Edited version of your private ruling

Authorisation Number: 1012453582179

Ruling

Subject: Goods and services tax (GST) and share sale arrangement

Question 1

Have any members of the purchaser GST group made creditable acquisitions under the SSAR?

Answer

Yes. Entity 4 has made creditable acquisitions.

Question 2

Is there an entitlement to input tax credits on acquisitions a member of the purchaser GST group made under the SSAR?

Answer

Yes. Entity 6 has these input tax credit entitlements.

Relevant facts and circumstances

Entity 5 is a subsidiary company of entity 4.

Entity 4 is a subsidiary company of entity 6.

Entity 4, entity 5 and entity 6 are members of the same GST group (the purchaser GST group). Entity 6 is the GST group representative of this GST group.

Entity 5 was an incorporated joint venture company which was owned by interests associated with and/or forming a part of the vendor group and those associated with entity 6. The joint venture was supported by a complex contractual framework for the making of various supplies between the entities within the two groups and entity 5 to ensure the commercial success of the joint venture entity.

The issued shares in entity 5 were held as to a certain percentage by entity 1 (a wholly owned subsidiary of a certain company) and as to a certain percentage by entity 4.

The vendor group decided to dispose of its shares in entity 5. The disposal of those interests meant that the contractual arrangement between the entities within the vendor group and entity 5 had to be restructured in a way that ensured the continued success of entity 5 as an entity wholly owned by the purchaser GST group following the sale. This was achieved by the vendor group guaranteeing certain rights and supplies.

Share sale arrangement

On a certain date, the following parties entered into a share sale arrangement (SSAR):

· entity 1.

· entity 2.

· entity 3.

· entity 4 (referred to as Buyer in contract 1).

· entity 5.

· entity 6 (referred to as Guarantor in contract 1).

The SSAR comprised of a number of contracts, being contract 1 and various subsidiary contracts.

Under contract 1:

· entity 1 agreed to sell and entity 4 agreed to buy the sale shares (a certain number of ordinary shares in the capital of entity 5 being a certain percentage of the total number of shares on issue) (a certain recital); and

· entity 2 agreed to provide certain rights to entity 4 on the terms of contract 1 and to provide certain rights to entity 5 on the terms of contract 1, contract 2, the Charge, the Call Option, contract 3 and the Trade Mark Licence (a certain recital).

A certain clause in contract 1 states that entity 1 and entity 2 were sellers.

There were a number of subsidiary agreements to contract 1. They were:

· contract 2 (entity 2, entity 5 and entity 6 were parties to this agreement),

· contract 3 (entity 2 and entity 5 were parties to this agreement),

· contract 4 (entity 2 and entity 5 were parties to this agreement),

· contract 5 (entity 2 and entity 5 were parties to this agreement),

· contract 6 (entity 2 and entity 5 were parties to this agreement),

· contract 7 (entity 1 and entity 5 were parties to this agreement),

· contract 8 (entity 2 and entity 5 were parties to this agreement), and

· contract 9 (entity 3, entity 5 and entity 6 were parties to this agreement).

A certain clause in contract 1 refers to contract 4 between entity 5 and entity 1.

Contract 2

A certain clause in contract 1 provides that on completion, the parties agree to enter into contract 2.

A certain recital in contract 2 provides that in consideration for entity 4 entering into contract 1, entity 2 has agreed to provide to entity 5, on the terms of contract 2, rights in relation to the products supplied by entity 2 to entity 5 under contract 3 and to be restrained from certain activities in respect of those products.

Contract 2 provides for the following under the heading 'Grant of Rights' in a certain clause.

· entity 2 will refrain from supplying products to any person within Australia.

· entity 2 will refrain from licensing its intellectual property (IP) rights in respect of the Products to a third party where entity 2 knows, or has reasonable grounds for suspecting, that that third party with engage in Prohibited Conduct.

· entity 5 may purchase goods and products that are similar or functionally equivalent to the Products from any other person.

No consideration amount is specified in contract 2.

Contract 3

Contract 3 provides that the parties agree that from completion of contract 1, entity 2 will supply products to entity 5 on the terms and conditions of the contract 3. There is no agreement in contract 3 that a certain quantity of particular products would be sold.

Contract 4

A certain clause in contract 1 provides that the parties agree to enter into contract 4.

There is a trade mark licence schedule to contract 1.

A certain clause in contract 4 provides that the owner (entity 2) grants the licensee (entity 5) during the Term a sole, royalty-free and sub-licensable right to use the Trade Marks in Australia on or in respect of the Goods and Services and otherwise according to the terms of contract 4.

