Private ruling: GST and creditable purpose
Date of advice: 5 December 2018
Published: March 2019
Ruling period: 1 December 20XX to Quarter ending 31 December 20XX
Date scheme commenced: 1 June 20XX

Ruling: Q1: Are the acquisitions of Legal and Other Services made by the Liquidators and Special Purpose Receivers of Entity A in respect of the Legal Proceedings against Entity B, acquisitions that relate to making supplies that would be input taxed for the purposes of section 11-15(2)(a) of the GST Act? | A1: Yes

Relevant facts and circumstances: Entity A is an unlisted Australian public company and offers debenture investments to the public and advances funds to third party borrowers. Entity A operated pursuant to an Australian Financial Securities Licence issued by the Australian Securities and Investments Commission (ASIC) and raised capital from the public for its lending activities by issuing debentures to investors. Entity As assets included mortgaged loans to third party borrowers and its liabilities included outstanding debenture liabilities owed to Entity A’s Debenture Holders. Entity A has been registered for GST since 1 July 20XX and for the purposes of the GST Act exceeds the Financial Acquisition Threshold. Entity B is and was at all relevant times engaged in the business of providing trustee services as a licensed trustee company under the Corporations Act 2001 and held a license from the Australian Securities and Investment Commission to conduct those services. Entity B entered into a trust deed with Entity A where it: ● was appointed by Entity A as trustee, and ● held a fixed and floating charge over all of the assets of Entity A on trust for all the Entity A’s Debenture Holders pursuant to a Trust Deed. In its capacity as trustee for Entity A’s Debenture Holders, Entity B owed duties and obligations to Entity A and Entity A’s Debenture Holders, including amongst other things a duty not to continue to act as Trustee under the Trust Deed where that would result in a conflict of interest or duty. Entity A commenced legal proceedings (Legal Proceedings) against Entity B which relate to Entity A’s activities. The Legal Proceedings are in respect of a breach of duties and other claims relating to the operations of Entity A leading up to external administrators being appointed. Since the commencement of the Legal Proceedings Individual X has been appointed as Liquidator and then Special Purpose Receiver of Entity A. Individual A as Liquidator and Special Purpose Receiver has made acquisitions (Legal and Other Services) and incurred costs to pursue the Legal Proceedings against Entity B. For the purposes of this request any further reference to Entity A is a reference to Individual X in their capacity as Liquidator, and then Special Purpose Receiver of Entity A.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 11-5 | Section 11-15 | Section 58-5 | Section 58-10 | Section 58-20

