Edited version of your written advice

Authorisation Number: 1051303155981

Date of advice: 2 November 2017

Ruling

Subject: GST and creditable acquisitions

Question 1

Is the payment made by you to the Manager under the Agreement consideration for a creditable acquisition made by you under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the payment made by you to the Manager under the Agreement is consideration for a creditable acquisition made by you under section 11-5 of the GST Act. Accordingly, you are entitled to the input tax credit (ITC) for the creditable acquisition you make.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You own interests in a number of subsidiaries which include an intermediate holding company and an asset holding company (together your subsidiaries).

You and your subsidiaries entered into an agreement (Agreement) with the Manager for the supply of management services.

In broad terms the Agreement provides that:

● the fee payable to the Manager would be paid by you, and

● your subsidiaries would not be under any obligation pursuant to the Agreement to pay the Manager in relation to the provision of management services.

On or about the time that the Agreement was entered into, you also entered into a separate fee agreement with the Manager which provided that you would pay a management fee to the Manager.

Terms of the Agreement indicate that the services to be provided by the Manager are to your subsidiaries and that the Manager agrees that employees of the Manager will provide the services to your subsidiaries. The Manager is to keep you informed of the progress of the works undertaken and notify you of becoming aware of any circumstances which may have adverse effects on the project.

The Agreement provides that either the Manager or you may terminate the Agreement.

Schedule 1 to the Agreement provides that the Manager will be involved in the day-to-day management of your subsidiaries. The Manager must provide those services listed in Schedule 1 to the Agreement.

Tax Invoice

You provided a document which included the words ‘Tax Invoice’ issued to you by the Manager for a fee described as a management fee which shows a GST component. The tax invoice indicates that the Manager is registered for GST and that the supply by the Manager is treated as a taxable supply.

Relevant legislative provisions

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 Section 11-15

Reasons for decision

Under the GST Act, you are entitled to an ITC for any creditable acquisition you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if:

● you acquire anything solely or partly for a creditable purpose

● the supply of the thing to you is a taxable supply

● you provide, or are liable to provide, consideration for the supply, and

● you are registered, or required to be registered for GST.

The first requirement for a creditable acquisition involves acquiring ‘anything solely or partly for a creditable purpose’. Subsection 11-15(1) of the GST Act provides that you acquire things for a creditable purpose to the extent that you acquire it in carrying on an enterprise.

Under subsection 11-15(2) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed (paragraph 11-15(2)(a) of the GST Act) or the acquisition is of a private or domestic nature (paragraph 11-15(2)(b) of the GST Act).

On the facts provided, paragraphs 11-5 (b) (c) and (d) of the GST Act are satisfied in that you are registered for GST and you provide and are liable to provide consideration to the Manager for the supply of services pursuant to the Agreement. The Agreement demonstrates a sufficient nexus between the payment made by you and services supplied by the Manager so that the payment constitutes consideration for the supply of the services by the Manager. To the extent that the supply by the Manager pursuant to the Agreement satisfies the requirements of section 9-5 of the GST Act those supplies would be taxable supplies.

The issues that arise under section 11-5 of the GST Act, in the present matter is whether the taxable supply of services made by the Manager pursuant to the Agreement are acquired by you (whether you are the recipient) and if so were the services acquired for a creditable purpose.

Are you the recipient of the supply?

The Commissioner has considered the concept of supply in the context of multi-party arrangements (referred to as tripartite arrangements) in Goods and Services Tax: supplies (GSTR 2006/9).

As explained in GSTR 2006/9 you make an acquisition if you are the recipient of a supply. Consequently, it is the recipient that must satisfy the creditable purpose requirement in section 11-15 of the GST Act.

The Commissioner explains at paragraph 115 of GSTR 2006/9 that an analysis of a tripartite arrangement (as is the case here) may reveal:

● a supply made to one entity but provided to another entity

● two or more supplies made, or

● a supply made and provided to one entity and consideration paid by a third party.

At paragraph 117 of GSTR 2006/9 the Commissioner sets out six propositions to assist in characterising supplies and analysing the more complex tripartite arrangements.

Examining the agreement between the parties is the starting point in analysing your arrangement in order to determine who is making a supply to whom. Here, you are a party to the Agreement with the Manager who makes the supply in question. You are liable to pay and you did pay the Manager for the supply as evidenced by the tax invoice issued to you. Either you or the Manager can terminate the Agreement. Under the terms of the Agreement your subsidiaries have no liability to pay the Manager for the provision of services notwithstanding they are also parties to the Agreement.

