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Ruling

Subject: GST & Creditable Purpose

Questions

1. The Commissioner confirm that to the extent Entity A proposes acquiring shares in ENTITY B from non-resident Scheme Participants, ENTITY A is entitled to a full input tax for its acquisition of services from Entity C.

2. The Commissioner confirm that to the extent that ENTITY A proposes acquiring shares in ENTITY B from a resident Scheme Participant, ENTITY A is entitled to reduced input tax credits for its acquisition of services from Entity C.

3. The Commissioner confirm that for the purposes of determining the extent to which ENTITY A proposes to acquire shares from non-resident Scheme Participants, it would be reasonable for ENTITY A to rely on the City in which the Scheme Participant is said to be located on ENTITY B's share register.

Advice/Answers

1. The Commissioner confirms that to the extent ENTITY A proposes acquiring shares in ENTITY B from non-resident Scheme Participants, ENTITY A is entitled to a full input tax for its acquisition of services from Entity C.

2. The Commissioner confirms that to the extent that ENTITY A proposes acquiring shares in ENTITY B from a resident Scheme Participant, ENTITY A is entitled to reduced input tax credits for its acquisition of services from Entity C.

3. The Commissioner confirms that for the purposes of determining the extent to which ENTITY A proposes to acquire shares from non-resident Scheme Participants, it would be reasonable for ENTITY A to rely on the City in which the Scheme Participant is said to be located on ENTITY B's share register.

Relevant facts

ENTITY B is a production company listed on the Australian Securities Exchange (ASX).

ENTITY A is a joint investment vehicle that has been established by the Entity D and Entity E to acquire the minority shareholdings in ENTITY B.

ENTITY B announced that it had executed a Scheme Implementation Agreement ("SIA") with ENTITY A, which proposed that minority shareholders of ENTITY B (i.e. ENTITY B shareholders other than ENTITY A and its Related Bodies Corporate) will have their shares acquired by ENTITY A by way of a Court approved Scheme of Arrangement ("Scheme").

Under the Scheme, ENTITY A has proposed that it will acquire each minority ENTITY B share for cash.

ENTITY A is over the financial acquisition threshold (FAT) and is registered for GST.

Record Date other than ENTITY A and its Related Bodies Corporate ("Scheme Participants"). The Share Register will be closed as at the Scheme Record Date.

As set above, if ENTITY B announces and pays a Special Dividend.

The Scheme Participants will transfer their shares to ENTITY A on the Implementation Date.

All of the steps of the Scheme listed above with indicative dates prior to the date of this application have occurred. In particular, the Scheme was approved at an extraordinary general meeting of ENTITY B.

The Entity C services

Entity C is an Australian Public Company and is registered for GST.

Entity C provides advisory and capital raising services to corporate and government clients involved in public mergers and acquisitions, private treaty acquisitions and divestments, debt and equity fund raising and corporate restructuring.

ENTITY A engaged Entity C to act as its financial adviser in connection with the proposed takeover of ENTITY B as described above. We have cited a copy of the Entity C Engagement letter (Engagement Letter) entered into between ENTITY A and Entity C (together with Entity D and Entity E).

In connection with the proposed takeover outlined above, Entity C has provided strategic and financial advice and day-to-day implementation services.

The engagement with Entity C was subject to Entity C's Standard Terms which included GST.

ENTITY A, as the "Bidder" referred to in the Engagement Letter, is the party liable for paying Entity C's fees.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 9-30

Section 11-5

Subsection 38-190(1)

Section 40-5

Section 70-5

Section 70-10

A New Tax System (Goods and Services Tax) Regulations 1999:

Regulation 40-5.09

Subregulation 40-5.09(1)

Subregulation 40-5.09(2)

Reasons for decision

The issue to address is if ENTITY A is entitled to any input tax credits (or reduced input tax credits) for the acquisition it made from Entity C.

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with the entitlement to input tax credits. Section 11-20 of the GST Act provides for an entitlement to an input tax credit for any 'creditable acquisition' made by an entity.

Section 11-5 of the GST Act states:

You make a creditable acquisitions 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 liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered.

