Edited version of your written advice

Authorisation Number: 1012815879379

Ruling

Subject: Goods and services tax and creditable acquisitions

Question 1

Are input tax credits (ITCs) available to Entity A for GST included in acquisitions made by Entity A to the extent those acquisitions relate to Entity A considering various transaction options, that would not have resulted in Entity A making an input taxed financial supply, before a final decision was made to pursue one option resulting in the issuing of new shares?

Answer

Yes.

Question 2

Are ITCs available to Entity A for GST included in acquisitions made by Entity A to the extent that those acquisitions relate to the issue of shares to non-resident entities?

Answer

Yes.

Question 3

On the basis that the Commissioner rules in the affirmative to question 1, can the Commissioner please confirm that the methodology to be utilised by Entity A to determine its entitlement to ITCs on acquisitions relating to considering more than one option, before a final decision to issue shares was made, is fair and reasonable?

Answer

Yes.

Question 4

Are ITCs available to Entity A for GST included in acquisitions made by Entity A to the extent that those acquisitions do not relate to Entity A making a financial supply?

Answer

Yes.

Question 5

On the basis that the Commissioner rules in the affirmative to question 4, please confirm that the adjusted methodology to be utilised by Entity A in determining the extent to which it is entitled to claim ITCs is fair and reasonable?

Answer

Yes.

Question 6

To the extent that Entity A made input taxed financial supplies of issuing shares to resident investors, please confirm that the services provided by certain suppliers qualify as a reduced credit acquisition (RCA)?

Answer

Yes.

Relevant facts and circumstances

Entity A is registered for GST and is a member of a GST group, the nominated representative of which is Entity X.

Prior to making a final decision to pursue the transaction, Entity A had been considering various options. These options included:

Option 1 which would involve the making of input taxed financial supplies;

• Option 2 which would involve the making of GST-free financial supplies; and

• Option 3 which would involve the making of either taxable or GST-free supplies.

The various options were being considered by Entity A for around 12 months culminating with the making of financial supplies. The timeline is represented as follows:

• Option 1 - A days

• Option 2 - B days

• Option 3 - C days

Entity A has made a number of acquisitions in relation to considering and pursuing the above options over the relevant timeframe.

It was decided at some point that Option 1 was the preferred option.

Entity A assessed itself as exceeding the Financial Acquisitions Threshold (FAT). Entity A has not claimed all input tax credits (ITCs) for GST included in all of the acquisitions made during that tax period that related to the various options being considered. However, reduced input tax credits (RITCs) have been claimed for certain acquisitions which Entity A has considered as clearly being reduced credit acquisitions (RCAs).

Entity A's apportionment methodology

Entity A is considering apportioning its acquisitions for a particular period.

Entity A has proposed adopting an apportionment methodology with a formula applied as a proxy for estimating the extent to which the acquisitions incurred by Entity A relate to the various options that were under consideration, where the acquisitions cannot be accurately identified as relating to any one particular course of action.

Reduced Credit Acquisitions

Entity A considers that certain services acquired relate to managing the whole Transaction.

As a result, to the extent that Entity A acquired these services in relation to the making of input taxed financial supplies to resident investors, Entity A considers that the acquisition of these services should qualify as a reduced credit acquisition (RCA).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-05.06

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-05.07

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-05.09(4A)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-05.02(2)

Reasons for decision

Question 1

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 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 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 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.)

Entity A is registered for GST, has made acquisitions which are taxable to it and has provided or is liable to provide the relevant consideration for these acquisitions. Accordingly, paragraphs (b), (c) and (d) of section 11-5 of the GST Act are satisfied and we need to ascertain if paragraph (a) of section 11-5 of the GST Act is met.

The meaning of creditable purpose is defined in section 11-15 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 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…

Entity A has made a number of acquisitions that relate to the options under consideration ('acquisitions'). Entity A submits that these acquisitions were made in the carrying on of its enterprise. It is taken that none of these acquisitions are of a private or domestic nature.

The issue of whether or not Entity A is carrying on an enterprise is not in contention. We are satisfied that Entity A is carrying on an enterprise and therefore, satisfies the tests set out in section 9-20 of the GST Act. What needs to be determined is if there is a connection between the acquisitions and Entity A's enterprise.

