Private ruling: GST and supplies made under an option agreement
Date of advice: 9 October 2020
Published: November 2020

Ruling: Q1: Are the supplies of the assets by the taxpayer to the special purpose vehicle (SPV) taxable supplies? | A1: Yes. The supplies of the assets by the taxpayer to the SPV are taxable supplies. | Q2: Is the taxpayer entitled to input tax credits for GST it incurs on acquisitions for making the supplies of the assets to the SPV? | A2: Yes. The taxpayer is entitled to input tax credits for the GST payable on the supplies of things it acquires for making the supplies of the assets to the SPV. | Q3: Are the payments being made by the grantee under the option agreement consideration for the taxpayer's supply of the option to the grantee to acquire the taxpayer's equity in the SPVs? | A3: Yes. The payments being made by the grantee under the option agreement is consideration for the taxpayer's supply of the option to the grantee to acquire the taxpayer's equity in the SPVs. | Q4: Are the supplies of the options to acquire equity in the SPVs input taxed supplies under subsection 9-30(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | A4: Yes. The supplies of the options to acquire equity in the SPVs are input taxed supplies under subsection 9-30(2) of the GST Act.

Relevant facts and circumstances: § The taxpayer carries on an enterprise of developing certain projects § The taxpayer acquires goods and services in developing each project § The taxpayer creates an SPV for each project and holds the interest in each SPV § The taxpayer transfers the assets of each project to the SPV and the SPV pays for those assets § The taxpayer entered into an option agreement with another entity (the grantee) whereby the taxpayer grants the grantee an option to purchase all of the taxpayer's equity in the SPV § In consideration for the grant of the option, the grantee pays the taxpayer a certain amount calculated in accordance with a formula set out in the option agreement § The taxpayer and the grantee are registered for GST.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 , section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 , section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 , section 40-5 | A New Tax System (Goods and Services Tax) Regulations 2019, section 40-5.09

