Private ruling: GST treatment of a proposed sale
Date of advice: 28 May 2018
Published: August 2018

Ruling: Q1: Will the supply of the Interest constitute an input taxed financial supply for GST purposes? | A1: Yes | Q2: Will the receipt of the amounts payable by the buyer, together with deferred amounts payable by the buyer to the supplier, constitute consideration for the supply of the Interest? | A2: Yes

Relevant facts and circumstances: The sale purchase price will include the following components: a. Initial Purchase Price - payable by Buyer 1 and Buyer 2 upon transfer of the Interest at completion; and b. Deferred Consideration - payable by Buyer 1 under a deferred consideration deed. The upfront purchase consideration received from the Buyer 1 and Buyer 2 for the transfer of the Interest will ultimately be distributed by way of capital return and dividend to the shareholders. This occurs due to the ownership rights held by the shareholders and not as a result of any action, obligation or requirement under the agreement. Following the above, 100% of the shares will be transferred to a trust, the wholly owned subsidiary of a holding trust. As a result, the supplier will cease to be a wholly owned subsidiary and will be indirectly owned by Buyer 1 and Buyer 2 at completion. The decision to defer part of the consideration to become payable under the deed was made with the intention to ensure that all potential bidders have the opportunity to allocate value between upfront and deferred, depending on their risk appetite and irrespective of their experience within the industry. This aims to level the playing field in the sale process and increase competitive tension.

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 9-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-5 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.02 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.04 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.06 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.09

Reasons for decision: Summary: 1. Under section 9-5 of the GST Act, an entity will make a taxable supply if: a. The entity makes the supply for consideration; and b. The supply is made in the course or furtherance of the entity's enterprise; and c. The supply is connected with the indirect tax zone; and d. The entity is registered or required to be registered [for GST]. However, the supply is not a taxable supply to the extent it is GST-free or input taxed. 2. It is considered that the supply will not be GST­ free under Division 38 of the GST Act on the basis that the likely counterparty will be an Australian-based entity. 3. However, the supply of the Interest will constitute an input taxed financial supply under section 40-5 of the GST Act. Section 40-5 of the GST Act states that: (1) A financial supply is input taxed. (2) Financial supply has the meaning given by the regulations. 4. Broadly, regulation 40-5.08 states that a supply will be a financial supply if the supply is mentioned as: a. A financial supply in regulation 40-5.09; or b. An incidental financial supply in regulation 40-5.10; and c. Is not mentioned in regulation 40-5.12 (which considers what supplies are not financial supplies). 5. Regulation 40-05.09 states: (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 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 supply of the interest. 6. Item 10 in the table in subregulation 40-5.09(3) lists Securities as an interest for subregulation (1). 7. In working through the above requirements in respect of regulation 40-5.09 it is considered that: ● The vendor is making a disposal, in accordance with regulation 40-5.04, of the Interest; ● The Interest (being the shares and the units) constitutes an interest in accordance with regulation 40-5.02 on the basis that the Interest is recognised at law or in equity as property; ● The disposal is made for consideration, being the purchase price and the deferred consideration (which is considered as part of Question 2); ● The disposal is made in the course or furtherance of the vendors enterprise; ● The disposal is connected with the indirect tax zone on the basis that the supply is done in the indirect tax zone or through an enterprise that the vendor carries on in the indirect tax zone; ● The vendor is registered for GST; ● The vendor is a financial supply provider in relation to the supply of the interest in accordance with regulation 40-5.06 on the basis that, immediately before the supply, the interest was the property of the vendor; and ● The Interest is an interest mentioned at item 10 of the table in subregulation 40-5.09(3), being shares in a body and units in a unit trust (per the examples provided in Schedule 7, Part 8 of the GST Regulations). 8. This view is supported by Part D of Schedule 2 to Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions , whereby: a. Line D4 states that the supply of shares in a body is input taxed under subregulation 40-5.09(3), item 10; and b. Line D16 states that the supply of an interest in a trust is input taxed under subregulation 40-5.09(3), item 10. 9. Consideration is defined in section 9-15 of the GST Act to include: 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. 10. As noted in the background facts: a. Buyer 1 and Buyer 2 are required to pay the purchase price at the time of completion; and b. Buyer 1 is required to pay the deferred consideration, calculated and payable under the deed. 11. While the calculation and payment of the deferred consideration is governed by the deed, each party must perform (or procure the performance of) all the actions to implement the completion steps contemplated as being performed, or procured, by that party (either alone or jointly with another party) in the manner and at the times prescribed for their performance. 12. On or before the completion date, the Buyer must execute and deliver an original counterpart of the deed, as well as an original counterpart of the security. 13. Additionally, it is possible that the deferred consideration amount will fluctuate depending on the eventual Buyer. 14. In addition to the above, the consideration is payable to two separate (but related) parties. 15. Consequently it is considered that that the agreement governs the arrangement between the relevant parties, under which: a. The vendor makes a supply of the Interest to Buyer 1 and Buyer 2 in the agreed proportions; b. Buyer 1 and Buyer 2 agree to pay the purchase price in relation to the supply of the Interest; and c. Buyer 1 agrees to pay the deferred consideration in relation to the supply of the interest. 16. The definition of "consideration" in section 9-15 of the GST Act does not require that the consideration be paid to the supplier of the supply. Similarly, the recipient of the payment is not determinative of whether the payment constitutes consideration. Rather a sufficient nexus must be established between the payment and a supply to determine whether that payment is consideration. 17. Relevantly, paragraph 180 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies states that: "In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that: a. the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective; b. regard needs to be had to the true character of the transaction; and c. an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made." 18. Accordingly, the supply made under the agreement by the vendor is an input taxed financial supply made for the payment of the purchase price and the deferred consideration.