ATO Interpretative Decision
ATO ID 2012/11
Goods and Services TaxGoods and Services Tax: Reduced credit acquisitions and investment banking services acquired by a takeover target
FOI status: may be released
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ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019.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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Is the entity (target entity), acquiring a reduced credit acquisition under item 9 in the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), when it acquires investment banking services to assist in considering a takeover bid by way of a scheme of arrangement proposal, and the subsequent implementation of a scheme of arrangement so that the target entity shareholders dispose of their shares to the bidder entity?
Yes, the target entity is acquiring a reduced credit acquisition under item 9 in the table in subregulation 70-5.02(2) of the GST Regulations (Item 9), when it acquires investment banking services to assist in considering a takeover bid by way of a scheme of arrangement proposal, and the subsequent implementation of a scheme of arrangement so that the target entity shareholders dispose of their shares to the bidder entity.
The target entity receives a takeover bid by way of a scheme of arrangement proposal under section 411 of the Corporations Act 2001 from the bidder entity.
The bidder entity proposes to acquire the target entity shares from the target entity's shareholders (shareholders) by way of the target entity and its shareholders entering into a scheme of arrangement to transfer the shares to the bidder entity. The bidder entity will provide consideration to the target shareholders by way of cash or the bidder entity shares (or a combination of both).
The target entity will not itself be disposing of the relevant shares or making a financial supply directly relating to the takeover transaction.
The target entity engages an investment bank to assist it in relation to the potential disposal of target entity shares from its shareholders to the bidder entity. The investment bank provides an overall arranging and co-ordination role in relation to the scheme proposal for the target entity. This includes considering the offer and assisting with the target entity's decisions about whether to recommend the bid to the shareholders, developing bid response strategies, negotiating with the bidder, assisting with execution of the proposed transaction by a scheme of arrangement, including the preparation of scheme booklets provided to shareholders and other regulatory approvals.
The target entity and its directors decide that the bid is in the best interests of the company and its shareholders, and recommend that the shareholders accept the bid. The target entity commences the scheme of arrangement process and the shareholders vote in favour of the scheme. The scheme receives court approval and the shareholders' shares are transferred to the bidder entity, in return for the bidder entity providing consideration to the shareholders.
Unrelated to the takeover, the target entity has a division of its ongoing enterprise that makes input taxed financial supplies (ongoing financial supplies). The target entity exceeds the financial acquisitions threshold for the purposes of subsection 11-15(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and to the extent that acquisitions relate to the ongoing financial supplies the target entity treats these acquisitions as not being for a creditable purpose under Division 11 of the GST Act.
The target entity has established that the acquisition of investment banking services in respect of the takeover bid relates to the overall operation of its enterprise and the structure of the entity and is therefore partly related to its ongoing financial supplies.
This ATO ID only discusses that part of the acquisition that relates to the target entity making input taxed ongoing financial supplies that would not be acquired for a creditable purpose under paragraph 11-15(2)(a) of the GST Act, but for the operation of Division 70 of the GST Act. Subsection 70-5(1A) of the GST Act does not apply.
The disposal of the shares by the target entity shareholders via a transfer executed by a scheme of arrangement is a disposal of an interest in a security under subsection 92(1) of the Corporations Act 2001, and is therefore a disposal of a security for the purposes of Item 9, and a 'financial interest' listed in Item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.
Reasons for Decision
In some cases, specific acquisitions (referred to as reduced credit acquisitions) that relate to making input taxed financial supplies may attract a reduced input tax credit, even though no input tax credit would ordinarily arise under Division 11 of the GST Act (subsection 70-5(1) of the GST Act).
The first requirement to determine if an entity is acquiring a reduced credit acquisition is whether the acquisition 'relates to making financial supplies' (subregulation 70-5.02(1) of the GST Regulations). As the acquisition relates to input taxed supplies (i.e. the 'ongoing financial supplies') for paragraph 11-15(2)(a) of the GST Act, it is also taken to relate to making financial supplies for the purposes of subsection 70-5(1) of the GST Act (paragraph 48 of Goods and Services Tax Ruling GSTR 2004/1).
The second requirement is to determine if the nature of the acquisition is one that is listed in one of the Items of the table in subregulation 70-5.02(2). Having met the first requirement the acquisition's connection to the relevant financial supply (for example, ongoing financial supplies of the target entity), will not be relevant unless the specific requirements of a particular Item require a more stringent nexus to a particular type of supply (paragraph 48 of GSTR 2004/1). In this regard the second requirement is separate; it involves an assessment as to whether the acquisition meets the description in a particular Item. For example, Item 16, 'supplies to a credit union' and Item 25 'brokerage of general ... insurance' do not refer to any particular category of financial supply.
Because the disposal of the shares by the shareholders is not a supply made by the target entity this does not impact on the extent to which acquisition 'relates to making financial supplies' (paragraph 102 of Goods and Services Tax Ruling GSTR 2008/1). However this does not prevent the disposal of the shares being relevant in characterising if the service is of the kind described in Item 9.
Item 9 - arrangement of securities transactions
Item 9 provides that 'Arrangement, by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security...' is a reduced credit acquisition. Paragraphs (a) to (i) of Item 9 then provide illustrative examples of such acquisitions (paragraph 216 of Goods and Services Tax Ruling GSTR 2002/2), including paragraph (e) 'arranging mergers and acquisitions'.
