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Ruling

Subject: Claiming input tax credits

Question 1

Are the services acquired by Entity B from Entity C under the Agreement creditable acquisitions under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Is Entity A entitled to claim an input tax credit equal to the GST charged on the Underwriting Charge (Charge) that is payable by Entity B to Entity C as consideration for the Services provided under the Agreement.

Answer

Yes. As Entity A is the GST representative member of the GST group which includes Entity B, Entity A will be entitled to claim the input tax credit.

Question 3

Is the Charge consideration for a financial supply under of section 40-5 of the GST Act and Regulation 40-5.09 of the A New Tax System (Goods and Services Tax Regulations 1999 (GST Regulations)?

Answer

No

Relevant facts

Entity B is a member of a GST Group in which Entity A is the GST representative member.

Entity B enters into an Agreement with Entity C for Services.

Entity C agrees to provide payment for the Services which is an amount consisting of various charges one of which is known as an "Underwriting Charge" (Charge)

To provide the Services under the Agreement to Entity B, Entity C enters into a separate agreement (Contract) with Entity D for services.

Under the Contract between Entity C and Entity D, Entity C will provide payment for the services acquired. This payment includes an amount equal to the Charge.

The Rules that govern how the entities operate are to a large extent governed by statute.

Reasons for decision

1. Are the services acquired by Entity B from Entity C under the Agreement creditable acquisitions under section 11-5 of the GST Act?

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for a creditable acquisition that it makes. Section 11-5 of the GST Act sets out the meaning of a creditable acquisition and 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 a liable to provide, *consideration for the supply; and

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

* denotes a term that is defined in the GST Act.

It has been submitted by Entity B that the Services acquired by Entity B from Entity C under the Agreement will satisfy all the requirement of a creditable acquisition under section 11-5 of the GST Act. In particular, Entity B submits that the Charge amount under the Agreement is consideration for the acquisition of Services by Entity B rather than a straight reimbursement for an amount incurred by Entity C as agent for Entity B.

In this case the Commissioner agrees with the submission that Entity B is making a creditable acquisition of the Services acquired under the Agreement. We explain our reasons as follows.

The first requirement for making a creditable acquisition is that the acquisition must be made for a creditable purpose. The meaning of creditable purpose is given under section 11-15 of the GST Act which states:

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:

o the acquisition relates to making supplies that would be *input taxed; or

o the acquisition is of a private or domestic nature.

In this case the acquisition of the Services by Entity B is made in the course of carrying on its enterprise. Further the acquisition does not relate to Entity B making supplies that are input taxed nor are they related to supplies that are private or domestic in nature. Therefore the acquisition is made for a creditable purpose and section 11-5(a) of the GST Act is satisfied.

To satisfy the requirements of a creditable acquisition under paragraph 11-5(b) of the GST Act the supply of the thing to you must also be a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and the relevant requirement here is that there must be a supply for consideration.

Under the Agreement Entity C has agreed to supply Services (the Specified Services) to Entity B which are outlined in the Agreement. Further the Agreement sets out the price and charges which will include the Charge.

You have raised the issue of whether the Charge is merely a reimbursement by Entity B for services supplied to Entity B by Entity D with Entity C acting as an agent for Entity B. In this regard, Goods and services tax ruling, GSTR 2000/37, Goods and services tax: agency relationship and the application of the law (GSTR 2000/37) is relevant.

GSTR 2000/37 describes what is meant by an agency relationship. Of relevance is paragraph 10 and 11 which state:

10. An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal. …

11. For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

Paragraph 48 and 49 of GSTR 2000/37 state:

Agency relationship and disbursements

48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client.

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

Although the view expressed in paragraphs 48 and 49 are in the context of a solicitor-client relationship, it is also applicable to this case. Consistent with that view, and taking into account the context in which the payment of the Charge is made under the Agreement by Entity B to Entity C, the Commissioner accepts that the component being the Charge is part of the consideration for the supply of the Specified Services by Entity C. That is, the Charge component represents the consideration for the provision of services by Entity D to Entity C to enable Entity C to provide the Specified Services to Entity B under the Agreement.

On the understanding that Entity C satisfies the remaining requirements of section 9-5 of the GST Act in its supply of the Specified Services, the supply is taxable and the acquisition of the Services by Entity B will satisfy paragraph 11-5(b) of the GST Act.

As Entity B will provide consideration for the supply of Services under the Agreement and is registered for GST, the remaining requirements of section 11-5 are satisfied. Consequently Entity B will make a creditable acquisition in respect of the Specified Services acquired from Entity C under the Agreement.

Please refer to our decision in 3 below which outlines wether the Charge is consideration for a financial supply.

2. Is Entity A entitled to claim an input tax credit equal to the GST charged on the Charge that is payable by Entity B to Entity C as consideration for the services provided under the Agreement?

As noted above, section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for a creditable acquisition that it makes.

Section 11-25 of the GST Act provides that the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired.

