Private ruling: creditable purpose
Published: July 2012

Ruling: Q1: Are the acquisitions made by Entity X as representative of the GST Group in relation to the supply of shares by Entity Y to the shareholders of Entity X, made for a creditable purpose? | A1: No. Acquisitions made by Entity X as representative of the GST Group which are made in relation to the supply of shares by Entity Y to the shareholders of Entity X are not made for a creditable purpose.


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 11-5 | Section 11-15 | Section 11-20 | Section 48-45 | A New Tax System (Goods and Services Tax) Regulations 1999 | Regulation 40-5.09

Reasons for decision: Summary: Section 48-45 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), sets out who is entitled to input tax credits in the context of a GST group. Relevantly, section 48-45 provides: (1) If an *entity makes a *creditable acquisition or *creditable importation the input tax credit for which is attributable to a tax period during which the entity is a *member of a *GST group: (a) the *representative member is entitled to the input tax credit on the acquisition or importation; and (b) the entity making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the entity is the representative member). (2) In deciding, for the purposes of subsection (1), whether an acquisition or importation by an entity is a *creditable acquisition or *creditable importation, the acquisition or importation is treated as being solely or partly for a *creditable purpose if, and only if, it would be so treated if: (a) the GST group were treated as a single entity; and (b) the GST group were not treated as a number of entities corresponding to the members of the GST group. * Denotes a term defined in the GST Act. Therefore, an acquisition by Entity X will be treated as a creditable acquisition, if the GST Group, when treated as a single entity, makes the acquisition for a creditable purpose. The meaning of creditable purpose is provided in section 11-15 of the GST Act which states: 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: the acquisition relates to making supplies that would be *input taxed; The issue here is if the supply of Entity Z shares is an input taxed supply and results in the respective acquisitions involved in the demerger being made for a non creditable purpose. The supply of Entity Z shares prima facie falls within the meaning of a security under item 10 in subregulation 40-5.09(3) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Subregulation 40-5.09(1) of the GST Regulations provides the definition for a financial supply and states: 40-5.09 What supplies are financial supplies (1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if: (a) the provision, acquisition or disposal is: (i) for consideration; and (ii) in the course or furtherance of an enterprise; and (iii) connected with Australia; and (b) the supplier is: (i) registered or required to be registered; and (ii) a financial supply provider in relation to supply of the interest. Therefore, the supply of Entity Z shares will be a financial supply provided the requirements in subregulation 40-5.09(1) are met. It is not in contention that where Entity Y makes a supply of shares, that this supply will be the supply of an interest mentioned in subregulation 40-5.09(3) of the GST Regulations. It is also not in contention that Entity Y is a financial supply provider in relation to the supply of the Entity Z shares and that Entity Y will satisfy paragraph 40-5.09(1)(b) and subparagraph 40-5.09(1)(a)(ii) and (iii) of the GST Regulations. However, Entity X submits that the supply of Entity Z shares has no nexus with any consideration. As such, on the basis that subparagraph 40-5.09(1)(a)(i) of the GST Regulations is not satisfied the acquisitions by Entity X relating to the demerger can not relate to a supply which is input taxed. We do not agree with this submission and are of the view that the supply of Entity Z shares are made for consideration. Section 9-15 of the GST Act provides the meaning of the term consideration and states: (1) Consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply. … (3) However: (a) if a right or option to acquire a thing is granted, then: (i) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or (ii) if there is no such additional consideration - there is no consideration for the supply; and Goods and Services Tax Ruling GSTR 2002/2, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2), provides a discussion on the meaning of consideration. Paragraph 33 to 35 of this ruling state: Consideration 33. The provision, acquisition or disposal of an interest is a financial supply if it is for consideration and it meets the other requirements of regulation 40-5.09. Thus, a single transaction between two parties can involve two financial supplies - the provision or disposal of an interest for consideration and the acquisition of an interest for consideration. 34. 'Consideration' as used in the GST regulations has the same meaning as in the GST Act. Consideration is defined in section 195-1 to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition'. For there to be a provision, acquisition or disposal of the interest 'for consideration', there must be sufficient nexus between the consideration and the particular supply. 