The previous post referred to how the ATO has sought to apply the Travelex decision to foreign exchange businesses like Travelex itself.  The Travelex case however has further implications relating to the scope of GST-free treatment for various types of services and rights, including in respect of foreign share transactions.

Pursuant to item 4 of the table in section 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999, a supply is GST-free if it is a supply that is made in relation to rights and the rights are for use outside Australia.

The ATO on 21 December 2011 issued an addendum to its public ruling on this provision, GSTR 2003/8 (link), to deal with the Commissioner’s loss in the Travelex litigation.  An Interpretative Decision, ATO ID 2012/1 (link), issued on 6 January 2012 further discusses the implications for transactions involving foreign shares listed overseas.

The ATO now concedes that item 4 does not just apply to the creation, grant, transfer or surrender of a right, but extends to:

• supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights; and
• supplies of services directly connected with rights.

The first of these includes the bank notes dealt with in the Travelex case.  The ATO also now accepts that it covers supplies of shares.

In most situations where there is a supply of shares in a foreign company (or units in a foreign trust etc), the transaction is between an Australian enterprise and a non-resident, and the supply (or acquisition-supply) of shares by the Australian enterprise is GST-free under item 2 of the table in section 38-190(1).  However, item 2 does not cover a supply of shares in a foreign company between two Australian residents.  Contrary to its previous position, the ATO would now accept that it is a supply that is made in relation to rights, but the issue remains whether those rights are for use outside Australia.  This is addressed in ATO ID 2012/1.

The ATO comments that if the company in which particular shares are held was incorporated in an overseas location and those shares are listed on an exchange in that overseas location, the rights attached to those shares will be for use in that overseas location. This is the case even if the holder of the shares is in Australia at the time any dividend is declared or received, or is in Australia at the time any on-sale of the shares it may make takes place.  Not sure if this is consistent with the ATO’s conclusion on inbound FX transactions referred to in the previous post???

This Interpretative Decision also does not explicitly cover unlisted foreign shares, and the addendum to GSTR 2003/8 sheds no further light on this specific situation.  However the presumption must be that, in the absence of any other overwhelming contradicting fact, incorporation overseas will dictate that the rights are for use outside Australia as the rights of each shareholder is contained in and derived from the memorandum and articles of association (or the equivalent documents in overseas jurisdictions) of the company, and overseas legislative or regulatory requirements.

The sale of shares in a foreign company between two Australian residents should therefore be GST-free, with the resulting ability of the parties to claim full input tax credits for any GST they incur on associated costs.  The treatment of foreign trusts and other entities may depend upon the nature of the legal rights.

As mentioned above, the ATO also accepts that services directly connected with rights can also be covered by item 4.

In the addendum to GSTR 2003/8 and in ATO ID 2012/6 the ATO states that the supply of brokerage services is directly connected with rights as they affect the ownership of rights.  ATO ID 2012/6 goes on to conclude that, if the rights themselves are for use outside Australia, the services are in relation to rights for use outside Australia.  The supply of brokerage services is then GST-free.

The addendum to GSTR 2003/8 also discusses what other services may be directly connected with rights, including the types of legal and advisory services that are and are not covered by item 4.

Suppliers of services relating to foreign share transactions should review the GST treatment of their services going forward.  For past transactions where GST was charged to the Australian enterprise which did not claim full input tax credits (eg it only claimed 75% reduced input tax credits), the parties need to consider the ability to claim GST refunds from the ATO.

Other transactions involving tangible things which are worthless but for the bundles of rights encompassed, and services directly related to them, may also now qualify for GST-free treatment.