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Ruling

Subject: GST and reverse charging

Questions

Question 1

(a) Is entity A required to reverse charge non-resident entity 1 under Division 84 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the services that they provided in relation to the share acquisition and offshore debt/equity raising activities?

(b) Is entity A entitled to claim full input tax credits to the extent the services provided by non-resident entity 1 related to the offshore debt/equity raising activities?

(c) Is entity A entitled to claim any reduced input tax credits under item 9 of regulations 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) in relation to services provided by non-resident entity 1?

Question 2

Is entity A entitled to claim any reduced input tax credits in relation to the services acquired from an Australian arranger under item 9 of regulation 70-5.02 of the GST Regulations?

Question 3

Should entity A reverse charge the other non-resident entities for their services under Division 84 of the GST Act?

Answers

Question 1

The following answers are provided on the premise that:

§ the services provided by non-resident entity 1 were "not connected with Australia" as defined in the GST Act (therefore, before any adjustments are made in relation to claiming input tax credits or reduced input tax credits, it must be established whether non-resident entity 1's services were connected with Australia); and

§ the acquisition supply of the offshore debt and equity raising activities made by entity A were GST-free financial supplies

(a) Yes, entity A is required to reverse charge non-resident entity 1 under Division 84 of the GST Act for the services that non-resident entity 1 provided in relation to the share acquisition and offshore debt/equity raising activities.

(b) Yes, entity A is entitled to claim full input tax credits to the extent the services supplied by non-resident entity 1 related to making GST-free supplies.

(c) Yes, entity A is entitled to claim some reduced input tax credits under item 9 of regulation 70-5.02 of the GST Regulations in relation to the service supplied by non-resident entity 1.

Question 2

Yes, entity A is entitled to claim reduced input tax credits in relation to the services acquired from the Australian arranger under item 9 of regulation 70-5.02 of the GST Regulations.

Question 3

No, entity A should not reverse charge the other non-resident entities for their services under Division 84 of the GST Act.

Relevant facts and circumstances

Entity A is registered for GST and is the appointed representative member a GST group.

Entity A was set up to acquire a company (the company) by way of a share acquisition.

Of the shares acquired in the company by entity A, a certain percentage of shares was acquired from Australian resident shareholders, with the remainder being acquired from offshore shareholders.

The GST turnover of entity A meets the financial acquisition threshold.

The following entities were appointed to undertake various activities in relation to the share acquisition (including raising funds):

Non-resident 1

§ Non-resident 1 was appointed to arrange and facilitate the acquisition of the shares in the company via offshore debt financing and offshore equity raising and also to provide other services in relation to the acquisition of shares by entity A in the company.

§ We have been advised to proceed with the ruling on the premise that the services provided by non-resident 1 were not connected with Australia for the purposes of the GST Act.

§ Non-resident 1 is a non-resident entity and is not an associate of entity A.

§ The invoice issued by non-resident 1 to entity A describes its services as follows:

'Fee for arranger services provided by non-resident 1 to entity A respect of the acquisition of the shares in the company including the arrangement of debt finance and equity raising.'

§ Of the amount for the above services a particular amount related to the provision of services in connection with the share acquisition. The balance was for the services provided in relation to the raising of debt and equity for entity A.

Specific arranging services that non-resident 1 provided with respect to the financing of the acquisition via offshore debt and equity raising are:

§ preparatory work to set up the financing structure,

§ negotiations with potential investors in relation to the equity raising,

§ negotiations with investors and lenders to agree on the terms and conditions for the debt finance,

§ preparation of the legal documentation for the debt finance and equity raising,

§ execution of the loan transactions and equity raising.

§ There is no formal agreement that outlines terms and conditions of the arrangement between non-resident 1 and entity A.

§ In addition to the invoice issued by non-resident 1, the only other document that exists between non-resident 1 and entity A is a checklist which outlines the services supplied by non-resident 1. Entity A has prepared this checklist and forwarded it on to non-resident 1 to complete and confirm.

