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Subject: reduced credit acquisition

Question 1

Is Entity A entitled to claim a 75% reduced input tax credit ('RITC') under item 9 of sub-regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 ('GST Regulations') in respect of the services provided by the Joint Lead Managers and Dealers in arranging and facilitating the syndicated issue of the securities?

Answer:

Yes, Entity A is entitled to claim a 75% RITC' under item 9 of sub-regulation 70-5.02(2) of the GST Regulations in respect of the services provided by the Joint Lead Managers and Dealers in arranging and facilitating the syndicated issue of the securities.

Question 2

If, alternatively, Entity A's acquisition of the services does not qualify as a reduced credit acquisition under item 9 of sub-regulation 70-5.02(2), is the supply of those services by the Joint Lead Managers and Dealers an input taxed financial supply under regulation 40-5.09 of the GST Regulations?

Answer:

No, the supply of those services by the Joint Lead Managers and Dealers is not an input taxed financial supply under regulation 40-5.09 of the GST Regulations.

Relevant facts and circumstances:

Parties:

Entity A entered into a Subscription Agreement in relation to a syndicated issue of securities with A, B, and C as Joint Lead Managers. A, B and C were also Dealers in relation to the syndicated issue, together with X, Y and Z. A took primary responsibility for the syndication.

Raising funds by tender:

Previously Entity A raised funds by issuing securities in tender processes which Entity A managed itself. Entity A would announce to the market that Entity A intended to issue securities at a set price, investors wishing to subscribe would respond to the tender by lodging applications and Entity A would issue the securities accordingly.

As Entity A issued the securities in direct response to applications, Entity A did not have to appoint dealers or managers or enter into a Subscription Agreement. All members of the Dealer Panel were governed by a Dealer Panel Agreement which comprised Dealer Terms and Conditions plus Dealer Acknowledgements.

Raising funds by syndicated issue:

One disadvantage of the tender process is that it did not provide Entity A with certainty, prior to the announcement of the issue of the securities, as to the amount of funding that would be raised or the identities of the ultimate purchasers of securities.

Consequently Entity A opted to raise funds by way of a syndicated issue of securities. The syndicated issue was managed by A, B and C as Joint Lead Managers. A, B and C were also Dealers in relation to the syndicated issue, together with X, Y and Z.

The Dealers made inquiries in the market to quantify the indicative interest in the securities. Based on that level of interest, Entity A and the Dealers agreed a price for the securities. The Dealers then obtained orders for the securities at the agreed price from their clients and communicated those orders to A for collating.

Following this, Entity A announced the issue of the securities to the market during A particular month. Entity A did not predetermine the amount of funding to be raised prior to the issue of the securities - that amount was determined based on the amount of orders for securities obtained by the Dealers plus the amount of securities the Dealers wished to purchase for themselves. Thus, unlike a tender, the syndicated issue provided Entity A with an indication of the amount of funding that would be raised and details of the ultimate purchasers of the securities before Entity A announced the issue of the securities.

Entity A and the Joint Lead Managers and Dealers signed the Subscription Agreement during A particular month. During A particular month Entity A issued all of the securities to A, A then facilitated the transfer of the securities to the other Dealers in accordance with the orders placed during the book build and each Dealer then placed their allocated securities with the clients in accordance with the orders placed by those clients.

Entity A's adviser stated that the Dealers merely arranged the placement of the securities with the ultimate investors and did not undertake an obligation to subscribe for any unplaced securities, although the Dealers retained some of the securities for themselves in the normal course of their businesses.

Media Release:

Entity A provided a copy of a Media Release issued by Entity A which announced the launch of a new benchmark issue which represented Entity A's first deal executed in syndicated format.

The Media Release stated that the transaction 'will be open this morning' with pricing expected to take place during a particular month and identified the Joint Lead Managers and Dealers. The Media Release did not state the amount of the syndicated issue.

Deed Poll:

Entity A executed a Deed Poll in favour of each person which became a holder of a security issued pursuant to the syndicated issue.

Schedule X to the Deed Poll sets out the terms and conditions of the securities, e.g. denomination of securities, status (unsubordinated), transferability, payment of interest, and redemption.

Schedule X to the Deed Poll sets out the procedures for issue of securities (initially by way of syndicated issue pursuant to the terms of the Subscription Agreement and Pricing Supplement).

Schedule X to the Deed Poll sets out the rules governing meetings of holders of the securities and Schedule X sets out a brief description of Entity A's business, operations and activities.

