Edited version of your private ruling

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Ruling

Subject: Mergers and acquisitions

Question 1

Does the acquisition of services by Entity A from Entity B that relate to facilitating the merger between Entity A and Entity C qualify as a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) such that Entity A is entitled to full input tax credits for the GST included in the price of the acquisition?

Answer

Entity A's acquisition of services from Entity B is an "enterprise cost". As Entity A makes a combination of input taxed and taxable or GST free supplies the acquisition is not a creditable acquisition to the extent that it relates to making supplies that would be input taxed, Entity A must apportion the acquisition based on a suitable apportionment methodology that is fair and reasonable.

Question 2

If Entity A is not entitled to a full input tax credit pursuant to section 11-5 of the GST Act, does the acquisition by Entity A qualify as a reduced credit acquisition under section 70-5 of the GST Act and thus eligible to a reduced input tax credit (RITC) under subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer

Provided Entity B is a 'financial supply facilitator' and their services are characterised as arranging for the disposal of the shares by the shareholders, the acquisition of services by Entity A qualifies as a reduced credit acquisition under section 70-5 of the GST Act and is eligible for to a RITC under item 9 of subegulation 70-5.02(2) of the GST Regulations.

Question 3

On the basis that the Commissioner answers in the affirmative to either question 1 or 2 above, can Entity A claim the relevant input tax credit or RITC in the Business Activity Statement (BAS) for the tax period in which this Private Ruling is issued?

Answer

Whether the amount is able to be claimed on a current BAS is based on a number of factors. Please refer to our reason for decision below for further guidance.

Relevant facts and circumstances

Entity A was registered for GST.

On a particular date Entity B was formally engaged by Entity A to act as takeover and merger advisor. At the time of entering into this engagement, Entity A had not agreed to any specific restructure or merger proposal.

On a particular date the Entity C merger option became the Entity A's board of directors' preferred option.

Due to various structural impediments, it was decided that Entity C would acquire the shares in Entity A pursuant to a scheme of arrangement.

Entity A commenced talks with Entity C to discuss the possibility of a merger. The purpose of the merger was to access greater shareholder value from the merger of these entities.

The fee to Entity B is an 'in total' fee for all services provided in accordance with the engagement letter and is not payable for discrete segments of actual work performed or specific restructure proposals/options that were considered.

A scheme of arrangement between Entity A and Entity C was implemented, which effected a merger between the two organisations.

Subsequent to the merger Entity A became a wholly owned subsidiary of Entity C.

Entity A has not acquired or issued any additional shares or interests as part of the merger transaction.

Entity A's shares have been sold to Entity C by Entity A's existing shareholders. Therefore, the disposal of the share in Entity A was undertaken by shareholders of Entity A and not by Entity A itself.

Entity A has received and holds a valid tax invoice in relation to the services acquired.

Entity A's existing shareholders are not associates of entity A pursuant to section 318 if the Income Tax Assessment Act 1936 and therefore the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 70-5

A New Tax System (Goods and Services Tax) Regulations 1999 70-5.02

Reasons for decision

Question 1

Entitlement to Input Tax Credits in relation to On-Going Acquisitions

Division 11 of the GST Act deals with the entitlement to input tax credits. Section 11-20 of the GST Act provides for an entitlement to an input tax credit for any creditable acquisition made by an entity. Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if: 

· it acquired anything solely or partly for a creditable purpose; and

· the supply to it is a taxable supply; and

· it provides, or is liable to provide, consideration for the supply; and

· it is registered or required to be registered for GST.

Relevant to this matter is the meaning of creditable purpose. What is a creditable purpose is provided for in section 11-15 of the GST Act. Relevantly, that section states:

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

However, you do not acquire the thing for a creditable purpose to the extent that:

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

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act

It must now be determined if Entity A's acquisition from Entity B satisfies subsection 11-15(1) of the GST Act or subsection 11-15(2) of the GST Act applies.

Goods and Services Tax Ruling 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) offers guidance to determine this issue. In particular paragraph 55 of GSTR 2008/1 states:

55. Subsection 11-15(1) requires that you acquire a thing in carrying on your enterprise. It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

The meaning of the term 'carrying on an enterprise' is defined by reference to section 195-1 of the GST Act to include "...doing anything in the course of the commencement or termination of the enterprise". The word 'enterprise' is given its meaning by section 9-20 and includes "...an activity or series of activities, done in the form of a business".