As the Specified Services acquired from Entity C is a creditable acquisition, Entity B is entitled to claim an input tax credit equal to the GST charged on the Specified Services, which ordinarily will be 10% of the Charge (if the Charge is GST-exclusive).

In this case, Entity B is a member of a GST group of which Entity A is the representative member. Under Division 48 of the GST Act, a GST group is effectively treated as a single entity.

Subsection 48-45(1) of the GST Act provides that the input tax credit on a creditable acquisition that a member of a GST group makes is entitled to be claimed by the representative member, in this case, Entity A and is not claimed by Entity B.

3. Is the Charge consideration for a financial supply under section 40-5 of the GST Act and regulation 40-5.09 of the GST Regulations?

Division 40 of the GST Act lists the supplies that are input taxed and relevantly subsection 40-5(1) of the GST Act provides that a financial supply is input taxed.

Subsection 40-5(2) of the GST Act provides that financial supply has the meaning given by A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Regulation 40-5.08 of the GST Regulations provides that a supply is a financial supply if it is a financial supply mentioned in regulation 40-5.09 of the GST Regulations. Subregulation 40-5.09(1) of the GST Regulations describes the circumstances under which the provision, acquisition, or disposal of an interest mentioned in subregulation 40-5.09 (3) or (4) is a financial supply. The circumstances are that the provision, acquisition, or disposal is:

o for consideration; and

o in the course or furtherance of an enterprise; and

o connected with Australia; and

o the supplier is registered or required to be registered; and

o the supplier is a financial supply provider in relation to the supply of the interest.

Regulation 40-5.02 of the GST Regulations defines an 'interest' as anything that is recognised at law or in equity as property in any form.

Entity B have submitted that the Charge is not consideration for an input taxed supply. This is on the basis that the Specified Services acquired by Entity B from Entity C do not fall within the definition of an 'interest' as defined in the GST Regulations. We take this to mean that the supply of the Specified Services is not the supply of an interest in, or under, one of the categories set out in the table in subregulation 40-5.09(3) of the GST Regulations rather than whether the Specified Services are recognised at law or in equity as property in any form.

Entity B is concerned that the description of the Charge as an 'underwriting charge' may result in the Specified Services of which the Charge relates to be characterised as a supply of an interest that falls within one of the categories set out in the table in subregulation 40-5.09(3).

Goods and services tax ruling, Goods and services tax GSTR 2006/9: supplies (GSTR 2006/9) at paragraph 223 states:

223. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which the transactions are made…

Thus the description of the Charge as an 'underwriting charge' is not conclusive as to the character of the supply to which it relates.

Paragraphs 300 to 302 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions describe underwriting in the context of item 9(i) under subregulation 70-5.02(2) of the GST Regulations. They are in the following terms:

300. Item 9(i) includes underwriting, except a matter that is described in the table in regulation 40-5.09 as an arrangement by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security. The paragraph refers to the part of the underwriting service that does not relate to the acquisition of unplaced securities. This part is sometimes referred to as best endeavours underwriting. The supply of best endeavours underwriting is a taxable supply by the underwriter.

301. Where an underwriter agrees to make its best endeavours to place securities, but also undertakes to take up unplaced securities, only the acquisition of the part of the service not relating to the agreement to take up the securities is a reduced credit acquisition. This is because the agreement to take up the securities is the supply of an interest in securities (or a derivative) as described in the table in regulation 40-5.09. The underwriter is a financial supply facilitator in relation to the supply of the securities by the financial supply provider, and the placement activities of the underwriter are the arrangement of the provision of the securities in question.

Example 38 - underwriting

302. Grabber and Co (Grabber) agrees to underwrite a share issue by Grandslam Limited (Grandslam). Under the agreement Grabber will attempt to place 50 million shares, and agrees to take up unplaced shares at $3.50 per share. The supply under the underwriting agreement is a mixed supply.

303. Grabber supplies a placement service and an interest in securities (or a derivative), being a put option over the unplaced shares. The acquisition of the placement service part of the supply is a reduced credit acquisition to Grandslam under item 9, as it is the acquisition of the service of arranging the provision of the shares by a financial supply facilitator of the supply.

Goods and Services Tax ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisition (GSTR 2002/2), is also relevant. It clarifies what is, and what is not a financial supply under Division 40 of the GST Act.

Line D41 in schedule 2 of GSTR 2002/2 explains that the underwriting of securities (e.g., shares or debentures) by a financial supply provider is input taxed.

'Underwriting' in the context of an input taxed financial supply generally refers to the acquisition of unplaced securities by an underwriter. An interest in or under securities falls within item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.

In this case, the Charge is the consideration in respect of the supply of the Specified Services. The Specified Services outlined in the Agreement do not fall within item 10 nor any other items in the table in subregulation 40-5.09(3). Therefore the Charge is not consideration for a financial supply under section 40-5 of the GST Act and regulation 40-5.09 of the GST Regulations.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 11-5

A New Tax System (Goods and Services Tax) Act 1999 11-15

A New Tax System (Goods and Services Tax) Act 1999 40-5