Edited version of private ruling

Authorisation Number: 1011747356240

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Subject: GST and acquisition of shares

Question

Are you entitled to an input tax credit for the payment made under the deed of settlement?

Answer

No. As the acquisition was not made for a creditable purpose, you are not entitled to claim an input tax credit.

Relevant facts and circumstances

You carry on an enterprise and are registered for GST.

You are an individual shareholder in a number of companies.

You are one of a number of directors of a company (Company A).

You commenced proceedings against Company A and some of its directors.

A cross-claim was filed against you by Company A and some of its directors.

Further proceedings were commenced against you and other companies you are associated with.

The proceedings commenced by you were not done as part of the enterprise you conduct.

You and one of the directors (Director A) entered into a deed of settlement (Settlement Deed).

As part of the Settlement Deed Director A has agreed to sell you their shares.

The Settlement Deed provides the purchase price for the shares.

As part of the Settlement Deed, you and Director A have agreed to take no further legal action and withdrew the existing proceedings against each other.

You and Director A have agreed that the amount paid represents full and final settlement of proceedings.

A tax invoice was not issued in relation to the payment made under the Settlement Deed..

Reasons for decision

Summary:

You are not entitled to claim input tax credits on the acquisition of the shares that arises from the Settlement Deed as you are not carrying on an enterprise and GST does not apply to the buying or selling of shares.

Detailed reasoning:

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) explains that you are entitled to the input tax credit for any creditable acquisition you make.

The term creditable acquisition is defined in section 11-5 of the GST Act which states:

You make a creditable acquisition if:

you acquire anything solely or partly for a *creditable purpose; and

the supply of the thing to you is a *taxable supply; and

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

you are *registered, or *required to be registered.

* Terms with an asterisk are defined in section 195-1 of the GST Act.

The first requirement of a creditable acquisition is that you acquire anything solely or partly for a creditable purpose. The meaning of creditable purpose is defined in section 11-15 of the GST Act which states:

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

Goods and Services Tax Ruling GSTR 2006/3, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) explains when an acquisition is made in 'carrying on your enterprise'. Paragraph 51 of this ruling states:

When is an acquisition or importation made in 'carrying on your enterprise'

51. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. The acquisition must be made in the course of the activities that constitute your enterprise. An acquisition is made 'in carrying on your enterprise' if it is made for the purposes of that enterprise, but not if it is made for some other purpose.

Based on the facts, you have reached an out-of-court settlement which resulted in you and Director A entering into the Settlement Deed.

Goods and Services Tax Ruling. GSTR 2001/4, Goods and Services Tax: GST consequences of court orders and out of court settlements (GSTR 2001/4) explains supplies related to an out-of-court settlement. In particular paragraph 43 of this ruling states:

43. A supply related to an out-of-court settlement may have occurred prior to the settlement (and in fact have been the subject of the dispute in the first place), or it may be created by the terms of the settlement itself. There may be more than one supply that is related to a settlement. In addition, the subject of the dispute may not be a supply at all (refer paragraph 71).

In this case, under the Settlement Deed there is a sale and purchase of the agreed shares between the parties. The Settlement Deed provides the amount you pay to Director A for the shares. Therefore consistent with paragraph 43 it is clear that the supply related to the Settlement Deed is the shares which you acquire.

However, in commencing the proceedings against Company A and reaching the out of court settlement, you did so as an individual shareholder of that company. Further you have advised that the proceedings and subsequent payment made under the Settlement Deed was not part of any enterprise you conduct. Therefore consistent with paragraph 51 of GSTR 2006/3 you have not made an acquisition in carrying on your enterprise and will not satisfy the requirement of 11-15(1) of the GST Act.

As the requirement of 11-15(1) of the GST Act is not met, you will not make a creditable acquisition according to 11-5 of the GST Act.

Consequently you will not be entitled to any input tax credit for the acquisition of the shares under the Settlement Deed.

We note that further guidance regarding the GST implications when you buy and sell shares can be found in our "Financial Services - questions and answer" located on the ATO website. It states at question 4.1 that:

GST is not applicable when you buy or sell shares in the course or furtherance of an enterprise that you carry on, because the provision, acquisition or disposal of an interest in shares is a financial supply under item 10 in the table in subregulation 40-5.09(3) of the GST regulations.

Where you are not carrying on an enterprise, GST is not applicable to your buying or selling of shares.