Subscription Agreement:

Entity A and the Joint Lead Managers and Dealers signed the Subscription Agreement.

The Subscription Agreement stated that the Dealers agreed to subscribe for the securities on the Issue Date at the purchase price set out in the Pricing Supplement and according to the allocations in Schedule X.

It was a condition precedent that Entity A was not obliged to issue any securities unless on the Settlement Date all securities were subscribed for by the Dealers.

The securities were to be issued by way of syndicated issue, Entity A agreed to issue the securities in A' name as initial holder and A agreed to transfer the securities to the account of the dealer purchasing them or such other account as directed by the dealer against payment of the Purchase Price. Each Dealer agreed to offer the securities for sale within X days of purchase and, subject to market conditions, to facilitate liquidity in the secondary market in respect of the securities for which the Dealer acted as Dealer.

Each Dealer agreed to indemnify Entity A against any loss which Entity A suffers in respect of a breach of the Dealer's obligations under the subscription Agreement.

Pricing Supplement:

A Pricing Supplement referred to a syndicated issue of unsubordinated notes with an aggregate principal amount of $X.

Announcement to ASX:

Entity A announced the issue of the securities to the ASX by facsimile, stating that the securities were benchmark domestic fixed interest securities issued in the wholesale market. The announcement indicated that there were no underwriters and no underwriting fee or commission was paid.

Copies of e-mails:

There was an email to Entity regarding the proposed allocations.

An exchange of e-mails between A and Entity A recorded Entity A's agreement to A's proposal as to the fees to be paid by Entity A to the Joint Lead Managers and Dealers in respect of the syndicated issue, based on a total volume of $X.

Both e-mails predated execution of the Subscription Agreement.

Entity A also provided copies of spreadsheets which contained a record of the book build undertaken in respect of the syndicated issue plus the Final Confirmed Order Book which indicate that the book build was scaled back to $X in the Final Confirmed Order Book and that the Joint Lead Managers and Dealers retained a substantial portion of the $X billion of securities.

Tax invoices:

Entity A supplied copies of tax invoices issued by A, B, C, X Y, and Z. Each tax invoice included an amount of GST.

Submissions:

In the ruling request it was submitted that the issue of the securities by Entity A was an input taxed supply pursuant to regulation 40-5.09(3) of the GST Regulations, that Entity A could not claim any input tax credits for GST charged on acquisitions made by Entity A which were related to the issue of the securities, but that Entity A was entitled to a 75% RITC because those acquisitions fall within item 9 of the table in sub-regulation 70-5.02(2) of the GST Regulations:

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

It was submitted that the Joint Lead Managers and Dealers supplied the following services to Entity A:

Providing Entity A with an indicative subscription price and subscription amount;

Arranging and facilitating the placement of the securities in the market; and

Determining the final subscription amount, and this amount was inserted into the Subscription Agreement.

It was submitted that it was the understanding of the parties that the Joint Lead Managers and Dealers did not undertake to subscribe for any securities which could not be placed in the market, although the Joint Lead Managers and Dealers were offered the option of purchasing the securities in their own right and some Lead Managers and Dealers may have retained some of the securities in the ordinary course of their business.

The ruling request also addressed an 'alternative view', i.e. that, on reading clauses of the Subscription Agreement, it could be inferred that the Joint Lead Managers and Dealers were obliged to subscribe for any securities that could not be placed. We have outlined the material clauses.

In relation to Question 2, i.e. whether the supplies made by the Joint Lead Managers and Dealers to Entity A were financial supplies, it was submitted that the supply of those services satisfied section 9-5 of the GST Act and was a taxable supply and not input taxed as it did not comprise the provision, acquisition or disposal of an interest in or under securities within the meaning of regulation 40-5.09(3) of the GST Regulations because:

the Joint Lead Managers and Dealers considered those services to be taxable supplies because they issued tax invoices to Entity A in respect of them; and

the descriptions of the services in those tax invoices indicate that those services were facilitating or arranging services

Further documents and submissions:

In response to a request for further information, Entity A supplied copies of the Deed Poll, the Registry Services Agreement, the Media Release, the e-mail (regarding proposed allocations), the e-mail (Entity A's agreement to A's proposal concerning fees) and the spreadsheets detailing the book build and the Final Confirmed Order Book.

In a further letter Entity A submitted that the definition of 'underwriting' in Goods and Services Tax Ruling GSTR 2002/2, i.e.

