Edited version of your written advice

Authorisation Number: 1013030314094

Date of advice: 8 June 2016

Ruling

Subject: Grants of financial assistance

Question 1

Are the shares classified as a financial supply and input taxed for GST purposes?

Answer

No, the shares are not a financial supply.

Question 2

Is the sale of shares amongst businesses in the subsidised marketplace a taxable supply?

Answer

Where a seller of shares is registered, or required to be registered, for GST, the supply will be a taxable supply.

Question 3

Are any subsidies paid by you to buyers under the scheme consideration for a taxable supply?

Answer

No, the subsidies paid by you are not consideration for a taxable supply.

Question 4

Are payments made by you for voluntary cancelled businesses consideration for a taxable supply?

Answer

Yes, the supply of the rights to you is made for consideration in the form of the payment and will be a taxable supply assuming the business is registered, or required to be registered for GST.

Question 5

Will the payment by you for any shares that are surrendered for cancellation, be consideration for a taxable supply?

Answer

Yes, the payment by you for any shares that are surrendered for cancellation is consideration and will be a taxable supply assuming the business is registered, or required to be registered for GST.

Question 6

Will the grant to obtain financial advice, offered to businesses by you, be consideration for a taxable supply?

Answer

No, the grant is not consideration for a taxable supply. As a result no GST consequences arise.

Relevant facts and circumstances

You are registered for GST. Another government entity is part of your cluster. The government is undertaking a restructuring program.

The aims of the program include:

• Provide a link between access rights (shares) and the access they provide to resources; and

• Provide a method for the subsidised adjustment of a business or to exit the industry.

Shares in a class (share class) represent a unitised level of access to state owned resources. Currently shares are not linked to access rights in the resources being restructured and businesses have the same access rights regardless of whether they hold the required minimum shareholding or more than the minimum number of shares.

You are rolling out a subsidised market for existing shareholders to adjust their business or to exit their business and have announced a budget to subsidise that process.

You will match buyers and sellers who participate in the program. The subsidy will specifically target those share classes where linkages between shares and resource access have the largest economic impact but other considerations may also be made. It will not be compulsory to participate in the program.

Program funds will be used to:

a) Buy out empty businesses; and

b) Subsidise prices paid for shares.

Potential types of payments include:

1) a proportion of the price of shares bought by active businesses will be paid to the purchaser by the government. The amount paid will vary from share class to share class.

2) a payment will be paid to the owner of a business emptied of all shares and entitlements (whether through transfer or sale of those shares/entitlements) which is then automatically cancelled by you. The business cannot re-enter the industry as it no longer exists. However, there is no restriction on the owner/s of that business re-entering the industry by purchasing another business and associated shares etc.

3) if there are shares which are in excess to market demand but part of an offer for sale, you may pay the market price for these shares which will then be surrendered for cancellation.

4) to assist businesses with the cost of seeking professional advice, grants of up to $1000 are available for payment of fees associated with obtaining advice through an accredited accountant or financial advisor.

Other considerations:

• Participation in the program is limited to businesses holding shares.

• To receive a subsidy for purchase of shares in a particular share class the business must be 'active' in that share class.

• 'Inactive' businesses may still bid to buy shares but will not be subsidised.

• A uniform market price will be calculated for all share classes.

• Any business may only trade shares in a share class that it currently holds.

• There may be a cap on the number of shares that a business can buy in some share classes where supply is likely to be limited.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 s9-5.

A New Tax System (Goods and Services Tax) Act 1999 s11-5.

Reasons for decision

Question 1

Detailed reasoning

Item 10 of the table in regulation 40-5.09(3) lists the provision, acquisition or disposal of an interest in securities as a financial supply. The Dictionary in the GST Regulations states that 'securities' has the meaning given by subsection 92(1) of the Corporations Act 2001.

Corporations Act 2001 - Section 92

Securities

(1) Subject to this section, securities means:

a) debentures, stocks or bonds issued or proposed to be issued by a government; or

b) shares in, or debentures of, a body; or

c) interests in a managed investment scheme; or

d) units of such shares;

but does not include:

e) a derivative (as defined in Chapter 7), other than an option to acquire by way of transfer a security covered by paragraph (a), (b), (c) or (d); or

f) an excluded security.

Shares are generally defined as being a share in the capital of a company. The main types of share are:

• ordinary shares, which confer a right to vote and a right to share in the surplus assets of the company upon dissolution, plus (usually) a right to a dividend; and

• preference shares, which give the holder a preference, generally in the form of priority in the payment of a declared dividend or in the distribution of capital.

The 'shares' owned by businesses are a method for distributing access rights to different classes of resources. They are not similar to a share in a body, such as a company, nor are they an interest in a managed investment scheme. Therefore, the shares in access rights have no relationship to an interest in securities in item 10 of the table in regulation 40-5.09(3) and are not a financial supply.

