Edited version of your written advice

Authorisation Number: 1051369718817

Date of advice: 11 May 2018

Ruling

Subject: Input tax credits entitlement for acquisitions relating to making financial supplies

Question

Is Entity A entitled to claim full input tax credits under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the GST incurred on professional services acquired relating to the making of the investments in Entity B being the acquisition of the partnership interest in Entity B and the making of a loan to Entity B?

Answer

Yes.

Relevant facts and circumstances

Entity A is an Australian resident with all its enterprise activities in the indirect tax zone.

Entity A is a unit trust and is registered for GST.

Entity A’s enterprise is to invest to derive income for its unit holder investors.

Entity A, as part of its investment enterprise, acquired a partnership interest in Entity B with cash and provided an interest free loan to Entity B.

Entity B is a limited partnership established in England under the laws of England and Wales.

Entity B does not carry on business in the indirect tax zone nor does it have any presence in the indirect tax zone.

The application for the investments in Entity B were emailed to Entity B and accepted by them offshore.

Entity A incurred various expenses related to the investments in Entity B and will continue to incur expenses in the future. The expenses incurred relate to the provision of professional services from solicitors, accountants, financial planners, insurance agents, auditors, etc, leading to the investments in Entity B.

GST was incurred in obtaining the services referred to above.

Relevant legislative provisions

Subsection 9-30(3) of the A New Tax System (Goods and Services Tax) Act 1999

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999

Division 38 of the A New Tax System (Goods and Services Tax) Act 1999

Regulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999

Regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999

Reasons for decision

An entity acquires or imports something for a creditable purpose to the extent that it acquires or imports it in carrying on its enterprise. However, an entity does not acquire or import it for a creditable purpose to the extent that it relates to making input taxed supplies (such as financial supplies) or is of a private or domestic nature.

In the current case, the acquisitions are related to two transactions, being the acquisition of an interest in Entity B and the provision of an interest-free loan to Entity B.

As per the facts provided, these acquisitions are made in carrying on Entity A’s enterprise and they are not of a private or domestic nature.

The issue remains whether these acquisitions are related to making input taxed supplies.

Financial supplies of the acquisition of an interest in Entity B and the provision of the loan to Entity B

The acquisition by Entity A of an interest in Entity B is the acquisition of an interest in a partnership or trust under Item 10(c) of regulation 40.5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

The provision of an interest-free loan is the provision of an interest in a credit arrangement which is Item 2 in Regulation 40.5.09(3) of the GST Regulations.

Pursuant to Regulation 40-5.09(1) of the GST Regulations, the acquisition of the interest in Entity B and the provision of the loan by Entity A will be a financial supply if it is:

● for consideration;

● in the course or furtherance of an enterprise; and

● connected with the indirect tax zone i.e. Australia as defined in section 9-27 of the GST Act; and

● the financial supplier must be registered or required to be registered and a financial supply provider in relation to the provision, acquisition or disposal of the interest.

For consideration

The Partnership interest – Entity paid for a partnership interest in Entity B

In discussing consideration for financial supplies, GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) provides guidance in the example below:

Example 1: Supply and acquisition-supply are for consideration

36. Geo Co. supplies shares to McCulloch for $2,000. The payment of $2,000 by McCulloch is consideration for the provision of the shares (the first supply) by Geo to McCulloch. McCulloch acquires the shares for consideration of $2,000. The acquisition-supply by McCulloch (the second supply) is for consideration.

In accordance with examples 1 in GSTR 2002/2, Entity B supplied an interest in the capital of a partnership to Entity A for a cash consideration. The payment of cash consideration by Entity A is consideration for the provision of the security or partnership interest (the first supply) by Entity B to Entity A. Entity A acquires the partnership interest for consideration. The acquisition-supply by Entity A (the second supply) is for consideration. This outcome is in line with examples 1 in GSTR 2002/2.

The consideration requirement is therefore met in relation to the acquisition of the partnership interest in Entity B.

Loan – Entity A lends money to Entity B

Example 3 in paragraph 42 of GSTR 2002/2 provides an example of consideration for an interest-free loan.

42. Meteor Limited lends $150,000 to Satellite Limited, a subsidiary company that is not part of Meteor's GST group. The loan is for five years and there is no interest payable by Satellite Limited. Satellite Limited supplies an interest in a debt to Meteor Limited, and Meteor Limited supplies an interest in a credit arrangement to Satellite Limited. The consideration provided by Satellite is the interest in a debt and is money as defined in section 195-1. The supply by Meteor of the interest in a credit arrangement is the supply of a financial interest for consideration (the interest in a debt). In acquiring the interest in a credit arrangement, Satellite has made an acquisition-supply for consideration.

In the current case, there is no interest payable by Entity B. In accordance with example 3 in GSTR 2002/2, Entity B supplies an interest in a debt to Entity A, and Entity A supplies an interest in a credit arrangement to Entity B. The consideration provided by Entity B is the interest in the debt and is money as defined in section 195-1. The supply by Entity A of the interest in a credit arrangement is the supply of a financial interest for consideration (the interest in the debt). In acquiring the interest in the credit arrangement, Entity B has made an acquisition-supply for consideration.

