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Ruling

Subject: GST and reverse charge provisions

Question 1

Will an Australian company (AusCo) be liable for GST under the reverse charge provision contained in Division 84 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the recharge of legal and consulting costs incurred by a non-resident company (N/RCo) in connection with the acquisition of shares (including the funding arrangements) under a particular arrangement, as invoiced by N/RCo to AusCo on the date of invoice?

Answer

Yes. AusCo will be liable for GST under the reverse charge provision contained in Division 84 of the GST Act in relation to the recharge of legal and consulting costs incurred by N/RCo in connection with the acquisition shares (including the funding arrangements) under a particular arrangement, as invoiced by N/RCo to AusCo on the date of invoice.

Question 2

Will AusCo be liable for GST under the reverse charge provision contained in Division 84 of the GST Act in relation to any further charges of legal and consulting costs incurred by N/RCo in connection with the acquisition of the shares (including the funding arrangements) under a particular arrangement, and which are invoiced by N/RCo to AusCo post the date of invoice?

Answer

Yes. AusCo will be liable for GST under the reverse charge provision contained in Division 84 of the GST Act in relation to any further charges of legal and consulting costs incurred by N/RCo in connection with the acquisition of the shares (including the funding arrangements) under a particular arrangement, and which are invoiced by N/RCo to AusCo post the date of invoice.

Relevant facts and circumstances

N/RCo is a non-resident company whose operations are conducted from offices overseas and is not registered for Australian Goods and Services Tax (GST). N/RCo is not carrying on an enterprise in Australia.

N/RCo owned a percentage of the issued shares in another Australian company, AusCo2 (referred to as 'XX shares').

N/RCo had an agreement with AusCo2 where they offered to acquire, via a particular arrangement, the shares in AusCo2 that they did not already own (referred to as the 'ZZ shares'). The agreement provided that N/RCo could nominate one of their wholly owned subsidiaries to acquire the ZZ shares under the arrangement.

N/RCo nominated their Australian subsidiary company, AusCo, as the entity that would acquire the shares under the arrangement.

N/RCo advised that if the arrangement is approved, they intended to transfer their existing percentage interest in AusCo2 to AusCo. They agreed to provide AusCo with all amounts AusCo would require to pay for the acquisition of the ZZ shares pursuant to the arrangement. In aggregate, N/RCo would fund the consideration for the arrangement and all associated transaction costs. N/RCo would not fund any payments associated with the special dividend. Any such payments will be made by AusCo.

AusCo acquired the XX shares from N/RCo by entering into a share sale agreement with N/RCo.

AusCo acquired the ZZ shares from AusCo2 shareholders under the arrangement between N/RCo and AusCo2 and that not all of the ZZ shareholders are Australian residents for Australian income tax purposes.

Following the implementation of the arrangement, AusCo registered for GST from that day. AusCo afterwards became a member of the AusCo2 GST group and the group's nominated representative is AusCo3.

AusCo stated that N/RCo was the entity responsible for the proposal of the arrangement and the entity that entered into the agreement with AusCo2. Although N/RCo was able to nominate AusCo, N/RCo and AusCo asserted that N/RCo was in relation to the arrangement acting as principal, and not an agent of AusCo.

N/RCo incurred significant costs in relation to the acquisitions, including payment for legal advice and consulting services on the funding and transfer of the XX shares and also on the ZZ shares acquired under the arrangement (transaction costs). Any advice and consulting services provided to N/RCo were directed substantively to the acquisition of shares and the financing arrangements.

N/RCo and AusCo have not provided the letters of engagement with the relevant service providers, but have asserted that N/RCo was the party that entered into the engagement terms relating to the transactions with the service providers listed on the invoice(s) that is later issued by N/RCo to AusCo.

N/RCo invoiced AusCo the majority of the transaction costs they incurred on the basis that the costs relate to AusCo's acquisitions of shares in AusCo2. A copy of this invoice was provided. N/RCo intends to charge AusCo any further transaction costs they are invoiced for and that are related to AusCo's acquisitions of the shares in AusCo2.

