So, before I start – yes, an Initial Public Offering (IPO) is a major milestone event, and GST may seem trivial in the overall context of an IPO. However, as an accountant I feel dutybound to find savings wherever I can for my clients, particularly when the money raised from an IPO is to be used to meet a company’s expected use of funds set out in a Prospectus, and not for a nasty little wrinkle in GST legislation called the Financial Acquisitions Threshold (FAT).
What is the FAT?
Ordinarily, GST paid on acquisitions made in connection with the making of a financial supply is not creditable. However, you may be entitled to input tax credits for acquisitions relating to financial supplies if you do not exceed the Financial Acquisitions Threshold.
The FAT establishes how much can be recouped as an input tax credit for acquisitions made in making financial supplies in any given 12-month period. The FAT will be exceeded where the input tax credits related to making those acquisitions would exceed the lesser of either:
- $150,000 in input tax credits from financial supplies, or
- 10% of the total input tax credits available in the test period (see below).
In determining whether the FAT will be exceeded in a given month, you must consider whether the acquisitions made, and the total input tax credits available, are above the thresholds for each of two test periods:
- In the current month and the previous 11 months, and
- In the current month and the upcoming 11 months.
Where the FAT is exceeded, input tax credits will generally not be available, unless the acquisition can qualify as a reduced credit acquisition. Where an acquisition relating to financial supplies is treated as a reduced credit acquisition, a reduced input tax credit (RITC, generally 75% of the GST paid on the acquisition) may apply. There are only limited acquisitions that can attract a reduced input tax credit, meaning that a breach of the FAT will often result in GST paid on acquisitions being lost to the entity. These provisions are supplemented by two rulings by the Commissioner of Taxation and are inherently technical.
Why is this important to IPOs?
An IPO will generally be considered a financial supply, meaning that many of the costs of the IPO, like those from brokers, lawyers and accountants, are considered to be acquisitions connected to making a financial supply. Therefore, all these costs need to be analysed in determining whether or not the FAT is exceeded. Given that the threshold is a ‘hard’ threshold, any breach of either limb means that all acquisitions relating to financial supplies are excluded from accessing the full input tax credit.
Importantly for IPOs, the Prospectus requires a full account of costs of the IPO, both in setting out the use-of-funds and in the financial information sections. The applicability of FAT, at a potential penalty greater than $150,000, suddenly becomes very relevant in understanding how a company will:
- acquit its funds post Prospectus, and
- map out costs of the IPO in the Prospectus document that is not materially misleading to investors.
What should practitioners be doing?
Going into an IPO, the CFO and auditor should have a model for tracking acquisitions directly connected to the IPO, relative to total taxable supplies, to understand where their FAT is and ensure that the threshold is not breached.
Where the threshold limit is tested, understanding the company’s position in relation to the FAT will be relevant to the structuring of commercial arrangements for remunerating brokers and professional advisors around the Prospectus.
This may present an opportunity in structuring arrangements in terms of managing the timing of the financial supply credits and how they are structured. As an example, there may be a stronger incentive for brokers to discount their cash % commission entitlement in favour of a share-based compensation arrangement.
Bearing these in mind, smart CFOs and corporate advisors engage with their accounting advisors early in the piece to see what practical strategies are available to them in this process to minimize the potential negative outcomes of a breach of the FAT threshold.