Private ruling: GST - input tax credits
Date of advice: 27 November 2024
Published: 13 January 2025

Ruling: Q1: Are the acquisitions of Company A, the consideration for which are the Transaction Costs, made in the course or furtherance of its enterprise pursuant to subsection 11-15(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. | Q2: If the answer to Question 1 is yes, are such acquisitions made in relation to any supplies of Company A's that would be input taxed pursuant to paragraph 11-15(2)(a) of the GST Act? | A2: No. | Q3: Is Company A making a taxable supply to the shareholders under section 9-5 of the GST Act? | A3: Yes.

Relevant facts and circumstances: Company A (You) are registered for GST and your overall enterprise consists of taxable and GST-free supplies. Your shareholding consists of two shareholders. A third party proposed acquiring all the shares in the company by your shareholders. You sought corporate, legal and tax advice to effect the Transaction. The costs for the advice are referred to in this ruling as the Transaction Costs. You did not provide copies of the advice received to the shareholders. You have not exceeded the financial acquisitions threshold (FAT).

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 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 40-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 72 | A New Tax System (Goods and Services Tax) Regulations 2019 subsection 40-5.09(3) | Income Tax Assessment Act 1936 section 318

Reasons for decision: Summary: The acquisitions of Company A, the consideration for which are the Transaction Costs, are made in the course or furtherance of its enterprise pursuant to subsection 11-15(1). | Detailed Reasoning - Reasons for decision: Section 11-15 provides when something is acquired for a creditable purpose. The section states (in part): (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. (3) ... | Detailed Reasoning - Are Company A's acquisitions made in carrying on its enterprise?: Subsection 9-20(1) provides, amongst other things, that an enterprise is an activity, or series of activities, done in the form of a business, or in the form of an adventure or concern in the nature of trade. The definition of 'carrying on' an enterprise can be found in section 195-1 'carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.' We are satisfied that Company A (You) are carrying on a business therefore, satisfies the tests set out in section 9-20. As such, the next issue to be considered is whether the services acquired by you, the consideration paid for those services being the Transaction Costs (hereafter referred to as the 'Transaction Acquisitions' for convenience), were acquired by you in carrying on your enterprise. 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) provides at paragraph 64 that whether something is acquired in carrying on an enterprise requires a connection or link between the thing acquired and the enterprise. Paragraphs 69 and 70 of GSTR 2008/1 state: 69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative. 70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that: • the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise; • the thing acquired is used by the enterprise in making supplies; • the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise; • the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise; • the acquisition does not meet the personal needs of individuals such as partners or directors; • the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and • the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise. Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies provides guidance on when an acquisition or importation is made in 'carrying on your enterprise'. 51. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. The acquisition must be made in the course of the activities that constitute your enterprise. An acquisition is made 'in carrying on your enterprise' if it is made for the purposes of that enterprise, but not if it is made for some other purpose. 52. The test for establishing whether you have made an acquisition in carrying on your enterprise is broader than the test for income tax deductibility. Under section 195-1, 'carrying on' is defined to include the commencement or termination of your enterprise. For example, usually the cost of a feasibility study incurred in commencing a business is not deductible for income tax purposes, while acquisitions for the same study conducted in the course of commencing an enterprise could be creditable acquisitions under the GST Act. You maintain that the Transaction Acquisitions incurred by you from the various professional advisors were engaged directly by you and involved work that related to the implementation of the Transaction. The costs extended to but were not limited to doing the due diligence activities relating to the Transaction which concerned the 'sale' of the business by way of a Share Sale and Purchase Agreement by your shareholders. On an objective assessment of the facts and circumstances in this case, it is accepted that your acquisitions under the Transaction, consideration for which are the Transaction Costs, are made in the course or furtherance of your enterprise pursuant to subsection 11-15(1). | Detailed Reasoning - Question 2: If the answer to Question 1 is yes, are such acquisitions made in relation to any supplies of Company A's that would be input taxed pursuant to paragraph 11-15(2)(a)? | Summary: The acquisitions referred to at Question 1 are not made in relation to any supplies of Company A's that would be input taxed pursuant to paragraph 11-15(2)(a). | Detailed Reasoning - Reasons for decision: In determining whether paragraph 11-15(2)(a) is satisfied it must be established whether the relevant acquisitions relate to supplies that would be input taxed. In this case, the supplies in question are the sale of the shares in the company by the shareholders (the Transaction). The sale of shares will be a financial supply if it satisfies the requirements of section 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). Financial supplies are input taxed as per section 40-5 of the GST Act. Before considering if section 40-5.09 of the GST Regulations is applicable to these facts, it's necessary to first establish whether paragraph 11-15(2)(a) of the GST Act requires the 'supplies that would be input taxed' to only be made by the acquirer of the acquisition, or can the supplies be made by another entity. Paragraphs 101 to 106 of GSTR 2008/1 explain the requirements of paragraph 11-15(2)(a) in more detail: | Detailed Reasoning - Part B - Determining a connection between an acquisition and the making of supplies that would be input taxed: 101. In this section we explain the Commissioner's approach to determining whether an acquisition relates to the making of supplies that would be input taxed. If it is established that an acquisition is made in carrying on an enterprise, paragraph 11-15(2)(a) will preclude it being for a creditable purpose to the extent that it 'relates to' making supplies that would be input taxed. In this section of the Ruling, all of the examples assume that the acquisitions have been made in carrying on an enterprise. 