On 1 December 2011 the Commissioner issued GSTD 2011/3 ‘Goods and services tax: do the acquisitions of the services provided under the arrangement described in Taxpayer Alert TA 2010/1 form part of a reduced credit acquisition made by the financial supply provider under item 9 of the table in in sub regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999?’

The Determination was previously issued as draft GSTD 2011/D2 and is based upon the arrangement outlined in Taxpayer Alert TA 2010/1.

Nature of the arrangement targeted

The major elements of the arrangement targeted by the Determination are as follows:

• An entity (A) identifies a potential takeover target (B) and establishes a special purpose company (the FSP) for the purpose of acquiring the shares in the target.  The FSP is registered for GST but does not enter into a GST Group with A;
• A enters into an Arranging Services Agreement (ASA) with FSP to supply the FSP with a bundle of services described as ‘arranging services’, being for the purposes of the takeover, and include tax, legal and public relations advisory services in relation to the proposed transaction and investment banking services.
• A acquires the relevant tax, legal, public relations and investment banking services from third parties and claims input tax credits on those acquisitions.
• A supplies these services to FSP (as a taxable supply), calculating its fee by reference to the costs incurred in paying the third party providers – this supply is described as a single supply of ‘arranging services’ and a tax invoice is issued to that effect;
• A is a financial supply facilitator (FSF) as set out in regulation 40-05.07 as it helps take forward the securities transaction through the services it supplies to the FSP;
• FSP claims a reduced input tax credit (RITC) for its entire acquisition of the ‘arranging services’ acquired from A – FSP would not have been entitled to an RITC on some of the acquisitions, such as tax, legal and public relations services, had it acquired those services directly from the service providers
• FSP makes an input taxed financial supply when it acquires the shares in B.

Consideration

The Commissioner considers that under the above arrangement, FSP is only entitled to claim an RITC for the investment banking services and not for the legal, accounting or public relations services.  In taking this approach, the Commissioner contends that there is not a single supply or acquisition of ‘arranging services’ under the ASA, but rather a mixed supply and acquisition, constituted by the investment banking services (entitled to an RITC as an ‘arranging service’) and the other services (i.e., tax, legal and public relations) which are not ‘integral, ancillary or incidental’ to the ‘arranging service’.  As stated at paragraph 25 of the Determination:

The tax, legal and public relations advisory services by themselves do not have a sufficient connection to the ‘arrangement’ by the FSF of preparing or planning the merger and acquisition to be properly described as arranging.

The Commissioner finds support for this approach in GSTR 2002/2 ‘GST treatment of financial supplies and acquisitions’, where it is stated that ‘To work out whether there is a mixed acquisition, the Ruling states that the characterisation of the thing acquired must be viewed from the perspective of the acquirer and the key question is what ‘in substance and reality” is acquired for the consideration paid.”  This approach is consistent with the decision of the Full Court in Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113 at [52] and [55] (noting the Commissioner has sought special leave to appeal); Saga Holidays Limited v Commissioner of Taxation [2006] FCAFC 191 at [42]-[43]; Travelex Ltd v Commissioner of Taxation [2010] HCA 33 at [32] and [47]; Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20 at [15].

Under the arrangement outlined above, the Commissioner considers that the the lack of integration by FSF of the tax, legal and public relations services into the preparation, planning and settlement services indicates that FSP has made a mixed acquisition from FSF.  This shows that no general rule can be made and that the circumstances of each matter will need to be considered.  Indeed, at paragraph 28 of the Determination the Commissioner accepts that the position could be different if there was not a “mere passing on” of the acquisitions from third party providers, and the third party services were truly incorporated into the services of arranging a share acquisition.

Anti-avoidance – Division 165 and Sham

The Commissioner considers that variations to the particular arrangement described above may warrant consideration of the anit-avoidance provisions of Division 165 of the GST Act or the common law concept of sham.  This shows that the Commissioner may still look at such arrangements very closely, even if the agreement and the circumstances show that the third party services were truly incorporated into the services of arranging the share acquisitions, rather than simply being “passed on”.

1 December 2011