The consideration requirement is therefore met in relation to the loan to Entity B.

In the course or furtherance of an enterprise

The two investments are done as part of entity A’s investment enterprise therefore, the in the course or furtherance of an enterprise requirement is therefore met.

Connected with the indirect tax zone

Partnership interest

Entity A conducts an enterprise in the indirect tax zone i.e. Australia. The acquisition-supply, namely acquisition of the financial interest (partnership interest) in Entity B is connected with the indirect tax zone as the acquisition is made through an enterprise that Entity A is carrying on in the indirect tax zone.

The connected with the indirect tax zone requirement for the acquisition of the partnership interest is therefore met.

The interest-free loan

Entity A conducts an enterprise in the indirect tax zone i.e. Australia, therefore the supply of the interest in a credit arrangement is connected with the indirect tax zone as the supply is made through an enterprise that Entity A is carrying on in the indirect tax zone.

The connected with the indirect tax zone requirement for the loan is therefore met.

A financial supply provider that is registered or is required to be registered

An entity is the financial supply provider of an interest if:

● the interest was the entity's property immediately before the supply (for example, an entity sells a debenture that it owns);

● the entity created the interest when making the supply (for example, an entity issues a debenture); or

● the entity acquires the interest supplied (for example, an entity acquires a debenture).

Based on the facts provided, Entity A is a financial supply provider in relation to the acquisition of the interest in the partnership and the provision of an interest in the credit arrangement. Entity A is registered for GST. The financial supply provider that is registered or is required to be registered requirement for both the acquisition of the partnership interest and the provision of the loan is met.

Since the requirements in Regulation 40-5.09(1) of the GST Regulations are met, Entity A’s acquisition of the partnership interest and the provision of the interest-free loan are financial supplies.

GST- free Supplies under Division 38

In accordance with Goods and services tax ruling GSTR 2004/7, a supply to a non-resident recipient is GST-free under subsection 38-190(1) if it is a supply made to a non-resident who is not in Australia when the thing supplied is done and:

● the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or

● the non-resident acquires the thing in carrying on the non-resident’s enterprise, but is not registered or required to be registered (Subsection 38-190(1), item 2).

However, the supply is not GST-free if subsection 38-190(2), (2A) or (3) applies to that supply.

GSTR 2002/2 in paragraph 150 provides an example of the GST-free supply of a financial supply:

150. Australian Enterprises is a share-trader resident in Australia with all its activities being in Australia. Therefore, supplies that it makes are connected with Australia. It acquires shares from American Inc. a company that is located in the United States and is not in Australia in relation to the supply. The GST regulations and GST Act operate so that in acquiring the shares, Australian Enterprises makes a financial supply (an acquisition-supply) to American Inc. The acquisition-supply to American Inc satisfies the requirements of subsection 38-190(1), item 2 and is GST-free. To the extent that anything acquired or imported by Australian Enterprises relates to making that financial supply (that is, acquiring the shares) it is for a creditable purpose.

In the present case, Entity A is an Australian unit trust with all its activities in the indirect tax zone.

Partnership interest

Entity A acquired an interest in Entity B, a limited partnership established in England and not located in the indirect tax zone in relation to the supply.

In acquiring the limited partnership interest Entity A makes a financial supply (an acquisition-supply) to Entity B. The acquisition-supply is made to a non-resident who is not in the indirect tax zone when the thing supplied is done and the non-resident acquires the thing in carrying on the non-resident’s enterprise, but is not registered or required to be registered (Item 2). As such this acquisition-supply to Entity B satisfies the requirements of subsection 38-190(1) Item 2 and is GST-free.

Interest-free loan

Entity A made a loan to Entity B, a limited partnership established in England and not located in the indirect tax zone in relation to the supply.

The supply made by Entity A of the interest in a credit arrangement is a financial interest for consideration (the interest in the debt supplied by Entity B). It is connected to the indirect tax zone as it is made through an enterprise it carries on in Australia. The supply is made to a non- resident who is not in the indirect tax zone when the thing supplied is done and the non-resident acquires the thing in carrying on the non-resident’s enterprise, but is not registered or required to be registered (Item 2). This supply to Entity B (supply of an interest in a credit arrangement to Entity B) satisfies the requirements of subsection 38-190(1) Item 2 and is GST-free.

As such, the supplies of acquiring an interest in the partnership and providing an interest-free loan are GST-free under subsection 38-190(1) of the GST Act. Where a supply is both GST-free and input taxed, subsection 9-30(3) of the GST Act applies to make the supply GST-free.

Also, because these supplies are GST-free, the reverse charge rules under Division 84A are not applicable.

It is therefore concluded that, to the extent that anything is acquired by Entity A relates to making these financial supplies i.e. acquiring the partnership interest or making a loan, it is for a creditable purpose according to section 11-15 of the GST Act.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).