35. Consideration for a financial interest is something given for the provision, acquisition or disposal of the financial interest. Part of what is given as consideration may include promises made, or rights granted, under a contract. In the context of financial supplies, the payment received is consideration for the provision or disposal of the financial interest and the payment made is consideration for the acquisition of the financial interest. Where consideration is given for the 'first' supply, there is no need to identify consideration specific to the acquisition-supply (the 'second' supply), as the acquisition will have been made for consideration. Where the financial supply has been made ' for consideration' , the acquisition-supply will also be ' for consideration' . The Scheme provides that Entity X will reduce its share capital by the Amount which will be applied against each ordinary share. Consequently the value of each ordinary share in Entity X held by the Entity X shareholder after the demerger will be reduced. This reduction in share capital is intrinsically linked to the supply of shares by Entity Y. That is, as part of Entity X reducing the share capital Entity X will be obliged to pay Entity Y the Amount as consideration for the transfer by Entity Y of the Entity Z shares. Therefore, it is our view that there is clearly a nexus between the payment made by Entity X and the supply of the Entity Z shares owned by Entity Y to the Entity X shareholder. That is, consistent with paragraph 33 to 35 of GSTR 2002/2 we consider that the payment received by Entity Y from Entity X is for consideration and made in connection with the supply by Entity Y of the Entity Z shares. As, the requirements of section 9-15(1) of the GST Act are present, subparagraph 40-5.09(1)(a)(i) of the GST Regulations is satisfied. Entity X acknowledges that it is possible to argue that the promise by it to pay Entity Y the Amount to procure the supply of the Entity Z shares may have constituted consideration for the supply of those shares. However, it submits that this amount cannot be viewed as consideration because it is a payment made between two entities in the same GST group. Therefore the payment should be disregarded because the group is treated as a single entity for GST purposes. Entity X's conclusions are inconsistent with the Commissioner's view and also with the policy behind the grouping provisions. The Commissioner has outlined his view on the principles behind the grouping provisions from time to time and more particularly in Goods and Services Tax Ruling GSTR 2005/4, Goods and services tax: arrangements of the kind described in Taxpayer Alerts TA 2004/6 and TA 2004/7: use of the Grouping or Margin Scheme provisions of the GST Act to avoid or reduce the Goods and Services Tax on the sale of new residential premises (GSTR 2005/4). They key principles in GSTR 2005/4 for the purposes of this ruling can be elicited from paragraphs 42- 46 which state: 42. Under Division 48 the GST payable on any taxable supply that a group member makes is payable by the representative member and is not payable by the member that made it unless the member is the representative member. The purpose of the grouping provisions is to reduce the cost of accounting for intra-group transactions by ignoring those transactions for GST. 43. The intention of the provisions is based on the assumption of a neutral GST effect within the group and that GST will be payable by the representative member on the added value within the group when a taxable supply is made out of the group. Subsection 48-40(3) provides that section 48-40 has effect despite section 9-40 and 13-15 (which are about liability for GST). However, this only applies to transactions between members of the group. It is improbable that it was ever intended that a transaction out of the group would not be subject to GST because of an intra-group transaction. 44. The Commissioner considers, given the evident policy of the provisions in Subdivision 40-C and the Commissioner's view on the meaning of previously sold in paragraph 40-75(1)(a), the intra-group sale does not prevent GST being payable by the representative member on the sale of the completed premises to a third party. 45. Division 48 provides advantages in relation to administrative and cash flow costs. The choice to use a group structure, the GST grouping provisions and an intra-group transaction do not override the intention of the Act that GST should be payable on the first sale of new residential premises. 46. The Commissioner considers it is improbable that Parliament intended that the intra-group sale should have the effect of avoiding or reducing the GST on the sale of new residential premises. That would be inconsistent with the evident policy of the legislation that new residential premises first sold after the introduction of GST should bear GST. Consistent with the principles in CIC Insurance Ltd set out at paragraph 38, the Commissioner considers that a Court would prefer a construction of Subdivision 40C and subsection 48-40(2) that did not lead to that improbable outcome (emphasis added). Therefore, we consider that where there are payments and/or supplies made between group members, Division 48 of the GST Act provides only an administrative concession. However, that does nothing to disturb the nature of the transactions within the group to characterise transactions that take place from the group to external third parties. Therefore, it is our view that Entity Y satisfies the requirements provided by subregulation 40-5.09(1) of the GST Regulations and the supply by Entity Y of the Entity Z shares will be an input taxed supply. Consequently, to the extent any acquisitions are made by Entity X in relation to the supply of Entity Z shares under the Demerger, such acquisitions will not be made for a creditable purpose.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: Entity X carried out a demerger of all shares in its wholly owned subsidiary, Entity Z. | Entity X is the GST group representative of the group which includes Entity Y and Entity Z. | Entity X holds a 100% interest in Entity Y and Entity Y holds 100% interest in Entity Z. Therefore Entity Z is an indirectly wholly-owned subsidiary of Entity X. | Under the terms of the Scheme between Entity X and its shareholders, Entity X will: | · reduce its share capital by an Amount and | · in satisfaction of reducing its share capital Entity X will be obliged to pay an Amount equal to the reduced share capital (the Amount) as consideration for the supply of Entity Z shares by Entity Y to the shareholders of Entity X. | At no stage during the process did the shareholders of Entity X have any option or entitlement to receive anything other than shares in Entity Z. | The shareholders of Entity X were not required to make any payment in cash or in kind for any shares in Entity Z which were supplied to them under the Demerger. | Upon the Demerger taking effect, Entity Z ceased to be a member of the GST Group.