GST and entitlement offer to new shares

Is the entity, which does not exercise a right to acquire shares under an entitlement offer, but is subsequently paid a premium amount, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

No, the entity, which does not exercise a right to acquire shares under an entitlement offer, but is subsequently paid a premium amount, is not making a taxable supply.

The entity is registered for GST and buys and sells shares in the course or furtherance of its enterprise.

The entity acquired a number of shares in a company (the company).

At a later date, the company announced an entitlement offer to its eligible shareholders. The offer provides each shareholder with an entitlement to subscribe for a certain number of new shares at a set offer price per share, based on the number of shares held by the shareholder at a specific date.

The entitlement cannot be traded on the Australian Securities Exchange or any other exchange, nor can it be privately transferred.

New shares attributable to the entitlement offer that are not taken up by eligible shareholders will be offered under a program to other investors (the program). The prospectus specifically indicates that this is what occurs when a shareholder 'does nothing' in relation to the entitlement offer.

If the price achieved in the program (sale price) is higher than the offer price, eligible shareholders will be paid the difference between these two amounts (the premium amount).

The entity is an eligible shareholder under the entitlement offer and it did not take up any of its entitlement to subscribe for new shares. Consequently, a bundle of new shares not taken up under the entity's entitlement were offered for subscription under the program and sold above the offer price. The entity therefore received a premium amount from the company.

There was no arrangement under which the entity agreed with the company or any other entity to allow the entitlement to lapse; or under which the entity may have played some other part in the acquisition of the shares by the other investors.

Subsection 7-1(1) of the GST Act provides that GST is payable on a taxable supply.

Under section 9-5 of the GST Act, an entity makes a taxable supply if: (a) it makes the supply for consideration (b) it makes the supply in the course or furtherance of an enterprise that it carries on (c) the supply is connected with Australia, and (d) it is registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this instance the issue is whether the entity makes a supply for which the premium amount is consideration. The meaning of 'supply' is given in section 9-10 of the GST Act. Subsection 9-10(1) of the GST Act provides that a 'supply is any form of supply whatsoever.' Subsection 9-10(2) of the GST Act provides a non-exhaustive list of things that are included as supplies.

The Commissioner's view on the meaning of 'supply' is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies. GSTR 2006/9, amongst other things, sets out a number of propositions to assist in analysing a transaction to identify the supply or supplies made in the transaction.

Proposition 5: to 'make a supply' an entity must do something is explained in paragraphs 71 and 72 of GSTR 2006/9: 71. In overseas jurisdictions the term 'supply' has been held to takes its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities: In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'. (Emphasis added.) 72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations. (Footnotes omitted)

The entity did not exercise its entitlement to take up the new shares by the closing date. By not exercising its entitlement by the due date the entitlement lapsed. The entity did not enter into any arrangement to allow the entitlement to lapse, so that another party could benefit. It is our view that simply letting the entitlement lapse in this manner does not itself form any positive action.

As the entitlement had lapsed the new shares were sold by the company in its own right not as an agent for the entity. Therefore, we do not consider the sale of the new shares to other entities is a result of any positive action by the entity.

Given there is no positive action taken by the entity, we do not consider that the entity has made a supply for which the premium amount may be regarded as consideration.

Therefore, the entity, which does not exercise a right to acquire shares under an entitlement offer, but is subsequently paid a premium amount, is not making a taxable supply. Note: Because the requirements of regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 are not satisfied, the entity is also not making an input taxed financial supply under subsection 40-5(1) of the GST Act.