To this end, paragraphs 69 and 70 of Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) states:

69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative.

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

• the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

• the thing acquired is used by the enterprise in making supplies;

• the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

• the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

• the acquisition does not meet the personal needs of individuals such as partners or directors;

• the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

• the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.

The acquisitions made by Entity A will be in line with several of the dot points above and therefore we are satisfied that there is a relevant connection between the acquisitions and the enterprise of Entity A. We therefore accept that the acquisitions are made by Entity A in the course of carrying on its enterprise.

Further, paragraph 11-15(2)(a) of the GST Act provides that a thing is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Accordingly, to the extent that Entity A made acquisitions that related to considering potential transactions which were not intended to be used for the making of supplies that would be input taxed, these acquisitions would be made for a creditable purpose. Input tax credits will be available to Entity A where these acquisitions meet all the other requirements of section 11-5 of the GST Act.

Question 2

Entity A submits that one option would result in Entity A making a financial supply. Further, it submits that to the extent that there are any non-resident recipients, the supply should also be considered a 'GST-free' supply. We agree with these submissions.

Further, subsection 9-30(3) of the GST Act provides that the GST-free status of a supply overrides its input taxed status. Accordingly, Entity A will be entitled to claim input tax credits for GST included in the acquisitions it makes to the extent that the acquisitions relate to a financial supply to non-residents.

Question 3

In considering a restructure, Entity A considered the following three main (although not limited to) options:

• Option 1 which would involve the making of input taxed financial supplies;

• Option 2 which would involve the making of GST-free financial supplies; and

• Option 3 which would involve the making of either taxable or GST-free supplies.

Where acquisitions made by Entity A are used, or intended to be used, only for a creditable purpose, such acquisitions are fully creditable and do not require apportionment.

Similarly, where acquisitions made by Entity A are used, or intended to be used, only for a non-creditable purpose, these acquisitions are not creditable and Entity A is not entitled to claim input tax credits in relation to these acquisitions except to the extent that reduced input tax credits are available.

However, there are acquisitions made by Entity A that are both for a creditable purpose (making or intending to make GST-free or taxable supplies) and an input taxed purpose (making or intending to make financial supplies).

These acquisitions are partly creditable and the amount of input tax credits to which Entity A is entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

The phrase 'extent of creditable purpose' is defined in subsection 11-30(3) to mean 'the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition'.

On this basis, an apportionment of these acquisitions would need to be made by Entity A to determine the extent of creditable purpose.

The Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations are outlined in Goods and Services Tax Ruling: GSTR 2006/3: Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3).

Specifically, paragraphs 33 and 73 of GSTR 2006/3 provide that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purposes needs to satisfy the following requirements which are founded on the principles established in the High Court case of Ronpibon Tin NL v. FC of T:

• it must be fair and reasonable;

• it must reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and

• it must be appropriately documented in your individual circumstances.

Importantly, the Commissioner considers that the use of direct methods, including direct estimation, best accords with the principles from which the above requirements were founded. Further, the Commissioner considers that if it is not possible or practicable to use a direct method, an entity may use some other fair and reasonable basis, including an indirect estimation method.

Paragraph 90 to 91 of GSTR 2006/3 discusses the use of direct methods and provides that:

Direct methods

90. Direct methods seek to identify, on a fair and reasonable basis, a direct connection between acquisitions or importations and supplies or other activities of the enterprise. This may result in a decision that acquisitions or importations are solely (or not at all) for a creditable purpose. In other cases, the intended use may be considered to be partly for a creditable purpose.

91. An assessment that an acquisition or importation is intended to be (or has been) used solely (100%), not at all (0%), or partly in connection with one or more particular supplies or activities of the enterprise could, at the most simple level, be made by considering each acquisition or importation individually. In many cases, however, it may not be practical for such an individual process to be applied. In those cases, an estimation on some fair and reasonable basis may be appropriate.

