Holden & Bolster Avenir Newsletter – July 2006

Does your Company have a FAT problem?

If your company is involved in mergers and acquisitions you need to be aware of GST and the financial acquisitions threshold (“FAT”).

In most cases GST works by a supplier charging GST on its supplies to its customers and forwarding the collected GST to the ATO. On the flipside of this, the GST paid on purchases (“inputs”) are claimed back from the ATO as “input tax credits”. GST is thus collected and paid and there is no expense or revenue to the supplier. GST is therefore ultimately borne by the end user.

However some supplies, including “financial supplies”, are “input taxed”. This means the supplier does not charge GST on the supply, but cannot claim input tax credits on acquisitions. In this case the GST paid on the input is a deductible expense. A common example of a financial supply is a loan made by a bank.

Another example of a financial supply is a share. If your company supplies (sells) a share in a subsidiary company to another party, it is making a financial supply. There is no GST charged on the sale but conversely input tax credits cannot be claimed on acquisitions made in relation to making the supply. These acquisitions can be legal, accounting and due diligence costs. These can be substantial.

As a concession, input tax credits can be claimed if the company does not exceed the financial acquisitions threshold.

The FAT is exceeded where the input tax credits on the financial acquisitions exceeds either or both of the following:

• $50,000; or

• 10% of the total amount of input tax credits to which the business is entitled.

To determine whether the FAT has been exceeded in a given month, it is required to test for financial acquisitions in:

• The given month and the previous 11 months; and

• The given month and the estimated next 11 months.

The test is conducted on a month by month basis.

Where the FAT is exceeded, there may be an entitlement to a “reduced input tax credit” (75%) on specific acquisitions as specified in the GST regulations. An example of such a specific acquisition may be the services of a consultant who has facilitated the financial supply and is paid a success fee.

Disclaimer: The above is a general overview. For further information and specific advice please contact this office.