§ Non-resident 1 has completed the checklist as follows:

Description of services	Yes/No
Work in preparing for the share acquisition, being helping set up the acquisition structure, strategy and timetable	Yes
Work in preparing for the share acquisition, being undertaking a financial, legal and tax due diligence of the group	Yes
Negotiations with the existing shareholders and the company's Board for the purchase of the shares in the company including negotiating the commercial terms of the share purchase	Yes
Preparation and negotiation of legal documentation in respect of the share acquisition	Yes
Assistance in connection with the completion and settlement of the share acquisition	Yes
Co-ordinating and appointing external service providers with respect to the share acquisition	Yes
co-operating and communicating with entity A with respect to the purchase of the shares in the company	Yes
Reviewing all documentation an other reports issued by external advisors	Yes
Legal advice regarding the share transaction	No
Tax consulting services regarding the share transaction	No
Accounting advice regarding the share transaction	No
Services in relation to any pre-transaction work on the structure of the group	No
Public relations advisory services regarding the transaction	No
Financial, managerial or operational advice prior to the share acquisition	No

The checklist also states that:

§ non-resident 1 didn't provide any of the advice or deliverables from the services providers engaged by non-resident 1 (eg; lawyers and accounting firms) directly to entity A; and

§ entity A did not correspond directly or have any dealings with any of the service providers engaged by non-resident 1.

The Australian arranger - an Australian resident entity:

The appointment of the Australian arranger by entity A was formalised in the Deed of Arrangement (DoA).

The deed of agreement defines services provided by the Australian arranger to be 'Arranger Services'.

The tax invoice issued by the Australian arranger describes their services as follows:

"Fee for arranger services provided by the Australian arranger to entity A in respect of the acquisition of the shares in the company.'

A checklist (which is the same as the one completed by non-resident 1) has also been completed by the Australian arranger in relation to their services to entity A.

Other non-resident entities

Several other non-resident entities were appointed to facilitate debt raising arrangements.

We have been advised that the financing arrangements provided by various entities met the requirements of an input taxed financial supply as defined in section 40-5 of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 84

Reasons for decision

Question - 1 (a)

Subsection 84-5(1) of the GST Act states the following:

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

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

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

is a taxable supply if:

(a) 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

(b) the supply is for *consideration; and

(c) 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.

(terms marked with asterisks (*) are defined in section 195-1 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

the supply of the other thing would be connected with Australia.We have been asked to proceed on the basis that the services supplied by non-resident 1 were not connected with Australia and as such, in this ruling we have not examined whether or not the services supplied by non-resident 1 were in fact connected with Australia.

The recipient acquires the thing not solely for a creditable purpose:

Creditable purpose

Pursuant to section 11-15 of the GST Act, an entity acquires a thing for a creditable purpose to the extent that that acquisition is for the purposes of the entity's enterprise. However, according to paragraph 11-15(2)(a) of the GST Act an acquisition is not for a creditable purpose if that acquisition relates to making supplies that would be input taxed.

Entity A acquired services provided by non-resident 1 in relation to:

1. debt financing and offshore equity raising,

2. shares acquisition in the company.

Services in relation to offshore debt financing and offshore equity raising -

We have not been provided with full details of the offshore debt financing and offshore equity raising arrangements. However, we have been advised that the above debt and financing arrangements were GST-free financial supplies (acquisition supplies) made by entity A.

A financial supply is defined in section 40-5 of the GST Act as follows

(1) A *financial supply is input taxed.

(2) Financial supply has the meaning given by the regulations.

Regulations 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) states:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

Therefore, provided that the debt financing and offshore equity raising activities satisfied the above requirements, those activities will prima facie be input taxed financial supplies for the purposes of the GST Act.

You contended that the offshore debt and equity raising activities will also be GST-free under item 2 in the table in subsection 38-190(1) of the GST Act for the following reasons:

Item 2 in the table in subsection 38-190(1) of the GST Act states:

2

Supply to *non-resident outside Australia

a supply that is made to a *non-resident who is not in Australia when the thing supplied is done, and: (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or (b) the *non-resident acquires the thing in *carrying on the non-resident's *enterprise, but is not *registered or *required to be registered.

