IPO’s, capital raisings and mergers and acquisitions: have you considered GST & the Financial Acquisitions Threshold (the FAT)?
There are specific GST rules for making financial supplies, including IPO’s, capital raising, mergers and acquisitions, and dealings in shares. While financial supplies are usually input-taxed and therefore do not attract a liability to remit GST, they generally have no GST recovery on expenses relating to these supplies.
The purpose of the financial acquisitions threshold (the FAT) is to allow entities that make a relatively small amount of financial supplies, as compared to their taxable supplies or GST-free supplies, to claim full input tax credits relating to those financial acquisitions.
Therefore, if you do not exceed the financial acquisitions threshold, you will be entitled to full input tax credits for your acquisitions relating to financial supplies.
However, if you do, there are complex rules in place to determine your GST liability and the time it arises. Typically, the FAT needs to be considered when looking at the GST position in relation to IPO’s, capital raising, mergers and acquisitions in particular.
How to determine if your GST is affected
In determining the GST input tax credits (or reduced input tax credits) that may be available when a financial supply takes place, the following steps need to be followed:
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Determine if the FAT is exceeded.
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If it is, determine when the breach took place.
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Identify which acquisitions relate to the financial supply.
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Identify if any reduced input tax credits (RITCs) are available on any of these acquisitions (these are specified in Regulation 70-5.02).
The FAT Test
You exceed the FAT if you make, or are likely to make, financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:
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$150,000, or such other amount specified in the Regulations (first limb test), or
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10% of the total amount of input tax credits to which you would be entitled (second limb test).
If either or both of these levels are exceeded, an entity will have exceeded the FAT.
You will determine whether you exceed the financial acquisitions threshold in a given month based on your acquisitions in:
This means that it is a 'look back test' and a 'look forward test' for any given month.
Steps in applying the FAT
Input tax credits are normally not available for acquisitions made for making “financial supplies”.
The meaning of “financial supply” is set out in sec 40-5 and has a meaning given by the regulations.
However, section 11-15(4) allows input tax credits for acquisitions made for financial supplies if you do not exceed the “financial acquisitions threshold” (the FAT). The FAT test is defined in sec 189-5 and 189-10.
If the FAT is exceeded, the normal rules with regards to input tax credits apply (i.e. you can’t get them).
However, Division 70 allows that, in some cases, acquisitions relating to financial supplies can attract a “reduced input tax credit” (RITC), even though no input tax credit could arise under the basic rules.
Inputs that are “reduced credit acquisitions” are set out in the regulations. The RITC percentage is 75% for acquisitions relating to IPO’s and capital raisings.
When the FAT should be considered
Typically, financial supplies include (but are not limited to):
Why the FAT should be considered
The main (but not only) triggers for consideration of the FAT are IPO’s, capital raising, mergers and acquisitions. These are often high-profile arrangements and result in the ATO sending a questionnaire in the first instance to ensure that businesses have considered the FAT in calculating their GST liability.
Penalties apply if they have not.
Important to note
The GST as it relates to financial supplies can be very complex. For that reason, this summary should be seen as an overview only and a simplified guide. It should not be relied on for making decisions on significant GST issues. Further advice should be sought on such matters.
More information
If you would like to find out more, or need any assistance, please contact your local Moore Australia advisor.