This is consistent with proposition 13 in GSTR 2006/9 which proposes that there is a supply made by B to A that B provides to C where A has an agreement with B for B to provide a supply to C. The Commissioner considers the proposition to be derived from the UK House of Lords’ case Customs and Excise Commissioner v. Redrow Group plc [1999] BVC 96 (Redrow) which is no broader than: the entity that has an agreement with a supplier for a supply is the recipient of that supply (even if that supply is provided to a third party) (see paragraphs 138 to 145 of GSTR 2006/9).

This is to be distinguished from proposition 14 in which a third party may pay for a supply but not be the recipient of the supply. In these circumstances the third party payer would not be making a creditable acquisition in relation to the payment because the supply is not made to the third party payer as required by section 11-5 of the GST Act.

Having considered the arrangement as a whole and the total fact situation (proposition 16 of GSTR 2006/9) the arrangement with the Manager points to you being the recipient of the supply by the Manager notwithstanding that the supply is provided to your subsidiaries. As such you are acquiring the supply of services from the Manager.

Is the acquisition made in carrying on an enterprise?

An essential requirement for a creditable purpose under 11-15(1) of the GST Act is that you acquire the thing in carrying on your enterprise. Subsection 9-20(1) of the GST Act provides that an enterprise includes an activity or series of activities done in the form of a business.

The Commissioner notes at paragraph 192 of Miscellaneous Taxation Ruling: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN) MT 2006/1 that a holding company or similar entity that merely holds membership interests in other entities and is able to control those entities by virtue of that interest and/or derives income from other entities because it holds membership interests or other securities in those entities is not considered to be carrying on an enterprise. Accordingly, to be carrying on an enterprise you need to be doing more than merely holding shares in your subsidiaries.

A number of Australian and overseas cases are discussed in MT 2006/1 which touch on the issue of whether holding entities are carrying on a business or enterprise. Indicators are set out at paragraph 200 of MT 2006/1 that are useful in deciding whether a company is carrying on an enterprise including, amongst other things, the active involvement in the management of subsidiaries.

In this case, the arrangement between you and your subsidiaries sees you make acquisitions in relation to your subsidiaries in which you have a commercial interest. Active management of your subsidiaries is evidenced by you being a party to the Agreement pursuant to which the Manager provides services to your subsidiaries that manage the operation of those entities.

The fact situation here is not dissimilar to that set out in the cases referred to in paragraphs 196 and 197 and the example at paragraphs 202 to 204 of MT 2006/1.

On that basis you are doing more than merely holding shares in your subsidiaries and are thereby carrying on enterprise as a holding company where you are actively involved in the management of the affairs of your subsidiaries.

Do the acquisitions relate to making supplies that would be input taxed?

If the acquisition of services ‘relates to’ supplies that would be input taxed, paragraph 11-15(2)(a) of the GST Act precludes it from being for a creditable purpose. The words ‘relates to’ are wide words signifying some connection between two subject matters. The connection signified by the words may be direct or indirect, substantial or real.

For the purposes of paragraph 11-15(2)(a) of the GST Act a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used or intended to be used solely or to some extent for the making of supplies that would be input taxed (see paragraph 119 of Goods and Services Tax Ruling GSTR 2008/1).

The term ‘making a financial supply’ means the provision, acquisition or disposal of an interest meeting the requirements of regulation 40-5.09 or an incidental financial supply in regulation 40-5.10 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and would include an interest in a security mentioned in item 10 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 10 securities).

The issue is whether the acquisitions of services relating to you actively managing the operation of your subsidiaries are acquisitions that ‘relate to’ making supplies of interests in your subsidiaries that would be input taxed.

Notwithstanding that you receive ‘distributions’ from your subsidiaries through your interests in your subsidiaries, this is an insufficient connection (either direct or indirect) with the acquisition you make in actively managing the operations of your subsidiaries to establish that those acquisitions ‘relate to’ an input taxed financial supply. On an objective assessment of the surrounding facts and circumstances, the acquisition of the services from the Manager is used or intended to be used for the active management of the subsidiaries who are involved in making taxable supplies and not used or intended to be used for the acquisition/supplies of the interests in your subsidiaries.

Conclusion

Having regards to all the fact and circumstances the taxable supplies of services acquired by you to be provided to your subsidiaries satisfy all the requirements of a creditable acquisition under section 11-5 of the GST Act. That being the case you have an entitlement to ITCs for those creditable acquisitions of services you make subject to any time limits on that entitlement. By contrast your subsidiaries won’t satisfy all the requirements for a creditable acquisition in that they do not provide nor are they liable to provide consideration for the supply of services.

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