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. 104. Unlike subsection 11-15(1), paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) can be ascertained by its relationship with the other provisions of the GST Act. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future. 105. If the acquisition relates to supplies that would be input taxed, paragraph 11-15(2)(a) precludes it from being for a creditable purpose. Division 129 then focuses on the actual usage of the acquisition and adjusts accordingly, depending on whether the actual usage relates to input taxed supplies. 106. Paragraph 11-15(2)(a) does not require tracing to a specific supply. Nevertheless, unlike subsection 11-15(1), it requires some form of connection to the supplies that the entity makes, made or intends to make. It is clear from the above discussion in GSTR 2008/1 that paragraph 11-15(2)(a) requires you, the acquirer to be the entity that makes the supply that 'would be input taxed' in order for it to be triggered and deny the related acquisitions from being creditable. The Transaction Acquisitions were made by you in relation to the Transaction - which is the sale of shares held by the shareholders. It is the shareholders that are the ones making the supply of the shares, not the company itself. As a result, paragraph 11-15(2)(a) does not apply, and it is not necessary to further consider whether the sale of the shares would be financial supplies under section 40-5.09 of the GST Regulations and therefore input taxed under section 40-5 of the GST Act. Therefore, your acquisition of the Transaction Acquisitions does not relate to making supplies that would be input taxed, pursuant to paragraph 11-15(2)(a). | Detailed Reasoning - Question 3: Is Company A making a taxable supply to the shareholders under section 9-5 of the GST Act? | Summary: Company A is making a taxable supply to its shareholders under section 9-5 of the GST Act. | Detailed Reasoning - Reasons for decision: Section 9-40 provides that goods and services tax (GST) is payable on taxable supplies. Section 9-5 states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed. | Detailed Reasoning - Does Company A make a supply to its shareholders?: The meaning of 'supply' is set out in section 9-10 which states: (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; (ii) to refrain from an act; (iii) to tolerate an act or situation; (b) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). Subsection 9-10(2) does not limit subsection 9-10(1). Something that is not listed in subsection 9-10(2) but falls within subsection 9-10(1) will be a supply. Paragraphs 22 and 23 of GSTR 2006/9 outline 16 propositions which may be relevant to characterising and analysing supplies. The most pertinent of the propositions on these facts include: • Proposition 1: For every supply there is a supplier • Proposition 2: Generally, for every supply there is a recipient and an acquisition • Proposition 5: An entity will make a supply if it provides something of value to another entity • Proposition 6: 'Supply' usually, but not necessarily, requires something to be passed from one entity to another • Proposition 16: The total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply Paragraphs 222 and 223 of GSTR 2006/9 explain the meaning of Proposition 16 in the following terms: 222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes. 223. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which the transactions are made. This was made clear by McTiernan J in Radaich v. Smith (1959) 101 CLR 209 at 214: ...the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it. and by Gray J in Re Porter; Re Transport Workers Union of Australia (1989) 34 IR 179 at 184: A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it....the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck. You contend that you have not made a supply to your shareholders for the following reasons: • The Transaction Costs have been incurred for the benefit of the company's long-term strategic growth objectives. • You did not enter into any agreements or arrangements (implied or otherwise) for the supply of any advice or other transaction services to the shareholders. • All services undertaken by the advisors engaged by you were provided directly to you and not to the shareholders. Even though the facts do not show an express agreement for you to on-supply the advice you received from the advisors that were engaged as part of the Transaction, we disagree that you do not make a supply to the shareholders. A lack of an express agreement does not prevent there from being a supply being made for GST purposes if the totality of the factual circumstances suggest something of value has been passed from one entity to another. As explained above, the concept of supply is far broader than an entry into an arrangement to provide something (whether that arrangement is set out in writing or not). Proposition 5 of GSTR 2006/9 makes it clear that if an entity merely provides something of 'value' to another entity, then that is sufficient for there to be a supply for the purpose of section 9-10. The facts suggest that you sought advice with the intention of the shareholders benefitting from that advice, even if not supplied with copies of that advice specifically. The advice procured by you is valuable to the shareholders because it provides due diligence and advice around the merits of the purchase proposal, which assists shareholders determine whether to support that proposal. Furthermore, money has been expended