ATO ID 2004/902: GST and convertible notes to raise capital - a financial supply consisting of a borrowing
Date of decision: 13 September 2004
Business line: Indirect Tax

Issue
For the purpose of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is the entity, a company, making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise?

Decision
Yes. For the purpose of the GST Act, the entity is making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise.

Facts
The entity is a company that is registered for goods and services tax (GST). The entity raises capital in the course of its carrying on an enterprise by issuing convertible note securities. The entity's issue of the convertible notes is a financial supply under subsection 40-5(1) of the GST Act. Under the terms of the issue, note holders have the right to redeem the note for cash or convert it into ordinary shares at a fixed price at a specified date. Coupons are payable annually. The convertible notes are only issued to Australian residents.

Reasons for decision
Summary: A number of provisions in the GST Act refer to a 'financial supply consisting of a borrowing' (see paragraphs 11-15(5)(a) and 15-10(5)(a) of the GST Act and section 189-15 of the GST Act). 'Borrowing' is defined in section 195-1 of the GST Act as having the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 of the ITAA 1997 defines 'borrowing' as any form of borrowing, whether secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness. Paragraph 62 of the Goods and Services Tax Ruling GSTR 2003/9 provides that the requirement for a document evidencing indebtedness leads to the conclusion that for the purposes of the GST Act, a borrowing must involve a debtor-creditor relationship. The entity is issuing convertible notes to raise capital. Schedule 1 to Goods and Services Tax Ruling GSTR 2002/2 provides the following definition of convertible notes: Unsecured notes issued to existing shareholders with the right to either redeem the note for cash or convert it into ordinary shares at a fixed price at certain specified dates. Notes carry a fixed interest rate based on the issue price known as the coupon rate. Under the terms of the issue, note holders have the right to redeem the note for cash or convert it into ordinary shares at a fixed price at a specified date. This creates a debtor-creditor relationship between the entity and the holders of the convertible notes, allowing the issue of the entity's convertible notes to satisfy the definition of borrowing. The entity's issue of the convertible notes is a financial supply under subsection 40-5(1) of the GST Act. As such, for the purpose of the GST Act, the entity is making a 'financial supply consisting of a borrowing' when it issues convertible notes to raise capital in the course of its enterprise.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-15(5)(a) paragraph 15-10(5)(a) subsection 40-5(1) section 189-15 section 195-1
Related public rulings and determinations: GSTR 2002/2 | GSTR 2003/9
Subject references: Goods and services tax Input taxed supplies GST financial supplies GST debt securities GST debt, loan and credit