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Authorisation Number: 1051214158518
Date of advice: 13 April 2017
Subject: GST and reduced credit acquisitions
Is the entity entitled to the input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 on acquisitions it made in relation to its initial public offering to the extent they relate to shares issued to non-residents who are outside of Australia at the time of issue?
Yes, the entity is entitled to the input tax credits on acquisitions which relate to GST-free supplies.
Did the entity make a reduced credit acquisition under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it acquired services from the arranger?
Yes, the acquisition of services from the arranger is a reduced credit acquisition.
Is the entity entitled to full input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 on acquisitions it made following its initial public offering?
Yes, as the entity did not make any input taxed supplies apart from the IPO, it is entitled to full input tax credits.
Relevant facts and circumstances
The entity is a company that was incorporated with the intention of listing on the Australian Stock Exchange (ASX) under an initial public offering (IPO).
The prospectus states that the intended use of the funds was to acquire equipment and as working capital. It is understood that the equipment was to be acquired by a non-resident subsidiary possibly through a loan provided by the entity to that non-resident.
The entity engaged an arranger to provide various services in respect of the IPO, including, to act as the lead manager.
The entity’s shares were subsequently listed on the ASX. Of the shares issued in the IPO, a significant amount were issued to non-resident shareholders, the majority of which were individuals. None of the non-resident companies that received shares were in Australia when the shares were issued.
Subsequent to the IPO, the entity incurred various costs as part of its ordinary business operations. The majority of these costs related to the acquisition of the following services:
● Legal services to resolve disputes between the entity’s directors.
● Accounting services for the preparation of detailed financial reports and records of the entity.
● Secretarial services to assist the entity comply with its obligations
The entity was subsequently placed into liquidation prior to it undertaking any significant business operations.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 11-5
A New Tax System (Goods and Services Tax) Act 1999 section 11-15
A New Tax System (Goods and Services Tax) Act 1999 section 11-20
A New Tax System (Goods and Services Tax) Act 1999 section 40-5
A New Tax System (Goods and Services Tax) Act 1999 section 70-5
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09
A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.02
Reasons for decision
Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is entitled to the input tax credit on any creditable acquisition that it makes. A creditable acquisition is defined by section 11-5 of the GST Act:
11-5 What is a creditable acquisition?
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide, or are liable to provide, consideration for the supply; and
(d) you are registered, or required to be registered.
As the entity was registered for GST and provided consideration for the acquisitions which were taxable supplies made to the entity, the acquisitions will be creditable acquisitions if they are made for a creditable purpose, as defined by section 11-15 of the GST Act:
11-15 Meaning of creditable purpose
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.
(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a) the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.
The enterprise carried on by the entity was of being a holding company for non-resident subsidiary companies. The phrase 'carrying on an enterprise’ is defined by section 195-1 of the GST Act to include 'anything in the course of the commencement or termination of an enterprise’.
It was expected that the entity would provide loans and management services to its subsidiaries however, the entity was placed into liquidation before these services could be provided. In relation to holding companies carrying on an enterprise for the purposes of an Australian business number, Miscellaneous Taxation Ruling, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) states, at paragraph 195:
195. In FC of T v. Total Holdings (Australia) Pty Ltd the holding company did more than passively own the shares in its subsidiary, it was also involved in borrowing and on-lending funds to its subsidiary. In this case the Commissioner conceded that the activities of the holding company constituted carrying on a business.
It is accepted that the entity was carrying on an enterprise and acquisitions made by the entity satisfy subsection 11-15(1) of the GST Act.