By virtue of item 2 of subsection 38-190(1) of the GST Act, the acquisition supply that entity A makes in relation to the offshore debt and equity raising activities, will be GST-free under item 2(a).

Where a supply is both GST-free and input taxed, under subsection 9-30(3) of the GST Act, that acquisition supply is treated as a GST-free supply. Accordingly, supplies made by entity A in relation to the debt financing and equity raising are GST-free.

Services in relation to the share acquisition in the company

The acquisition of the percentage of the Australian shares in the company from resident shareholders meets the requirements of a financial supply and thus is input taxed.

The acquisition of the remainder of the shares which were from non-residents is a GST-free supply for the same reasons outlined above under offshore debt and financing arrangements.
This means that entity A acquired the services of non-resident 1 not solely for a creditable purpose because those services were acquired for both in relation to making a GST-free supply and also an input taxed supply.

Consideration

Non-resident 1 has invoiced entity A for a sum of money for their services and therefore entity A is required to provide consideration for non-resident 1's services.

Registration

Entity A is registered for GST.

GST-free or input taxed supplies

The services supplied by non-resident 1 were neither GST-free nor input taxed supplies.

Accordingly, as the requirements of subsection 84-5(1) of the GST Act are satisfied, the supplies made by non-resident 1 is a taxable supply.

"Reverse charge"

Subsection 84-10(1) of the GST Act state:

The GST on a supply that is a *taxable supply because of section 84-5:

(a) is payable by the *recipient of the supply; and

(b) is not payable by the supplier.

Accordingly, entity A as the recipient is liable for GST on supplies made by non-resident 1.

Question 1(b)

Is entity A entitled to claim full input tax credits on the extent the services provided by non-resident 1 related to the offshore debt/equity raising activities?

An entity is entitled to claim input tax credits on any creditable acquisitions that they have made.

A creditable acquisition is defined in section 11-5 of the GST Act as follows:

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.

As outlined earlier, entity A has made certain GST-free supplies and input taxed supplies. Any acquisitions that entity A makes in relation to GST-free supplies are considered to have been made for a creditable purpose.

We have determined above that, provided certain conditions are satisfied, the services supplied by non-resident 1 were taxable supplies.

Entity A has become liable to provide consideration for the services provided by non-resident 1.

Entity A is registered for GST.

Therefore, to the extent the services provided by non-resident 1 relate to the GST-free supplies, the acquisition of such services by entity A is considered as a creditable acquisition. Therefore, entity A is entitled to claim input tax credits on the service fee to the extent the service fee relates to making those GST-free supplies.

Question 1(c)

Is entity A entitled to claim any reduced input tax credits under item 9 of regulation 70-5.02 of the GST Regulations in relation to services provided by non-resident 1?

Goods and services tax ruling, Goods and services tax: reduced credit acquisitions (GSTR 2004/1) states:

45. To determine whether it is entitled to a reduced input tax credit for a particular acquisition, an entity needs to establish whether the supply in relation to which the acquisition was made would be a financial supply. Financial supplies are input taxed under subsection 40-5(1) and, consequently, acquisitions relating to these are not for a creditable purpose under paragraph 11-15(2)(a). The entity should then determine whether the acquisition is mentioned in the table in subregulation 70-5.02(2). If so, it is a reduced credit acquisition and gives rise to a reduced input tax credit under subsection 70-5(1), provided it is not excluded by subsection 70-5(1A).

Is the supply to which the acquisition relates a financial supply?

As mentioned before, a portion of the acquisition of shares by entity A in the company is an input taxed financial supply. This means that to the extent the services provided by non-resident 1 which relates to the acquisition of those shares, that portion of the services is not considered to have been made for a creditable purpose (and thus not a creditable acquisition). This means that entity A is not entitled to claim input tax credits on this portion of the service fee. However, where an acquisition is not for a creditable purpose the acquisition may nonetheless be a reduced credit acquisition, which entitles the entity to claim a reduced input tax credit.