In this case, there are acquisitions which, based on an objective assessment of surrounding facts and circumstances, are made wholly and directly in relation to a particular supply or particular supplies (that is, the acquisitions are directly attributable to particular supplies) and thus are not required to be apportioned under the methodology as a direct connection between such acquisitions and supplies of the enterprise is identifiable. Where practical, Entity A directly attributes acquisitions using direct methods referred to at paragraphs 90 and 91 of GSTR 2006/3, to the making of particular supplies.

Entity A's methodology will be applied to work out the extent of creditable purpose of acquisitions that are made partly for a creditable purpose where such acquisitions are not directly attributable to particular supplies.

Paragraphs 92 to 130 of GSTR 2006/3 discuss the use of direct and indirect estimation methods. Those paragraphs are not reproduced in full here. However, paragraphs 92 and 93 and paragraphs100 to 103 are worth noting. These paragraphs relevantly provide that:

92. If an estimate of the connection between acquisitions and the activities of an enterprise is required for the purposes of determining the planned or actual uses of those acquisitions, this may be effected via an automated or semi-automated system such as discussed in 'Direct estimation' below. The estimation method chosen should result in a fair and reasonable approximation of the intended or actual usage of acquisitions in your enterprise. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

93. Direct estimation methods are preferable to indirect estimation methods (see paragraphs 102 to 130 of this Ruling), particularly if the direct estimation method used involves a detailed measure of the intended (or actual) use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. These factors are sometimes referred to in management accounting and costing systems as 'drivers'.

…

100. If a direct estimation method is available to you, the Commissioner considers this will reflect most accurately the actual or intended use of the acquisition. If your accounts satisfy Australian Accounting Standards, or prudential requirements of equivalent rigor, the Commissioner considers that they may provide an appropriate foundation for applying the direct estimation method, subject to that application being fair and reasonable in your individual circumstances.

101. The Commissioner recognises that, from a practical point of view, it may be difficult to fully attribute individual costs via existing direct estimation systems in many organisations. If financial supply providers are unable to match individual acquisitions with individual revenue streams, other apportionment methods (including combinations of direct and indirect methods) may need to be used.

Indirect estimation methods

102. Indirect methods attempt to estimate the use of acquisitions and importations for creditable purposes by taking into account factors or characteristics that are not directly referable to the use of the particular acquisition. For this reason they may not give as accurate a measure of the creditable purpose of the acquisition or importation as direct methods. …

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Under any circumstances, the methodology adopted by Entity A must be fair and reasonable in the circumstances of its enterprise activities and must appropriately reflect the intended or actual use of its acquisitions or importations.

In this case we consider, on the basis of the information provided, Entity A's methodology is likely to provide a fair and reasonable basis of apportionment of GST on its acquisitions which are not directly attributable to particular supplies.

The decision that Entity A's methodology is considered to be fair and reasonable is based on the information submitted and circumstances applicable at the time of issuing this ruling. If those circumstances should change, Entity A may be required to review the methodology to determine if it remains fair and reasonable.

Question 4

As discussed in Question 1, Section 11-20 of the GST Act provides for an entitlement to input tax credits for any creditable acquisitions made by an entity.

Entity A made a number of acquisitions in respect to considering a restructure and we have established in Question 1 that these acquisitions were made by Entity A in carrying on its enterprise. To the extent that these acquisitions related to the making of supplies that would not be input taxed, these acquisitions would be made for a creditable purpose.

However, where Entity A makes input taxed supplies due to the operation of paragraph 11-15(2)(a) of the GST Act, any acquisitions it makes in relation to making such supplies would not be for a creditable purpose. Accordingly, no input tax credit would arise under section 11-20 of the GST Act for these acquisitions.

Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed and subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Regulation 40-5.09 of the GST Regulations set out the rules to determine what supplies are financial supplies.

The provision, acquisition, or disposal of an interest in or under the items mentioned in subregulation 40-5.09(3) or (4) of the GST Regulations is a financial supply if (as per subregulation 40-5.09(1) of the GST Regulations):

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.

The term interest is defined in subregulation 40-5.02 of the GST Regulations to be anything recognised in law or in equity as property in any form.

