Edited version of private ruling

Authorisation Number: 1011740649342

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Ruling

Subject: Group Sale of a Going Concern

Question

Do the supplies under the arrangement of interests in X and the associated assets by the Applicants to the Recipient, for the purposes of creating a joint venture interest, constitute GST-free supplies of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act)?

Answer

Yes the supply by each applicant of an interest in X and associated assets to the Recipient are GST-free supplies of a going concern under the arrangement for purposes of section 38-325 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Applicants are an economic group of companies involved in a joint venture project and distribution of product.

The Applicants and the Recipient intend to enter into an Agreement to facilitate the inclusion of the Recipient into the existing joint venture enterprise operated by the Applicants.

The Applicants are registered for GST

Under the terms of the proposed agreement each Applicant will supply part of their property interests in X and associated tangible and intangible assets (as defined in the proposed agreement) to give the Recipient an interest in the Project.

Under the proposed agreement the Recipient has agreed to pay the defined consideration which is based on costs incurred to the date of completion.

The Applicants and the Recipient propose to enter into an Agreement to provide the parties with certain rights, including governance rights, and obligations in respect of their participating interests and third party X contractual economic interests.

Under the Agreement

· Where the Applicants are unable to transfer a legal interest to the Recipient on Completion because certain legal requirements have not been met in respect of a Third Party X, the Applicants have agreed to grant a contractual economic interest in each of the Third Party Xs and the associated assets ; and

· The Recipient agrees to be responsible for the liabilities associated with those interests.

The sale of the interests by the Applicants to the Recipient is pursuant to a broad joint venture alliance. The parties will execute agreements which will document their intentions to, amongst other things, further develop, manage and operate underlying joint venture assets.

Under the terms of the Agreement, the Applicants agree to use their best endeavours to obtain the satisfaction of the relevant Regulatory Approvals and third party consents required to ensure that the Purchaser obtains the full benefit of the Applicants interests in respect of the assets to be supplied.

Each of the Applicants and the Recipient agree that the respective supply of the Assets is a supply of a separately identifiable enterprise and is a supply of a going concern for the purposes of subdivision 38-J of the GST Act.

Each of the Applicants agree to supply to the Recipient all things necessary for the continued operation of the relevant enterprise for the purposes of subdivision 38-J of the GST Act.

Each of the Applicants agree to carry on the relevant enterprise until the day of supply of the enterprise for the purposes of subdivision 38-J of the GST Act.

The Recipient is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

Reasons for decision

A supply will be a taxable supply if the requirements set out under section 9-5 of the GST Act are satisfied. The section provides that an entity makes a taxable supply if:

(a) the entity makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on

(c) the supply is connected with Australia, and

(d) the entity 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.

The Participants intend to enter into an agreement with the Recipient to supply property interests for consideration. The supply will be in the course of the joint venture enterprise that the Participants carry on. The supply is connected with Australia because the interests relate to land and rights situated in Australia. All of the Participants are registered for GST.

The supply will satisfy the positive requirements of section 9-5 of the GST Act. However, the supply will not be a taxable supply to the extent that it is GST-free or input taxed.

There are no circumstances which would make the supplies input taxed under Division 40 of the GST Act.

You have argued that the supply will be GST-free under Subdivision 38-J Supplies of going concerns, of the GST Act.

The supplies will be GST-free if they satisfy the requirements of section 38-325 of the GST Act which provides:

(1) The supply of a going concern is GST-free if:

(a) the supply is for consideration; and

(b) the recipient is registered or required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2) A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act. It also explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.

Subsection 38-325 (1)

Supply for consideration

Under the Agreement the Participants have agreed to sell and the Recipient has agreed to buy property interests which are defined in the Agreement:

The consideration payable is also identified in the Agreement. The exact amount has not been quantified; however, a methodology for calculating the consideration by reference to reasonable, documented and verified costs in relation to the interests being supplied is contained in the definitions clause.

The agreement details a supply for consideration.

Registered for GST

The Recipient is registered or required to be registered for GST.

Agreement in writing

A clause provides an agreement between the Applicants and the Recipient that the supplies by each applicant will constitute the supply of a going concern for the purposes of the GST Act.

The Recipient acknowledges it is registered for GST and will continue to be registered up to and including the day of the supply of the interests.

Conclusion on subsection 38-325 (1)

We concur that, under the agreement, the requirements of subsection 38-325(1) are satisfied.

Subsection 38-325 (2)

A supply under an arrangement

The definition for a supply of a going concern under subsection 38-325(2) of the GST Act requires that the supply be made under an 'arrangement'.

Paragraph 19 of GSTR 2002/5 explains:

19. A supply is defined in section 9-10.  The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.  However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the identified enterprise).

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.  (Refer to paragraphs 178 to 185 for more details.)  However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

The arrangement is identified in the joint venture agreements. The supplies under the terms of the agreements are under an arrangement for the purposes of section 38-325 of the GST Act.

What is the identified enterprise?

The definition of 'enterprise' under subsection 9-20(1) of the GST Act includes an activity, or series of activities, done in the form of a business.

Under the agreement the Applicants will agree to continue operating a joint venture enterprise of the specific business up to and including the day of supply. A joint venturer's interest in the specific business is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Paragraph 195 in GSTR 2002/5 explains that each individual joint venturer is capable of conducting an enterprise separate from the other joint venturers. Provided that all of the requirements of section 38-325 are satisfied, it is possible then for an individual joint venturer to make a GST-free supply of a going concern. This will be the case provided that what is supplied is all of the things that are necessary for the continued operation of the identified enterprise that is conducted by the joint venturer.

It is possible for each of the Applicants to make a GST-free supply of a going concern when they supply an interest that, combined with the other interests under the arrangement will culminate in a joint venture interest of the continuing enterprise.

What are the things that are necessary for the continued operation of an enterprise?

The definition of a supply of a going concern requires that the supplier supply to the recipient all of the things that are necessary for the continued operation of an enterprise.

Paragraphs 47 of GSTR 2002/5 provides:

47. … The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

In the present circumstances, each applicant is the supplier of an enterprise.

What things are necessary for the continued operation of an enterprise is a question of fact and degree, which is determined from the supplier's perspective. It is an objective test of the things that are necessary for the continued operation of the identified enterprise. Therefore, what is objectively necessary to operate the supplier's enterprise should the recipient choose to continue it and depends on what the supplier in fact uses to operate.

Paragraphs 72 of GSTR 2002/5 explains as follows:

72.  The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'.  The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. …  

Paragraph 75 of GSTR 2002/5 provides:

75.  Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

The supplies to be made to the Recipient are interests in the assets and X that make up the business operations under the joint venture arrangements. The identified enterprise is part of that larger enterprise. Following completion, the Recipient's interests will form part of the assets and X of the continuing business operations under the joint venture arrangements.

Because the joint venture operations will continue following completion of the arrangement, we conclude that all of the things that are necessary for the continued operation of an enterprise have been supplied.

The supplier will carry on the enterprise until the day of the supply

The agreement provides that each Applicant will carry on their respective enterprise until the day of the supply.

As part of a larger enterprise carried on by the supplier

You advise that the intended supplies by the respective Applicants form part of the larger enterprise carried on by the group, as contemplated by section 38-325(2)(b) of the GST Act.

Conclusion

We can conclude that all of the things necessary for the continued operation of an enterprise will be supplied and the enterprise will continue until the day of completion and subsequently.

We concur that under the proposed agreements the requirements of subsection 38-325(2) of the GST Act will be satisfied.

The supplies by the Applicants under the agreement will be GST-free supplies of a going concern to the Recipient.

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