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Edited version of private ruling

Authorisation Number: 1011747356240

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Subject: GST and acquisition of shares

Question

Are you entitled to an input tax credit for the payment made under the deed of settlement?

Answer

No. As the acquisition was not made for a creditable purpose, you are not entitled to claim an input tax credit.

Relevant facts and circumstances

You carry on an enterprise and are registered for GST.

You are an individual shareholder in a number of companies.

You are one of a number of directors of a company (Company A).

You commenced proceedings against Company A and some of its directors.

A cross-claim was filed against you by Company A and some of its directors.

Further proceedings were commenced against you and other companies you are associated with.

The proceedings commenced by you were not done as part of the enterprise you conduct.

You and one of the directors (Director A) entered into a deed of settlement (Settlement Deed).

As part of the Settlement Deed Director A has agreed to sell you their shares.

The Settlement Deed provides the purchase price for the shares.

As part of the Settlement Deed, you and Director A have agreed to take no further legal action and withdrew the existing proceedings against each other.

You and Director A have agreed that the amount paid represents full and final settlement of proceedings.

A tax invoice was not issued in relation to the payment made under the Settlement Deed..

Reasons for decision

Summary:

You are not entitled to claim input tax credits on the acquisition of the shares that arises from the Settlement Deed as you are not carrying on an enterprise and GST does not apply to the buying or selling of shares.

Detailed reasoning:

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) explains that you are entitled to the input tax credit for any creditable acquisition you make.

The term creditable acquisition is defined in section 11-5 of the GST Act which states:

The first requirement of a creditable acquisition is that you acquire anything solely or partly for a creditable purpose. The meaning of creditable purpose is defined in section 11-15 of the GST Act which states:

Goods and Services Tax Ruling GSTR 2006/3, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) explains when an acquisition is made in 'carrying on your enterprise'. Paragraph 51 of this ruling states:

Based on the facts, you have reached an out-of-court settlement which resulted in you and Director A entering into the Settlement Deed.

Goods and Services Tax Ruling. GSTR 2001/4, Goods and Services Tax: GST consequences of court orders and out of court settlements (GSTR 2001/4) explains supplies related to an out-of-court settlement. In particular paragraph 43 of this ruling states:

In this case, under the Settlement Deed there is a sale and purchase of the agreed shares between the parties. The Settlement Deed provides the amount you pay to Director A for the shares. Therefore consistent with paragraph 43 it is clear that the supply related to the Settlement Deed is the shares which you acquire.

However, in commencing the proceedings against Company A and reaching the out of court settlement, you did so as an individual shareholder of that company. Further you have advised that the proceedings and subsequent payment made under the Settlement Deed was not part of any enterprise you conduct. Therefore consistent with paragraph 51 of GSTR 2006/3 you have not made an acquisition in carrying on your enterprise and will not satisfy the requirement of 11-15(1) of the GST Act.

As the requirement of 11-15(1) of the GST Act is not met, you will not make a creditable acquisition according to 11-5 of the GST Act.

Consequently you will not be entitled to any input tax credit for the acquisition of the shares under the Settlement Deed.

We note that further guidance regarding the GST implications when you buy and sell shares can be found in our "Financial Services - questions and answer" located on the ATO website. It states at question 4.1 that:

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