Part 1 of this series posted on 27 March 2012 (link) discussed the claiming of input tax credits for GST incurred on M&A costs. This post looks at the ability to make later adjustments to the input tax credits claimed (or not claimed), and other issues including claiming 75% reduced input tax credits (RITCs) and structuring to reduce unnecessary irrecoverable GST costs.

As a recap, assuming the ‘financial acquisitions threshold’ in Division 189 is breached, Division 11 of the Australian GST Act denies input tax credits to the extent acquisitions relate to making supplies that “would be input taxed”, eg acquisitions or disposals of shares or units. There can be some real practical issues with working out from when and to what extent input tax credits should be denied. As a further complication, Division 129 requires later adjustments to input tax credit claims to the extent an acquisition was actually “applied” for a different purpose.

The ATO Guide referred to in the previous post only deals with claiming input tax credits under Division 11. A separate ATO Determination, GSTD 2012/3, deals with whether the Division 129 adjustment provisions can apply where the intended input taxed supply does not proceed at all, or does not proceed in the manner contemplated when the input tax credits entitlements were calculated.

The ATO view is that generally Division 129 will not apply, unless it can be said that the services acquired were applied or reapplied after the change in intention (eg advice which is still relevant to the changed form of transaction). The ATO then gives several examples, but the facts of each scenario need to be carefully considered. The debate that went into forming the published view is evident by the Determination specifically acknowledging an alternative view that gives Division 129 more application, which could be said to adopt a more literal interpretation of the relevant legislative provisions. This may ultimately be tested in the courts, but the current ATO view is a win for taxpayers where partial input tax credits were claimed along the way but the ultimate transaction was input taxed, as the input tax credits claimed may not need to be paid back.

Other important issues include determining which entity will acquire the shares or units, and which entity some or all of the costs will be incurred by or re-charged to, to limit unnecessary irrecoverable GST costs, particularly when international investments are involved.  Agreements or other documents supporting the cost or fee arrangements may need to be put in place. There have been a number of disputes with the ATO over very large amounts of input tax credit claims, where the problems may have been averted by upfront consideration of the GST impact of alternative structures.

A final point to mention is the ATO concern about taxpayers bundling costs together into “arranging services” to obtain 75% RITCs as referred to in Taxpayer Alert TA 2010/1 and in ATO Determination GSTD 2011/3.

Item 9 of the table in subregulation 70-5.02(2) of the GST regulations provides for 75% RITCs for the “[a]rrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security”. This can for example cover investment banking and brokerage services.  Advisory, due diligence, valuation, public relations and prospectus printing services may not, by themselves, be RITC-eligible according to the ATO’s views in ruling GSTR 2004/1, as not being “arranging services”, although they may become RITC-eligible when bundled into an overall arranging service supplied by a financial supply facilitator.

A financial supply facilitator for the purposes of item 9 could be a related entity of the entity making the input taxed supply but, analysing GSTD 2011/3, for RITCs to be available it is important to establish and support the role and substance of the “arranging” entity in the corporate/trust group, and the character of the services it actually supplies.

For taxpayers that already make input taxed supplies in the normal course of their business and so are generally denied input tax credits anyway, an important issue is from what point in time actual “arranging” commences, as opposed to preparatory activities, so that RITCs can start to be claimed under item 9, similar to the time analysis referred to in the previous post.

In conclusion, there are a number of important issues for businesses to consider in dealing with costs associated with M&A activity. There can be a fine (or vague?) line as to from when and to what extent input tax credits should be denied. Later GST adjustments may be available or required. Setting up appropriate structures and documentation upfront could reduce unnecessary input tax credit denial and disputes with the ATO. Taxpayers involved in such activities should seek specialist assistance in this regard.