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

required the Joint Lead Managers and Dealers to assume the risk of having to subscribe for any securities issued as part of the syndicated issue which were not placed. It was further submitted that as Entity A was not committed to issue a particular amount of securities in the syndicated issue (because the amount was determined by the volume of orders obtained by the Dealers during the book build) the Joint Lead Managers and Dealers did not assume the risk of having to subscribe for any unplaced securities.

It was further submitted that as the Media Release (which did not refer to the amount of the proposed issue) was issued during a particular month, i.e. before the Subscription Agreement was signed, there was evidence that the Joint Lead Managers and Dealers had secured the participants in the syndicated issue before the Subscription Agreement was signed and that the Subscription Agreement merely reflected the practicalities of finalising the manner in which the securities would be issued and transferred to the ultimate investors.

In a further letter Entity A submitted that the indemnity given by the Dealers pursuant to the Subscription Agreement was in respect of any loss under the Subscription Agreement (e.g. a Dealer's client defaulting on an order for some of the securities) and did not involve 'underwriting' by the Dealers as defined in GSTR 2002/2, i.e. assuming the risk of having to subscribe for any unplaced securities.

Entity A also explained why the book build was scaled back to $X worth of securities: Entity A was aware of the State's funding requirements for the relevant year but was uncertain as to how much funding could be raised via a syndicated process due to market conditions; the indicative orders obtained by the Joint Lead Managers demonstrated that the market's appetite for the securities exceeded the State's funding requirements; and when Entity A agreed a price for the securities with the Joint Lead Managers and the issue of the securities was announced to the market, the amount of the issue was scaled back to the amount of funding required by the State (i.e. $X).

Entity A also confirmed that the Dealers decided to subscribe for approximately one third of the securities themselves because the securities were backed by the State which had a long-standing AAA credit rating and not because the Dealers were obliged to subscribe for any unplaced securities. Entity A submitted that the e-mail from A to Entity A entitled proposed allocations indicated that the amount of securities to be purchased by the Dealers was agreed prior to execution of the Subscription Agreement and not as a result of any shortfall in demand when the securities were issued on the Completion Date.

Reasons for decision:

Question 1

Summary

Entity A acquired the arrangement, by a financial supply facilitator, of the provision of an interest in a security. Entity A did not acquire an undertaking from the Joint Lead Managers or Dealers to subscribe for any unplaced securities. Consequently Entity A made a reduced credit acquisition within the meaning of Item 9 in sub-regulation 70-5.02(2) of the GST Regulations.

Detailed reasoning

An entity is generally not entitled to an input tax credit in respect of an acquisition which relates to making an input tax supply because such an acquisition is not made for a creditable purpose. The basic rules in Chapter 2 of the A New Tax System (Goods and Services) Tax Act 1999 ('GST Act') include paragraph 11-15(2)(a) which provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Chapter 4 of the GST Act contains the special rules which have the effect of modifying the basic rules. Chapter 4 includes Division 70. Subsection 70-5(1) provides that the GST Regulations may provide that acquisitions of a specified kind that relate to making financial supplies can give rise to an entitlement to a reduced input tax credit ('RITC'). Subsection 70-10(1) provides that, despite section11-15, the fact that a reduced credit acquisition relates to making financial supplies does not stop that acquisition being for a creditable purpose to the extent that it relates to making financial supplies.

Goods and Services Tax Ruling GSTR 2004/1 sets out the procedure for determining whether an entity is entitled to a reduced input tax credit ('RITC') for a particular acquisition:

45. To determine whether it is entitled to a reduced input tax credit for a particular acquisition, an entity needs to establish whether the supply in relation to which the acquisition was made would be a financial supply. Financial supplies are input taxed under subsection 40-5(1) and, consequently, acquisitions relating to these are not for a creditable purpose under paragraph 11-15(2)(a). The entity should then determine whether the acquisition is mentioned in the table in sub-regulation 70-5.02(2). If so, it is a reduced credit acquisition and gives rise to a reduced input tax credit under subsection 70-5(1), provided it is not excluded by subsection 70-5(1A).

Was the supply in relation to which Entity A made the acquisition a financial supply?

In the ruling request it was submitted that the supply in relation to which the acquisition was made was:

…the sale of securities … by Entity A in the secondary market by way of syndicated issue.

Goods and Services Tax Ruling GSTR 2006/9 states:

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

In the present case the starting point is the Subscription Agreement which states that the Dealers agree to subscribe for the securities, that Entity A was not obliged to issue any securities unless the Dealers subscribed for all of them and that Entity A must issue all of the securities to A as initial holder.

