST debt securities
GST debt, loan and credit

Siebel/TDMS Reference Number:  4103988

Business Line:  Indirect Tax

Date of publication:  19 November 2004

ISSN: 1445-2782


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