It is important to note that Item 9 only identifies the supplier of the service (the financial supply facilitator) it does not specify who the recipient must be. This varies from Item to Item in the table, some other Items specify the recipient of the supply, for example Item 8 'to a third party', Item 10 'the securities and unit issuers', and Item 16 'supply to a credit union'.
As such for the purposes of Item 9 it is not relevant that the target entity shareholders, rather than the target entity are disposing of the securities. Rather, it is a question of assessing if the supplier is in fact a financial supply facilitator and if its services can be characterised as arranging for the disposal of the target shareholders' shares.
Financial supply facilitator
For Item 9 to apply, the entity providing the service must be a financial supply facilitator. 'Financial supply facilitator' is defined in the Dictionary of the GST Regulations by reference to regulation 40-5.07 of the GST Regulations which says 'A financial supply facilitator, in relation to supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider'. The shareholders are disposing of target entity shares that were immediately before the supply their property, it follows that they are a financial supply provider (paragraph 40-5.06(1)(a) of the GST Regulations).
As such it needs to be determined if the investment bank facilitates the disposal of the securities for the shareholders. An entity 'facilitates' a supply when its activities have the effect of helping forward or assisting the relevant supply of an interest, rather than those that simply assist the financial supply provider (paragraph 31 of GSTR 2004/1). The focus is the facilitator's '... role in a particular transaction' (paragraph 33 of GSTR 2004/1) and the relationship with a particular supply, rather than whether the recipient of that service is necessarily making the particular supply. As such, a financial supply facilitator can also provide a service to a recipient (target entity) that involves facilitating a supply made by a third party (the shareholders).
The role the target company has in negotiating, assessing and implementing a scheme of arrangement proposal, and the role and influence it has in regard to whether the takeover or merger is successful, gives rise to a situation where it is capable of acquiring a service that still has an 'identifiable association' with the relevant supply by the shareholders.
The activities of financial supply facilitator must relate to and assist a particular supply, not merely contemplated supplies (paragraph 32 of GSTR 2004/1). Goods and Services Tax Determination GSTD 2007/1 clarifies that the scope of 'contemplated supplies' does not include the situation where an entity has formed the intent (as evidenced by the surrounding circumstances) to make a specific type of supply. Accordingly, an 'intended supply' is a 'particular supply' such that the activities of an entity clearly directed towards assisting in the making of the intended financial supply will retain the character of a financial supply facilitator. This also establishes that a 'particular supply' does not mean that each recipient of the each individual supply needs to be specifically identifiable at the time of providing the relevant facilitation service.
In this case, the target entity has engaged the investment bank to assist in the intended disposal of the shareholders' securities because a takeover bid process has commenced and this is sufficient to meet the requirements that there is a particular financial supply.
In this context it is considered evident that the investment bank is assisting and helping forward particular supplies being the disposal of the shareholders' securities therefore the investment bank is a financial supply facilitator in relation to the supply of securities.
Arrangement of the disposal of the securities
The remaining requirement in Item 9 is to determine if the investment bank's service as a financial supply facilitator constitutes 'arrangement' of the disposal of the shareholders' securities. Paragraph 287 of GSTR 2004/1 indicates that in the context of a securities transaction, arrangement activities are those relating to the 'preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction'. The investment banking services in this case provide an overall co-ordinating role in the assessment and negotiation of the takeover bid and then the steps in the scheme of arrangement process. The nature of the services have a sufficient connection to the preparation, planning and settlement of the disposal of the shareholders' securities to be described as 'arranging' that transaction. Therefore the investment bank is providing arrangement services for the disposal of the shareholders' securities for the purposes of Item 9.
Further support regarding the application of Item 9 is the specific example of 'arranging mergers and acquisitions' in paragraph (e) of Item 9. Mergers and acquisitions is not a defined term but is generally understood to include takeovers by way of one company taking a controlling interest in the shares of another. A merger inherently implies the involvement of two corporate entities it is therefore a reasonable conclusion that paragraph (e) contemplates a service of arranging the transaction for either of the merging corporate entities.
In summary, the services acquired can be related back to an identified supply of the interests in the shares to the bidder entity by the shareholders. The provision of the investment bank's services to the target entity is capable of assisting in this supply and the investment bank is therefore a financial supply facilitator. Similarly the investment bank's services have a sufficient connection and scope to be considered arranging for the shareholders to dispose of their shares.
Therefore the investment banking services are an acquisition of arrangement by a financial supply facilitator of the disposal of securities and therefore qualify as a reduced credit acquisition for the purpose of Item 9.
Related Public Rulings (Including Determinations)Date of decision: 3 February 2012 Corporations Act 2001
section 411 A New Tax System (Goods and Services Tax) Regulations 1999
subregulation 40-5.09(3) table Item 10
subregulation 70-5.02(2) table Item 8
subregulation 70-5.02(2) table Item 9
subregulation 70-5.02(2) table Item 9 paragraph (e)
subregulation 70-5.02(2) table Item 10
subregulation 70-5.02(2) table Item 16
subregulation 70-5.02(2) table Item 25
Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2002/2
Goods and Services Tax Ruling GSTR 2004/1
Goods and Services Tax Ruling GSTR 2008/1
Goods and Services Tax Determination GSTD 2007/1
Reduced credit acquisitions
Input taxed supplies
GST financial supplies