Generally, the provision, acquisition or disposal of a share in a company is an input taxed financial supply. However, section 38-190 of the GST Act provides a list of supplies that are GST-free. Item 2 in the table in subsection 38-190(!) of the GST Act states that a supply is GST-free if it is:
a supply that is made to a non-resident who is not in the indirect tax zone when the thing supplied is done, and
(a) the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with real property situated in the indirect tax zone; or
(b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered
Subsection 9-30(3) of the GST Act provides that, where a supply is both input taxed and GST-free, that supply is GST-free and not input taxed. Therefore, the supplies of shares to non-residents were GST-free supplies. Consequently, acquisitions which relate to these supplies do not satisfy subsection 11-15(2) and are made for a creditable purpose to the extent that they relate to the issue of shares to non-residents.
To the extent that acquisitions relate to supplies of shares to non-residents, the entity has made creditable acquisitions and is therefore, entitled to the input tax credits under section 11-20 of the GST Act.
Acquisitions which relate to making input taxed supplies are not creditable acquisition, as they are not made for a creditable purpose under section 11-15 of the GST Act and therefore, do not give rise to an input tax credit entitlement. The supplies of shares by the entity under the initial public offering (IPO) are input taxed financial supplies under section 40-5 of the GST Act and subregulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).
The services provided by the arranger directly relate to the issue of shares by the entity under the IPO and, to the extent that the services relate to share issued to Australian residents, the entity is not entitled to an input tax credit because the acquisition is not for a creditable purpose under section 11-15 of the GST Act.
However, section 70-5 of the GST Act provides that certain kinds of acquisitions listed in the GST Regulations are reduced credit acquisitions which give rise to an entitlement to a reduced input tax credit.
Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations provides that 'arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, including arranging flotations and privatisations’ is a reduced credit acquisition. Goods and Services Tax Ruling, Goods and services tax: reduced credit acquisitions (GSTR 2004/1), at paragraphs 31 and 32, explains what a financial supply facilitator is.
31. A financial supply facilitator, in relation to a supply of an interest, is defined in regulation 40-5.07 to be an entity facilitating the supply of an interest for a financial supply provider. The facilitating of a supply refers to activities that help forward (assist) the supply, rather than those that simply assist the financial supply provider. An entity facilitates the supply of an interest where its activities have the effect of helping forward or assisting the supply, therefore, the activities must have a sufficient nexus with the supply of an interest by a financial supply provider.
32. To have a sufficient nexus, the activities of the entity must have an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities). The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest.
GSTR 2004/1 specifically discusses item 9 in the table in subregulation 70-5.09(2) of the GST Regulations and, from paragraph 287, states
287. … Arrangement under this item includes activities relating to the preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction.
288. Typically, arrangement activities take place before the transaction is completed. However, in some instances they may take place after the transaction is completed. Provided the activities relate to the arrangement of the transaction, and not to ongoing services once it is completed, they are arrangement for the purposes of the item. Items 9(d), (e) and (f) also require that the service listed in each has the character of arranging.
The services provided by the arranger as Lead Manager involved the arrangement and administration of the entire IPO for the entity. That is, by acting as Lead Manager, the arranger arranged for the sale of the shares in the entity. Therefore, the acquisition of the services from the arranger was a reduced credit acquisition under section 70-5 of the GST Act and subregulation 70-5.02(2) of the GST Regulations to the extent that the acquisition relates to share issued to Australian residents.
As discussed above, section 11-20 of the GST Act provides that an entity is entitled to the input tax credit on any creditable acquisition that it makes. However, an acquisition is not a creditable acquisition to the extent that it relates to supplies that would be input taxed.
Ordinarily, the provision of a loan is an input taxed financial supply under section 40-5 of the GST Act and item 2 in the table in subregulation 40-5.09(2) of the GST Regulations. However, as the loans were intended to be to non-residents, the supplies of loans, had they occurred, would have been GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.
Consequently, the supplies that the entity intended to make would have been GST-free supplies to its non-resident subsidiaries. Therefore, acquisitions made by the entity are creditable acquisitions under section 11-5 of the GST Act and the entity is entitled to input tax credits.
However, acquisitions which relate to the IPO are not made for a fully creditable purpose because the IPO involved the entity making input taxed supplies of shares to shareholders in Australia.