A certain clause in contract 4 provides that entity 5 must pay entity 2 a licence fee. The licence fee is set out in a schedule to contract 4 - it is a certain amount.

Contract 5

A certain clause in contract 1 provides that the parties agree to enter into various agreements (as applicable) including contract 5.

There is a software licence schedule to contract 1.

A certain recital in contract 5 provides that the licensor (entity 2) has offered to provide, and the Licensee (entity 5) has agreed to acquire, the Software and Documentation on the terms of the agreement.

A certain clause in contract 5 provides that entity 5 must pay entity 2 a one-off fee of a certain amount for the software and documentation on the Completion Date.

Contract 6

A certain clause in contract 6 provides that entity 2 grants to entity 5 an option to purchase Option

Property.

A certain clause in contract 6 provides that entity 5 may only exercise the Option in the following circumstances:

· entity 5 or entity 6 terminates contract 2 under a certain clause in that contract as a result of entity 2 breaching a certain clause ("Grant of Rights") in contract 2;

· entity 2 transfers, assigns, sells or offers to sell, or purports to transfer, assign, sell or to sell, any part of the Option Property to a Third Party;

· entity 2 creates or purports to create, an Encumbrance in favour of a Third Party over any part of the Option Property, apart from a Permitted Encumbrance;

· entity 5 terminates contract 3 under a certain clause in contract 3; or

· entity 2 becomes insolvent.

'Option Property' is defined in a certain clause in contract 6 as the Patents, the Designs and all Documentation relating to the Patents and Designs.

No consideration amount is stated in contract 6. However, it specifies in a certain clause that if entity 5 becomes entitled to exercise the Option, entity 5 may elect to purchase the Option Property for the Exercise Fee (a certain amount).

Contract 7 - entity 1

A certain clause in contract 7 provides that the Chargor (entity 1) charges the Secured Property to the Chargee (entity 5) for the purpose of securing the performance of the Secured Obligations.

Secured Obligations is defined in a certain clause in contract 7 as:

· the obligation to pay all amounts which are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by the Chargor to the Chargee including, without limitation, by way of damages as a result of breach by the Chargor of its obligations under a certain clauses of contract 1 or any disclaimer of the Chargor's obligations under contract 1 by an external administrator appointed to the Chargor; or

· the obligation of the Chargor to transfer the Secured Property to the Chargee upon the proper exercise of the Call Option by the Chargee of its rights under certain clauses of contract 1.

'Secured Property' means all the equipment.

There is no stated consideration in contract 7 or 8. However, the agreement states that the Chargor acknowledges giving the charge for valuable consideration.

The vendor group has stated that in allocating the purchase price, the decision was made to follow the advice contained in the report. The report contemplated the draft contract 1 along with draft versions of contract 3, certain contract (finalised as contract 2), contract 4, contract 5, contract 6 and an A$ contract. The Charges were not considered in the report.

Further to this, neither the overall value of the Purchase Price, the Initial Price, or the proposed apportionment contained in the report are altered subsequent to the addition of the Charges to the final executed set of ancillary agreements.

Contract 8- entity 2

A certain clause in contract 8 provides that the Chargor (entity 2) charges the Secured Property to the Chargee (entity 5) for the purpose of securing the performance of the Secured Obligations.

Secured Obligations is defined in a certain clause in the Charge agreement as:

· the obligation to pay all amounts which are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by the Chargor to the Chargee including, without limitation, by way of damages as a result of breach by the Chargor of its obligations under contract 6 by an external administrator appointed to the Chargor; or

· the obligation of the Chargor to transfer the Secured Property to the Chargee upon the proper exercise of the Call Option by the Chargee in accordance with contract 6.

· 'Secured Property' means all the Chargor's rights, property and undertaking in the Option Property, as that term is defined in contract 6.

There is no stated consideration in the Charge agreements. However, the agreement states that the Chargor acknowledges giving the charge for valuable consideration.

The vendor group has stated that in allocating the purchase price, the decision was made to follow the advice contained in the report. The report contemplated the draft contract 1 along with draft versions of contract 3, certain contract (finalised as contract 2), contract 4, contract 5, contract 6 and an A$ contract. The Charges were not considered in the report.

Further to this, neither the overall value of the Purchase Price, the Initial Price, or the proposed apportionment contained in the report are altered subsequent to the addition of the Charges to the final executed set of ancillary agreements.

Contract 9

A certain clause in contract 9 provides that Entity 3 undertakes to entity 5 and entity 6 that they would not engage or be involved in any business or activity which competes with the business of entity 5.

