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Ruling

Subject: GST and the supply of a going concern

Question 1

Is the sale of the interest in a joint venture by the entity and the sale of an interest in the plant by the second entity a GST-free supply of a going concern?

Answer

Yes, the sale of the interest in a joint venture by the entity and the sale of an interest in the plant by the second entity is a GST-free supply of a going concern.

Relevant facts and circumstances

The operator is the GST Joint Venture operator and the following entities are participants in the joint venture (JV):

· the entity

· the second entity

· the buyer

· other participants

The JV is managed by the operator.

The JV Agreement:

· provides each participant with an interest;

· requires the second entity to build, operate and maintain the plant;

· requires the second entity and the entity to remain, at all times, related bodies corporate (the second entity is a wholly owned subsidiary of the entity);

· requires each participant to enter into an agreement with the second entity for the provision of a service;

· requires each participant to sell a portion of its product to the second entity;

· appoints the operator to manage, supervise and conduct operations on behalf of, and as agent of each participant;

· appoints the operator as the manager of the plant in accordance with an agreement;

· restricts the entity from selling any part of its participating interest without the second entity also selling an equal percentage of its interest to the same purchaser (or a related body corporate);

· restricts the second entity from selling any part of its interest in the plant without the entity also selling an equal proportion of its interests to the same purchaser.

In addition to the JV agreement, there are numerous other agreements which describe the operation of the JV and the participants obligations and entitlements.

The entity; the second entity and the buyer entered into an agreement which states that the entity is selling to the buyer:

· its interest in the JV;

· other things.

The consideration for this is expressed as amounts of money.

The sale agreement also states that the second entity is selling to the buyer its interest in the plant and will receive a sum of money.

The entity; the second entity and the buyer have entered into an agreement stating that the supplies made under the sale agreement is a supply of a going concern and that all parties are registered for GST. Both the entity and the second entity state that they will continue to operate their respective enterprises until the day of completion of the sale. It is noted in the agreement that some part of the sale agreement is not part of the supply of the going concern for GST purposes.

Relevant legislative provisions

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

Reasons for decision

Subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the supply of a going concern is GST-free provided certain conditions are satisfied.

38-325 Supply of a going concern

(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.

(1) 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 a part of a larger enterprise carried on by the supplier).

Going Concern

There are a number of features in subsection 38-325(2) of the GST Act which must be satisfied for an arrangement to be considered a 'supply of a going concern':

· the supplier supplies to the recipient;

· all of the things that are necessary for the continued operation;

· of an enterprise.

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

Goods and Services Tax Ruling, Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains the ATO view of when a supply or supplies is the GST-free supply of a going concern. Paragraph 29 of GSTR 2002/5 explains that the:

'term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement'.

The various interdependent contracts involved in the sale of the interests to the buyer are an 'arrangement'.

GSTR 2002/5 discusses the need to identify an enterprise that is supplied under an arrangement (the 'identified enterprise'). Under the JV agreement, the joint venture assets are owned by the participants as tenants in common and each participant is entitled to receive a share of the product produced. That is, each participant is carrying on an enterprise by utilising assets owned as tenants in common; engaging the operator to manage the operation and engaging the second entity to provide services.

One of the necessary things for this enterprise relates to the services provided by the second entity. In order to supply 'all of the things that are necessary' for the continued operation of the enterprise, the entity needs to supply the means to acquire those services. This could be done by assigning its rights and interests in the agreement that it has with the second entity or by supplying the plant assets.

The JV agreement states that the second entity and the entity must, at all times, be 'Related Bodies Corporate' as defined in section 50 in the Corporations Act 2001. The JV agreement restricts the entity from selling any part of its interest without the second entity also selling an equal percentage interest in the plant assets to the same purchaser (or a related body corporate). Furthermore, the second entity is restricted from selling any part of its interest in the plant assets without the entity also selling an equal proportion of its interests to the same purchaser. The arrangement under which the sales of the interests are occurring is the sale agreement, in conjunction with the terms and conditions of the JV agreement and associated contracts. As provided in paragraphs 19 and 20 of GSTR 2002/5, an objective examination of the complete facts and circumstances of the arrangement must be undertaken to reach a conclusion.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. … The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement…'

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern' … 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.

Although the entity is not supplying the plant assets and is not transferring its rights and interests in the an agreement to acquire the services, it is still providing the ability to acquire the services by having its wholly-owned subsidiary, the second entity, supply its interest in the plant under the same arrangement.

It is not possible for the entity to supply the ability to acquire the services as the JV agreement requires the plant operation to be held separately from the interests albeit in a related entity. The interdependencies of the plant operations to main operations and the various contracts including the JV agreement mean that the entity has supplied the ability to acquire the services by ensuring that the second entity is a party to the sale agreement. This is similar to the situation where a supplier is unable to supply rights (for example, a licence to operate that is issued by a Government authority) that are essential for use in an enterprise. As explained in paragraph 51 of GSTR 2002/5, the fact that the essential rights are unable to be supplied does not stop the supply under the arrangement from by the supply of all things that are necessary:

51. Where the relevant thing is the rights under an existing contract, the surrender of those rights, in circumstances where the third party has committed to enter into a contract under which substantially similar rights will be created in favour of the recipient, will satisfy the requirement that the relevant thing is supplied.

Consequently, the supplier, the entity, is, for the purposes of section 38-325 of the GST Act, supplying all of the things that are necessary for the continued operation of an enterprise.

The entity and the second entity have both agreed that the identified enterprise will continue to be operated (via the operator) until completion of the sale agreement (ie the day of the supply).

Therefore, all of the requirements of subsection 38-325(2) of the GST Act are met.

GST-free

The supply of the Interest by the entity and the interest in the plant by the second entity under the sale agreement will be GST-free if all of the requirements of subsection 38-325(1) are met. The requirements are:

· the supply is for consideration;

· the recipient is registered or required to be registered; and

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

The agreement states that the parties have agreed in writing that the sales of the interest and the interest in the plant collectively are of a going concern and the parties are registered for GST. The consideration for the sale is expressed as amounts of money.

Consequently, the requirements of subsection 38-325(1) of the GST Act are met and the sale, as described in the sale agreement is GST-free.

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