Today the Commissioner published GST Determination GSTD 2012/3 “Goods and Services tax: does an adjustment for a change in extent of creditable purpose necessarily arise for services acquired in relation to a proposed merger and acquisition transaction that does not eventuate, or that does not proceed in the manner contemplated at the time the services were acquired?”

The Determination is the finalisation of Draft GST Determination GSTD 2011/D3.

The short answer in the Determination is “No”.  In taking this view, the Commissioner is of the view that an adjustment under Division 129 cannot be determined simply by reference to the outcome of the transaction.  Rather, the focus is on how the particular services have been used (or are intended to be used).  As noted at paragraphs [4] – [6] of the Determination:

Services acquired in the context of proposed M&A transactions typically include due diligence and other advisory services.  In many cases, those services are applied in evaluating or preparing for a proposed transaction.  If there has been no change in the extent to which those services relate to an input taxed supply between the time they are acquired, and the time they are used in evaluating or preparing for a transaction, the intended use of the services and their actual use are the same.  Accordingly, there is no change in the extent of creditable purpose of the services.

One the other hand, there may be a change in creditable purpose if the services are applied or reapplied at a time when there has been a change in the intended transaction.

The termination of a proposed transaction would not ordinarily give rise in itself to a Division 129 adjustment because services are not applied or reapplied for a different purpose once the transaction is terminated.

In summary, if the intended transaction is by way of a share transaction (an input taxed supply), input tax credits will not be available for services acquired in relation to that transaction if it proceeds and also, no adjustment will be available if the transaction does not proceed.

To understand the impact of the Determination (and the scope for dispute) it is useful to have regard to the “Alternative views” section at paragraphs [52]-[58].  If the matter went before a Court, the resolution may well come down to whether  the literal construction is to be observed (favouring the “alternative view”) or the purposive or substantive view (favouring the Commissioner’s view).

In considering the competing views, it is helpful to reproduce paragraphs [53]-[55] of the Determination:

[53] An alternative view argues that an entity should not be denied input tax credits on acquisitions relating to intended input taxed supplied that do not in fact eventuate.  On this view Division 129 should operate to ensure that an enterprise that otherwise makes only taxable supplies does not incur irrecoverable GST on its inputs.  This view is concerned with judging creditable purpose by reference to supplies that are actually made, rather than by the use to which an acquisition is put.  On this view:

(a) where an intended input taxed supply is not in fact made, there has been no application of the thing to a non-creditable purpose, and Division 129 may operate to produce a decreasing adjustment; and

(b) where the acquisition is used in contemplation of a taxable supply or a GST-free supply, but an input taxed supply is ultimately made, Division 129 may operate to produce an increasing adjustment.

[54] This view is said to be supported by the difference in wording of the ‘creditable purpose’ test in paragraph 129-50(2)(a) (which uses the term ‘are input taxed’) compared to the test in paragraph 11-15(2)(a) (which uses the term ‘would be input taxed’ and incorporates nexus to intended supplies).  The difference in terminology is treated as significant and an ordinary reading of the words of paragraph 129-50(2)(a) is said to lead to a conclusion that it must refer to supplies that are in fact made.  This view argues that whilst Division 11 is concerned with the hypothetical, Division 129 is concerned with what has actually happened, and that if the test in the two divisions were meant to be the same, the same words would have been used.

[55] We think that the better view is that the tests in Division 11 and Division 129 are not intended to be inherently different, but merely that one is judged at the time of acquisition, and the other at the time of application. Although the definition of creditable purpose in Division 129 refers to supplies that are input taxed, in our view this merely reflects the fact that application of a thing will typically be contemporaneous with supplies made using the thing.  Further, as noted in paragraph 48, subsection 129-50(3) refers to supplies being treated for paragraph 129-50(2)(a) purposes as supplies that ‘would be’ input taxed.

I can see arguments in favour of both sides.  The Commissioner quite properly refers to the comments of Hill J in HP Mercantile Pty Ltd v FCT [2005] FCAFC 126 (at [46] and [48) as being consistent with his approach.  However, one only has to consider decisions such as Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886  and Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 to see the effect of a literal construction of the words of the GST Act.