A certain clause in contract 9 provides that entity 3 undertakes to entity 5 and entity 6 that it would not engage or be involved in any business or activity which engages in Prohibited Conduct.

A certain clause provides that Prohibited Conduct means:

· selling, supplying, promoting or distributing any Products (or goods or products that are similar or functionally equivalent to those Products):

- to any person within Australia, or

- to any other person which Entity 3 knows, or has reasonable grounds for

suspecting, will supply, promote, sell or distribute the Products (or any goods or Products that are similar or functionally equivalent to those Products) in or to Australia; and

· allowing for the licensing of the IP rights of entity 2 or any of entity 2's Related Bodies Corporate in respect of Products to a third party where entity 3 knows or has reasonable grounds for suspecting that that third party will do any of the things referred to in a certain clause.

No consideration amount is specified in contract 9.

Lease and sale of equipment

A certain clause in contract 1 provides that entity 1 agrees to sell and entity 5 agrees to buy all of the right, title and interest in the Equipment on the Business Day immediately following the end of the Lease Period ("Purchase Date"). The equipment must be transferred to entity 5 free from any Encumbrances.

A clause in contract 1 provides that the price payable by entity 5 to entity 1 for the Equipment will be a certain amount and that entity 5 will pay this amount to entity 1 on the Purchase Date in cleared funds deposited into an account nominated by entity 1.

Lease Period is defined in a certain clause in contract 1 as the period of a certain number of years from the Completion Date.

A certain clause in contract 1 provides that the equipment lease means the lease between entity 1 and entity 5 dated a certain date pursuant to which entity 5 leased the equipment from entity 1.

A certain clause in contract 1 provides that entity 5 would not be required to pay rent for the lease of the equipment during the lease period.

Completion is defined in a certain clause in contract 1 as completion of the sale and purchase of the Sale Shares and entry into contract 3 in accordance with a certain clause in contract 1.

Total price

A certain clause in contract 1 provides that the aggregate price payable to the Sellers for:

· the sale and purchase for the Sale Shares; and

· the entry into contract 2, the Charges and the Call Option, and contract 9,

is the Initial Price plus the Additional Amount ("Purchase Price").

Sellers is defined in a certain clause in contract 1 as entity 1 and entity 2.

A clause in contract 1 provides that the Initial Price is a certain amount of money.

The Additional Amount is calculated in accordance with a formula in a clause in contract 1. The Additional Amount was the total of two 'earnout' amounts (a certain amount of money for a certain financial year and a certain amount of money for a certain financial year). The Additional Amount was a certain amount of money.

Therefore, the total price for the supplies referred to in a certain clause in contract 1 or made under the contracts referred to in that clause is a certain amount of money. This amount was paid by entity 4.

Certain clauses in contract 1 provide that the buyer would pay the sellers the initial price plus the Additional Amount (which is comprised of 'earnouts'). '

Contract 1 did not ascribe a value for the supply of the shares; the supplies made under contract 2; the supplies made under contract 6; the supplies of the interests in the charges or the supplies made under contract 9.

Allocation of the certain amount of money between vendors

The certain amount of money was allocated between the vendors as follows:

Entity 1: a certain amount of money

Entity 2: a certain amount of money

The certain financial year earnout was allocated between the vendors as follows:

Entity 1: a certain amount of money

Entity 2: a certain amount of money

The certain financial year earnout was allocated between the vendors as follows:

Entity 1: a certain amount of money

Entity 2: a certain amount of money

GST registration status of the parties and activities they carry on

· Entity 1

· Entity 1 was registered for GST at the time contract 1 was entered into.

· At that time, it was in the business of manufacturing and selling products in a certain industry. It also provided services to its various joint venture entities such as marketing, training, maintenance on the goods etc.

· Entity 2

· Entity 2 is registered for GST.

· Prior to the SSAR, entity 2 was in the business of exploiting its IP through contracting the use of the IP to a related party in return for a periodic royalty payment. The nature of this business was consistent for several years prior to a certain financial year.

· Entity 3

· Entity 3 was not registered or required to be registered for GST when the SSA was entered into.

· Entity 3 was not carrying on a business in the industry in their own right.

· Entity 4

· Entity 4 is registered for GST

· Entity 4 does/has done the following activities:

· Entity 4 acquired a certain percentage shareholding in entity 5 as a joint venture company from a related group company - a certain entity on a certain date.

· Entity 4 purchased rights under the SSAR for use in entity 5's business.