Terms denoted by asterisks are defined in section 195-1 of the GST Act.

(a) 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. Relevant to this issue is subsections 11-15(1) and (2) of the GST Act which states:

(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 a thing for a creditable purpose to the extent that:

(a) the acquisition of the thing related to making *input taxed supplies; or

(b) the thing is acquired for a private or domestic purpose.

(3) …………
An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making *financial supplies; and

(b) you do not *exceed the financial acquisition threshold.

(4) …………
The services acquired from Entity C has a direct nexus to ENTITY A's acquisition of all the resident and non resident Scheme Participants' shares in ENTITY B.

GST Treatment of Shares

Generally, share acquisitions are input taxed or GST free and are not taxable supplies.

Under subsection 9-30(2) of the GST Act, a supply is input taxed if:

(a) it is input taxed under Division 40 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

While Division 40 of the GST Act is about input taxed supplies, only subdivision 40-A falls for consideration in this context.

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the GST Regulations. Subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides that the provision, acquisition, or disposal of an interest mentioned under sub-regulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if the other requirements in subregulation 40-5.09(1) of the GST Regulations are satisfied. That is, the provision, acquisition or disposal is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia; and

· the supplier is:

· registered or required to be registered; and

· a financial supply provider in relation to supply of the interest.

Sub Regulation 40-5.06(1) of the GST Regulations defines a financial supply provider as:

(1) an entity, in relation to the supply of an interest that was:

immediately before the supply, the property of the entity; or

created by the entity in making the supply

is the financial supply provider of the interest.
(2) The entity that acquires that interest is also the financial supply provider of the interest.

Share capital would potentially fall within the ambit of a security listed in item 10 of the table in sub regulation 40-5.09(3) of the GST Regulations. Accordingly, an interest in or under securities will be a financial supply where the requirements of sub regulation 40-5.09(1) of the GST Regulations are met. The Dictionary to the GST Regulations provides that the term 'securities' has the meaning given by subsection 92(1) of the Corporations Law which includes shares in a body.

Therefore, it must be determined if ENTITY A's share acquisitions from resident and non resident Scheme Participants are input taxed or GST free supplies.

We agree with your submission that the Commissioner at paragraph 66 of 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) recognises the concept of an "acquisition supply". That is, where an entity makes an acquisition supply through the purchase of shares, the recipient of that deemed supply must be the entity that sold the shares. Therefore, if ENTITY A acquires shares from a non resident Scheme Participant, it must follow that ENTITY A will made the deemed supply back to that same non resident Scheme Participant.

Acquisition Supply made by ENTITY A to resident ENTITY B Shareholders

When ENTITY A acquires the shares that are disposed by resident ENTITY B shareholders, they are acquired for consideration (Scheme consideration) in the course of ENTITY A's enterprise, and are connected with Australia. ENTITY A and the respective shareholders would be registered for GST and also meet the definition of a financial supply provider. Therefore, ENTITY A makes an input taxed acquisition supply of shares from the resident shareholders of ENTITY B.

Acquisition Supply made by ENTITY A to non-resident ENTITY B Shareholders

The non resident ENTITY B shareholders reside outside of Australia and therefore, they are not subject to the GST Act and Regulations. The GST Regulations and the GST Act operate so that when ENTITY A acquires the shares, it makes a financial supply by virtue of the acquisition supply to the non resident ENTITY B shareholders. The acquisition supply to ENTITY B non resident shareholders will be GST free if it satisfies the requirements of subsection 38-190(1) item 2 of the GST Act.

Subsection 38-190(1) item 2 states:

Subsection 9-30(3) of the GST Act contemplates that a supply may be both GST free and input taxed, and to the extent that a supply would otherwise have the character of both, subsection 9-30(3) of the GST Act provides that the supply is to that extent GST free and not input taxed.

The Commissioner at paragraph 145 of GSTR 2002/2 interprets subsection 9-30(3) of the GST Act and outlines the GST treatment where something is both a GST free and input taxed supply.