N/RCo and AusCo have advised that the agreement was oral in relation to the on-charge of the transaction costs. Other than the invoice(s), there are no other written documentations.

The supplies on the invoice covered services made to N/RCo over a certain period and related to:

· the acquisition by AusCo of all the ZZ shares in AusCo2 via the arrangement;

· the acquisition by AusCo of the XX shares in AusCo2; and

· the funding arrangements in relation to AusCo's acquisition of the shares in AusCo2.

N/RCo has not charged any GST to AusCo in relation to the recovery of their transaction costs on the basis that any supply that might have been made by N/RCo is not connected with Australia.

AusCo provided further information as follows:

· The funds required for AusCo's acquisition of ZZ shares were obtained by AusCo through the issue of redeemable preference shares to N/RCo. Consequently, there is no loan or funding arrangement.

· AusCo is not in a position to provide copies of any engagement letters without formal consent from each of the service providers as they may contain commercially sensitive information.

· There were no specific agenda items included in the AusCo Board Meetings to approve or specifically discuss the arrangement for N/RCo to on-charge the relevant legal and consulting costs. The costs that were on-charged by N/RCo were included in the overall AusCo costs for the acquisition, as part of the acquisition accounting disclosures in the AusCo's accounts, that were reviewed and approved by the AusCo Board.

· AusCo provided a copy of the notification that was made by N/RCo of the nomination of AusCo as acquirer of the ZZ shares made by N/RCo to AusCo through its legal advisors for the transaction.

· AusCo also provided copies of the original invoices issued by the third party service providers on services provided to N/RCo but the details of the services provided on the invoices have been masked.

Reasons for decision

Division 84 of the GST Act

Division 84 of the GST Act is a special rule that deals with supplies of things other than goods or real property that are made outside Australia to a recipient in Australia. The GST on a supply that is a taxable supply under this division is reverse charged to the recipient of the supply.

Under section 84-5 of the GST Act, a supply may be treated as a taxable supply as follows.

84-5 Intangible supplies from offshore that are taxable supplies under this Division

(1) A supply of anything other than goods or *real property that is:

(a) a supply not *connected with Australia; or

(b) a supply that is connected with Australia because of paragraph 9-25(5)(c);

is a taxable supply if:

(c) the *recipient of the supply acquires the thing supplied solely or partly for the purpose of an *enterprise that the recipient *carries on in Australia, but not solely for a *creditable purpose; and

(d) the supply is for *consideration; and

(e) the recipient is *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.

(2) For the purposes of paragraph (1)(e), in determining whether the *recipient is *required to be registered, what would be the *value of such supplies (if they were *taxable supplies) is to be counted towards the recipient's *GST turnover.

(3) This section has effect despite section 9-5 (which is about what is a taxable supply).

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

Accordingly, where the requirements in subsection 84-5(1) of the GST Act are satisfied, a supply of things other than goods or real property that is made outside Australia to a recipient in Australia is a taxable supply and the recipient will be liable for GST on that supply.

Characterisation of the supply that is neither goods nor real property

The invoice issued by N/RCo to AusCo indicates that N/RCo has on-charged the costs for services it acquired from third parties which relate to either or all of the acquisition, valuation, structuring and financing in relation to the arrangement to AusCo. Whilst these costs may have a nexus to the arrangement, they are nevertheless inextricably linked to the takeover of AusCo2 by way of share acquisitions made by AusCo. These services were acquired by AusCo to enable them to structure their business and to purchase the shares in AusCo2. This is supported by AusCo's statement made in its letter which states:

"…from a commercial perspective, it was necessary for AusCo to reimburse the costs associated with the scheme on the basis that they relate to AusCo's acquisition of the shares in AusCo2, and which are reflected in the accounts of AusCo as an investment."