· Entity 4 is actively involved in the administration of its subsidiary - entity 5. This includes providing staff education resources; sales training support, marketing, public relations support, operations logistics (such as ongoing technical and maintenance support), technical and other services.

· Entity 4 provides products and accessories (such as the something system, something etc).

· Entity 4 procured the purchaser group of companies to assist in providing services to entity 5.

· Entity 4 acquired a further certain percentage shareholding in entity 5 from entity 1 on a certain date.

· Entity 4 lends funds to entity 5.

· Entity 4 negotiated on behalf of the purchaser group of companies to obtain a group financing facility for a certain amount of money from a certain bank. Entity 4 participated in a later refinancing of that facility so that entity 6 could become primary borrower.

· Entity 4 provided security to the bank by providing a guarantee and indemnity and charging its assets in order to obtain finance for the purchaser group of companies.

· Entity 5

· Entity 5 is registered for GST.

· Entity 5 carries on a business in the industry.

· Entity 6

· Entity 6 is registered for GST.

· Entity 6 is carrying on a business in the industry and it is also an active holding company providing a range of services to group entities.

Miscellaneous

You stated that the rights and obligations referred to in contract 1 support the value of the shares and that these rights and obligations are ancillary to the sale of the shares and merely support that transaction.

You stated that the substance of the transaction was only a supply of shares.

The parties did not allocate the total sale price between the various supplies.

An entity valued the shares at between a certain amount of money and a certain amount of money. The total sale price paid by entity 4 is close to the upper end of the range of the entity's valuations.

The things supplied under the SSAR were done in Australia.

Contract 1 and the subsidiary agreements do not contain information to enable the amount of GST to be clearly ascertained.

Assumption

The decisions in this ruling are based on the assumption that if the Australian Taxation Office (ATO) objection decision relating to the associated audit case relating to entity 2 is appealed in court, the court does not overturn the ATO objection decision. If this assumption turns out to be incorrect, this ruling cannot be relied upon.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 29-10

A New Tax System (Goods and Services Tax) Act 1999 section 29-70

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 48-45(1)

Reasons for decisions

All questions

Summary

Entity 6 is entitled to input tax credits on entity 4's acquisition of the rights under contract 2 as entity 4 made creditable acquisitions of these things and entity 6 is the GST group representative.

Entity 4 has made creditable acquisitions of the rights under contract 2 as:

· it acquired these things for a creditable purpose,

· taxable supplies were made to it under these arrangements,

· it provided and was liable to provide consideration for these supplies, and

· it is registered for GST.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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

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

(*Denotes a term defined in section 195-1 of the GST Act)

If entity 4 or entity 5 had made a creditable acquisition, their GST group representative (entity 6) would claim the input tax credit (in accordance with paragraph 48-45(1)(a) of the GST Act) because the input tax credit would be attributable to a tax period during which entity 4 or entity 5 is a member of the GST group.

Acquisition for creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it

in carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

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

that:

(a) the acquisition relates to making supplies that would be *input taxed;

or

(b) the acquisition is of a private or domestic nature.

Taxable supply

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and

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

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

Acquisition of shares

Entity 4 acquired the shares.

A sale of shares is an input taxed financial supply. Hence, it is not a taxable supply. Therefore, the requirement of paragraph 11-5(b) of the GST Act is not satisfied.

As not all of the requirements of section 11-5 of the GST Act are satisfied, entity 4 did not make a creditable acquisition of the shares. Therefore, entity 6 is not entitled to an input tax credit on entity 4's purchase of the shares.

Single supply of shares argument

The tax agent for entity 4 and entity 5 considers that the supplies made under the SSA formed a single composite supply of shares.

Goods and Services Tax Ruling GSTR 2001/8 discusses composite supplies.

Paragraph 2 of GSTR 2001/8 defines composite supply. It states:

2. This Ruling describes the characteristics of a supply that contains taxable and non-taxable parts. It refers to such a supply as a 'mixed supply'. This Ruling also describes the characteristics of a supply that appears to have more than one part but is essentially a supply of one thing. This type of supply is referred to as a 'composite supply'.

Paragraph 17 of GSTR 2001/8 provides guidance on determining whether a supply is a composite supply. They state:

17. In this Ruling, the term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts.

Paragraph 18 of GSTR 2001/8 states:

18. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply.

Paragraph 59 of GSTR 2001/8 provides guidance on determining whether a part of a supply is integral, ancillary or incidental to the dominant part of a supply. It states:

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

· you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

· it represents a marginal proportion of the total value of the package compared to the dominant part; or

· it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

· it contributes to the proper performance of the contract to supply the dominant part.

