Edited version of private advice

Authorisation Number: 1051749098190

Date of advice: 09 September 2020

Ruling

Subject: GST and input tax credits

Question

Are you entitled to the input taxed credits in relation to your acquisition of Advisor Services from the service provider (Service Provider) under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

All further legislative references are to the GST Act unless otherwise specified.

Answer

Yes, you are entitled to the input taxed credits in relation to your acquisition of Advisor Services from the Service Provider as the requirements under section 11-5 are satisfied in respect of the acquisition. In particular, the acquisition is not denied creditable purpose under paragraph 11-15(2)(a).

Relevant facts and circumstances

Background

·         You are a company incorporated in Australia.

·         You are a resident of Australia for taxation purposes and registered for GST.

·         You are a provider of services relating to transportable modular school buildings.

·         All of your sales are taxable supplies to which GST applies. You make no input taxed supplies in the ordinary course of your business.

·         You were previously owned by three company shareholders (the Shareholders), each company owned and controlled by a founder. The three companies owned their shares in you both legally and beneficially and not as trustees of trusts.

·         The directors of you (the Directors) had not actively worked in the business since 20XX and in recent years had only provided supervisory support at Board level. The day-to-day operations of you were undertaken by a professional management team.

·         As advised, you and the Shareholders are not "associates" as defined in section 318 of the Income Tax Assessment Act 1936.

The arrangement

·         After many years of on-going discussions and meetings between the Shareholders and the Service Provider, more significant discussions about the future of the business were held in 20XX.

·         These more significant discussions were prompted at that time due to concerns about the longevity of existing business.

·         As the Shareholders were not able to agree on the preferred strategic direction that you should take, and as the Directors were no longer involved in the day-to-day operations of the company, it was decided to pursue a sale of the business. This decision was made in 20XX at the time the Service Provider was appointed through execution of an engagement letter (Engagement Letter). It was perceived that a sale of the business would be in the best interest of the company, its employees and stakeholders and its on-going arrangements.

·         On XX XXXX 20XX, you appointed the Service Provider as corporate advisor representing you and the Shareholders in the sale of 100% of you (that is, a business sale) or 100% of the Shareholders' interests in you (that is, a share sale).

·         An Information Memorandum (IM) was issued by the Service Provider and distributed to potential buyers. The IM confirmed the key reasons for wishing to sell the business (as noted above) and did not provide a preference by the Shareholders to structure the sale as either a business sale or a share sale.

·         As the Shareholders were companies who held their shares in you legally and beneficially, there was not an inherent Capital Gains Tax (CGT) advantage in undertaking a share sale as opposed to a business sale.

·         Your brief to the Service Provider was to maximise the after tax proceeds to shareholders and that this could be through either a sale of business or sale of shares. Either option was to be considered by the exiting Shareholders.

·         Ultimately, XYZ were open to an acquisition of shares and this was the ultimate transaction structure. This meant ease of business succession given the extensive contracts that were in place including the customer contract and employee arrangements under an Enterprise Agreement and given the entire business was being transitioned with the same Management team. The seamless transition was considered advantageous and simplest by both parties. It also meant the shareholder exit was clean and no residual tidy up of the remaining company was required and this was attractive to the exiting Shareholders given their strong desire for a full and clean exit and to minimise ongoing arrangements and decisions between them.

·         In undertaking their agreed services (referred to as 'Advisor Services' in this private ruling), the team at the Service Provider undertook extensive work in preparing the business for sale, identifying suitable acquisition partners and negotiating the term deals, including:

o   workshops with the Directors, Management and other key stakeholders to agree on value objectives, strategy for sale, formation of internal teams/resources, agree on proposed timelines, etc.;

o   identify and record key financial information, build a detailed financial model and forecast and identify and record other operating information;

o   test due diligence readiness;

o   initiate contact with potential buyers to gauge interest;

o   negotiate non-disclosure agreements;

o   preparation and distribution of IM;

o   manage and assist with pre-offer presentations to potential buyers;

o   manage the offer process and solicit non-binding indicative offers;

o   discussions and negotiations with potential buyers regarding deal structure;

o   assistance during the due diligence process, including establishment of the data room, assist with query responses, etc

o   liaise with legal and other advisors; and

o   manage the completion of the final agreed transaction.

·         Following several months of due diligence and negotiations, on XX XXXX 20XX the Shareholders entered into a share sale agreement with XYZ for the sale of their shares in the company. Legal settlement occurred on XX XXXX 20XX.

·         The consideration for the Advisor Service by the Service Provider is set out in the Engagement Letter which includes a success fee of $X inclusive of GST.

·         On XX XXXX 20XX, the Service Provider issued an invoice of $X to you for their Advisor Services in accordance with the Engagement Letter.

Other information

·         The Advisor Services by the Service Provider to you was a taxable supply.

·         The Engagement Letter stipulates that the Service Provider agrees to provide financial advice, structuring, documentation and marketing assistance to you in connection with your proposed sale arrangement. However, the Engagement Letter does not constitute or otherwise evidence a commitment on the part of the Service Provider to:

o   purchase or subscribe for any securities;

o   make any loans;

o   provide any financing to you or your affiliates; or

o   provide legal, tax or accounting advice.

·         You were liable to pay consideration for the Advisor Services.

·         You did not make any input taxed supplies in respect of the arrangement described in this private ruling.

·         You did not make any supplies to the Shareholders.

·         XYZ is a resident of Australia for tax purposes.

·         In respect of the relevant 12 month periods historically and going forward under sections 189-5 and 189-10:

• the maximum total input tax credits in relation your financial acquisitions under Division 189, if in the event the acquisition of Advisor Services is considered to be made in relation to input taxed financial supplies and hence not for a creditable purpose, is $Y; and
• the maximum total input tax credits in relation your financial acquisitions under Division 189, if in the event the acquisition of Advisor Services is considered to be made in relation to input taxed financial supplies and hence not for a creditable purpose, is significantly below Z% of your total input tax credits to which you would be entitled for all acquisitions and importations.

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