The issue of whether or not Entity A is carrying on an enterprise is not in contention. We are satisfied that Entity A is carrying on the business and therefore, satisfies the tests set out in section 9-20 of the GST Act. As such, the next issue that has to be considered is whether there is a connection between the acquisition made from Entity B and Entity A's enterprise.

Paragraphs 69 and 70 of GSTR 2008/1 states:

69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative.

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

· the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

· the thing acquired is used by the enterprise in making supplies;

· the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

· the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

· the acquisition does not meet the personal needs of individuals such as partners or directors;

· the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

· the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.

It is arguable, in line with dot point 3 in paragraph 70 of GSTR 2008/1 that the acquisition of the relevant services in this case secures a real benefit or advantage in continuing Entity A's enterprise. The proposal to merge Entity A with Entity C was a decision made by the board of Entity A for what were regarded as compelling reasons related to enhancing the commercial strength and on-going viability of Entity A's business.

It is equally arguable that the last dot point in paragraph 70 of GSTR 2008/1 is also pertinent to Entity A's circumstances.

Entity A submit that subsection 181(1) of the Corporation Act 2001 (CA) requires directors of a corporation to exercise their powers and discharge their respective duties in good faith in the best interests of the corporation. Further, section 602 of the CA requires certain information to be provided to shareholders to assist them in evaluating any acquisition or change in control of a company such as a merger.

In acquiring the services of Entity B, the directors were better able to ascertain the benefits of this particular merger. Consequently, they were better placed to negotiate optimal outcomes with Entity C for the benefit of Entity A's enterprise. In doing so they were also able to discharge their respective statutory obligations in the best interest of the company and the shareholders.

Based on this evidence we are satisfied that the services acquired from Entity B were made by Entity A to either secure a real benefit or advantage for the continuation of its enterprise and/or to satisfy its statutory obligations. Therefore, it is our view that there is a relevant connection between the acquisition of those services and the business or enterprise Entity A carries on.

It must now be determined if the acquisition from Entity B relates to making an input taxed supply as required by paragraph 11-15(2)(a) of the GST Act.

As a general rule, to the extent that Entity A makes input taxed supplies, due to the operation of paragraph 11-15(2)(a) of the GST Act, any services acquired by it in relation to making such supplies, would not be for a creditable purpose. Accordingly, no input tax credit would arise under section 11-20 of the GST Act.

Note: Entitlement to reduced input tax credits by Entity A is not taken into account in this issue (it is addressed separately in our response in issue 2).

Entity A submit that, the only potential type of input taxed supply (if any) that Entity A's acquisition of services from Entity B might relate to would be in connection to making a financial supply in relation to shares. Therefore, it must now be determined if acquisition by Entity A has any nexus to a financial supply for the purpose of 11-15(2)(a) of the GST Act.

An entity is often required to determine the extent to which an acquisition is for a creditable purpose based on the entities intended use of the acquisition. GSTR 2008/1 sets out the Commissioners view on determining the extent of creditable purpose. Relevantly, paragraph 119 of GSTR 2008/1 provides that:

119. For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Further in determining if the relevant acquisition relates to making supplies that would be input taxed, paragraph 103 of GSTR 2008/1 states:

103. If an entity makes, has made, or intends to make, input taxed supplies, it needs to consider whether paragraph 11-15(2)(a) applies to its acquisitions. Consideration of paragraph 11-15(2)(a) is also required if an entity acquires residential premises as defined in section 195-1 subject to an existing lease. Paragraph 11-15(2)(a) applies if acquisitions relate solely or partly to supplies that would be input taxed.

Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed. Subsection 40-5(2) of the GST Act states that a financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

The GST Regulations set out the rules to determine what supplies are financial supplies. Regulation 40-5.09 of the GST Regulations is about what supplies are financial supplies. The provision, acquisition, or disposal of an interest in or under the items mentioned in subregulation 40-5.09(3) or (4) of the GST Regulations is a financial supply if (as per subregulation 40-5.09(1) of the GST Regulations):

(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.

The term 'interest' is defined in regulation 40-5.02 of the GST Regulations to be anything recognised in law or in equity as property in any form.

A financial supply provider is defined in regulation 40-5.06 of the GST Regulations. This regulation provides that while an entity that supplies an interest is the financial supply provider of the interest, an entity that acquires the interest, is also the financial supply provider of the interest.