Reasons for decision: Summary: The supplies of the assets by the taxpayer to the SPV are taxable supplies because all of the requirements of section 9-5 are satisfied. | Detailed Reasoning - Detailed reasoning: Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with the indirect tax zone, and (d) you are registered, or required to be registered, for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Subsection 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38 or under a provision of another Act, or it is a supply of a right to receive a supply that would be GST-free. Subsection 9-30(2) provides that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act, or it is a supply of a right to receive a supply that would be input taxed. The taxpayer's supplies of the assets to the relevant SPV for a project would be taxable supplies because all of the requirements of section 9-5 are satisfied. That is, (a) the taxpayer will make the supplies to the relevant SPV for consideration - being the price the relevant SPV will pay to the taxpayer (b) the supplies will be made by the taxpayer in the course or furtherance of its enterprise (c) the supplies will be connected with the indirect tax zone as the projects are all located in Australia (d) the taxpayer is registered for GST, and (e) the supplies of the assets are not GST-free or input taxed supplies. | Summary: The taxpayer is entitled to input tax credits for the GST payable on the supplies of things it acquires for making the supplies of the assets to the SPV. The acquisitions are not to be apportioned merely because the taxpayer makes, under the option agreement, an input taxed supply to the grantee. | Detailed Reasoning - Detailed reasoning: Section 11-20 provides that you are entitled to the input tax credits for any creditable acquisitions that you make. Section 11-5 provides that you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose (b) the supply of the thing to you is a taxable supply (c) you provide, or are liable to provide, consideration for the supply, and (d) you are registered, or required to be registered, for GST. Section 11-15 provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. 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. Section 11-25 provides that the amount of the input tax credit is equal to the GST payable on the supply of the thing. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable. The phrase 'to the extent that' in section 11-15 means that an apportionment is necessary if an acquisition is made in carrying on your enterprise and the acquisition relates partly to making supplies that would be input taxed. [1] Determining whether an acquisition relates to making supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances. If an objective assessment of the facts and circumstances shows that an acquisition has a direct relationship with the making of both input taxed supplies and other taxable or GST-free supplies made in the course of carrying on an enterprise, the acquisition is a partly creditable acquisition. [2] However, an acquisition that relates solely to the making of supplies that would be input taxed is not to be apportioned merely because that supply may serve some broader commercial objective of the supplier. The words in section 11-15 require that there be a factual identification of the acquisitions in question and a factual inquiry into the extent to which those acquisitions relate to the making of supplies that would be input taxed. The relevant inquiry called for by paragraph 11-15(2)(a) is not into the relationship between the acquisition and the enterprise more broadly. [3] In this case, the acquisitions made by the taxpayer have a direct relationship to the supplies of assets that it will make to the SPV. In making those acquisitions, the taxpayer creates value in the SPV and, under the option agreement, the taxpayer would sell its shares in the SPV to the grantee. The concept in Rio Tinto applies here. The mere fact that the acquisitions serve the taxpayer's broader commercial objective of developing a project and selling its equity in the relevant SPV (which is an input taxed supply) does not mean that an apportionment is necessary. The taxpayer is entitled to input tax credits for the GST payable on the supplies of things it acquires for making the supplies of assets to the SPV. For avoidance of doubt, the acquisitions that Question 2 relates do not include acquisitions (such as legal fees) that relate to the taxpayer making the supplies of options to the grantee. | Summary: The payments being made by the grantee under the option agreement is consideration for the supply by the taxpayer of options to acquire equity in the SPVs. | Detailed Reasoning - Detailed reasoning: Section 9-15 defines the term 'consideration' very broadly to include any payment, or any act or forbearance in connection with, in response to or for the inducement of a supply of anything. The definition of 'consideration' has two elements. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply. It is not sufficient for there to be a supply and a payment. There must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. [4] The Commissioner considers that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) has a similar meaning to 'there is consideration for the supply that you make'. [5] In this case, the option agreement expressly states that the amount payable by the grantee to the taxpayer are in consideration of the taxpayer granting the grantee the option to purchase all the shares and units in each SPV. The payments by the grantee are in connection with, in response to or for the inducement of the supply of the options by the taxpayer to the grantee. | Summary: The supplies of options to acquire equity in the SPVs are input taxed supplies under subsection 9-30(2) of the GST Act. | Detailed Reasoning - Detailed reasoning: Subsection 9-30(2) provides that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act, or it is a supply of a right to receive a supply that would be input taxed. Section 40-5, which is in Division 40, provides that a financial supply, as defined in the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations), is input taxed. Subsection 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subsection (3) is a financial supply if: (a) the provision, acquisition or disposal is: (i) for consideration (ii) in the course or furtherance of an enterprise, and (iii) connected with the indirect tax zone, and (b) the supplier is: (i) registered or required to be registered, and (ii) a financial supply provider in relation to the supply of the interest. Section 40-5.06 of the GST Regulations provides that an entity is the financial supply provider of an interest if the interest was the entity's property immediately before the supply, the entity created the interest when making the supply or the entity acquires the interest supplied. [6] Item 10 of the table in subsection 40-5.09(3) of the GST Regulations lists 'Securities' including, at paragraph (d), the capital of a trust. In this case, an SPV is a unit trust established, and the interest in them are held, by the taxpayer. If and when the grantee exercises its option to purchase all of the taxpayer's equity in the SPV, the taxpayer would be making a financial supply. This is because the taxpayer will dispose of its equity for consideration, make the disposal in the course or furtherance of its enterprise, the disposal will be connected with the indirect tax zone, the taxpayer is registered for GST and is the financial supply provider in relation to the supply of the interest in the SPV. Pursuant to subsection 9-30(2), the taxpayer's supplies of the options to the grantee under the option agreement are input taxed because the taxpayer is supplying a right to the grantee to receive a supply that would be input taxed under section 40-5. [1] Goods and Services Tax Ruling GSTR 2006/4: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose , at paragraph 53 [2] Decision Impact Statement: Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCAFC 117 [3] Rio Tinto Services Ltd v Federal Commissioner of Taxation [2015] FCAFC 117 at [7] [4] Goods and Services Tax Ruling GSTR 2001/6: non-monetary consideration , at paragraphs 50, 51 and 56 [5] Ibid, at paragraph 65 [6] Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions , paragraph 104

Reasons for decision: All legislative references in this Reasons for Decision are to the A New Tax System (Goods and | Services Tax) Act 1999 , unless otherwise specified.