Accordingly, we consider there was a separate supply of the services made by N/RCo (N/RCo's services) which was distinct from the supplies of the shares in AusCo or the lending of money by N/RCo to AusCo. This supply of services is not a supply of goods or real property and therefore the first limb of subsection 84-5(1) of the GST Act is satisfied.

Other Requirements of Section 84-5 of the GST Act

Paragraphs 84-5(1)(a) or 84-5(1)(b) of the GST Act - Connected with Australia

For paragraphs 84-5(1)(a) or 84-5(1)(b) of the GST Act to apply, the supply must not be connected with Australia or be connected with Australia because of paragraph 9-25(5)(c) of the GST Act respectively.

Under subsection 9-25(5) of the GST Act:

A supply of anything other than goods or *real property is connected with Australia if:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia; or

(c) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing; and

(iii) the supply of the other thing would be connected with Australia.

Paragraph 84-5(1)(a) of the GST Act is satisfied as the supply of the services made by N/RCo was not connected with Australia because:

· the services were not done in Australia - that is, N/RCo conducts its operations overseas and is/will be providing their services to AusCo when they are outside Australia; or

· the supply was not made through an enterprise that N/RCo carries on in Australia - that is, N/RCo is not carrying on an enterprise in Australia.

As paragraph 84-5(1)(a) of the GST Act is satisfied, there is no need to consider paragraph 84-5(1)(b) of the GST Act.

Paragraph 84-5(1)(c) of the GST Act - Creditable purpose

Paragraph 84-5(1)(c) of the GST Act will be satisfied where the services are acquired by the recipient of the supply solely or partly for the purpose of an enterprise that the recipient carries on in Australia, but not solely for a creditable purpose.

Under subsection 11-15(1) of the GST Act a thing is acquired for a creditable purpose to the extent that it is acquired in carrying on an enterprise. However, subsection 11-15(2) of the GST Act provides a qualification, which states that, to the extent that an acquisition relates to making supplies that would be input taxed (such as financial supplies) or of a private or domestic nature that acquisition is not for a creditable purpose.

As AusCo acquired the N/RCo's services in carrying on its enterprise and is not of a private nature, the services are therefore acquired by AusCo as the recipient of the supply solely for the purpose of an enterprise that it carries on in Australia.

However, for the purposes of meeting the creditable purpose test, it must also be determined if these acquisitions made by AusCo relate to its making of supplies that would be input taxed.

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

As N/RCo's services were inextricably linked to AusCo's acquisition of shares (from N/RCo and ZZ shareholders) the acquisition of these services will prima facie be in relation to making an input taxed financial supply. This is because, as outlined in our Ruling, shares fall within the definition of a security which is a financial interest under item 10 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and will become a financial supply that is input taxed provided the conditions in subregulation 40-5.09(1) of the GST Regulations are met. We are satisfied that AusCo has fulfilled the requirements set out in subregulation 40-5.09(1) of the GST Regulations for making financial supplies when AusCo made the respective acquisition-supplies of shares to both N/RCo and the ZZ shareholders.

In the context of AusCo's financial supplies made in relation to the acquisition of shares from both N/RCo and ZZ shareholders, we have to determine whether they are all input taxed or GST-free supply. This is because under subsection 9-30(3) of the GST Act, to the extent that a supply would be both GST-free and input taxed, the supply is GST-free and not input taxed.

ZZ Shareholders' residency status

In the light of AusCo's advice, not all of the ZZ shareholders are Australian residents for Australian income tax purposes. Therefore, we need to address the situations where acquisition-supplies made by AusCo are to the ZZ shareholders who are residents of Australia and those who are non-residents respectively.

Acquisition-supply made by AusCo to the ZZ Shareholders who are residents of Australia

The acquisition-supply of the ZZ shares that AusCo made to the ZZ shareholders who are residents of Australia is an input taxed supply under subregulation 40-5.09(1) of the GST Regulations and section 40-5 of the GST Act. There is no provision under the GST Act that will make this acquisition-supply GST-free.

