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Edited version of your written advice
Authorisation Number: 1012913435537
Date of advice: 17 November 2015
Ruling
Subject: GST and reduced input tax credits
Question 1
Is the 'success fee' paid to the advisor consideration for a reduced credit acquisition made by the entity under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999?
Answer
Yes, the 'success fee' paid to the advisor is consideration for a reduced credit acquisition made by the entity.
Question 2
Is the entity entitled to a reduced input tax credit equal to 75% of the GST payable on the supply of the services from the advisor under section 70-15 of the A New Tax System (Goods and Services Tax) Act 1999?
Answer
The entity is entitled to a reduced input tax credit equal to 75% of the GST payable on the supply.
Relevant facts and circumstances
The entity was the owners of all of the issued shares in a company.
The entity engaged the advisor for a period to assess the viability of a potential sale of certain assets of the entity, essentially, the sale of all or part of the company.
The advisor provided a wide range of services to the entity in connection with the sale of all or part of the company or its assets. Under the agreement, the advisor agreed to assist and/or advise the entity in all aspects of the sale process including identifying and liaising with potential purchasers, evaluating offers , structuring the sale, preparing a valuation of the company, coordinating legal, accounting and tax advisors and structuring the sale.
The fee for the services provided by the advisor is stated in the engagement letter as an amount (plus GST and expenses) and is only payable if a sale of 50% or more of the assets of the company are sold.
Later, the entity entered into an agreement with the purchaser in which the entity agreed to sell all of the shares in the company.
Upon completion of the sale, the entity was issued with a minority equity interest in a new company with the purchaser holding the remainder of the shares.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 70-5.
A New Tax System (Goods and Services Tax) Act 1999 section 70-15.
A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-5.02(2).
A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.03.
Reasons for decision
Question 1
The success fee paid to the advisor is consideration for the various services provided to the entity since its engagement in relation to the sale of the company' assets. Section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that certain specified kinds of acquisitions (reduced credit acquisitions) which relate to making financial supplies give rise to a reduced input tax credit. The table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides a list of reduced credit acquisitions.
Relevantly, item 9 in the table in subregulation 70-5.02(2) of the GST Regulations provides that an acquisition that is of 'arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security' is a reduced credit acquisition. Item 9(e) further specifies that 'arranging mergers and acquisitions 'is an example of arrangement services by a financial supply facilitator.
Accordingly, for the acquisition of services to be a reduced credit acquisition under item 9(e) in the table in subregulation 70-5.02(2) of the GST Regulations, the following must be satisfied:
• the advisor must be a financial supply facilitator in regard to the services provided;
• the transaction must involve the provision, acquisition or disposal of an interest in a security and
• the advisor must have arranged that provision, acquisition or disposal of an interest in a security.
Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions provides a comprehensive analysis of the items in the table in subregulation 70-5.02(2) of the GST Regulations including the meaning of 'financial supply facilitator' (paragraphs 30 - 35), 'arrangement' (paragraphs 287 - 291) and 'securities' (paragraph 297).
The advisor acted as a financial supply facilitator when it arranged for the acquisition of the shares by the purchaser. Consequently, the services provided by the advisor to the entity is a reduced credit acquisition under item 9(e) in the table in subregulation 70-5.02(2) of the GST Regulations.
Question 2
Section 70-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the amount that the input tax credit on a reduced credit acquisition is reduced by is specified in the GST Regulations.
Regulation 70-5.03 of the GST Regulations provides that the reduced input tax credit for an acquisition that is covered by item 9 in the table in subregulation 70-5.02(2) of the GST Regulations.is 75% of the GST payable on the supply.