Are you entitled to an input tax credit pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the acquisition of services from the Advisors?
Yes. The expenditure incurred by you was acquired for a creditable purpose as it was solely for the creditable purpose of carrying on your enterprise under sub-section 11-15(1) of the GST Act and was not related to you making input taxed supplies. The sale of the shares by the shareholders was a separate supply made by the shareholders and not a supply by you. This ruling applies for the following period : 1 April 20XX to 1 April 20XX
You are a company incorporated in Australia and are registered for the goods and services tax (GST). All sales by you are either taxable supplies to which GST applies or GST-free supplies. You do not make any input taxed supplies in the ordinary course of your business. You engaged advisors to provide advice on the future direction of the company. A share purchase agreement (SPA) was entered into. The Advisors were not engaged to provide services to the shareholders and you did not make any supplies for consideration to the shareholders in relation to the transaction.
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)
In this ruling: • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all terms marked by an *asterisk are defined terms in the GST Act. What is a financial supply? Section 40-5 provides that a financial supply is input taxed. Financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). The provision, acquisition or disposal of an interest in shares is a financial supply under item 10 in the table in subsection 40-5.09(3) of the GST Regulations. It needs to be determined whether the sale the company via a share sale to an unrelated party is a financial supply made by the company. The Commissioner considers the sale of the shares in the company were made by the shareholders of the company and not by the company. Therefore, there is no financial supply made by the company. What is a creditable acquisition? Section 11-5 provides that you make a creditable acquisition if: a) you acquire anything solely or partly for a creditable purpose; and b) the supply of the thing to you is a taxable supply; and
c) you provide, or are liable to provide, consideration for the supply; and d) you are registered, or required to be registered, for GST. In order to claim the input tax credits for acquisition of the Advisors services section 11-5 needs to be satisfied. In this case, you have made acquisitions in respect of the Advisors fees. The Advisors fees acquired by you were taxable supplies to you. You are registered for GST and you are liable to provide payment for the acquisitions. Therefore, paragraphs (b), (c) and (d) of section 11-5 are met. What remains to be determined is whether paragraph (a) of section 11-5 is also satisfied. The meaning of 'creditable purpose' is defined in section 11-15, which 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 the acquisition relates to making supplies that would be input taxed. Goods and Services Tax Ruling GSTR 2008/1: when do you acquire anything or import goods solely or partly for a creditable purpose
(GSTR 2008/1) at paragraph 69 in relation to the connection between the thing acquired and the enterprise provides: 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. Paragraph 70 of GSTR 2008/1 provides some of the factors relevant to determining whether an acquisition is made in carrying on an enterprise and states: 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. The services provided by the advisors, which were engaged directly by and provided to the company involved an analysis of and assistance with various strategic options. The company acquired the services of the Advisors in ensuring the best outcome for the company and as such these costs are considered enterprise costs. The acquisitions made from the Advisors were not acquired for a private purpose or in connection with the entity making supplies that would be input taxed. Therefore, the acquisitions are for a creditable purpose and the requirements section 11-5 are satisfied. Division 72
Division 72 ensures that supplies and acquisitions from 'associates' without consideration are brought within the GST system. Division 72 also ensures that supplies made for inadequate consideration are valued at their proper value for GST purposes. Meaning of 'associates' An '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. Section 318(2) of the ITAA 1936 categorises the types of entity capable of being an associate of a company (not acting in the capacity of trustee) as follows: (a) a partner of the company or a partnership in which the company is a partner. If the partner of the company is a natural person, that person ' s spouse and children are also associates of the company (b) a trustee of a trust where the company (or an associate of the company) benefits under the trust; (c) an entity that (together with any associates) controls more than 50% of the maximum number of votes that may be cast at a general meeting of the company, or any associate of that person or entity; (d) a controlled company of the company; and
(e) an associate of a third entity, where the third entity is itself an associate of the primary company by virtue of being a controlling entity. Based on the information provided the Commissioner does not consider that Division 72 has application in this case. In summary The sale of the shares in the company by the shareholders was a separate supply made by the shareholders and not a supply by the company. The acquisitions made from the Advisors are an enterprise cost and were not acquired for a private purpose or in connection with the entity making supplies that would be input taxed.