ATO ID 2012/66: Goods and Services Tax and redemption of redeemable preference shares
Date of decision: 9 July 2012
Business line: Indirect Tax

Issue
Does an entity make a financial supply under subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) when it redeems redeemable preference shares from its shareholders?

Decision
Yes, the entity makes a financial supply under subregulation 40-5.09(1) of the GST Regulations when it redeems redeemable preference shares from its shareholders.

Facts
The entity is a company that is registered for GST. The entity has several classes of shares on issue to its shareholders, including redeemable preference shares, which are all fully paid up. All the entity's redeemable preference shareholders are in Australia. The entity issues a redemption notice to holders of its redeemable preference shares. The notice requires each holder of the redeemable preference shares to deliver to the entity the certificates for all such shares held, by the redemption date. On the redemption date: Each shareholder delivers their redeemable preference share certificates, as required under the notice. The company pays each shareholder for their redeemable preference shares. The company cancels the redeemable preference shares. The redemption process complies with all requirements of the Corporations Act 2001 .

Reasons for decision
Summary: Subsection 40-5(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a financial supply has the meaning given by the GST Regulations. Regulation 40-5.02 of the GST Regulations gives the meaning of 'interest' as anything that is recognised at law or in equity as property in any form. The GST Regulations relevantly provides that the provision, acquisition or disposal of an interest listed in the table in subregulation 40-5.09(3) of the GST Regulations is a financial supply if the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied. Securities are listed at item 10 in the table in subregulation 40-5.09(3) of the GST Regulations. Redeemable preference shares are securities for the purposes of the GST Regulations. It follows that an acquisition of an interest in redeemable preference shares (an acquisition-supply) is a financial supply if the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied in relation to the acquisition. 'Acquisition', in relation to the provision and disposal of an interest, includes acceptance and receipt of the interest. Through the redemption process, the shareholders deliver their share certificates, thereby disposing of their interests in the redeemable preference shares. By taking delivery of the share certificates, the entity accepts and receives the interests. Accordingly, the entity acquires an interest in (makes an acquisition-supply of) the redeemable preference shares. The GST Regulations do not require that, following acquisition, the interest must be enduring. It is not relevant that the entity cancels the shares after it acquires them. For the acquisition-supply to be a financial supply, subregulation 40-5.09(1) of the GST Regulations requires that the acquisition must be for consideration, in the course or furtherance of an enterprise, and connected with Australia; and that the supplier is registered or required to be registered for GST, and is a financial supply provider in relation to the supply of the interest. A payment that is consideration for the supply of an interest acquired, may also be treated for GST purposes as consideration for the acquisition-supply of that interest (Authority for this view is found in AXA Asia Pacific Holdings Limited v. Commissioner of Taxation [2008] FCA 1834). Thus, the payment made to each shareholder for redemption of the redeemable preference shares is consideration for the entity's acquisition-supply of that interest. The entity acquires the interest in the course or furtherance of its enterprise and the acquisition was in connection with Australia. The company is registered for GST. Subregulation 40-5.06 of the GST Regulations provides that, in relation to the supply of an interest, the entity that acquires the interest is also the financial supply provider of the interest. Accordingly, the entity is also a financial supply provider in relation to supply of the interest. It follows that the entity meets the requirements of subregulation 40-5.09(1) of the GST Regulations in relation to the acquisition of the interest in redeemable preference shares and therefore makes a financial supply of the interest when it redeems the shares from its shareholders.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(2)
Case references: AXA Asia Pacific Holdings Limited v Commissioner of Taxation [2008] FCA 1834 (2008) 2008 ATC 20-074 (2008) 71 ATR 1
Subject references: Goods and services tax GST financial supply Redeemable preference share