Acquisition-supply made by AusCo to the ZZ Shareholders who are non-residents of Australia

In accordance with subsection 9-30(3) of the GST Act, the acquisition-supply of the ZZ shares made by AusCo to ZZ shareholders who are non-residents is an input taxed supply to the extent that it is not GST-free.

Under item 2 in the table in subsection 38-190(1) of the GST Act

The acquisition-supply made by AusCo to ZZ shareholders who are non-residents of Australia will be GST-free under item 2(a) because:

· the supply is made to a non-resident that is not in Australia when the acquisition-supply was done as ZZ shareholders are either not carrying on any enterprise or if they do are carrying out their business activities outside Australia; and

· the supply is neither a supply of work physically performed on goods, nor a supply directly connected with real property, situated in Australia.

There are no provisions under section 38-190 of the GST Act which exclude the acquisition-supply by AusCo to ZZ shareholders who are non-residents of Australia from being GST-free.

Acquisition-supply made by AusCo to N/RCo

As N/RCo is a non-resident, the analysis under subsections 9-30(3) and 38-190(1) of the GST Act above, would be applicable. Accordingly, the acquisition-supply made by AusCo to N/RCo will be GST-free under item 2(a) because:

· the supply is made to a non-resident that is not in Australia when the acquisition-supply was done as N/RCo is carrying on its enterprise outside Australia; and

· the supply is neither a supply of work physically performed on goods, nor a supply directly connected with real property, situated in Australia.

There are no provisions under section 38-190 of the GST Act which exclude the acquisition-supply by AusCo to N/RCo from being GST-free.

The acquisitions from N/RCo are in relation to the supplies AusCo makes. That is, AusCo makes both input taxed and GST-free supplies when making acquisition-supplies of shares to N/RCo and ZZ shareholders. Therefore, the acquisitions from N/RCo are not solely for a creditable purpose. Accordingly, paragraph 84-5(1) (c) of the GST Act is satisfied.

Paragraph 84-5(1)(d) of the GST Act - Consideration

N/RCo has invoiced AusCo for the N/RCo's services and AusCo is required to provide consideration to N/RCo for these services. Hence, paragraph 84-5(1)(d) of the GST Act is satisfied.

Paragraph 84-5(1)(e) of the GST Act - GST registration

Paragraph 84-5(1)(e) of the GST Act requires that the recipient (in this circumstance, AusCo) is registered or required to be registered for GST. Further, subsection 84-5(2) of the GST Act requires a recipient who is not registered for GST to take into account the value of all taxable supplies that are deemed by virtue of subsection 84-5(1) of the GST Act, in calculating its GST turnover.

In determining if an entity is required to be registered for the purposes of paragraph 84-5(1)(e) of the GST Act, it should take into account the value of supplies made under subsection 84-5(1) of the GST Act when calculating its GST turnover. AusCo's turnover (including the Division 84 supplies) is greater than $75,000 and therefore, it satisfies the registration turnover threshold of $75,000 stipulated in Regulation 23-15.01 of the GST Regulations. Accordingly, it must register for GST and consequently paragraph 84-5(1)(e) of the GST Act is satisfied.

Is the supply of N/RCo's services GST-free or input taxed?

The supply of the N/RCo's services provided and invoiced by N/RCo to AusCo is not GST-free or input taxed under the GST Act. Therefore, the exclusion set out at the end of subsection 84-5(1) of the GST Act does not apply in the circumstances.

Summary

· The supply of the N/RCo's services provided and invoiced by N/RCo to AusCo (covering legal and consulting services in relation to the acquisition of the shares in AusCo2 and funding) has satisfied all the requirements of subsection 84-5(1) of the GST Act and is therefore, a taxable supply.

· The supply of these services is taxable regardless of when N/RCo invoiced AusCo.

· AusCo is therefore liable to pay GST on the taxable supply of N/RCo's services pursuant to section 84-12 of the GST Act.