by you (and not the shareholders) to procure this advice, which also benefits the shareholders. In your submissions you referred to subsection 181(1) of the Corporations Act 2001 (Corporations Act), which requires directors of a corporation to exercise their powers and discharge their respective duties in good faith in the best interest of the corporation. You submitted that in relation to a proposed acquisition or change of control, subsection 181(1) requires the company directors to provide its shareholders with sufficient information to allow them to make an informed decision regarding a proposal from a potential buyer, and further submitted that, on this basis, you have incurred the costs for the purpose of satisfying the statutory requirements imposed on the enterprise. We agree with your submissions in relation to subsection 181(1) of the Corporations Act - namely, that the costs associated with engaging the advisors in relation to the Transaction have been incurred as part of satisfying subsection 181(1) to ensure shareholders are provided with sufficient information in relation to the Transaction to make an informed decision whether or not to accept the buyer's proposed purchase of the shares. There is a direct connection between you engaging the advisors, and you providing sufficient information to shareholders to enable them to make an informed decision about the Transaction as part of the director duties in subsection 181(1) of the Corporations Act. Based on the above analysis, we consider that you have made a supply to the shareholders, within the meaning of section 9-10, by passing on the benefit of the advice you received from the advisors in relation to the Transaction to the shareholders as part of satisfying your obligations under subsection 181(1) of the Corporations Act, to enable the shareholders to make an informed decision about whether to support the proposal under the Transaction. The advice is valuable to the shareholders given it provides due diligence and advice regarding the Transaction. | Detailed Reasoning - Is the supply made to shareholders for consideration under paragraph 9-5(a)?: Section 9-15 of the GST Act defines consideration for a supply to include any payment or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything. In this case, no consideration was provided by the shareholders to you in respect to the supply provided. Where supplies are made to an associate for no consideration or inadequate consideration, the special rules in Division 72 of the GST Act may bring such supplies within the GST system. The intent of the associate provisions is reflected in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998, which states at paragraph 6.88: | Detailed Reasoning - Supplies between associates are brought into the GST system if the recipient of the supply is not entitled to a full input tax credit.: Further, as confirmed in Paragraph 174 in the Explanatory Memorandum to the Tax Laws Amendment (2009 GST Administration Measures) Bill, the intent of the associate provisions under the GST Act were to ensure that a supply to an associate that would be a sale (or some other particular kind of supply) if made without consideration will be taken to be a supply with consideration. Relevantly, subdivision 72-A refers to supplies without consideration. Subsections 72-5(1) and (2) provide: (1) The fact that a supply to your *associate is without *consideration, does not stop the supply being a *taxable supply if: (a) your associate is not *registered or *required to be registered; or (b) your associate acquires the thing supplied otherwise than solely for a *creditable purpose. (2) This section has effect despite paragraphs 9-5(a) and 84-5(1)(a) (which would otherwise require a taxable supply to be for consideration). The term associate is defined in section 195-1 as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Of relevance in this case is 'associates' of a company. Subsection 318(2) of the ITAA 1936 sets out the associates of a company. As is relevant, the associates of a company (the primary entity) are: (d) another entity (in this paragraph called the controlling entity ) where: (i) the primary entity is sufficiently influenced by: (A) the controlling entity; or (B) the controlling entity and another entity or entities; or (ii) a majority voting interest in the primary entity is held by: (A) the controlling entity; or (B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3); (e) another company (in this paragraph called the controlled company ) where: (i) the controlled company is sufficiently influenced by: (A) the primary entity; or (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or (C) a company that is an associate of the primary entity because of another application of this paragraph; or (D) 2 or more entities covered by the preceding sub-subparagraphs; or (ii) a majority voting interest in the controlled company is held by: (A) the primary entity; or (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; Subsection 318(6) of the ITAA 1936 provides interpretation for some of the expressions used in subsection 318(2) of the ITAA 1936: ... (a) a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and (b) an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company. We consider your shareholders meets the definition of associates under subsection 318 of the ITAA 1936. Therefore, we consider you are making supplies to your shareholders, who are also your associates and who are neither registered nor required to be registered for GST. Therefore, the supplies meet the requirements of section 72-5. Consequently, paragraph 9-5(a) is satisfied. For completeness, section 72-10 deals with the value of taxable supplies made without consideration. It states that where a supply to your associate without consideration is a taxable supply, its value is the GST exclusive market value of the supply. | Detailed Reasoning - The other requirements of section 9-5: It is clear from the facts that the other elements of section 9-5 are satisfied. | Detailed Reasoning - Conclusion on Question 3: As all the requirements of section 9-5 and section 72-5 are met, you make one or more taxable supplies to your shareholders. GST is payable on these taxable supplies under section 9-40.

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. | • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au