In accordance with paragraphs 99 to 101 of Goods and Services Tax Ruling GSTR 2006/9, where supplies are made by different suppliers, they cannot be fused together to make a single supply. Paragraphs 99 to 101 of GSTR 2006/9 state:

99. This proposition has been stated by Millet LJ in C & E Commrs v. Wellington Private Hospital Ltd [1997] BVC 251 at 252:

Where supplies are made by different suppliers, they cannot be fused together to make a single supply...

100. As part of its judgment, the House of Lords in The Trustees of the Nell Gwynn House Maintenance Fund v. Customs and Excise Commissioners [1999] 1 All ER 385 ( Nell Gwynn ) endorsed Millett LJ's statement above.In Nell Gwynn the House of Lords considered whether maintenance fees paid to an entity other than the lessor or the lessor's agent were consideration for the grant of the lease. The trustees submitted that the grant of the lease and provision for the supply of maintenance services all formed part of a single economic transaction and should be treated as one exempt supply.

101. The House of Lords rejected this approach. The court held that it was not possible to view the supply of the services and the supply of the lease as a single supply because the supply of services was separate from the supply of the lease and they could not be a single supply because the services and the lease were supplied by different taxpayers.

There were three suppliers under contract 1. One supplier supplied shares to entity 4. The other two suppliers supplied the other things other than one of the charges. Therefore, the supplies of the shares and the supplies made by entity 2 and entity 3 cannot be fused together to make a single supply (composite or otherwise). Hence, the SSAR cannot be treated as giving rise to a single supply, being a supply of shares.

Contract 2

In accordance with paragraph 218 of Goods and Services Tax Ruling GSTR 2006/9, one set of acts can constitute two or more supplies to different persons.

Paragraph 93 of GSTR 2006/9 states:

93. Also, a comparison of subsection 9-10(2) with its corresponding provision, subsection 11-10(2), shows that the thing supplied is not necessarily the thing acquired. For example, a supply that is 'an entry into an obligation' is mirrored by an acquisition that is 'an acquisition of a right'. The obligation remains with the supplier, while the 'right' is created in the hands of the recipient, rather than there being a thing that passes from one entity to another.

Certain obligations and a right were supplied under contract 2. This is mirrored by an acquisition of rights (including rights to performance of obligations). The obligations and the right that were supplied under contract 2 came under the heading in contract 2 - Grant of Rights.

We shall now determine who acquired these rights.

Paragraph 132 of GSTR 2006/9 explains that the recipient of a supply may be a different entity to the entity to which the supply is provided. It states:

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

In accordance with paragraph 23 of GSTR 2006/9, when A has a contract with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

The supplies made by entity 2 under contract 2 were effectively made under a contract between entity 2 (as supplier) and entity 4 (as buyer). We have reached this conclusion because:

· a certain clause in contract 1 provides that on completion, the parties agree to enter into contract 2,

· entity 2 was a party to contract 1 and contract 1 indicates that it was a seller,

· a recital in contract 1 provides that entity 2 agreed to provide certain rights to entity 5 on the terms of various agreements, including contract 2,

· the supplies made under contract 2 had to be made in order to complete the requirements of contract 1 and the contract 1 deal,

· the price for the supplies made under contract 2 was payable under contract 1 (certain clauses),

· the price for the supplies made under contract 2 had to be paid in order to complete the requirements of contract 1 and the contract 1 deal,

· A certain recital in contract 2 provided that in consideration for entity 4 entering into contract 1, entity 2 agreed to provide to entity 5 rights in relation to products supplied by entity 2 under contract 3 and to be restrained from certain activities in respect of those products,

· contract 2 is a subsidiary agreement to contract 1,

· the two agreements are part of the same broader arrangement - the share sale arrangement,

· entity 4 was a party to contract 1 and it was referred to in contract 1 as the buyer

· a certain clause in contract 1 provided that the buyer would pay the sellers the initial price plus the additional amount payable, which were payable in return for the supplies covered by a certain clause in contract 1 (which included the supplies made under contract 2)

· a certain clause in contract 1 provides that the aggregate price payable (a certain amount of money) was payable to the sellers, and

· entity 2 supplied the rights under contract 2 and it received part of the total price payable by entity 4 under contract 1.

A certain recital in contract 1 provided that entity 2 agreed to provide certain rights to entity 5 on the terms of contract 2. Under contract 2, entity 2 agreed to provide certain obligations and a right and these came under the heading 'Grant of rights' in contract 2. Therefore, entity 5 was the providee under contract 2.

