Edited version of private ruling

Authorisation Number: 1011816559364

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Ruling

Subject: GST and sale of business assets to a foreign entity

Question 1

Was The Entity's sale of business assets (Business Assets) to the Foreign Purchaser a GST-free supply pursuant to either item 2, 3 or 4 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

The Entity's sale of Business Assets to the Foreign Purchaser was a GST-free supply pursuant to item 2(a) of subsection 38-190(1) of the GST Act.

Question 2

Are the services provided on The Entity's' behalf by its directors and employees to the Foreign Purchaser (other than the Training Services provided to the Foreign purchaser's employees or personnel in Australia) a GST-free supply pursuant to item 2 in subsection 38-190(1) of the GST Act?

Answer:

The services provided on The Entity's' behalf by its directors and employees to the Foreign Purchaser (other than the Training Services provided to the Foreign Purchaser's employees or personnel in Australia) is a GST-free supply pursuant to item 2(a) in subsection 38-190(1) of the GST Act.

Relevant facts and circumstances

The Entity conducted an online affiliate marketing business (Business) which advertised and marketed promotional offers coupons, and discounts from its contracted affiliates and merchants (Affiliated Businesses) through an online business system (Website). The Website is accessible by internet users across the world. A majority of the Affiliated Businesses are located and conducted outside Australia. The Entity operated the Business from leased premises in Australia (Business Premises). The Entity was entitled to receive commission from the Affiliated Businesses based on various criteria including the number of visits to the Affiliated Businesses' websites via a Link on the Website, and ultimate purchases made by the internet users of the Website via the Link on the Website.

The computer servers used to operate the Business are located overseas. The Entity had no contact with the clients of the Affiliated Businesses nor did it receive any payment from such clients, The Entity received income from the Affiliated Businesses directly. The Entity did not own an interest in any Affiliated Business. Pursuant to an Asset Purchase Agreement dated November 2010, The Entity sold its business assets used in the conduct of the Business, comprising:

· Accounts receivable, inventory and prepaid or other current assets;

· Contracts;

· Books and records;

· Intellectual Property, including the relevant domain name;

· Goodwill associated with the business and intellectual property;

· To the extent their transfer is permitted by Applicable Law, all Permits; and

· Australian and foreign intellectual property rights.

(Collectively the referred to as the Business Assets) to the Foreign Purchaser in 2010 (Asset Sale).

The lease of The Entity's' Business Premises was not transferred to the Foreign Purchaser nor was the Foreign Purchaser granted any right to occupy the Business Premises as the Foreign Purchaser would not operate the Business in Australia. No inventory was actually transferred from The Entity to the Foreign Purchaser under the Asset Purchase Agreement as The Entity's did not use or acquire any inventory to conduct the Business before Completion. The Business Assets comprise only intangible assets except for contracts, books and records. All contracts, books and records relating to the Business and forming part of the Business Assets:

· were uploaded and maintained by The Entity in an electronic database, and

· were supplied to the Foreign Purchaser by The Entity making that electronic database available to the Foreign Purchaser at completion of the Asset Sale.

Since completion of the Asset Sale, The Entity has provided the Foreign Purchaser with certain transition services with respect to the operation of the Business Assets and the Business (Transition Services) in a contractor capacity under a separate agreement between the Foreign Purchaser and The Entity dated on or around November 2010 (Transition Services Agreement). The Transition Services include:

· responding to any queries that the Foreign Purchaser has or may have in relation to the operation of the Business and the Business Assets; and

· training the employees and other personnel of the Foreign Purchaser to use the Business Assets (Training Services);

· but exclude the provision of services directly to Affiliated Businesses and the clients of the Affiliated Businesses for and on behalf of the Foreign Purchaser.

In consideration for the provision of the Transition Services, The Entity is entitled to receive a service fee from the Foreign Purchaser. The Transition Services (other the Training Services) are generally provided by the directors and some of the employees of The Entity on its behalf, either by phone or electronic mail or any other means, from the Business Premises. However, occasionally the directors or employees of The Entity may be required to travel overseas to provide the Transition Services (other than the Training Services).

The Training Services were provided by the directors and some of the employees of The Entity on its behalf to the employees of the Foreign Purchaser at the Business Premises and the premises overseas used by the Foreign Purchaser to operate the Business following completion of the Asset Sale. The Transition Services Agreement will expire 6 months following completion of the Asset Sale (ie. May 2011). The Entity was at the time of the Asset Sale, and still is, registered for GST. The Foreign Purchaser was not, and is not currently, registered for GST. The Foreign Purchaser has advised The Entity that the Foreign Purchaser:

· is a wholly owned subsidiary of an overseas corporation;

· does not, and does not intend to, carry on any business in Australia;

· is a non resident for the purposes of the GST Act;

· does not have any subsidiary in Australia; and

· does not have any presence in Australia.

Question 1

Summary

The Entity's sale of Business Assets to the Foreign Purchaser was a GST-free supply pursuant to item 2(a) of subsection 38-190(1) of the GST Act. Given this outcome, the provisions of items 2(b), 3 and 4 of subsection 38-190(1) of the GST Act were not considered.

Detailed reasoning

A supply is taxable where it meets the requirements of section 9-5 of the GST Act:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

The GST-free provisions of items 2, 3 and 4 of subsection 38-190(1) of the GST Act may be relevant to Stateless System's sale of Business Assets to the Foreign Purchaser.

