In our latest Tax in M&A series – or GST in M&A to be specific – we look at a threshold test that can be applied to transactions whereby businesses only make limited financial supplies. But there is a limit to how much GST can be claimed back when the threshold has been exceeded.
There are a specific set of GST rules for the provision of financial supplies, which include M&A activity, IPOs, and the purchasing and selling of shares. While financial supplies are 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 Financial Acquisitions Threshold (‘FAT’) must be considered as it acts as a mechanism to enable recovery of GST.
The FAT is a threshold test that allows businesses that only make limited financial supplies to claim back all of the GST incurred on purchases that directly or indirectly relate to making the financial supplies (‘financial acquisitions’).
It is essentially a ‘get out of jail free’ card that can be played when there are spikes of financial supply activity, such as IPOs or shares sales of a limited nature.
However, where the FAT is exceeded, businesses may be blocked from claiming back the GST incurred on financial acquisitions.
How it works
The FAT will be exceeded where the GST incurred or input tax credits on financial acquisitions exceeds one of the following in either the current or future periods:
- $150,000 (first limb test); or
- 10% of the total amount of GST incurred or input tax credits to which the entity would be entitled to for all of their acquisitions and importations (second limb test).
The current period is the current month and the previous 11 months, while the future period is the current month and the next 11 months.
What this means
Once the FAT is exceeded, an entity can no longer claim GST refunds on expenses relating making financial supplies.
An entity undergoing M&A activity, including IPOs and the purchase and selling of shares, should undertake a FAT review to ensure whether or not the FAT has been exceeded so it may determine the GST recoverability of its financial acquisitions.
Undertaking this process will allow entities to accurately determine its GST recoverability, which, in some instances, may result in GST refunds.
Example – FAT exceeded
- In August 2021, Willow Pty Ltd calculates that its total acquisitions and importations (including financial acquisitions) during the months from 1 September 2020 to 31 August 2021 are $3,300,000.
- Of that amount, Willow calculates that $1,100,000 was for financial acquisitions.
- Assuming these financial acquisitions were made solely for a creditable purpose, Willow's input tax credits for its total acquisitions and importations would be $300,000 (1/11th of $3,300,000)
- Its input tax credits for financial acquisitions would be $100,000 (1/11th of $1,100,000).
- The amount of $100,000 does not exceed $150,000 under the first limb test, however, it does exceed 10% of $300,000 ($30,000) under the second limb test.
GST Recovery – Reduced Input Tax Credits
If the FAT is exceeded, the entity may be entitled to a reduced input tax credit (‘RITC’). Specific acquisitions that relate to the making of financial supplies can give rise to an entitlement to RITC’s of 75% or 55% of any GST paid.
Typically in the case of M&A activity it will be 75% GST refund, these services are ‘arranging’ financial supplies. These are specific acquisitions listed in the GST Regulations are called ‘reduced credit acquisitions’. Careful examination of the nature of the expenses incurred will be required to determine whether the expense is eligible for the 75% GST refund.
- FAT is a combined threshold for members of a GST group. Therefore, if the group makes financial acquisitions exceeding the threshold, each group member exceeds the threshold.
Offshore acquisitions subject to reverse charge
- If an entity incurs costs that relate to the M&A activity from an offshore provider, they will typically not be charged Australian GST.
- However, under the ‘reverse charge’ rules, these acquisitions will need to be considered as part of the FAT analysis and a GST liability may need to be applied to these costs.
Working with clients
Each M&A transaction is unique and depending on the entities involved – and structures at play – GST can be charged, and also refunded. Get in touch to discuss indirect and GST implications of your transactions.