Edited version of private advice

Authorisation Number: 1051807269559

Date of advice: 15 June 2021

Ruling

Subject: GST and the sale of shares

Question

Are the activities undertaken by you incidental and ancillary to the sale of the shares rather than constituting consideration for a separate supply which is a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The activities are incidental and ancillary to the sale of the shares.

Relevant facts and circumstances

You are registered for the goods and services tax (GST).

You sold your business via shares.

Under the share sale agreement, you agree to undertake some activities that have a marginal value to the value of the shares.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80

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

A New Tax System (Goods and Services Tax) Regulations 2019 Subsection 40-5.09(3)

Reasons for decision

GST is payable on a taxable supply. Section 9-5 of the GST Act describes when an entity makes a taxable supply. It provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed.,

Section 9-80 of the GST Act provides that where a supply (the actual supply) is partly a taxable supply and partly a supply that is GST-free or input taxed the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

Section 40-5 of the GST Act provides that a financial supply is input taxed. Financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). The provision, acquisition or disposal of an interest in shares is a financial supply under item 10 in the table in subsection 40-5.09(3) of the GST Regulations.

Mixed supply or composite supply

Goods and Services Tax Ruling GSTR 2001/8 - Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8)provides guidance on how you can identify whether a supply includes taxable and non-taxable parts under the GST Act.

GSTR 2001/8 uses the terms 'mixed supply' and 'composite supply' which are not used in the GST Act.

GSTR 2001/8 states that a mixed supply is a supply that must be separated or unbundled because it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. A composite supply is a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that dominant part. GSTR 2001/8 treats a composite supply as a supply of a single thing and states that a composite supply is either taxable or non-taxable and may also be a part of a larger mixed supply.

Paragraphs 19B to 21 of GSTR 2001/8 provide that having regard to the essential character and with regard to the statutory provision in issue, you can determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being a dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part, we take the view that you adopt a common-sense approach.

Differentiating between mixed and composite supplies

We must consider the essential character or features of the transaction, to determine whether the supply has more than one separately identifiable part, or is a supply of one dominant part (with one or more integral, ancillary or incidental parts) (see paragraphs 41 and 44 of GSTR 2001/8).

Paragraph 40 of GSTR 2001/8 states:

40. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

Separately identifiable parts

At paragraph 23 of GSTR 2001/8, a supply may be considered to be a mixed supply where a particular provision of the GST Act requires you to treat a part of a supply in a particular way, regardless of its scale or connection with the supply.

In many circumstances it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity (paragraph 45 of GSTR 2001/8).

Paragraph 45A of GSTR 2001/8 provides:

In Re Food Supplier and Commissioner of Taxation (Food Supplier),^[21A] promotional items packaged with food had intrinsic value, would not be consumed with the food and were mostly unconnected with the food. This was so even when, for example, the main item was a jar of coffee and the promotional item was a mug in which coffee might be served. In these circumstances the Tribunal found that the supply of the promotional items packaged with the food items was a mixed supply. ^[21B] In such a case, it could not be said that the food component was the dominant part of the supply and the promotional item was ancillary or incidental to the supply of the food.

Paragraphs 46 to 49 of GSTR 2001/8 provide examples of mixed and composite supplies:

46. The question in Sea Containers was whether the supply was of transport or of transport and catering.²² It was decided that the proper approach was to see whether the catering element was significant in its own right or whether it was merely ancillary to the provision of transport. Keene J said:

'The evidence shows that it [the catering] constituted a very important element in its own right in what was being provided by the appellant. Its significance in these transactions went well beyond the point where it could be seen merely as a way of better enjoying the transport element....it constituted for customers an aim in itself. Not, of course, the sole aim but, given its prominence in the marketing literature, clearly a separate aim from the travel element. The emphasis upon this aspect of the facilities provided is very striking. The fine meals and wines were a vital part of what the customer was paying for, whether by way of a separate or an all-inclusive price.'²³

47. Sea Containers can be contrasted with British Airways plc v. Customs and Excise Commissioners (British Airways ), another United Kingdom case.²⁴ In this case, the question was whether British Airways was to be taken as making supplies of air transport and of catering services, or a single supply of air transport with the catering services being merely integral or ancillary (a composite supply).