The Subscription Agreement also requires A to transfer the securities to the account of the Dealer purchasing them or such other account as directed by that dealer against payment of the Purchase Price, acknowledges that the securities are to be distributed by the Dealers, and obliges each Dealer to facilitate liquidity in the secondary market in respect of the securities.

Entity A has also provided copies of e-mails and other documents (discussed in more detail below) which indicate that Entity A announced the launch of an unspecified amount of securities in a Media Release issued on during a particular month and that the securities were priced and a proposed allocation of $X of securities between the Joint Lead Managers and Dealers who had decided to subscribe for some of the securities for themselves and ultimate investors had occurred during a particular month, i.e. prior to execution of the Subscription Agreement.

In our view the total fact situation indicates that the supply in relation to which the acquisition was made was the sale of securities by Entity A in the secondary market by way of syndicated issue.

Is the supply in relation to which the acquisition was made input taxed?

In the ruling request it was submitted that the issue of the securities was input taxed pursuant to regulation 40-5.09(3) of the GST Regulations.

We agree. Section 40-5 of the GST Act provides that a financial supply is input taxed and that 'financial supply' has the meaning given by the GST Regulations. Regulation 40-5.09 of the GST Regulations states that the disposal of an interest in

10. Securities, including:

(a) A debenture described in paragraph (a), (b), (c), (d), (e) or (f) of the definition of debenture in section 9 of the corporations Law

is a financial supply if the requirements in paragraphs (a) and (b) of regulation 40-5.09(1) are met. Part 8 of Schedule 7 to the GST Regulations includes the following as an example for Item 10 in regulation 40-5.09:

2. Bonds, stocks or debentures issued, or proposed to be issued, by a government entity.

and the Glossary in Goods and Services Tax Ruling GSTR 2002/2 states that for the purposes of Item 10 'securities' has the meaning given by subsection 92(1) of the Corporations Act 2001 which includes:

Debentures, stocks, or bonds issued or proposed to be issued by a government.

Line D3 in Schedule 2 to GSTR 2002/2 confirms that the supply of bonds stocks or debentures issued by a government entity is input taxed under Item 10(a) in regulation 40-5.09(3) of the GST Regulations. Goods and Services Tax Ruling GSTR 2005/6 states that if a corporation is discharging governmental functions for the State - that is, the State is carrying on the relevant business or other function through the corporation - the corporation is the State and therefore a 'government entity' (Para 11).

Is the acquisition mentioned in the table in regulation 70-5.02(2)?

In the ruling request it was submitted that the acquisition made by Entity A fell within Item 9 in regulation 70-5.02(2) as it comprised arrangement, by a financial supply facilitator, of the provision of an interest in a security.

In relation to the meaning of 'arrangement' in Item 9, GSTR 2004 /1 states:

287. The term arrangement is not defined in the GST Act or regulations, nor does it have a specific industry meaning. Its ordinary meaning is a 'preparatory measure, previous plan, preparation or a final settlement, adjustment by agreement'. 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 documents provided by Entity A indicate that, between the 'launch' of the securities in the Media Release issued during a particular month and the issue of the securities the Joint Lead Managers and Dealers ascertained the level of interest in the market in respect of the proposed issue of securities, advised Entity A on pricing of the securities, obtained orders for the securities from ultimate investors, agreed the subscription amount and fees with Entity A, and executed the Subscription Agreement, all of which are 'activities relating to preparation of the transaction' within the meaning of Para 287 of GSTR 2004/1. The transfer by A to each Dealer or such other account as directed by each Dealer during a particular month of the Subscription Agreement falls within 'order placement and trade execution' which is included in 'arrangement'.

It is less clear whether the obligation of each Dealer to facilitate liquidity in the secondary market in respect of the securities pursuant to the Subscription Agreement is 'arrangement' as that obligation survives the termination of the Subscription Agreement and may be an ongoing service. However it is arguable that assuming such an obligation does relate to the sale of the securities in the secondary market because ultimate investors would agree to buy the securities only if they were satisfied that there was a liquid secondary market for the securities.

'Financial supply facilitator' is defined in regulation 40-5.07 of the GST Regulations in relation to the supply of an interest as an entity facilitating the supply of the interest for a financial supply provider. GSTR 2004/1 states (Para 31):

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.