Part 8 of Schedule 7 to the GST Regulations lists examples of things that fall within Item 10 of subregulation 40-5.09(3) of the GST Regulations. Relevantly, shares in a body is listed as an example of things that fall within item 10 in subregulation 40-5.09(3) of the GST Regulations. Therefore, such items are interests that fall within the scope of item 10 in the table to subregulation 40-5.09(3) of the GST Regulations.

It is Entity A's submission that Entity A does not make a financial supply consisting of shares because it does not acquire, dispose of or issue any shares as a result of the merger. The provision, acquisition or disposal of shares takes place between Entity A's shareholders and Entity C. If all the conditions of subregulation 40-5.09(1) of the GST Regulations are met a financial supply will come into existence between Entity C and Entity A's shareholders. We concur with the submission by Entity A.

In this case, as a result of Entity A not providing, acquiring or disposing of an interests in any shares as a consequence of the merger, the requirements in subregulation 40-5.09(1) of the GST Regulations are not met by Entity A and therefore, Entity A makes no input taxed supply. Accordingly, there is no real and substantial relationship between the acquisition of services made from Entity B with the share transaction between Entity A's shareholders and Entity C.

As such, the fact that the merger lead to Entity A's shareholders supplying shares is not relevant, because the connection under paragraph 11-15(2)(a) is in relation to the input taxed supplies Entity A makes, not other entities, may make.

On this basis, the acquisition made by Entity A from Entity B does not fall within the scope of paragraph 11-15(2)(a) of the GST Act. However, it meets the conditions of subsection 11-15(1) of the GST Act and therefore, qualifies as an acquisition that is made in carrying on its enterprise.

Entity A submit that because the acquisition from Entity B does not fall within the scope of paragraph 11-15(2)(a) of the GST Act, Entity A should be entitled to claim full input tax credits on this acquisition. This submission would be correct in law if Entity A only makes taxable or GST free supplies. However, if Entity A makes a mixture of input taxed and taxable or GST free supplies it will need to apportion the acquisition from Entity B against such a mixture of supplies.

Such a treatment is supported in the Commissioner's ruling GSTR 2006/3 which states at paragraph 53:

53. Carrying on an enterprise includes those activities that you undertake in actually managing or conducting that enterprise. Certain acquisitions or importations relate to the carrying on of the enterprise as a whole and are not directly linked to the making of supplies but nonetheless they relate indirectly to all activities of the enterprise. These may be referred to as enterprise costs and may include costs such as compliance costs for meeting Australian Securities and Investments Commission (ASIC), GST or income tax obligations, directors' fees or maintaining a register of shareholders. These may still be creditable acquisitions provided you made them in carrying on your enterprise. However, if you make input taxed supplies as well as taxable supplies or GST-free supplies, you will still need to establish the extent of creditable purpose relating to these acquisitions and importations.

We consider that the acquisition from Entity B in relation to the merger with Entity C is a 'whole of enterprise' cost and is therefore not a creditable acquisition to the extent that it relates to making supplies that would be input taxed. Therefore, if Entity A makes a combination of input taxed, taxable and/or GST free supplies, it must apportion such enterprise costs as outlined by paragraph 53 of GSTR 2006/3. Such apportionment must be done on a fair and reasonable basis. In this regard, Entity A may use the guidance provided in GSTR 2006/3 to formulate an apportionment methodology that is fair and reasonable.

We acknowledge Entity A's comments in relation to an edited version of a private ruling which it is contend supports Entity A's claim for entitlement to full input tax credits in respect of this acquisition. In this regard we wish to point out that edited versions of rulings do not necessarily disclose all the relevant facts or circumstances on which the advice was based. Furthermore, the register is not updated to reflect changes in the law or the Tax Office's views, withdrawal of advice, or any other changed circumstances.

As such, edited versions of written binding advice as published on the Register of private binding rulings cannot be relied upon as precedent by any other entity.

Question 2

It is Entity A's submission that their acquisition of services from Entity B is an acquisition of the arrangement by a financial supply facilitator (being Entity B), of the disposal of securities, and should qualify as a reduced credit acquisition for the purposes of Item 9 of subegulation 70-5.02(2) of the GST Regulations (Item 9). In support of this submission Entity A have identified that the circumstances set out in this ruling request are similar to those set out in ATO ID 2012/11. Therefore consistent with to the reasons set out in ATO ID 2012/11, Entity A is entitled to a RITC.