145. Subsection 9-30(3) provides that if a supply is both GST-free and input taxed, the supply is GST-free (unless the supply is of the type where the supplier can choose to treat it as input taxed under a specific provision). This means that if something is both GST-free by virtue of subsection 38-190(1) and input taxed because of the GST Act and regulations, it is GST-free. Acquisitions relating to the making of that GST-free supply are creditable.

In applying the principles of paragraph 145 of GSTR 2002/2 the acquisition supply made by ENTITY A to ENTITY B shareholders who are non-residents of Australia will be GST-free under item 2(a) of subsection 38-190(1) of the GST Act. This is because the supply is made to a non-resident that is not in Australia when the acquisition-supply was done, the supply is neither a supply of work physically performed on goods in Australia or the non residents are not registered or required to be registered for GST. Furthermore, none of the provisions under section 38-190 of the GST Act which exclude the acquisition-supply by ENTITY A to ENTITY B non-resident shareholders from being GST-free apply.

It is therefore evident that the Entity C services directly relate to a non creditable purpose (acquisition supply of resident shareholder ENTITY B shares) and a creditable purpose (acquisition supplies of non resident shareholder ENTITY B shares). Accordingly, ENTITY A's acquisition of Entity C services are made solely or partly for a creditable purpose thus satisfying paragraph (a) of section 11-5 of the GST Act.

Paragraphs (b) (c) and (d) of section 11-5 of the GST Act are not in contention and are thus satisfied. That is, the supply of the Entity C services to ENTITY A is a taxable supply; ENTITY A provides or is liable to provide consideration for that supply and is registered for GST.

Therefore, in conclusion ENTITY A makes a partly creditable acquisition (ie the GST free acquisition supply) and a partly non creditable acquisition (ie the input taxed acquisition supply). The consequences of ENTITY A's partly creditable and partly non creditable acquisition from Entity C are outlined below.

Acquisition Supply made by ENTITY A to resident ENTITY B Shareholders and Input Tax Credit Consequences

The general rule is that, any acquisitions in relation to making an input taxed supply will not be creditable unless the exceptions in subsection 11-15(3) - (5) of the GST Act apply. None of these exceptions apply to the present circumstances. However, section 70-5 of the GST Act provides that specified acquisitions that relate to making input taxed financial supplies, known as reduced credit acquisitions, can give rise to a reduced input tax credit. The percentage of the reduced input tax credit is 75%. Subregulation 70-5.02(2) of the GST Regulations provides a table of 31 items. The acquisition of something that is covered by an item in this table will be a reduced credit acquisition and accordingly, you will be entitled to a reduced input tax credit.

In this case, ENTITY A is over the FAT and the services it acquired from Entity C partly relates to making input taxed financial supplies. Therefore, if this particular service is listed as a reduced credit acquisition by virtue of sections 70-5 and 70-10 of the GST Act, ENTITY A will be entitled to a reduced input tax credit.

You submit that the acquisition from Entity C constitutes and arranging service under item 9 in Regulation 70-5.02(2) of the GST Regulations and therefore, ENTITY A should be entitled to a reduced input tax credit. Accordingly, the issue to be determined is if the acquisition from Entity C is an "arranging" service.

ARRANGING SERVICES

Under item 9 in subregulation 70-5.02(2) of the GST Regulations (item 9), the acquisitions of arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, include the following:

(a) order placement and trade execution;

(b) clearance and settlement of trades;

(c) management of the issue of securities, including rights and bonus issues;

(d) arranging flotation and privatisations;

(g) performing a settlement, including issue of drafts and encashment;

(h) other securities transactions, including lodgement, withdrawal and exchange control;

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

A 'financial supply facilitator' is defined in regulation 40-5.07 of the GST Regulations to be an entity facilitating the supply of an interest for a financial supply provider.

The word 'facilitates', as evidenced by paragraphs 30 - 35 of GSTR 2004/1, requires that an entity have an active, rather than a passive or minor role.

A financial supply facilitator facilitates the acquisition of an interest where its activities have the effect of helping forward or assist a particular financial supply, rather than where those activities simply assist the financial supply provider.

It follows that the activities of a financial supply facilitator must have a sufficient nexus with the acquisition of an interest by a financial supply provider.

