Edited version of private ruling

Authorisation Number: 1011530354856

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Ruling

Subject: GST and reduced input tax credits

Questions

1. Whether XYZ Limited (XYZ) is entitled to reduced input tax credits (RITCs) on the acquisition of services from AAA Pty Ltd (AAA)?

Answer: Yes.

XYZ is entitled to RITCs on the acquisition of services from AAA?

2. Whether XYZ is entitled to RITCs on the acquisition of services from SSS Limited (SSS)?

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise

Answer: Yes.

XYZ is entitled to RITCs on the acquisition of services from SSS?

Relevant facts

Background

XYZ is a commodity explorer listed on the Australian Stock Exchange (ASX).

XYZ is focussed on its exploration activities and has been successful with one of its projects (the Project).

In order to bring the Project into production, XYZ required additional funding and as such acquired services from AAA and SSS to enable it to obtain the additional funding.

AAA issued a letter to XYZ (the Mandate) setting out its role in respect of obtaining funding for the Project.

XYZ announced a Share Placement to raise funds for the Project.

SSS issued a letter to XYZ (the Agreement) setting out its role with respect to the Share Placement.

Some input tax credits on acquisitions relating to XYZ's share placement has not been claimed.

Apart from XYZ, AAA and SSS, no other entities were involved in the Share Placement.

XYZ exceeds the financial acquisitions threshold (FAT).

XYZ makes financial supplies which are input taxed for GST purposes when it issues shares under the Share Placement.

The nature of AAA's services

AAA had previously been a corporate advisor to XYZ.

After discussions with XYZ, AAA issued the Mandate to vary its role to reflect its involvement with the funding aspects of the Project.

Specifically, the Mandate stipulates that AAA would assume responsibility for all the funding aspects of bringing the Project into production and would assist XYZ in raising any external funds. Additionally, AAA's advisory role would include engaging with appropriate debt, hybrid, equity or alternate funding providers to deliver an optimal mix of funding to XYZ and introducing and negotiating with participating funders and ensuring all parties are provided with the continuous, quality information required to garner support for XYZ.

Remuneration to AAA for its services is a completion fee.

AAA also acted as a Co-Lead Manager with SSS in respect of the Share Placement.

The tasks performed by AAA as a Co-Lead Manager formed part of AAA's role the Mandate.

AAA's role as a Co-Lead Manager involve overall management of the capital raising and advising XYZ through:

· Determining the appropriate level of funding to raise through equity, given the estimated capital requirements at the time and state of the financial markets and the demand;

· Determining the acceptability of terms being charged by the Co-Lead Manager; and

· Negotiating the placement price in respect of the placement.

The nature of SSS's services

SSS and XYZ entered into an agreement (the Agreement) under which SSS was appointed as a Co-Lead Manager with AAA to raise funds in new equities by way of a placement to institutional and sophisticated investors.

The Agreement stipulates that SSS will be directly accountable for managing the bookbuild and that SSS is not providing underwriting or settlement underwriting services to XYZ.

Additionally, the Agreement provides that the Lead Manager role may include:

· managing the bookbuild process;

· in conjunction with XYZ's legal and professional advisors, advising and assisting with the structuring the Placement;

· in conjunction with XYZ's legal and professional advisors, assisting with dealings with the ASX and ASIC in relation to the Placement;

· assisting XYZ in the due diligence process for the Placement;

· assisting with the communication strategy for the Placement; and

· coordinating and advising on the presentation and marketing of the Placement, including assistance in the preparation of presentations and coordinating investor roadshows.

SSS will ensure that all placement letters from SSS to potential investors and application forms from potential investors to SSS will be in the forms agreed with XYZ.

As advised, the bookbuild process relates to contacting and signing up participants in the Share Placement and collection of placement monies.

The Agreement provides that the remuneration to SSS will be a placement fee and a management fee.

The application fee invoiced by SSS to XYZ

An application fee was paid by SSS to the ASX relating to "Delivery vs Payment" (DvP).

SSS subsequently sought reimbursement of the application fee from XYZ.

Information from the ASX website discloses that DvP is a process under the ASX's Clearing House Electronic Subregister System (CHESS) which enables the efficient transfer of title of shares between buyers and sellers and facilitates the transfer of money for these shares in real-time. The DvP settlement is irrevocable.

Reasons for decision

Entitlement to input tax credits

The general rule under Division 11 is that no entitlement to input tax credits would arise for acquisitions that relate to the making of input tax supplies as they are denied creditable purpose under paragraph 11-15(2)(a). That paragraph states that:

However, you do not acquire the thing for a creditable purpose to the extent that:

the acquisition relates to making supplies that would be input taxed, or

In this case, XYZ's acquisition of services from AAA and SSS and the acquisition of the DvP facility are acquired in relation to its input taxed financial supply of issuing equity under the Share Placement and are thus denied creditable purpose under the general rule of Division 11.

One of the exceptions to the general rule is where the FAT is not exceeded. This exception is provided under subsection 11-15(4). However, in this case XYZ exceeds the FAT and therefore this exception does not apply.

Entitlement to reduced input taxed credits on acquisitions related to making financial supplies

Another exception to the general rule under Division 11 exists and is provided under Division 70. Subsection 70-5(1) states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as 'reduced credit acquisitions' (RCAs).

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

The RCA items relevant to this case are discussed below.

