Edited version of private ruling

Authorisation Number: 1011719197046

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST implications of funding arrangement

Question 1: Whether the payments made by V to W represent consideration for taxable supplies made by the W.

Answer 1: No, the payments made by V to W do not represent consideration for taxable supplies made by the W. The transaction does not alter this conclusion from the earlier rulings.

Question 2: Whether payments made to X by Y represent consideration for taxable supplies.

Answer 2: No, payments made to X by Y do not represent consideration for taxable supplies. As the transaction does not affect the nature of the relationship between X and Y, it does not alter this conclusion from the earlier rulings.

Question 3: Whether payment made by W to X represents consideration for taxable supplies.

Answer 3: No, payments made by W to X do not represent consideration for taxable supplies. The transaction does not alter this conclusion from the earlier rulings.

Question 4: Whether payment made by Z to X represents consideration for taxable supplies.

Answer 4: No, payments made by Z to X do not represent consideration for taxable supplies. As the transaction does not affect U in its capacity as trustee of Z, it does not alter this conclusion from the earlier rulings.

Question 5: Whether any other activities of U, W or Z result in the making of taxable supplies for goods and services tax (GST) purposes.

Answer 5: Where U in its capacity as trustee of W supplies management services to W, U makes a supply to itself and does not make a supply for GST purposes.

Where U in its capacity as trustee of W supplies services to Y, subsection 48-40(2) of the GST Act requires those supplies to be treated as if they were not taxable supplies.

Where U in its capacity as trustee of W invests the assets contributed to or received by W, U will make financial supplies which are input taxed provided that U acquires or disposes of interests in items mentioned in sub-regulation 40-5.09(3) or (4) of the GST Regulations and provided that the requirements of sub-regulation 40-5.09(1) of the GST Regulations are satisfied.

In the original GST private ruling we noted that A Ltd's adviser had advised that Z will not make any taxable supplies and a clause of the amended and restated trust deed limits the activities of U in its capacity as trustee of Z to paying or applying the annual income which would not be a supply for GST purposes as subsection 9-10(4) of the GST Act provides that a supply does not include a supply of money.

The transaction does not alter the conclusions from the earlier rulings.

Question 6: Whether the transaction flows represent or comprise consideration for a taxable supply made by or to U, W, Z or Y.

Answer 6:

Supplies made by U, W, Z or Y under the funding agreement are input taxed supplies and are not taxable supplies.

Question 7:

Whether during and after the implementation of the transaction U, W, Z and Y, are entitled to claim input tax credits on acquisitions made in relation to the arrangement.

Answer 7: You are entitled to input tax credits for your creditable acquisitions. 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 are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered

Section 11-15 of the GST Act states:

11-15  Meaning of creditable purpose  

(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.

(3) ..

(4) ..

(5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed to the extent that:

(a) the acquisition relates to making a *financial supply consisting of a borrowing; and

(b) the borrowing relates to you making supplies that are not input taxed.

The criteria that must be met before the acquisitions in question will be for a creditable purpose pursuant to sub-section 11-15(5) of the GST Act is: The acquisitions must relate to U, W, Z and Y, making a financial supply consisting of a borrowing and the borrowing must relate to U, W, Z and Y, making supplies that are not input taxed.

To the extent that an acquisition that is made by U, W, Z and Y, relates to the acquisition supply of a debt, credit or right to credit, those acquisitions will qualify as acquisitions that relate to a financial supply consisting of a borrowing. However the acquisitions in question will not qualify where the borrowing relates to either:

· Input taxed supplies that U, W, Z and Y, make; or

· Activities that do not represent the making of supplies at all.

You submit that the borrowing related costs are creditable because, for s11-15(5) purposes, the acquisitions do not relate to any supplies that U, W, Z and Y, has made. You did not address the particular requirement of paragraph (b) of the subsection that the borrowing relates to U, W, Z and Y, making supplies that are not input taxed. You argue that the borrowing related acquisitions that U, W, Z and Y, make relate to an activity (making payments) which are not supplies - this activity is not sufficient for 11-15(5) purposes to entirely over-ride paragraph 11-15(2)(a). Our conclusion is consistent with GSTR 2008/1 which states:

206...The effect of subsection 11-15(5) is that if the borrowing is for the purpose of making supplies other than supplies that are input taxed, then acquisitions that relate to the borrowing are for a creditable purpose.

207. If the borrowing does not relate to making particular supplies, it relates to all of the supplies made by the entity and apportionment may be required.

The borrowing related acquisitions that U, W, Z and Y have incurred relate to all of the supplies that U, W, Z and Y make. From the facts as given it is unclear what these supplies are - it is clear, however that U, W, Z and Y do make some input taxed financial supplies.

Therefore borrowing costs in question will have some connection to the making of input taxed supplies and, to the extent the acquisitions relate to the input taxed supplies that are made by the U, W, Z and Y, those acquisitions will not be for a creditable purpose. If U, W, Z and Y only make input taxed supplies the borrowing costs in question will not be for a creditable purpose to any extent. If U, W, Z and Y make both inputs taxed and taxable/GST-free supplies the borrowing costs will need to be apportioned on a fair and reasonable basis. This outcome is consistent with example 18 of GSTR 2008/1 which states:

Example 18 - acquisition of a borrowing where proceeds are used to pay dividends

212. Viva Ltd is an event organiser. It has very uneven cash flows and invests surplus income in various securities. Although Viva has made a profit, at the time it is called on to pay a dividend to its parent company, it is engaged on a major project and has no cash available. It incurs legal and broker's fees in borrowing the funds required to pay the dividend .

213. The acquisitions of the legal and brokerage services are made in carrying on Viva Ltd's enterprise. Under paragraph 11-15(2)(a) the acquisition of the legal and broking services is not for a creditable purpose. However, subsection 11-15(5) requires that you look to the purpose of the borrowing to determine whether the acquisition in question is for a creditable purpose .

214. The purpose of the borrowing is to pay dividends, which is not a supply. The borrowing is not for the purposes of making any particular supplies; it is for the purposes of Viva Ltd's enterprise as a whole. Viva Ltd's activities include making both taxable and input taxed supplies, and therefore the acquisitions of the services are partly creditable and partly not creditable and apportionment on a fair and reasonable basis is required.

U adviser also asked that we provide the above GST private rulings for a period from when the implementation of the transaction commences for a specific period. We do not provide GST private rulings for a specified period but the private rulings set out above may be relied on until they are withdrawn, overridden by a public ruling, or there is a change in the legislation affecting the treatment for GST purposes of the subject matter of those private rulings.