A financial supply provider is defined in regulation 40-5.06 of the GST Regulations. This regulation provides that while an entity that supplies an interest is the financial supply provider of the interest, an entity that acquires the interest, is also the financial supply provider of the interest. 

Acquisitions made by Entity A that do not relate to Entity A making any supply do not fall within the scope of subsection 11-15(2)(a) of the GST Act. These acquisitions will form part of Entity A's enterprise cost as the acquisitions do not relate directly to any supplies made by Entity A. Entity A will be able to claim input tax credits for these acquisitions to the extent of its creditable purpose.

Question 5

It follows from the analysis in Question 4 and on the basis of the information provided, Entity A's adjusted methodology is likely to provide a fair and reasonable basis of apportionment of its acquisitions which are not directly attributable to particular supplies.

The decision that Entity A's methodology is considered to be fair and reasonable is based on the information submitted and circumstances applicable at the time of issuing this ruling. If those circumstances should change, Entity A may be required to review the methodology to determine if it remains fair and reasonable.

Question 6

Subsection 70-5(1) states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as reduced credit acquisitions (RCAs). The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

Entity A submits that item 9 would encompass certain services it acquired and that to the extent that Entity A acquired these services in relation to making input taxed financial supplies to resident recipients, the acquisition of these services should qualify as an RCA in accordance with Item 9.

Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provide the Tax Office view of the legislation relating to reduced credit acquisitions. In particular paragraph 285 of GSTR 2004/1 provides that an acquisition is a reduced credit acquisition under item 9 where it is an acquisition of the arrangement by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security.

Therefore there are two elements that have to be satisfied before a reduced input tax credit (RITC) is allowed on any of the services listed in Item 9. The elements to be satisfied are:

• there must exist an arrangement, and

• the arrangement must be provided by a financial supply facilitator.

Arrangement

Paragraph 287 of GSTR 2004/1 explains that the word 'arrangement' is not defined in the GST Act or GST Regulations and does not have a specific industry meaning and therefore it takes its ordinary meaning. By its ordinary meaning an 'arrangement' under item 9 includes activities relating to the preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction.

Typically, arrangement activities take place before the transaction is completed. However, 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 item 9 (paragraph 288 of GSTR 2004/1).

Paragraph 289 of GSTR 2004/1 states:

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).

Where an entity conducts preparatory activities as part of the planning of and preparation for a securities transaction, those activities may be part of the arrangement of the transaction. Where the entity engages other entities to undertake parts of those preparatory activities, the services of the other entities are inputs into the supply of arrangement services by the entity and are not, in themselves, arrangement services (see paragraphs 290 to 296 of GSTR 2004/1).

Financial supply facilitator

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

Subregulation 40-5.06(1) of the GST Regulations provides that a financial supply provider is an entity, in relation to a supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply ...

Subregulation 40-5.06(2) of the GST Regulations also provides that the entity that acquires that interest is also the financial supply provider of the interest.

Paragraph 31 of GSTR 2004/1 provides that the facilitating of a supply refers to activities that help forward the supply, and not just activities which help the financial supply provider. To achieve this, the activities need to have a sufficient nexus with the supply of the interest by the financial supply provider.

Paragraph 32 of GSTR 2004/1 also provides that to have a sufficient nexus, the activities must have an identifiable association with the supply that goes beyond mere general association. The activities do not have to be directly linked to the supply, but there does need to be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising etcetera). If no identifiable association can be ascertained, the entity will not be a financial supply facilitator.

Paragraph 34 of GSTR 2004/1 further provides that as a general rule, an entity acting in an agent-like capacity on behalf of a financial supply provider indicates an identifiable association with the supply of the interest as there is a substantial connection between the activities of the agent and the supply of the interest.

Consequently, the financial supply facilitator needs to have a dominant role in coordinating or overseeing the arrangement. This means that the arrangement activities need to be viewed objectively as encompassing all three elements of the arrangement (preparation, planning and settlement).

Accordingly, Entity A will be entitled to claim RITCs for acquisitions from certain suppliers in regard to making input taxed financial supplies to resident recipients, where these acquisitions meet the requirement of "arrangement" by "financial supply facilitators" as discussed above.

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