Securities transaction services

Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations (item 9) deals with arrangement services provided by a financial supply facilitator in respect of the provision, acquisition or disposal of an interest in a security. Specifically, item 9 is in the following terms:

Arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, including the following:

· order placement and trade execution;

· clearance and settlement of trades;

· management of the issue of securities, including rights and bonus issues;

· arranging flotations and privatisations;

· arranging mergers and acquisitions;

· arranging takeover bids;

· performing a settlement, including issue of drafts and encashment;

· other securities transactions, including lodgment, withdrawal and exchange control;

· underwriting, except a matter that is described in the table in regulation 40-5.09.

Item 9 - existence of an arrangement by a financial supply facilitator

A fundamental requirement which must be satisfied under item 9 is the existence of an arrangement by a financial supply facilitator.

Paragraph 287 of Goods and Service Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides that an arrangement includes activities relating to the preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction.

Furthermore, paragraph 291 of GSTR 2004/1, provides that:

Whether or not a service is the arrangement of a transaction depends upon the nature of the services undertaken, not the name applied to them. For example, a merchant bank may invoice its clients for advisory services for a securities transaction. If, however, the merchant bank is a financial supply facilitator in relation to that supply of securities, and is, in reality, supplying arrangement services under the agreement, the acquisition of those services is a reduced credit acquisition under item 9.

It follows that the nature of the services being rendered is crucial in determining whether an entity is arranging a transaction for a financial supply provider.

In our view, GSTR 2004/1 requires an entity to have a significant or dominant role in co-ordinating or overseeing a whole transaction in order to be accepted as 'arranging' for the purposes of Item 9. Thus, the arranger arranging the transaction for a financial supply provider must:

· have substantial control over the necessary acquisitions and processes, and

· be charged with the responsibility of facilitating the transaction from formation to completion.

Where the services acquired by the financial supply provider are on a piecemeal basis, it would lead to the conclusion that the services acquired are not arrangement services.

A further requirement to be taken into account when considering an acquisition under item 9 is that the acquisition must be an acquisition of arrangement by a financial supply facilitator.

The definition of a financial supply facilitator is provided in regulation 40-5.07 of the GST Regulations which states that:

A financial supply facilitator, in relation to the supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

In this case, the financial supply provider is XYZ.

A financial supply facilitator facilitates the supply of an interest where its activities have the effect of helping forward or assisting a particular financial supply, rather than those that simply assist the financial supply provider. It follows that the activities of a financial supply facilitator must have a sufficient nexus with the supply of an interest by a financial supply provider.

A sufficient nexus requires that there be 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 (see paragraph 32 of GSTR 2004/1).

It follows that it is only when the financial supply facilitator is carrying out activities that are sufficiently or substantially identifiable with the actual financial supply being made, such that they help forward or assist the financial supply, that the activities can be said to comprise an arrangement by a financial supply facilitator of an interest in a security.

Services remunerated by commission and franchise fees

Item 27 in the table in subregulation 70-5.02(2) of the GST Regulations (item 27) deals with services provided by financial supply facilitators for which they are paid commission by a financial supply provider.

'Commission' is defined in GSTR 2004/1 by reference to its definition in Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) as:

payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.

Acquisition of AAA's services

In consideration of the nature of AAA's services, our view is that AAA's services fall within item 27.

In our opinion, AAA services do not satisfy all the elements of an arrangement service which requires the preparation for, planning of and settling the details of the financial supply of issuing shares.

However, AAA's overall role as Co-Lead Manager with respect to the Share Placement which entails introducing participating funders supports the view that AAA's activities have a sufficient nexus with XYZ's financial supply of issuing shares that goes beyond a mere general association. As such, our view is that AAA is a financial supply facilitator to the Share Placement.

Additionally, we consider that the consideration provided by XYZ to AAA for its services (being the completion fee) falls within the definition of a commission for the purposes of item 27.

Accordingly, our view is that XYZ is entitled to RITCs on the acquisition of AAA's services for which it paid completion fees.

Acquisition of SSS's services

In consideration of the nature of SSS's services, our view is that SSS's services fall within item 9.

SSS's appointment to the role of Lead Manager with respect to the Share Placement which entails carrying out the whole bookbuild process and placement of new equity to institutional investors supports the view that SSS's activities have a sufficient nexus with XYZ's financial supply of issuing shares that goes beyond a mere general association. As such, our view is that SSS is a financial supply facilitator to the Share Placement.

In addition, the activities carried out by SSS as the Lead Manager supports the view that it has carried out a significant or dominant role in co-ordinating or overseeing the Share Placement for the purposes of Item 9. As such, it is our view that SSS's services would constitute an arrangement service under item 9.

The DvP facility

As already noted, SSS has sought reimbursement from XYZ of the application fee it paid to the ASX for the DvP facility.

The use of the term 'reimbursement' could suggest that SSS was contracting for the DvP facility as agent for XYZ.

However, in this case our view is that the DvP facility which has been organised with the ASX by SSS is an acquisition made by SSS in its own principal capacity as a supplier of services rather than as an agent on behalf of XYZ.

Support for this view is contained in the Agreement which, under the indicative timetable for the Share Placement, provides that the settlement of Tranche 2 will be via DvP. This together with SSS's role of assisting with dealings with the ASX demonstrates that the DvP facility is an acquisition made by SSS in order for SSS to supply its services to XYZ.

Accordingly, the consequence of this is that the amount reimbursed by XYZ to SSS for the DvP is an amount which is part and parcel to the acquisition of SSS's services and forms part of the consideration for those services.

As such from our analysis above, XYZ is entitled to RITCs on the acquisition of SSS's services for which it paid Placement fees, Management fees and the reimbursement of the cost of the DvP facility to SSS under Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations.

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