As noted above, we agree with the submission made on Entity A's behalf that the supply in relation to which the acquisition was made was the sale of securities by Entity A in the secondary market by way of syndicated issue. In the ruling request it was submitted that the Joint Lead Managers facilitated the placement of the securities to the market and we agree that the activities undertaken by the Joint Lead Managers and Dealers during a particular month had the effect of helping forward or assisting the supply of the securities by Entity A to the ultimate investors. Consequently we consider that each of the Joint Lead Managers and Dealers was a financial supply facilitator.

In our view the Joint Lead Managers and Dealers arranged the 'provision' of an interest as defined in regulation 40-5.03 of the GST Regulations, i.e. the allotment, creation, grant and issue of the interest to the ultimate investors (albeit that the Subscription Agreement required Entity A to issue all the securities to A and A to transfer the securities to the account of the Dealer or such other account as directed by that Dealer).

In relation to the meaning of 'security', GSTR 2004/1 states:

297. The term securities is defined in the Dictionary as having the meaning given by subsection 92(1) of the Corporations Act 2001 (the Corporations Act) (including, for example, shares or debentures in a body, interests in a managed investment scheme). Securities, for the purposes of regulation 70, does not have the expanded definition found in item 10 in the table to sub-regulation 40-5.09(3) and does not, therefore, include such things as an interest in the capital of a trust (unless it is an interest in a managed investment scheme) or partnership.

We consider that the fixed rate senior note with the characteristics described in the Pricing Supplement is a security.

When is underwriting a reduced credit acquisition?

Sub-regulation 70-5.02(2) provides that acquisitions which are reduced credit acquisitions include the following:

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

…

(i) Underwriting, except a matter that is described in the table in regulation 40-5.09.

The Glossary of Terms in Schedule 1 to GSTR 2002/2 defines 'underwriting' as follows:

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 sub-regulation 40-5.09(3).

Underwriting includes both debt and equity underwriting.

The exclusion from Item 9 in regulation 70-5.02(2) for 'a matter that is described in the table in regulation 40-5.09 of the GST Regulations' is explained in GSTR 2004/1:

300. Item 9(i) includes underwriting, except a matter that is described in the table in regulation 40-5.09 as an arrangement by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security. The paragraph refers to the part of the underwriting service that does not relate to the acquisition of unplaced securities. This part is sometimes referred to as best endeavours underwriting. The supply of best endeavours underwriting is a taxable supply by the underwriter.

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.

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.

This explanation suggests that the acquisition of the service of placing securities is a reduced credit acquisition but the acquisition of an undertaking to subscribe for any unplaced securities is not.

Did the Joint Lead Managers or Dealers agree to take up any unplaced securities?

The only document provided with the ruling request was the Subscription Agreement which suggests that the Dealers did agree to subscribe for any unplaced securities as the Dealers agreed to subscribe for the securities and Entity A was not obliged to issue the securities unless the Dealers subscribed for all the securities.

However it was submitted in the ruling request that it was the understanding of the parties that the Joint Lead Managers and Dealers were not obliged to subscribe for any unplaced securities; and

At the time the Subscription Agreement was written, the Joint Lead Managers had secured the participants in the issue and the terms of the Subscription Agreement were mainly reflective of the practicalities of the way in which the issuance of the securities was finalised and transferred to the ultimate investors.

A subsequent letter expanded on this submission:

As detailed above, Entity A was not locked into a particular amount it was going to raise (this amount was a function of the completed sales) and as such [Entity A] did not require the Joint Lead Managers and Dealers to assume any risk to take up any unsubscribed securities.

It was further submitted that the Media Release in which Entity A announced:

the launch of a new…benchmark issue…the transaction will open this morning with pricing expected to take place [on a specific] afternoon

supported this submission because it predated the signing of the Subscription Agreement, thereby indicating that the Joint Lead Managers and Dealers had secured ultimate investors in the issue before the Subscription Agreement was signed.

The documents attached to that subsequent letter indicate that the Joint Lead Managers and Dealers did not agree to subscribe for any unplaced securities. Those documents indicate that the 'launch' of the issue of the securities was announced in the Media Release (which did not specify the amount of securities to be issued), that Entity A and the Joint Lead Managers expected pricing of the securities to take place during a particular month, and that A 'cut off the book to get $X'. These documents indicate that the Dealers had agreed to buy for themselves or had obtained orders for $X of securities by XX A particular month. There was a further exchange of e-mails between A and Entity A on XX A particular month which agreed the fee pool and fee split based on a $X 'total volume'.

