Edited version of your written advice

Authorisation Number: 1012998787185

Date of advice: 14 July 2016

Ruling

Subject: GST and reduced input tax credits

Question

Will the Shareholder be entitled to claim reduced input tax credits (RITCs) on acquisitions it has made from Company in connection with the sale of shares by the Shareholder in the Company?

Answer

The Shareholder is entitled to claim RITCs on acquisitions to the extent these acquisitions are reduced credit acquisitions in accordance with Item 9 in the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Regulations).

Relevant facts and circumstances

The Shareholder entered into a Share Sale Agreement (SSA) as the seller of all the issued share capital in the Company. The Shareholder held 100% of the issued share capital in the Company.

Other parties to the SSA were the Buyer, the Buyer's Guarantor and the Seller.

The Company has acquired adviser services from Group A and Group B in relation to the sale of the shares by it's Shareholder.

The Company and the Shareholder entered into a secondary agreement which provides that advisers were engaged by the Company in order for the Company to do all the things necessary to effect the sale of all of the shares in the Company by the Shareholder to the Buyer. The effect of the secondary agreement was that the Company's adviser services to the Shareholder were the same as those that the Company acquired from Group A and Group B.

The Company has accounted in its activity statements, for the GST liability referred to in the secondary agreement arising from the supply by the Company to the Shareholder. The Company has also claimed input tax credits in respect of the advisers' fees for an amount equivalent to the amount of the GST liability referred to in the secondary agreement that represented the fees paid to Group A and Group B.

The representative of the Shareholder has stated the following in relation to the advisers' fees:

The Company directly did not on-charge these services via a Tax Invoice to the Shareholder. The Shareholder instead paid for these services via an offset of the Purchase Price from the Buyer.

The sale of shares was payable by the Buyer to the Shareholder. This Purchase Price was reduced by the Advisor expense amounts incurred by the Company.

So the result of this transaction was:

• The Company incurred expenditure for services and claimed the resulting Input Tax Credits.

• The Company was agreed to have supplied these services to an associate and accounted for the GST liability to the full value of the services.

• The Shareholder paid for the full value of the services via a reduction in the net completion payment received from the Buyer.

• The reduction in completion payment received from the Buyer has been taken into account in the calculation of the Capital Gain made by the Shareholder - as Transaction Costs.

• There has been no net GST refund received by any party for the Input Tax Credits on these services.

• If these services had been incurred and paid directly by the Shareholder to the service providers, the related Input Tax Credits would have been available to the Shareholder, albeit as a RITC.

Relevant legislative provisions

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

Section 11-5, 11-15

Section 40-5

Section 70-5

A New Tax System (Goods and Services Tax) Regulations 1999

Subregulation 40-5.09(3)

Subregulation 70-5.02(2)

Reasons for decision

In order to be entitled to an input tax credit, an entity must make a creditable acquisition. To be a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), amongst other things, the thing must be acquired, solely or partly, for a creditable purpose.

Subsection 11-15(1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it is acquired in carrying on its enterprise. However, paragraph 11-15(2)(a) of the GST Act provides that you do not acquire a thing for a creditable purpose to the extent that it relates to making supplies that would be input taxed.

Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed.

The provision, acquisition or disposal of something is a financial supply where it satisfies the relevant requirements of regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

The table in subregulation 40-5.09(3) of the GST Regulations contains eleven categories of interests, the provision, acquisition or disposal of which, will constitute a financial supply. The provision, acquisition or disposal of shares is one category of an interest. Therefore, where the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied the provision, acquisition or disposal of shares will be a financial supply that is input taxed.

The Shareholder sells its shares in the Company to the Buyer. As the Shareholder exceeds the financial acquisitions threshold (FAT), any acquisition it makes in relation to the sale of this shares would prima facie be not made for a creditable purpose under paragraph 11-15(2)(a) of the GST Act.

However, subsection 70-5(1) of the GST Act states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as 'reduced credit acquisitions' (RCAs). The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

The RCA item relevant to this case (which is item 9) is discussed below.