Is the acquisition a reduced credit acquisition?

Subregulation 70-5.02(2) of the GST Regulations lists reduced credit acquisitions. An acquisition is a reduced credit acquisition under item 9 of the table in subregulation 70-5.02(2) of the GST Regulations (item 9) where it is an acquisition of the arrangement by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security. Item 9 is as follows:

Item 9

Arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, including the following:

(a) order placement and trade execution;

(b) clearance and settlement of trades;

(c) management of the issue of securities, including rights and bonus issues;

(d) arranging flotations and privatisations;

(e) arranging mergers and acquisitions;

(f) arranging takeover bids;

(g) performing a settlement, including issue of drafts and encashment;

(h) other securities transactions, including lodgment, withdrawal and exchange control;

(i) underwriting, except a matter that is described in the table in regulation 40-5.09

GSTR 2004/1 states:

287. The term arrangement is not defined in the GST Act or regulations, nor does it have a specific industry meaning. Its ordinary meaning is a 'preparatory measure, previous plan, preparation or a final settlement, adjustment by agreement'. Arrangement under this item includes activities relating to the preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction.

288. Typically, arrangement activities take place before the transaction is completed. However, in some instances they may take place after the transaction is completed. Provided the activities relate to the arrangement of the transaction, and not to ongoing services once it is completed, they are arrangement for the purposes of the item. Items 9(d), (e) and (f) also require that the service listed in each has the character of arranging.

289. Although many activities may be undertaken as part of the preparations for, for example, the public float of a company, not all of these are the arrangement of the provision of an interest in securities. Planning by the financial supply facilitator may require that a company group restructures. However, it is the acquisition of the planning which is the arrangement service, not the activities involved in the restructure that is the reduced credit acquisition. Equally, due diligence activities, though part of the preparation for the float, are not arranging for the purposes of item 9(d). This is because due diligence by itself, does not have sufficient connection to the 'arrangement' of preparing or planning a float. However, where an entity provides due diligence activities, as part of its services in planning or preparing a float, then it may come within item 9(d).

When considering the services outlined in the checklist which was completed and confirmed by non-resident 1 in relation to the share acquisition, we are of the view that those services can be considered as 'arranging' for the purposes of item 9. Accordingly, the acquisition of the services by entity A in relation to the input taxed portion of the share acquisition can be considered as a reduced credit acquisition.

This means that entity A is entitled to claim reduced input tax credits to the extent that those services provided by non-resident 1 relates to the input taxed portion of the share acquisition of the company by entity A.

Question 2

Is entity A entitled to claim any reduced input tax credits in relation to the services acquired from the Australian arranger under item 9 of regulation 70-5.02 of the GST Regulations?

Where the services provided by the Australian arranger related to any financial supplies that were input taxed, then, the acquisition of that portion of the service is not for a creditable purpose.

According to the checklist completed by the Australian arranger the services they have supplied are the same as those supplied by non-resident 1. Furthermore the DoA between the Australian arranger and entity A defines the services provided by the Australian arranger to be 'Arranger Services'. On that basis, we are of the view that the services acquired by entity A from the Australian arranger in relation to an input taxed share acquisition are reduced credit acquisitions. Consequently, entity A is entitled to claim reduced input tax credits on the fee that they paid to the Australian arranger for the arranger services to the extent the services supplied by the Australian arranger were in relation to an input taxed financial supply made by entity A.

Question - 3

Should entity A reverse charge the other non-residents for their services under Division 84 of the GST Act?

Whilst we have not been provided with full details of the offshore debt equity raising arrangements we have been advised that those activities were GST-free financial supplies under item 2 of subsection 38-190(1) of the GST Act. On this basis, any acquisitions that are made in relation to that GST-free supply were for a creditable purpose.

Consequently, entity A is not required to reverse charge the other non-resident entities for their services as one of the requirements of subsection 84-5(1) of the GST Act is not met (i.e. 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). Accordingly entity A does not have any GST liability under Division 84 of the GST Act in relation to the relevant services provided by the other non-resident entities.