ATO ID 2007/18: GST and right to a share of net profit in return for a contribution of money - a taxable supply
Date of decision: 22 December 2006
Business line: Indirect Tax

Issue
Is the entity, a business operator, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it grants a right to a share of the net profit from its business to another entity, in return for the contribution of an amount of money?

Decision
Yes. The entity is making a taxable supply under section 9-5 of the GST Act when it grants a right to a share of the net profit from its business to another entity, in return for the contribution of an amount of money.

Facts
The entity is a business operator and enters into an arrangement with another entity (the financier). Under the terms of the arrangement, in return for the contribution of an amount of money by the financier, the entity grants the financier a right to receive a share of the net revenue from its business, at a certain rate up to the extent of the contribution amount, and thereafter, at a lesser rate. The entity is registered for goods and services tax (GST) and the arrangement entered into is connected with Australia. The arrangement does not involve a supply that is GST-free under Division 38 of the GST Act.

Reasons for decision
Summary: Under section 9-5 of the GST Act, an entity makes a taxable supply if: However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. To satisfy the first requirement in section 9-5 of the GST Act, an entity must first make a 'supply' for 'consideration'. Subsection 9-10(1) of the GST Act states that a supply is any form of supply whatsoever. Paragraph 9-10(2)(e) of the GST Act provides that a supply includes the creation, grant, transfer, assignment or surrender of any right. In this case, under the terms of the arrangement, the entity makes a supply for GST purposes to the financier. The supply is the creation or grant of a right to receive a share of the net revenue from the entity's business. The entity provides the financier with a right to participate in the net profit from its business, at a certain rate up to the extent of the amount contributed by the financier, and thereafter, at a lesser rate. The supply of this right is a supply under paragraph 9-10(2)(e) of the GST Act. Subsection 9-15(1) of the GST Act provides that consideration includes any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything. The amount contributed is in connection with, and in response to, the grant of a right to a share of the net revenue from the entity's business. There is a direct nexus between the amount contributed and the supply of the right, so that the payment is consideration for the supply for the purposes of subsection 9-15(1) of the GST Act. The entity therefore makes a supply for consideration which satisfies paragraph (a) of section 9-5 of the GST Act. Paragraphs (b) to (d) of section 9-5 of the GST Act are also satisfied as the entity is registered for GST, the supply of the right is made in the course or furtherance of its enterprise and is connected with Australia. Given that the positive limbs of section 9-5 of the GST Act are satisfied, the entity makes a taxable supply to the financier to the extent that the supply is not GST-free or input taxed. Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if: Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit. Item 10 of the table in subregulation 40-5.09(3) of the GST Regulations (Item 10) lists an interest in securities, including the capital of a partnership or trust. In this circumstance, the arrangement does not involve a supply made by the entity to the financier that is an interest under Item 2. Further, the supply made under the arrangement is not the provision, acquisition or disposal of an interest in or under Item 10 or any of the other interests mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations. The requirements of subregulation 40-5.09(1)(a) of the GST Regulations are therefore not satisfied and the supply by the entity to the financier is not a financial supply. As the requirements in paragraphs (a) to (d) of section 9-5 of the GST Act are satisfied, and the supply is neither GST-free nor input taxed under the provisions of Divisions 38 and 40 of the GST Act respectively, the supply by the entity to the financier of the right to a share of the net revenue from the entity's business is a taxable supply under section 9-5 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 9-10 subsection 9-10(1) paragraph 9-10(2)(e) subsection 9-10(4) section 9-15 Division 38 section 38-190 Division 40 subsection 40-5(1)
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2002/2
Related ATO interpretative decisions: ATO ID 2007/15 | ATO ID 2007/16 | ATO ID 2007/17
Subject references: Goods and services tax GST regulations GST supplies & acquisitions GST supply Taxable supply