Hence, we consider that the supplies made by entity 2 under contract 2 were effectively made pursuant to a contract between entity 2 and entity 4, with entity 4 being the buyer, although these supplies were provided to a third entity - entity 5. This is despite the fact that entity 4 is not listed as a party to contract 2 in contract 2. Entity 2 effectively supplied the obligations and right that were supplied under contract 2 at the request of entity 4. Therefore, the supplies of the obligations and right under contract 2 were made to entity 4. Hence, entity 4 acquired the corresponding rights under contract 2.

Entity 5 was a party to contract 2. Hence, entity 5 contracted entity 2 to make the supplies under contract 2. Therefore, entity 5 also acquired the corresponding rights under contract 2.

Entity 6 was a party to contract 2. Hence, entity 6 contracted entity 2 to make the supplies under contract 2. Therefore, entity 6 also acquired the corresponding rights under contract 2.

We shall now determine whether entity 4 acquired the rights under contract 2 for a creditable purpose.

We need to determine whether entity 4 is carrying on an enterprise.

Entity 4 is a holding company for entity 5.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on determining whether an enterprise is being carried on for ABN purposes.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'enterprise' for the purposes of the GST Act and can be relied upon for GST purposes.

Paragraphs 195 to 205 of MT 2006/1 discuss holding companies. They state:

195. In FC of T v. Total Holdings (Australia) Pty Ltd the holding company did more than passively own the shares in its subsidiary, it was also involved in borrowing and on-lending funds to its subsidiary. In this case the Commissioner conceded that the activities of the holding company constituted carrying on a business.

196. In FC of T v. Email Limited in a joint judgment Hill, Drummond and Sackville JJ stated:

In arriving at his conclusion the learned primary Judge found that Email was at all material times carrying on a business which his Honour described as 'acting as the holding company of a group of companies'. It was not a merely passive holding company doing nothing but receiving and distributing dividends. Rather it was active in the administration of the affairs of its subsidiaries in various ways. In particular it provided services to its subsidiaries such as management of cash flows, currency fluctuations and interest rate exposure, legal, taxation, internal auditing and accounting services, training, information technology, recruitment and human resources. It provided guarantees for borrowing undertaken by subsidiaries and provided warranties and indemnities on sales of shares or businesses of subsidiaries.

197. In the case of Spassked Pty Ltd v. Commissioner of Taxation 68 Hill J and Lander J (Gyles J in agreement) stated:

It can be accepted that a holding company can itself carry on a business, which may be referred to as the business of a holding company: Brookton Co-operative Society Ltd v. FCT (1981) 147 CLR 441 at 469-470; 11 ATR 880 at 898-89; 81 ATC 4346 at 4363. The taxpayer in Total Holdings on the facts of that case was held to carry on such a business. The cases sometimes distinguish between a holding company which is a passive investor, that is to say it does no more than acquire and hold shares in a subsidiary or subsidiary companies and a company the activities of which are properly characterised as a business.

That distinction is to be found not only in the context of income tax, but in the context of value added tax where liability turns effectively on whether the taxpayer is carrying on an economic activity such as a business, see for example, Wellcome Trust Limited [1996] 2 CMLR 909, Harnas & Helm CV v. Staatssecretaris van Financien [1997] 1 CMLR 649. Generally a company which may be referred to as carrying on business as a holding company will be seen to be actively involved in the management of the affairs of its subsidiaries. Active management is not, however, a necessary factual circumstance to permit there to be a finding of business. In Carapark Holdings Ltd v. FCT (1967) 115 CLR 653; 14 ATD 402 the taxpayer which was found to be carrying on a business lent money to its subsidiaries and performed 'specific management functions for the group as a whole' which seem to have been primarily, at least, secretarial, budgeting and financial matters (see at CLR 659). An example where an intermediate holding company was held to be carrying on a business is to be found in FCT v. E A Marr & Sons (Sales) Ltd (1984) 2 FCR 326; 15 ATR 879; 84 ATC 4580.

198. The following two overseas VAT cases may assist even though they consider 'economic activity' rather than 'enterprise'. Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-60/90) [1993] BVC 88 considered the activities of a Dutch holding company and whether they constituted carrying out any 'economic activity'. It was found that Polysar's activities did not constitute 'economic activities' and there was discussion of other sorts of activities that may satisfy that test.

