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Authorisation Number: 1051277831527
Date of advice: 4 September 2017
Subject: GST and underwriting
Is the amount payable under paragraph 1(a) of the Agreement consideration for an input taxed supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999?
The amount payable is consideration for an input taxed supply. However, 10% of the amount may be consideration for a deemed taxable supply.
Is the amount payable under paragraph 1(b) of the Agreement consideration for an input taxed supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999?
The amount payable is consideration for an input taxed supply.
Relevant facts and circumstances
The relevant scheme includes the facts and circumstances arising from the Underwriting Agreement provided.
The entity is registered for GST and entered into an Underwriting Agreement (Agreement) with another entity.
Under the terms of the Agreement, the Underwriter agreed to purchase units in a trust. Other than the agreement to purchase the units, the Underwriter was not required to provide any other goods or services under the Agreement.
The Agreement provides that the Trustee will pay the Underwriter fees and commissions as set out in paragraphs 1(a) and 1(b).
The Underwriter issued a tax invoice to the Trustee for obligations incurred in accordance with the terms of the Agreement. The Trustee has disputed the invoice on the basis that it incorrectly treats the whole of the supply in respect of the underwriting commission as a taxable supply.
The parties subsequently agreed that the part of the invoice relating to paragraph 1(a) of the Agreement and that the services provided by the Underwriter was partly a taxable supply and partly an input taxed supply. The Trustee issued a revised tax invoice.
The Underwriter issued another revised invoice in relation to paragraph 1(b) of the Agreement and this remains in dispute
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(2)
A New Tax System (Goods and Services Tax) Act 1999 section 40-5
A New Tax System (Goods and Services Tax) Act 1999 Division 142
A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09
Reasons for decision
Section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a financial supply is input taxed. A financial supply is defined by regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and includes the provision, acquisition or disposal of an interest in a security.
The Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) provides broad definition of underwriting:
Underwriting is simply defined in section 9 of the Corporations Act to include ‘sub-underwrite’. In general, an underwriter assumes risk by agreeing to take up securities if unable to place them.
Best endeavours underwriting does not involve the underwriter assuming risk because the underwriter does not commit to taking up securities if the issue is undersubscribed. The underwriter undertakes to use its best endeavours to sell securities for the issuer as agent. Best endeavours underwriting is not the provision of an interest mentioned in subregulation 40-5.09(3).
Underwriting includes both debt and equity underwriting.
Line D41 in Schedule 2 to GSTR 2002/2 further explains that the underwriting ordinarily includes the agreement to take up the securities in addition to providing services of facilitating the placement of those securities being underwritten. The facilitation service is a taxable supply yet taking up the securities is an input taxed supply (of the acquisition of the securities).
The contract between the Underwriter and the Trustee requires the Underwriter to agree to purchase units in the trust if certain conditions were met. Under the Agreement, the Underwriter is not required to provide any goods or other services. Therefore, there is no taxable supply of facilitation services being provided by the Underwriter.
Subsection 9-30(2) of the GST Act provides that a supply of a right to receive a supply that would be input taxed is itself, input taxed. Under the Agreement, the Underwriter agreed to purchase the units. As the acquisition of a security is deemed to be a financial supply, the agreement to purchase a security is also a deemed input taxed supply. This is confirmed in Goods and Services Tax Ruling, Goods and services tax: reduced credit acquisitions (GSTR 2004/1) at paragraph 301 (underlined):
301. Where an underwriter agrees to make its best endeavours to place securities, but also undertakes to take up unplaced securities, only the acquisition of the part of the service not relating to the agreement to take up the securities is a reduced credit acquisition. This is because the agreement to take up the securities is the supply of an interest in securities (or a derivative) as described in the table in regulation 40-5.09. The underwriter is a financial supply facilitator in relation to the supply of the securities by the financial supply provider, and the placement activities of the underwriter are the arrangement of the provision of the securities in question.
The amount agreed to be paid to the Underwriter is consideration for the Underwriters’ agreement to purchase the units under the Agreement. That is, the payment is consideration for the Underwriters’ input taxed supply.
However, Division 142 of the GST Act operates to deem certain activities as taxable supplies where the supplier has treated the activities as a taxable supply and the GST has been passed on to the recipient. If the Underwriter has treated part of the supply as a taxable supply and remitted the GST from the amount that was paid by the Trustee in accordance with the second, undisputed invoice, then the supply made by the Underwriter will be deemed to be a taxable supply. That is, even though the Underwriter did not actually make a taxable supply, the supply is deemed to be taxable to the extent agreed.
As discussed in Question 1 above, the Underwriter is not required to provide anything other than the agreement to purchase the units and that supply is an input taxed financial supply.
The consideration payable to the Underwriter is determined with reference to both paragraph 1(a) and 1(b) in the Agreement. As the Underwriter is not making any supplies of goods or other services under the Agreement, an amount payable under paragraph 1(b) the Agreement can only be in relation to the input taxed financial supply of the agreement to purchase the units. GSTR 2004/1 demonstrates the difference between ordinary underwriting activities and the underwriting provided by the Underwriter:
Example 38 – underwriting
302. Grabber and Co (Grabber) agrees to underwrite a share issue by Grandslam Limited (Grandslam). Under the agreement Grabber will attempt to place 50 million shares, and agrees to take up unplaced shares at $3.50 per share. The supply under the underwriting agreement is a mixed supply.
303. Grabber supplies a placement service and an interest in securities (or a derivative), being a put option over the unplaced shares. The acquisition of the placement service part of the supply is a reduced credit acquisition to Grandslam under item 9, as it is the acquisition of the service of arranging the provision of the shares by a financial supply facilitator of the supply.
As the invoice remains in dispute, Division 142 of the GST Act will not apply as no GST amount has been passed on to the Trustee.