These documents support the submissions that it was the understanding of the parties that the Joint Lead Managers and Dealers were not obliged to subscribe for any unplaced securities and that the Subscription Agreement merely reflected the practicalities of how the securities would be transferred to ultimate investors. We consider it unlikely that the Joint Lead Managers and Dealers would sign a Subscription Agreement in which the Dealers agreed to subscribe for all of the securities on the Issue Date (unless the Dealers had already obtained orders from ultimate investors for the securities which the Dealers did not wish to subscribe for themselves.

Taking into account both the Subscription Agreement and the other documents supplied by Entity A, we consider that Entity A did not acquire an undertaking from the Dealers to subscribe for any unplaced securities.

Question 2

Summary

The Dealers did not make input taxed supplies under the Subscription Agreement because each of the Joint Lead Managers and Dealers was a financial supply facilitator, not a financial supply provider, in relation to the acquisitions made by Entity A.

Detailed reasoning

In the ruling request Entity A asked the ATO to confirm that the supplies made by the Dealers under the Subscription Agreement are input taxed only if the ATO considered that Entity A's acquisitions under the Subscription Agreement were not reduced credit acquisitions.

Entity A submitted that the supply made by the Joint Lead Managers and Dealers to Entity A was a taxable supply as it satisfied section 9-5 of the GST Act and that that supply was not a financial supply because it did not comprise the provision, acquisition or disposal of an interest in or under securities within the meaning of Item 10 in regulation 40-5.09(3) of the GST Regulations and because the description of that supply ('Joint Lead Manager', 'Co-manager fee') on the tax invoice issued by each Dealer plus the fact that each Dealer charged 10% GST indicated that each Dealer was a financial supply facilitator in relation to the supply.

In Question 1 we ruled that Entity A made a reduced credit acquisitions under the Subscription Agreement, so it is not necessary to answer Question 2. Nevertheless, for the reasons set out below, we consider that the Dealers did not make input taxed supplies to Entity A.

Under the Subscription Agreement the Dealers agreed to acquire the securities, Entity A agreed to transfer all the securities to A, A agreed to transfer the securities to the Dealers and the Dealers agreed to offer the securities for sale.

Sub-regulation 40-5.09(1) provides that the provision, acquisition or disposal of an interest mentioned in sub-regulation 40-5.09(3) is a financial supply provided certain requirements are met and Item 10 in sub-regulation 40-5.09(3) refers to an interest in or under securities. In order for a supply to be a financial supply, sub-regulation 40-5.09(b)(ii) requires that the supplier is a financial supply provider in relation to the supply of the interest. Regulation 40-5.06 states that an entity is a 'financial supply provider' in relation to the supply of an interest if that interest was the property of the entity immediately before the supply or was created by the entity in making the supply.

In Question 1 we determined that each of the Joint Lead Managers and Dealers was a financial supply facilitator, not a financial supply provider, in relation to the acquisitions made by Entity A. GSTR 2002/2 states:

107. A financial supply facilitator is an entity that facilitates the supply of an interest for the financial supply provider. The supply by a financial supply facilitator, in that capacity, is not a financial supply. A supply by a facilitator will be a taxable supply, unless it is not taxable under another provision of the GST Act (for example, it is GST-free or input taxed). Only the financial supply provider in relation to a particular supply can make a financial supply of that thing, as only the provider can satisfy the requirements of sub-regulation 40-5.09(1)(b)(ii).

In addition, Goods and Services Tax Ruling GSTR 2004/4 states that the placing of securities by an entity which does not undertake to subscribe for any unplaced securities involves a taxable supply by the underwriter:

Step 12: Provision of underwriting services

120. There are two forms of underwriting. One only requires the underwriter to use their best endeavours to place the securities with investors while the other requires the underwriter to take up any unplaced securities up to an agreed number. The first is referred to as best endeavours underwriting and the underwriter is a financial supply facilitator in relation to the supply of the securities by the SPV. The underwriter's supply of services is a taxable supply to the SPV.

121. In the other form of underwriting the placement service is complimented by an agreement to take up unsold securities. Taking up the unsold securities is the supply of an interest in securities (or a derivative) as described at items 10 or 11 in the table in sub-regulation 40-5.09(3). This is a financial supply if the other requirements in sub-regulation 40-5.09(1) are satisfied. In this circumstance the underwriting fee is consideration for both a taxable supply of placement services and a financial supply.

Footnote 61 to Para 120 refers to Item 12 in Schedule 1 to GSTR 2004/4 which also states that best endeavours underwriting not relating to the acquisition of unplaced securities is a taxable supply.

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