199. The second VAT case is Floridienne SA & Berginvest SA v. Belgian State (Case C-142/99) [2001] BVC 76. Both companies were holding companies (within a larger group) supplying administrative, accounting and information technology services to their subsidiaries. The main question was the form of their 'economic activity' and the connection between that activity and the dividends and interest they received from subsidiaries. The judgment analysed the passive nature of dividend income from shares. Broadly, it was found that the passive holding of shares did not amount to 'economic activity'. Australian courts may be guided by this approach for ABN and GST purposes in determining whether an entity carries on an enterprise.

200. From this range of cases the following indicators may give some useful guidance when deciding whether a holding company or other entity is carrying on an enterprise:

· Active involvement in the management of subsidiaries.

· Providing loans, guarantees or indemnities to subsidiaries.

· Providing equipment, premises or rights to intellectual property to subsidiaries.

· Providing specific management services to its group such as secretarial, financial, legal, taxation, information technology or recruitment and human resources expertise.

201. While these indicators may give guidance as to whether an entity's activities are sufficient for it to be considered to be carrying on an enterprise, deciding that question is ultimately a matter of fact having regard to the scale of the activities undertaken, the form of operation of the corporate group and the commercial context in which it occurs.

Example 22 - provision of services by a holding entity that is an enterprise

202. A unit trust is a holding entity for three wholly owned companies that conduct enterprises in Australia. The trustee of the trust involves itself directly and indirectly in the management of the companies. The trustee also provides accounting services to the companies without prejudice to its rights as a shareholder in the companies.

203. No fees are received by the trust for the services provided to the subsidiaries which if provided to an arm's length party would have been capable of being charged for.

204. Although no fees are received, the activities still have a commercial basis underlying them. The trust's activities are done in the form of a business. The trustee is carrying on an enterprise by providing management and accounting services to the group and is entitled to an ABN.

Example 23 - holding entity not carrying on an enterprise

205. B trust is a holding entity for three companies. The trustee passively holds all shares, is not involved in the running of the companies and provides no services to the group. There are no headquarters of the group but each company provides its own business premises. The trustee for B trust distributes any dividends received to the unit holders. The trustee's activities are not done in the form of a business and it does not carry on an enterprise.

Entity 4 does/has done the following activities:

· Entity 4 purchased rights under the SSAR for use in entity 5's business.

· Entity 4 is actively involved in the administration of its subsidiary - entity 5. This includes providing staff education resources; sales training support, marketing, public relations support, operations logistics (such as ongoing technical and maintenance support), technical and other services.

· Entity 4 provides products and accessories (such as the something system, something etc).

· Entity 4 procured the purchaser group of companies to assist in providing services to entity 5.

· Entity 4 lends funds to entity 5.

Entity 4 negotiated on behalf of the purchaser group of companies to obtain a group financing facility for a certain amount of money from a certain bank. Entity 4 participated in a later refinancing of that facility so that entity 6 could become primary borrower.

· Entity 4 provided security to the bank by providing a guarantee and indemnity and charging its assets in order to obtain finance for the purchaser group of companies.

Considering these facts, we consider that entity 4 is carrying on an enterprise and it acquired the rights under contract 2 in carrying on an enterprise.

These acquisitions do not relate to making supplies that would be input taxed.

These acquisitions were not of a private or domestic nature.

Hence, entity 4 acquired the rights for a creditable purpose. Therefore, the requirement of paragraph 11-5(a) of the GST Act is satisfied.

We shall now determine whether there was consideration for the supplies made under contract 2.

Paragraph 180 of GSTR 2006/9 provides guidance on determining whether there is consideration for a supply. In determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a 'supply for consideration' we take the view that:

· the test is whether there is a sufficient nexus between the supply and the payment made;

this test is objective;

· regard needs to be had to the true character of the transaction; and

· an arrangement between parties will be characterised not merely by the description that

the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

A certain clause in contract 2 provides that the aggregate price payable to the Sellers for:

- the sale and purchase for the Sale Shares; and

- the entry into contract 2, the Charges and the Call Option, and contract 9,

is the Initial Price plus the Additional Amount ("Purchase Price").

A certain clause in contract 2 provides that the Initial Price is a certain amount of money.

The Additional Amount is calculated in accordance with a formula in a certain clause. The Additional Amount ended up being a certain amount of money.

Therefore, the total price for the supplies referred to in a certain clause in contract 1 and supplies made under the contracts referred to in that clause (including contract 2) was a certain amount of money (a certain amount of money + a certain amount of money).

The total sale price was paid by entity 4. A certain part of the total sale price was allocated to entity 2. Therefore, a certain amount of money has a sufficient nexus with the supplies made by entity 2. Hence, this payment is consideration for supplies entity 2 made, that is, the obligations and right under contract 2 and the call option and entity 4 provided this consideration.