48. In British Airways, the Court of Appeal found that the provision of in-flight catering was, in substance and reality, an integral part of the supply of air transportation. Stuart-Smith LJ said:

'While something that is necessary for the supply will almost certainly be an integral part of it, the converse does not follow... Catering facilities are part of and integral to the transportation in that degree of comfort which British Airways have decided is commercially appropriate and indeed necessary to attract passengers.'²⁵

49. The Court was also influenced by the fact that no separate charge was made for the in-flight catering, and the price of the air ticket did not vary, regardless of the type of meal provided or whether or not meals were provided. It was not part of the contractual obligation of the airline to supply meals, even if meals were expected as part of the service. Customers could not obtain a refund if a meal was not served on their flight.

Sea Containers and British Airways show that different conclusions may be reached after taking into account the relevant facts of cases that are similar. (Paragraph 50 of GSTR 2001/8)

Integral, ancillary or incidental parts

Paragraphs 55 to 61 of GSTR 2001/8 provide the following regarding composite supplies:

55. Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

55A. The Full Federal Court in Luxottica found that while 'supply' is widely defined it 'invites a commonsense, practical approach to characterisation'. Their Honours said:

While 'Supply' is defined broadly, it nevertheless invites a commonsense, practical approach to characterisation. An automobile has many parts which are fitted together to make a single vehicle. Although, for instance, the motor, or indeed the tyres, might be purchased separately there can be little doubt that the sale of the completed vehicle is a single supply. Like a motor vehicle, spectacles are customarily bought as a completed article and in such circumstances are treated as such by the purchaser. The fact that either the frame or the lenses may be purchased separately is not to the point. Similarly the fact that one component, the lenses, is GST-free or that one component is subject to a discount does not alter the characterisation. ^29A

55B. In Saga Holidays Stone J focussed on the 'social and economic reality' of the supply and found that there was a single supply of accommodation and the adjuncts to that supply (including the use of the furniture and facilities within each room, cleaning and linen services, access to common areas and facilities such as pools and gymnasiums and various other hotel services such as porterage and concierge) were incidental and ancillary to the accommodation part of the supply.

55C. In Westley Nominees the Full Federal Court considered what the expenditure was calculated to effect from a practical and business point of view in characterising the supply as a single supply.

56. In Customs and Excise Commissioners v. Madgett and Anor (t/a Howden Court Hotel), the European Court of Justice described the term 'ancillary' in terms of scale and connection:

'... a service is ancillary if, first, it contributes to the proper performance of the principal service and second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.'³⁰

57. In Customs and Excise Commissioners v. British Telecommunications plc, Lord Slynn of Hadley considered whether delivery was ancillary or incidental to a supply of cars or whether it was separately identifiable. In concluding that, as a matter of commercial reality, there was one contract for a delivered car, Lord Slynn found it necessary to consider all of the circumstances of the supply and said:

'... the fact that separate charges are identified in a contract or on an invoice does not on a consideration of all the circumstances necessarily prevent all the supplies from constituting one composite transaction nor does it prevent one supply from being ancillary to another supply which for VAT purposes is the dominant supply... the essential features of a transaction may show that one supply is ancillary to another and that it is the latter that for VAT purposes is to be treated as the supply.'³¹

58. You will need to consider all of the facts to determine whether the supply that you make has any parts that are integral, ancillary or incidental.

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply.³² Having regard to all the circumstances, and taking a common sense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

•         you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

•         it represents a marginal proportion of the total value of the package compared to the dominant part; or

•         it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

•         it contributes to the proper performance of the contract to supply the dominant part.

59A. The factors listed in paragraph 59 of this Ruling are not necessarily the only ones that may be taken into account in properly characterising a supply. In any given case there may be other particular circumstances that are relevant. It may also be necessary to weigh up those factors which may point to part of a supply being integral, ancillary or incidental against the relative significance of the parts in the supply and therefore consider whether the parts should be recognised as separate parts. It is a question of fact and degree whether a supply is mixed or composite.

It has also been held in the UK that all the rights conferred under a credit card protection plan, including registration of cards and emergency cash advances, were incidental to the main objective of the plan, which was insurance (Card Protection Plan Ltd v. Customs and Excise Commissioners) [1999] BVC 155.

Application to your circumstances

Having regard to the essential character of the transaction, you can determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

In this case, we consider there is a composite supply. The GST status of the activities are therefore determined to share the same GST status as the sale of the shares. As the sale of the shares satisfy item 10 of section 40-5.09 of the GST regulations, the activities are also input taxed.

In reaching this decision we considered the following factors:

•         you would reasonably conclude that the activities are a means of better enjoying the dominant thing supplied, rather than constituting to the purchaser an aim in itself;

•         the activities represents a marginal proportion of the total value of the package compared to the dominant part;

•         it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply;

•         it contributes to the proper performance of the contract to supply the dominant part.