Question 2

Detailed reasoning

9-5 Taxable supplies

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *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.

The definition of 'supply' in s9-10 of the GST Act is very broad and includes:

(e) a creation, grant, transfer, assignment or surrender of any right;

Businesses that trade shares in access rights, as described in the facts, will make a supply of those rights for consideration in the course or furtherance of their enterprise. This will be the case even if the supply is made as part of ceasing their business.

The supply of the shares will also be connected with the indirect tax zone. There are no provisions in the GST Act that will make the supplies either GST-free or input taxed.

Therefore, the only issue for consideration is whether the business is registered, or required to be registered, for GST. That issue will need to be determined by each of the businesses individually.

There is information about GST registration available on the ATO website: (https://www.ato.gov.au/Business/GST/Registering-for-GST/#Doyouneedtoregister1)

Where a seller of shares is registered, or required to be registered, for GST, the supply will be a taxable supply and they will have a GST liability of 1/11^th of the total consideration received for the shares.

Question 3

Detailed reasoning

GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) states at paragraph 15:

For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

Where a subsidy payment occurs, there is no supply made to you by the purchaser for which the payment could be deemed consideration.

For example, a business wants to sell a parcel of shares for $3300 but the potential purchaser will only pay $2300. You agree to provide a $1000 subsidy to the purchaser to ensure the transaction takes place.

Assuming all parties are registered for GST, the vendor of the shares will have a GST liability of 1/11^th of the sale price ($300) and the purchaser will be entitled to an input tax credit of 1/11^th of the sale price ($300). The provision of the subsidy has no connection to any supply being made by the purchaser to you; therefore, there is no GST liability for this payment.

Question 4

Detailed reasoning

Section 9-10 of the GST Act states:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything;

(ii) to refrain from an act;

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

The shares surrendered as part of a business buy out are access rights and fall within the definition of 9-10(2)(e) of the GST Act.

There is a clear agreement as part of the reform program that businesses will be paid a market-based price for the surrendered shares. The shares are then cancelled by you and the business is no longer able to operate in the industry.

As explained in GSTR 2006/9 Goods and services tax: supplies, a compulsory acquisition of land is not a taxable supply by the owner because the rights in the land are extinguished by operation of the statute.

In contrast:

91. It may transpire that, before a compulsory acquisition under a statute is made, an owner and an authority enter into negotiations that result in the owner selling land under a standard land contract. The land in this case is not vested in the authority through the compulsory acquisition process. Instead, the interest in the land transfers as a result of settlement of the contract and execution of a transfer instrument. As such, the owner makes a supply of land to the authority.

The business buy out arrangements differ from a compulsory acquisition. While the surrender and cancellation of the rights and entitlements results in a similar outcome to a compulsory acquisition, participation in the reform program is wholly voluntary.

Therefore, the supply of the rights to you is made for consideration in the form of the payment and will be a taxable supply assuming the business is registered, or required to be registered for GST.

Question 5

Detailed reasoning

The payment for the surrendered excess shares falls under the same consideration as the business buy out payment.

Assuming the business is registered, or required to be registered for GST they will be making a taxable supply of the excess shares surrendered.

Issue 6 Question 1

Detailed reasoning

The financial advice grant is available upon application by businesses who have sought professional advice. GSTR 2012/2 provides a number of examples where no supply is made in connection with the payment:

Example 12 - no supply - eligibility criteria

63. A government agency offers prepared food retailers a rebate of up to $3,000 when they purchase and install a new commercial dishwasher in their kitchen. The dishwasher can be purchased from any retailer.

64. To be eligible for the rebate the dishwasher must be installed in existing premises and the dishwasher must meet a specified energy efficiency rating. To obtain the rebate the prepared food retailer must submit an application form with copies of their purchase and installation invoices.

65. The food retailer does not enter into any obligations, other than providing further evidence to support their claim in accordance with the eligibility criteria.

66. Although the application submitted by the food retailer and the agreement to provide further evidence in support of their claim may meet the statutory definition of a ' supply', these supplies are not the reason for which the payment was made. Rather the payments were made in order to encourage and facilitate the purchase of the commercial dishwasher by the food retailers. The provision of evidence in support of the claim does not have a sufficient nexus with the payment and is merely incidental to it.

67. The financial assistance payment is made once the food retailer has met the eligibility criteria. In meeting these criteria the food supplier is not supplying any good, service, or anything else to the government agency.

68. There are no GST consequences arising from the arrangement for either party.

The financial advice grant is made within similar parameters to this example. There are eligibility criteria that must be met and evidenced through the application process but meeting these criteria does not amount to the applicant making a supply. Therefore, no GST consequences arise from the transaction.