08 Aug 12 Acquisition of intangible right for inflated consideration financed by supplier - TA 2012/5
On 8 August 2012, the ATO issued Taxpayer Alert TA 2012/5 entitled "Acquisition of intangible right for inflated consideration which is financed by supplier".
The Taxpayer Alert describes an arrangement where an entity claims an input tax credit on a purported acquisition (on non-commercial terms) of an intangible right from a GST-registered supplier, with the provision of vendor finance under which payments are contingent on a future event. In some cases, the purchaser is not obliged to pay anything unless and until the purchaser makes profits from exploiting the right. Any payments (including interest) are limited to a proportion of the profits.
The vendor accounts on a cash basis and does not remit the GST. The purchaser contends that it is entitled to an input tax credit on the acquisition in the tax period in which the tax invoice is received, either on the basis that an invoice has been issued to them or that consideration has been provided.
The ATO considers that arrangements outlined above give rise to taxation issues that include whether:
- the purchaser has made a creditable acquisition at all - there would not be a creditable acquisition if there is no taxable supply by the supplier; if the acquisition by the purchaser is not made in carrying on an enterprise; or if the purchaser does not provide, and is not liable to provide, consideration;
- the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied;
- the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply to the arrangement, as it appears artificial and contrived in its design and execution; and
- the arrangement, or certain steps within it, may constitute a sham at general law.
The ATO says that it is currently reviewing these arrangements.
In media release No 2012/35, issued 8 August 2012, the ATO said that it considers that the use of vendor finance agreements where payments to the supplier are dependent on an implausible future outcome do not create an obligation to pay. Further, agreements are seemingly structured so that the corresponding GST payment by the supplier is unlikely to occur.
"We are concerned about arrangements which included uncommercial features and which therefore may be ineffective under Australian tax laws. Under this arrangement, the purchaser may not be entitled to input tax credits," the Commissioner, Michael D'Ascenzo said.