38-190 Supplies of things, other than goods or real property, for consumption outside Australia

(1) The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property):

A universal requirement of subsection 38-190(1) of the GST Act is that the supply being dealt with is something other than goods or real property. In this regard we consider that The Entity's' supply of the Business Assets broadly to be one of:

· accounts receivable, inventory and prepaid other current assets;

· contracts;

· books and records;

· intellectual property;

· goodwill; and

· permits

In regard to assets, there are exclusions of tangible assets such as organisational documents, tax records, leased real property, furniture and equipment. While 'inventory' was included as a Business Asset, you have stated that no inventory was actually transferred under the Asset Purchase Agreement as The Entity did not use or acquire any inventory to conduct the Business before Completion. We consider that The Entity's' supply can be dealt with under subsection 38-190(1) of the GST Act.

A universal requirement of item 2 of subsection 38-190(1) is that the supply being dealt with must be made to a non-resident who is not in Australia when the thing supplied is done.

You state that as at Completion; the Foreign Purchaser was not in Australia; the Foreign Purchaser was not registered with ASIC at the relevant times; the transfer of Business Assets took place electronically to the Foreign Purchaser's business premises or legal advisers overseas or by The Entity simply making its electronic database available to the Foreign Purchaser.

You also state that the Foreign Purchaser has advised that before and after Completion:

· it did not carry on any business or activity in Australia either on its own, at its own place, through an agent at a fixed and definite place in Australia or otherwise; and

· it did not have a permanent establishment in Australia for Australian income tax law purposes or under the relevant double tax agreement.

You have not disclosed any doubts as to the Foreign Purchaser's presence in Australia, we concur that the Foreign Purchaser meets the requirement of being a non-resident that was not in Australia when the thing supplied was done.

A further requirement stipulated in item 2(a) in subsection 38-190(1) of the GST Act is that the supply is:

… neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; …

The Entity's' supply of Business Assets to the Foreign Purchaser is characterised above. Our characterisation of the supply is one of mainly intangible assets and does not include work physically performed on goods. While some services were contracted to be supplied to the Foreign Purchaser, these formed part of a separate transaction as outlined in the Transition Agreement. Further, we concur with earlier arguments that the Business Assets did not include and are not directly connected with real property in Australia.

The Entity's' supply of the Business Assets to the Foreign Purchaser is considered to meet the initial requirements of item 2(a) in subsection 38-190(1) of the GST Act. However subsequent subsections contain exclusions to the GST-free status conferred by item 2(a). In particular subsections 38-190(2), (2A) and (3) state:

(2) However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be *connected with Australia and would not be *GST-free.

(2A) A supply covered by any of items 2 to 4 in the table in subsection (1) is not *GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of *real property situated in Australia that would be, wholly or partly, *input taxed under Subdivision 40-B or 40-C.

Note: Subdivision 40-B deals with the supply of premises (including a berth at a marina) by way of lease, hire or licence. Subdivision 40-C deals with the sale of residential premises and the supply of residential premises by way of long-term lease.

(3) Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:

(a) it is a supply under an agreement entered into, whether directly or indirectly, with a *non-resident; and

(b) the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

We consider that subsection 38-190(2) of the GST Act will not negate the GST-free status conferred. The supply of the Business Assets cannot be characterised as one of a right or option to acquire something. As stated above, the supply is one of definite things rather than rights to acquire those things.

Further, subsection 38-190(2A) of the GST Act will not negate the GST-free status of the supply as the supply of Business Assets does not relate directly or indirectly to the making of an input taxed supply of real property situated in Australia.

Finally, subsection 38-190(3) of the GST Act will not negate the GST-free status of the supply as the Asset Purchase Agreement stipulates that the supply of the Business Assets was made by The Entity to the Foreign Purchaser. There is no apparent direction to ensure that the supply be provided to another entity in Australia.

Question 2

Summary

The services provided on The Entity's' behalf by its directors and employees to the Foreign Purchaser (other than the Training Services provided to the Foreign Purchaser's employees or personnel in Australia) is a GST-free supply pursuant to item 2(a) in subsection 38-190(1) of the GST Act. Given this outcome, the provisions of item 2(b) of subsection 38-190(1) of the GST Act were not considered.

Detailed reasoning

The requirements of item 2(a) of subsection 38-190(1) of the GST Act are discussed above. Briefly, The Entity's' supply of Transition Services is a supply of things other than goods or real property.

The supply of Transition Services is generally made by phone or electronic mail from the Business Premises, or on occasion The Entity's' directors or employees are required to travel overseas to provide the services. As discussed earlier, the Foreign Purchaser has no telling presence in Australia in regard to the supply of Business Assets, we consider that this situation does not change when Transition Services are supplied.

Transition Services are services rather than work physically performed on goods situated in Australia. Further, Transition Services are not directly connected with real property in Australia.

The Entity's' supply of Transition Services to the Foreign Purchaser is considered to meet the initial requirements of item 2(a) in subsection 38-190(1) of the GST Act.

We consider that subsection 38-190(2) of the GST Act will not negate the GST-free status conferred. The supply of Transition Services cannot be characterised as one of a right or option to acquire something. The supply made is one of services rather than one of rights to acquire those services.

Further, subsection 38-190(2A) of the GST Act will not negate the GST-free status of the supply of Transition Services as the supply does not relate directly or indirectly to the making of an input taxed supply of real property situated in Australia.

Finally, subsection 38-190(3) of the GST Act will not negate the GST-free status of the supply as the Transition Services Agreement stipulates that the supply of the Transition Services is to be made by The Entity to the Foreign Purchaser. While there is a general provision of assignment included at clause 15 of the Transition Services Agreement, there is no evidence that the parties have agreed to direct The Entity's' supplies be provided to another entity in Australia.

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