Securities transaction services

Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations (item 9) deals with arrangement services provided by a financial supply facilitator in respect of the provision, acquisition or disposal of an interest in a security. Specifically, item 9 states:

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

A fundamental requirement which must be satisfied under item 9 is the existence of an arrangement by a financial supply facilitator. The definition of a financial supply facilitator is provided in regulation 40-5.07 of the GST Regulations which states:

A financial supply facilitator, in relation to the supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

In this case, the financial supply provider is the Shareholder.

A financial supply facilitator facilitates the supply of an interest where its activities have the effect of helping forward or assisting a particular financial supply, rather than those that simply assist the financial supply provider. It follows that the activities of a financial supply facilitator must have a sufficient nexus with the supply of an interest by a financial supply provider.

A sufficient nexus requires that there be an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities). The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest (see paragraph 32 of Goods and Service Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1)).

Further, a fundamental requirement which must be satisfied under item 9 is the existence of an arrangement by a financial supply facilitator. The term 'arrangement' is discussed in paragraphs 287 to 291 of GSTR 2004/1 and state:

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).

290. Where an entity conducts preparatory activities as part of the planning of, and preparation for, a listed service, these may be part of the arrangement of the transaction. Where the entity engages other entities to undertake parts of preparatory activities, the services of those other entities are inputs to the supply of arrangement services by the entity and are not, in themselves, arrangement services.

291. Whether or not a service is the arrangement of a transaction depends upon the nature of the services undertaken, not the name applied to them. For example, a merchant bank may invoice its clients for advisory services for a securities transaction. If, however, the merchant bank is a financial supply facilitator in relation to that supply of securities, and is, in reality, supplying arrangement services under the agreement, the acquisition of those services is a reduced credit acquisition under Item 9.

It follows that the nature of the services being rendered is crucial in determining whether an entity is arranging a transaction for a financial supply provider. For a supply to be the arrangement of the provision, acquisition or disposal of a security the supply must have a sufficient connection to the arrangement of the proposed transaction to be properly described as itself constituting the 'arranging' of the transaction. A remote connection would not suffice.

The secondary agreement between the Company and the Shareholder provides that advisers were engaged by the Company in order for the Company to do all the things necessary to effect the sale of all of the shares in the Company by the Shareholder to the Buyer. Therefore in this case we are satisfied that the Company is the financial supply facilitator as its activities in relation to the sale has sufficient nexus and has the effect of helping forward or assist with the financial supply of an interest by the Shareholder as the financial supply provider.

However, Goods and Services Tax Determination Goods and services tax: do the acquisitions of the services provided under the arrangement described in Taxpayer Alert TA 2010/1 form part of a reduced credit acquisition made by the financial supply provider under item 9 of the subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999? (GSTD 2011/3) deals with situations where a financial supply facilitator acquires services and supplies these services through merely passing the services on to the financial supply provider.

GSTD 2011/3 provides that in instances where a financial supply facilitator acquires services and these services are merely passed on to the financial supply provider, each of the services acquired needs to be considered on its own to determine if it satisfies the requirements of item 9.

Based on the information submitted, it is our opinion that the services provided by some of the advisers (Group A) do satisfy the elements of an arrangement service which requires the preparation for, planning of and settling the details of the financial supply of issuing shares. The overall role with respect to assisting in executing the sale of shares supports the view that activities by Group A have a sufficient nexus with the financial supply of selling the shares that goes beyond a mere general association.

Accordingly, RITCs are available to the Shareholder in accordance with item 9 in relation to its acquisitions made from the Company to the extent that those services reflect the supplies made by Group A.

On the other hand, some of the advisers (Group B) do not satisfy all the elements of an arrangement service as set out in GSTR 2004/9. Accordingly, no RITCs are available to the Shareholder in relation to the acquisitions made from the Company to the extent these acquisitions reflect supplies made by Group B.