Reasons for decision: Detailed Reasoning - Question 1:: Summary: The acquisitions of Legal and Other Services made by the Liquidator and Special Purpose Receiver of Entity A are acquisitions that relate to making supplies that would be input taxed for the purposes of section 11-15(2)(a) of the GST Act. | Detailed Reasoning - Detailed reasoning: Pursuant to section 58-5 of the GST Act any acquisition made by an entity in their capacity as representative of another entity that is incapacitated is taken to be an acquisition by the other entity. Accordingly the acquisition of Legal and Other Services by Individual X in their capacity as Liquidator, and then Special Purpose Receiver of Entity A are taken to be acquisitions made by Entity A. Entity A submits that the acquisition of Legal and Other Services are creditable acquisitions and do not relate to any input taxed supply. Relevantly Entity A considers that, as the Legal Proceedings are to progress claims against Entity B’s conflict of interest and matters such as breach of duty, they do not related to the making of any input taxed supplies by Entity A. In support of this submission Entity A cites: ● comments at 38 in the Federal Court case of AXA Asia Pacific Holding Pty Ltd v Federal Commissioner of Taxation (AXA case), ● comments at 35 and 46 in the Full Federal Court case in HP Mercantile Pty Ltd v Federal Commissioner of Taxation (2005) 219 ALR 591 (HP Mercantile case), and ● the Full Federal Court decision in Rio Tinto Services Limited v Federal Commissioner of Taxation [2015] FCAFC 117 (Rio Tinto Case). We do not consider that the abovementioned cases support the conclusion that the acquisition of Legal and Other Services by Entity A are made for a creditable purpose. Further we do not agree with the conclusion reached by Entity A that the acquisitions of Legal and Other Services to progress the Legal Proceedings are made for a creditable purpose. The Commissioner considers that the application of section 11-15 of the GST Act is such that the acquisition of Legal and Other Services relate to input taxed supplies by Entity A. Section 11-15 of the GST Act discusses the meaning of creditable purpose and states that: Meaning of creditable purpose (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. * denotes a term defined in section 195-1. Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose (GSTR 2008/1) sets out the Commissioner’s views for determining whether an acquisition is made in carrying on an enterprise and whether an acquisition relates to supplies that would be input taxed. Paragraph 35 of GSTR 2008/1 states that: 35. The structure of the GST provisions has a significant difference in that the negative test in paragraph 11-15(2)(a) uses different words from the positive test to describe the required connection. The positive test in subsection 11-15(1) uses the expression 'in carrying on your enterprise', whereas the negative test in paragraph 11-15(2)(a) has 'relates to making supplies that would be input taxed'. | Detailed Reasoning - Acquisitions made in carrying on your enterprise: In this case the Commissioner agrees with the proposition that Entity A will satisfy subsection 11-15(1) of the GST Act. Further we agree with Entity A’s general comment that once an acquisition satisfies the positive limb (i.e. section 11-15(1)), the acquisition will be for a creditable purpose unless the negative limb (i.e. 11-15(2)) applies to ‘block’ the creditable purpose test. Therefore what needs to be considered is how subsection 11-15(2) of the GST Act applies and whether the acquisitions fall within 11-15(2) (or more specifically 11-15(2)(a)). | Detailed Reasoning - The negative limb test at paragraph 11-15(2)(a): Paragraph 36 of GSTR 2008/1 explains that the negative limb at paragraph 11-15(2)(a) has an independent operation to subsection 11-15(1) of the GST Act. Therefore it is the Commissioners view that the principles used to establish a connection between an acquisition and an input taxed supply are different to the principles used to establish a connection between an acquisition and an enterprise. Paragraphs 102 and 103 of GSTR 2008/1 discusses the circumstances in which an entity needs to consider whether paragraph 11-15(2)(a) applies and states: 102. Subject to paragraph 103 of this Ruling, if an entity does not make, has never made, and does not intend to make, supplies that would be input taxed, there is no need to consider whether paragraph 11-15(2)(a) applies. Instead, to establish whether an acquisition is for a creditable purpose, it is only necessary to ascertain whether the acquisition is made in carrying on the enterprise (see Part A at paragraph 54 of this Ruling). 103. If an entity makes, has made, or intends to make, input taxed supplies, it needs to consider whether paragraph 11-15(2)(a) applies to its acquisitions. Consideration of paragraph 11-15(2)(a) is also required if an entity acquires residential premises as defined in section 195-1 subject to an existing lease. Paragraph 11-15(2)(a) applies if acquisitions relate solely or partly to supplies that would be input taxed. Consistent with paragraph 103 of GSTR 2008/1, Entity A would need to consider whether paragraph 11-15(2)(a) applies to its acquisitions as it has made financial supplies that are input taxed. | Detailed Reasoning - The relationship between an acquisition and the making of a supply that would be input taxed: When discussing the negative test of 11-15(2)(a), the Commissioner states at paragraph 104 of GSTR 2008/1 that: ‘104. Unlike subsection 11-15(1), paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies.’… Hill J in HP Mercantile Pty Limited v. Commissioner of Taxation [2005] FCAFC 126 (HP Mercantile) considered the connection required between an acquisition and the making of supplies that would be input taxed. These principles have been adopted by the Commissioner for the purposes of determining whether an acquisition relates to making supplies that would be input taxed and provides at paragraph 118 of GSTR 2008/1: ‘118. The decision in HP Mercantile established the following principles that should be applied in determining whether an acquisition relates to making supplies that would be input taxed: ● … ● There is no requirement for an acquisition to precede a supply before it can be said that the acquisition is connected to the making of that supply. Therefore an acquisition can relate to the entity making past, current or future supplies. ● The words 'relates to' are wide words signifying some connection between two subject matters. There must be a connection between an acquisition and the making of input taxed supplies. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. ● …’ Accordingly, a relationship between an acquisition and the making of a supply that would be input taxed can be either a direct or indirect one. The Commissioner recognises that in some cases an acquisition can be made in relation to the whole of an enterprise carried on by an entity and thus has an indirect relationship to all the supplies that the entity makes in carrying on that enterprise. Conversely, the Commissioner has also provided that where an acquisition is used or consumed in making an input taxed supply, there is a direct connection between the acquisition and the input taxed supply. Paragraph 136 to 138 of GSTR 2008/1 considers acquisitions that are overheads or enterprise costs and states: 136. Some acquisitions have a direct relationship to a particular supply. Examples of these types of acquisition are repair services and letting services acquired for leased residential premises. Other acquisitions can relate to more than one supply or type of supply. For example, a company that has a number of pawn broker shops makes input taxed supplies of loans and taxable supplies of goods. Some of its acquisitions relate to both types of supplies. 137. Similarly, acquisitions such as contracted information technology services may relate to more than one division of a bank, and require apportionment if only some of the divisions make taxable supplies. 138. Other acquisitions do not directly relate to any specific type of supplies. Instead, they have an indirect relationship to all the supplies that the entity makes in carrying on its enterprise. If an entity makes both taxable and input taxed supplies, paragraph 11-15(2)(a) precludes these types of acquisitions from being for a creditable purpose to the extent that they relate to making supplies that would be input taxed. The principles discussed above are relevant to Entity A. That is, in the case of Entity A the acquisition of Legal and Other Services are acquired for the purposes of pursuing the Legal Proceedings. These proceedings are connected with the operation of Entity A’s enterprise of offering debenture investments to the public and advances funds to third party borrowers, which are financial supplies that are input taxed. As paragraph 11-15(2)(a) of the GST Act applies it preclude the acquisitions from being made for a creditable purpose. Consequently, Entity A’s acquisition of Legal and Other Services are made in relation to the making of supplies that would be input taxed and by virtue of section 11-15 of the GST Act would be denied creditable purpose under the general rule.