A sufficient nexus requires that there be an identifiable association with the acquisition that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the acquisition; however it does require that there be a substantial connection so as to exclude activities that are only generally related. 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. It follows that it is only when an entity 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 entity can be said to be a financial supply facilitator.

Therefore, it needs to be determined if the Entity C services facilitated the acquisition of securities from the ENTITY B shareholders. In this context it is considered that once it is evident that Entity C is arranging the acquisition of the respective securities it will also be sufficient to indicate that its services are facilitating that particular supply.

The term 'arrangement' is discussed in paragraphs 287 to 291 of Goods and Services Tax Ruling GSTR 2004/1: Goods and services tax: reduced credit acquisitions (GSTR 2004/1). Paragraph 287 of 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'.^F42 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.

289. Although many activities may be undertaken as part of the preparations for, for example, the public float of a company, not all of these are the arrangement of the provision of an interest in securities. Planning by the financial supply facilitator may require that a company group restructures. However, it is the acquisition of the planning which is the arrangement service, not the activities involved in the restructure that is the reduced credit acquisition. Equally, due diligence activities, though part of the preparation for the float, are not arranging for the purposes of item 9(d). This is because due diligence by itself, does not have sufficient connection to the 'arrangement' of preparing or planning a float. However, where an entity provides due diligence activities, as part of its services in planning or preparing a float, then it may come within item 9(d).

290. Where an entity conducts preparatory activities as part of the planning of, and preparation for, a listed service, these may be part of the arrangement of the transaction. Where the entity engages other entities to undertake parts of preparatory activities, the services of those other entities are inputs to the supply of arrangement services by the entity and are not, in themselves, arrangement services.

291. 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 ^F43 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.

Paragraph 287 of GSTR 2004/1 indicates that in the context of a securities transaction, arrangement activities are those relating to the 'preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction'. For a supply to be the arrangement of the provision, acquisition or disposal of a security the supply must have a sufficient connection to the arrangement of the proposed transaction to be properly described as itself constituting the 'arranging' of the transaction. A remote connection would not suffice. Paragraph 289 of GSTR 2004/1 provides guidance in respect to determining whether a specific supply has a relevant connection with the preparation, planning or settlement of a transaction:

In this case we are satisfied that the Entity C services provided to ENTITY A from 19 July 2011 has a sufficient connection to the arrangement of the acquisition of the ENTITY B shareholder shares. Accordingly, Entity C is a facilitator for the purposes of the GST regulations.

The Engagement Letter, expressly states that Entity C is engaged to act as a financial advisor. Under the heading "Entity C's Role" it is further stated that "In connection with this Engagement, Entity C shall provide strategic and financial advice in connection with the Transaction. This may include financial advice and assistance in relation to:………". However, we are cognisant of paragraph 291 of GSTR 2004/1 which notes that it is the nature of the services undertaken that will determine whether a service is the arrangement of a transaction, not the name applied to those services. In this regard we note that as a matter of industry practice Investment Banking Services may be describes as financial advisory services.

The functions of Entity C included but were not limited to dealing with the Target Board, Target shareholders, third party proposals, liaising with the Australian Securities and Investment Commission, Takeover panel, ASX, Foreign Investment Review Board and various other constituents to oversee this transaction is smoothly implemented. These services together with the other itemised services in the Engagement Letter fall within the genus of arranging under item 9..Accordingly, to the extent ENTITY A acquires shares in ENTITY B from resident Scheme Participants, it is entitled to reduced input tax credits for its acquisition of Entity C services.

Acquisition Supply made by ENTITY A to non resident ENTITY B Shareholders and Input Tax Credit Consequences

As the non resident ENTITY B acquisition supply is GST free to the extent that any acquisition is made in relation to making such a supply would be fully creditable.

Shareholder Residency Status

It is submitted that the method and most reasonable basis to identify the respective non resident shareholders is by reference to the City in which they are said to be located on the share register of ENTITY B. Paragraphs 166-169 of GSTR 2002/2 outlines various methods to identify a shareholder's residency where there is a lack of such detail. In this particular case we are satisfied that the reasonable method to determine this factor is in the manner you have submitted.

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