The supplies of the obligations and right under contract 2 were taxable supplies because:

these supplies were made for consideration,

· these supplies were made in the course or furtherance of an enterprise carried on by entity 2,

· these supplies were connected with Australia,

· entity 2 is registered for GST, and

· the supplies were not GST-free or input taxed.

Therefore, entity 4 satisfies the requirement of paragraph 11-5(b) of the GST Act in relation to these supplies.

Certain clauses in contract 1 provide that the buyer would pay the sellers the initial price plus the additional amount payable. Buyer is defined in contract 1 as entity 4.

This means that entity 4 was solely liable to pay the total price for the supplies referred to in a certain clause in contract 1 and supplies made under the contracts referred to in that clause (including contract 2).

Entity 4 provided and was liable to provide consideration for the supplies of the obligations and right made under contract 2. Therefore, entity 4 satisfies the requirement of paragraph 11-5(c) of the GST Act.

Entity 4 is registered for GST. Therefore, entity 4 satisfies the requirement of paragraph 11-5(d) of the GST Act.

As entity 4 satisfies all of the requirements of section 11-5 of the GST Act, it has made a creditable acquisition of the rights under contract 2. Therefore, entity 6 is entitled to input tax credits on entity 4's acquisition of rights under contract 2.

Contract 3

Entity 5 contracted with entity 2 for entity 2 to supply products to entity 5. At the time this contract was made, entity 5 acquired a right to receive supplies on certain terms and entity 2 assumed the obligation to supply products to entity 5 on certain terms. There was no agreement in contract 3 that a certain number of units of the product would be sold. The exchange of rights and obligations under contract 3 form part of the product sale transactions and are not separate supplies. Contract 3 merely sets out the terms and conditions under which products would be supplied. Therefore, entity 5 did not make an acquisition under contract 3.

Call Option

We have concluded that no part of the certain amount of money was consideration for the supply of the call option. Therefore, the requirement of paragraph 9-5(a) of the GST Act is not satisfied. Hence, the supply of the call option is not a taxable supply because not all of the requirements of section 9-5 of the GST Act are satisfied. Therefore, the requirement of paragraph 11-5(b) of the GST Act is not satisfied. The requirement of paragraph 11-5(c) of the GST Act is also not satisfied. As not all of the requirements of section 11-5 of the GST Act are satisfied, no creditable acquisition has been made of the call option. Hence, there is no entitlement to an input tax credit on the acquisition of the call option.

Charges

The vendor group has stated that in attributing the purchase price, the decision was made to follow the advice contained in the report. The report contemplated the draft contract 1 along with draft versions of contract 3, certain contract (finalised as contract 2), contract 4, contract 5, contract 6 and an A$ contract. Notably the Charges supplied were not considered in the report.

Further to this, neither the overall value of the Purchase Price, the Initial Price, or the proposed apportionment contained in the report are altered subsequent to the addition of the Charges to the final executed set of ancillary agreements.

It is therefore concluded that no part of the consideration was received in respect of the Charges supplied.

As the requirement of paragraph 9-5(a) of the GST Act is not satisfied, the supplies of the charges were not taxable supplies.

Therefore, the requirements of paragraphs 11-5(b) and 11-5(c) of the GST Act are not satisfied by any party. Hence, no entity is entitled to input tax credits for acquisitions of the charges.

Contract 9

As the entity that made the supplies under contract 9 did not receive any of the certain amount of money and contract 9 does not set out any consideration, we conclude that there was no consideration for the supplies made under contract 9.

As the requirement of paragraph 9-5(a) of the GST Act is not satisfied, the supplies made under contract 9 were not taxable supplies.

Therefore, the requirements of paragraphs 11-5(b) and 11-5(c) of the GST Act are not satisfied by any party. Hence, no entity is entitled to input tax credits on acquisitions made under contract 9.

Additional information

The input tax credits will be attributable to the first tax period for which entity 6 lodges an activity statement at a time when it holds a tax invoice.

Contract 1 and its subsidiary contracts are not tax invoices because they do not meet the content requirements of tax invoices. For example, they do not contain information to enable the amount of GST to be clearly ascertained and you have not provided any other documents that contain this information.

Before we would consider exercising discretion to treat a document as a tax invoice, we would seek evidence from the purchaser that it has made reasonable attempts to obtain a tax invoice from the supplier.

The total of the input tax credit entitlements will be equal to entity 2's total GST liability on the supplies it made under contract 2.

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