ATO ID 2008/123: GST: interaction of the financial acquisitions threshold and Division 72
Date of decision: 8 September 2008
Business line: Indirect Tax

Issue
Does a financial acquisition by the entity, when acquired from an associate for no consideration, give rise to input tax credits to which the entity would be entitled for purposes of determining the financial acquisitions threshold (FAT) under Division 189 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision
Yes, the financial acquisition by the entity when acquired from an associate for no consideration, does give rise to input tax credits to which the entity would be entitled for purposes of determining the FAT under Division 189 of the GST Act.

Facts
The entity raises funds in the capital market through the issue of debt instruments. The funds raised are on-lent to another entity for consideration. The entity's only acquisitions of taxable supplies relate to the issue of the debt instruments. In addition, the entity acquires from an associate for no consideration supplies of administrative functions. These are not supplies made in settling a claim under an insurance policy or compulsory third party scheme. The acquisitions the entity makes from its associate relate both to the issue of the debt instruments and to the on-lending supply it makes. The acquisitions are made in the course or furtherance of an enterprise that the entity carries on. The entity is not a member of a GST group. The entity and the associate are both registered for GST. The associate makes the supplies to the entity in the course or furtherance of the associate's enterprise. The associate is an associate of the entity for the purposes of section 318 of the Income Tax Assessment Act 1936.

Reasons for decision
Summary: The issue of the debt instruments and the on-lending of the funds borrowed are both financial supplies made by the entity in terms of subdivision 40A of the A New Tax System (Goods and Services Tax) Regulations 1999 and are input taxed in line with subsection 40-5(1) of the GST Act. The raising of funds through the issue of debt instruments is a 'borrowing' as defined in the Dictionary at section 195-1 of the GST Act (the definition taking its meaning from section 995-1 of the Income Tax Assessment Act 1997 ). The issue of the debt instruments is a financial supply consisting of a borrowing. The borrowing relates to the input taxed financial supply of the on-lending of the funds. The entity is entitled to input tax credits for creditable acquisitions that it makes. The essential requirements of a creditable acquisition are set out at section 11-5 of the GST Act. Paragraph (a) of that section requires that the acquisition be solely or partly for a creditable purpose. Creditable purpose is relevantly defined in the Dictionary of the GST Act by reference to section 11-15 of the GST Act. Subsection 11-15(1) of the GST Act provides that a thing is acquired for a creditable purpose 'to the extent that you acquire it in carrying on your enterprise'. Paragraph 11-15(2)(a) of the GST Act then operates to deny creditable purpose on an acquisition to the extent that the acquisition relates to making supplies that would be input taxed. However, to the extent one or more of subsections 11-15(3),(4) and (5) of the GST Act applies, denial of creditable purpose by paragraph 11-15(2)(a) in respect of that acquisition is reversed (see paragraph 197 of GSTR 2008/1: 'When do you acquire anything or import goods solely or partly for a creditable purpose?') Thus, even though acquisitions relating to the entity's financial supplies consisting of a borrowing do not have creditable purpose re-instated through subsection 11-15(5) of the GST Act (because they do not relate to making supplies that are not input taxed), denial of creditable purpose in respect of these acquisitions will be reversed under subsection 11-15(4) of the GST Act where the acquiring entity does not exceed the FAT. Division 189 of the GST Act contains tests to determine whether an entity exceeds the FAT. Goods and Services Tax Ruling GSTR 2003/9 'Goods and Services Tax Ruling: financial acquisitions threshold', explains in detail the operation of these tests. Central to the operation of the FAT is the concept of a 'financial acquisition', which is defined at section 189-15 of the GST Act as 'an acquisition that relates to the making of a financial supply (other than a financial supply consisting of a borrowing)'. Thus, the entity's acquisitions relating to the issue of the debt instruments are not financial acquisitions. In line with section 11-15 of the GST Act, a financial acquisition is not for a creditable purpose if the entity exceeds the FAT (unless the acquisition relates to a GST-free financial supply). The entity's acquisitions are financial acquisitions to the extent that they relate to the on-lending financial supply. An integral step in determining the FAT is the quantification of 'the amount of all the input tax credits to which you would be entitled for [financial] acquisitions' assuming the financial acquisitions were made solely for a creditable purpose (see for example paragraph 189-5(1)(a) of the GST Act). Unless the supply of the thing acquired is a taxable supply, the 'input tax credits to which you would be entitled' in respect of the supply is nil (paragraph 91 of GSTR 2003/9). In this case, the supply to the entity by the associate is not a taxable supply in terms of section 9-5 of the GST Act, as it is not made for consideration. However, section 72-5 of the GST Act provides that the absence of consideration does not stop a supply from an associate being a taxable supply where the conditions of that section are met. In the facts of this case, section 72-5 of the GST Act will apply to the supply by the associate to the entity if paragraph 72-5(1)(b) of the GST Act is satisfied. Paragraph 72-5(1)(b) of the GST Act requires the acquisition of the thing supplied to be 'otherwise than solely for a creditable purpose'. The acquisition in this case is, in the first instance, denied creditable purpose under paragraph 11-15(2)(a) of the GST Act, as it relates to making the input taxed financial supply of the loan from the entity to another entity. It will nevertheless be for a creditable purpose, in line with subsection 11-15(4) of the GST Act, if the entity does not exceed the FAT. However, the role of subsection 11-15(4) of the GST Act can only be considered for the purposes of section 11-15 of the GST Act when it is known whether the entity exceeds the FAT, whereas subsection 11-15(4) of the GST Act is being considered in this case for the very purpose of determining whether the entity exceeds the FAT. Thus, in considering the possible application of subsection 11-15(4) of the GST Act for determining whether a supply is a taxable supply under section 72-5 of the GST Act (and consequentially whether the entity exceeds the FAT), a literal reading of the provisions gives rise to a circularity in analysis, and results in ambiguity with no clear outcomes. To enable Divisions 72 and 189 of the GST Act to operate together, allowing this circularity in analysis to be overcome, we consider it is necessary to interpret these provisions taking into account their context and purpose. The relevance of context both in a broad sense and in relation to the text of specific provisions within an Act is discussed at paragraphs 18 to 20 of Goods and Services Tax Ruling GSTR 2006/9. Interpreting the provisions in this way requires as a first step a 'notional' consideration of Division 72 of the GST Act conducted purely for the purposes of determining whether the entity exceeds the FAT. For these purposes alone we consider it necessary to interpret 'otherwise than solely for a creditable purpose' in section 72-5 of the GST Act, without reference to subsection 11-15(4) of the GST Act. Once the entity has determined if it exceeds the FAT, section 72-5 of the GST Act can be actually applied based on the words of the provision (including the reference to subsection 11-15(4) of the GST Act), as the result of the FAT test is now known and the circularity issue is overcome. Accordingly, the financial acquisition by the entity gives rise to input tax credits to which the entity would be entitled for purposes of determining the financial acquisitions threshold under Division 189 of the GST Act, where the acquisition is from an associate entity for no consideration.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 11-5 section 11-15 subsection 11-15(1) paragraph 11-15(2)(a) subsection 11-15(3) subsection 11-15(4) subsection 11-15(5) subsection 40-5(1) Division 72 section 72-5 paragraph 72-5(1)(b) subsection 72-10(1) Division 189 paragraph 189-5(1)(a) section 189-15 section 195-1
Related public rulings and determinations: GSTR 2003/9 | GSTR 2006/9 | GSTR 2008/1
Subject references: Goods and services tax GST associates GST financial acquisitions threshold Accounting expenses Management fees expenses