In this case, provided the acquisition by Entity A is an acquisition of an arrangement by a financial supply facilitator of the Entity A shares, we agree that the reasons set out in ATO ID 2012/11 will apply on a similar basis to the acquisition of services from Entity B. That is, for the part of the Entity B services acquired by Entity A which relates to making input taxed supplies, Entity A will be entitled to a RITC under Item 9.

Our reasons, which only relate to that part of the Entity B services acquired by Entity A that relates to making input taxed financial supplies, are set out as follows.

In some cases, specific acquisitions, referred to as reduced credit acquisitions, that relate to making input taxed financial supplies may attract a reduced input tax credit, even though no input tax credit would ordinarily arise under Division 11 of the GST Act (subsection 70-5(1) of the GST Act).

The first requirement to determine if an entity is acquiring a reduced credit acquisition is whether the acquisition 'relates to making financial supplies' (subregulation 70-5.02(1) of the GST Regulations). As the acquisition relates to input taxed supplies (i.e. the 'ongoing financial supplies') for paragraph 11-15(2)(a) of the GST Act, it is also taken to relate to making financial supplies for the purposes of subsection 70-5(1) of the GST Act (paragraph 48 of Goods and Services Tax Ruling GSTR 2004/1).

The second requirement is to determine if the nature of the acquisition is one that is listed in one of the Items of the table in subregulation 70-5.02(2). Having met the first requirement the acquisition's connection to the relevant financial supply, will not be relevant unless the specific requirements of a particular Item require a more stringent nexus to a particular type of supply (paragraph 48 of GSTR 2004/1). In this regard the second requirement is separate; it involves an assessment as to whether the acquisition meets the description in a particular Item. For example, Item 16, 'supplies to a credit union' and Item 25 'brokerage of general ... insurance' do not refer to any particular category of financial supply.

In this case, because the disposal of the Entity A shares by the shareholder is not a supply made by Entity A this does not impact on the extent to which acquisition 'relates to making financial supplies' (paragraph 102 of GSTR 2008/1). However this does not prevent the disposal of the Entity A shares being relevant in characterising if the service (from Entity B) is of the kind described in Item 9.

Item 9 provides that 'Arrangement, by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security...' is a reduced credit acquisition. Paragraphs (a) to (i) of Item 9 then provide illustrative examples of such acquisitions (paragraph 216 of Goods and Services Tax Ruling GSTR 2002/2).

It is important to note that Item 9 only identifies the supplier of the service (the financial supply facilitator) it does not specify who the recipient must be. As such for the purposes of Item 9 it is not relevant that Entity A shareholders, rather than Entity A is disposing of the securities. Rather, it is a question of assessing if the supplier is in fact a financial supply facilitator and if its services can be characterised as arranging for the disposal of the Entity A shareholders' shares.

In this case, the shareholders are disposing of the Entity A shares that were immediately before the supply their property, it follows that they are a financial supply provider (paragraph 40-5.06(1)(a) of the GST Regulations). Therefore for the purpose of item 9, provided Entity B is a 'financial supply facilitator' and their services are characterised as arranging for the disposal of the shares by the shareholders it can be concluded that the acquisition of services by Entity A will fall within paragraph (e) of item 9 in subegulation 70-5.02(2). On this basis Entity A will be entitled to a RITC for that part of the acquisition of services from Entity B which relates to making input taxed supplies.

Question 3

The following information in relation to claiming an indirect tax refund is set out on our website at www.ato.gov.au

How can you claim an indirect tax refund or credit or notify us of your entitlement?

If you have an entitlement to an outstanding indirect tax refund or GST credit for a purchase, you can claim it by doing one of the following:

· lodging your original activity statement for the tax period to which the refund or credit relates - if you have not already done so

· revising your activity statement for the tax period to which the refund or credit relates

· taking the refund or credit into account in your next activity statement - although, in the case of a refund (or a credit that you partially claimed in an earlier activity statement) this is subject to any time limit or correction limit outlined in Correcting GST mistakes (NAT 4700) that may apply.

Based on the above, determining whether Entity A can claim the relevant refund or credit in its next activity statement will be subject to any correction and time limit outlined in our publication Correcting GST mistakes (NAT 4700).