Adjusting GST on merger and acquisitions services when the plans change

On 28 September 2011, the ATO released a draft GST Determination (GSTD 2011/D3) dealing with whether GST on services acquired in relation to a proposed merger and acquisition can be adjusted if the merger or acquisition does not go ahead as planned. The relevant law is in s 129-40 of the GST Act.

The determination states that an adjustment is allowed if certain differences arise between acquiring and applying the service.


Adjustment allowed if difference arises between acquiring and applying the service.

The ATO's determination states that if a service is acquired and applied in carrying on an enterprise, then an adjustment can only arise under s 129-40 if there is a difference between:

  • the extent that the service relates to input taxed supplies at the time it is acquired, and
  • the extent that it relates to input taxed supplies when it is actually applied in carrying on the enterprise.

The ATO takes the view that the connection to input taxed supplies for the purpose of Division 129 is determined in the same way as for Division 11. It says the difference between the two is that:

  • for Division 11 the connection is judged at the time of acquisition; and
  • for Division 129 it is at the time of application.

Therefore, the ATO says "where an acquisition is used in preparing for an intended supply or in the process of making a decision whether to proceed with the supply, that acquisition is applied in contemplation of the supply under consideration. If the intended supply is an input taxed supply, the application of the acquisition is not for a creditable purpose. The fact that the transaction does not eventuate will not affect his conclusion".

Two examples

The ATO provides the following 2 examples of proposed M&A transactions and whether a Division 129 adjustment arises.

Example 1

  • A company acquires due diligence and other advisory services in relation to a proposed M&A transaction for the purchase of another company's shares.
  • As the intended purchase of the shares would be an input taxed financial supply, the proposed transaction changes to the purchase of assets in the other company due to problems discovered from due diligence.
  • The Draft Determination states that:
    • as the actual application of the services (due diligence and other advisory services) reflected their intended application, no adjustment arises under Division 129; and
    • this is the case even though the transaction undertaken is different to the transaction that was contemplated at the time the services were acquired.

Example 2

  • The facts are similar to those in example 1, except the acquirer is a mining company and also engages a firm of consultants to provide a valuation for the mineral deposits in relation to the purchase of shares in the acquiree.
  • The valuation is then later reused to determine the bid price for the assets of the acquiree.
  • The Draft Determination states the valuation services provided were incorporated and reflected by the final report provided. Therefore, an adjustment arises under Division 129 as the service had been applied as intended but is then later also applied for a different purpose.

Date of application

When the final Determination is issued, it is proposed to apply both before and after the date of issue.

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please