GST and brokerage services for foreign shares listed overseas

Is the supply of brokerage services by entity A to entity B that facilitates the sale or purchase of shares in companies incorporated overseas, that are listed on an overseas exchange, GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Yes, the supply of brokerage services by entity A to facilitate the sale or purchase of shares in companies incorporated overseas that are listed on an overseas exchange, is GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act, as the services are in relation to rights and the rights are for use outside of Australia.

Entity A carries on an enterprise in Australia and supplies brokerage services to entity B that is buying or selling shares.

The shares are listed on an overseas securities exchange and are bought or sold as on-market transactions.

The shares are in companies incorporated overseas.

The supply of brokerage services to buy or sell shares in companies incorporated overseas that are listed on an overseas exchange will be GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act (Item 4) if: • the supply of brokerage services is a supply made in relation to rights; and • the rights are for use outside of Australia.

We consider that a supply of a service is made in relation to rights if the service is directly connected with rights. Services will be directly connected with rights if, for example, they affect the ownership of a thing and the essential character or substance of that thing is of rights.

The value of the share is in the rights that are attached to it. The rights of each shareholder in relation to each class of share are usually contained in the relevant law applicable to the share or the company's constitution (or the equivalent documents in overseas jurisdictions). A share is comprised of a bundle of rights; those rights are not separate pieces of property capable of being divided out and held separately. The nature of shares and the rights attached to shares are described in paragraphs 18 to 26 of TR 94/30 Income tax : capital gains tax implications of varying rights attaching to shares , and the view is supported by a large body of case law.

Whilst it is recognised that the detail of the rights that attach to shares (or stock) in companies incorporated overseas may vary, at a broad level the rights attached to a share generally consist of: • a right to participate in dividends and equity distributions whilst the company is a going concern; • a right to participate in distribution of assets on winding up; • a right to vote.

The brokerage services supplied by entity A are services that facilitate the change in ownership of the shares. The brokerage services have a direct connection with rights because through the acquisition or sale of the share, the recipient of the brokerage services acquires or sells the rights that are attached to the share.

Therefore, the supply of brokerage services is a supply made in relation to rights.

Under paragraph (a) of Item 4 the rights must be for use outside of Australia.

It is the intended use of the rights attached to the shares that is relevant in assessing the application of paragraph (a) of Item 4 to the supply of the brokerage services to buy or sell shares.

In Travelex Ltd v. Commissioner of Taxation [2010] HCA 33 at 35 ( Travelex ) the High Court considered whether the supply of Fijian currency by the appellant, Travelex, on the departure of the Customs barrier at Sydney International Airport to an individual travelling to Fiji was a 'supply made in relation to rights' for the purpose of Item 4. French CJ and Hayne J noted that 'where it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside Australia.

The analysis by the High Court is also relevant to shares, in that, if it is evident that the shares are to be used overseas, the rights that are attached to the shares will also be for use outside of Australia.

There could be a variety of intended uses of a share and these uses will also be considered a use of the rights attached to the share. Any or all of the following could be examples of the intended use of a share: • to generate an income flow or return of equity through the right to dividend or equity distributions; • to influence the direction of the company through the right to vote; • to generate a capital gain or profit (if a trader) through the on-supply of the share, and therefore the disposal of the rights attached to the share.

We consider that, if the company in which particular shares are held was incorporated in an overseas location and those shares are listed on an exchange in that overseas location, the rights attached to those shares will be for use in that overseas location. This is the case even if the holder of the shares is in Australia at the time any dividend is declared or received, or is in Australia at the time any on-sale of the shares it may make takes place.

In summary, the supply of brokerage services to buy and sell shares in companies incorporated overseas that are listed on an overseas exchange is a supply that is made in relation to rights that are for use outside Australia. Accordingly, the supply is GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act.