GST guide on input tax relief for mergers and acquisitions
It was generally thought that GSTR 2002/2, as it was originally released, took a view that (in merger and acquisition activities) acquisitions would relate to making a financial supply under paragraph 11-15(2)(a) of the GST law at the time at which the taxpayer had formed a definite intention to pursue the acquisition or disposal of shares.
The discussion came under the “Belvedere example” in the ruling. Following the late Justice Hill’s clarification of the meaning of the example (in the HP Mercantile decision), the principle of a “time line” approach has been rejected by the ATO.
For three years, the professional bodies have been engaged in discussions with the ATO to obtain an understanding of how costs incurred in merger and acquisition activities are to be apportionment between the various purposes and outcomes that arise.
On 1st June 2011 the ATO released a “GST guide” entitled “claiming input tax credits on acquisitions made in connection with a merger and acquisition activity”
The guide can be found at http://www.ato.gov.au/content/00281268.htm
The main criticism that can be levelled at both the guide and the process leading up to it is that the ATO would not engage on the question of what the required nexus was between an acquisition and the possibility of a future input taxed supply to engage the operation of paragraph 11-15(2)(a).
As a result the following “guidance” is provided in the guide:
- The practical guidance provided by this guide focuses on whether the acquisition relates to making supplies
- that would be input taxed. For this purpose, a sufficient connection is established between acquisitions and supplies that would be input taxed if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or is intended to be used, solely or to some extent for the making of supplies that would be input taxed.
- In the context of M&A, not all of the possible transactions that might arise would be input taxed financial supplies. You will need to assess the character of the relevant supplies on a case-by-case basis. For example, if you are planning to buy shares in a target entity (an input taxed supply), then to the extent that an acquisition relates to buying those shares, it would not be for a creditable purpose. This is so regardless of whether or not you are committed to proceeding with the purchase of shares or ultimately do purchase the shares.
- On the other hand, if you are planning to buy the assets of an enterprise and use the assets to make supplies that are taxable or GST-free, to the extent your acquisitions relate to the purchase of that enterprise, they may not be related to making supplies that would be input taxed and may be for a creditable purpose.
The description of how acquisitions made in a variety of “phases” of the deal are viewed from the point of view of “remoteness” to input tax supplies, confirms that, early in the deal, acquisitions may not be able to be related to an input taxed supply that might result from the undertaking.
This is the view that the ATO takes of the initial phase of the activity in which preliminary activities occur “at different levels within an organisation that may be looking at new business opportunities, restructuring and expansion plans, internal review of strategic objectives and divestment opportunities.”
But as the examination moves beyond the exploratory and high-level to the specific and detailed, the guide indicates that there is sufficient nexus for the denial of input tax credits to operate.
An extract of the discussion surrounding remoteness from an input taxed supply is:
- Acquisitions of services such as the provision of advice on taxation, regulatory, contractual or other matters in the context of an M&A activity need to be examined to determine whether or not they relate to a specific form of M&A transaction or a number of different forms indifferently. As a general proposition, however, we do not consider that taxation advice relating to the M&A activity per se constitutes an overhead cost – that is, it is not sufficiently connected to the M&A transaction. Rather, the creditable purpose of such advice will need to be determined on the basis of the nature of that advice and the particular purpose or purposes to which it is directed.
Where acquisitions relate indifferently to the alternative forms an M&A transaction may take, in determining creditable purpose you will need to assess the degree of relatedness to any potential input taxed supply. - This should be assessed by reference to the current preferences or decision of the enterprise (for example, senior management or the board) in conducting the M&A, as at the time of acquisition.
- If this is not possible because no sufficiently defined approach to the proposed transaction has been developed, there might be other objective factors that could be used to establish creditable purpose. For example, for a business that engages in M&As regularly, this might be done by reference to the business’s track record of successful M&A transactions.
- On the other hand, there may be no particular objective factors that indicate the form in which the M&A is likely to occur. If it is reasonable to consider that it is about as likely as not that the M&A will be conducted in a manner that gives rise to an input taxed supply as a non-input taxed supply, a fair and reasonable approach may be to claim 50% of the input tax credits.
The guide does not cover changes in application of the acquisitions that might be affected by Division 129 of the GST law.