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Ruling

Subject: Goods and services tax (GST) and sale of business assets to an overseas entity.

Question

Is GST payable on your sale of the intangible business assets to Buyer 2?

Answer

No.

Relevant facts and circumstances

Prior to a certain date, Vendor 1 (you) conducted a business of selling, marketing and distributing (entity name) branded software products (and services associated with those products) to wholesale and retail customers in Australia (the business). Vendor 1 has been registered for GST since a certain date.

Vendor 2 (you) owned the intellectual property of the business and carried on an enterprise of licensing the use of that intellectual property to vendor 1. Vendor 2 has been registered for GST since a certain date.

Buyer 1 is an Australian company which was incorporated on a certain date. From a certain date, buyer 1 began to operate an enterprise of distributing (entity name) branded software products to wholesale and retail customers in Australia. Buyer 1 has been registered for GST since a certain date.

Buyer 2 is a company registered under the laws of an overseas country and is not incorporated in Australia. Buyer 2's central management and control is not in Australia and its voting power is controlled by a shareholder who is not a resident of Australia.

Pursuant to a sale agreement dated a certain date, Vendor 1 and Vendor 2 agreed to sell the assets of each of its businesses to Buyer 1 and Buyer 2.

Pursuant to the sale agreement, the sellers agreed to sell:

(a) the business assets (other than the Business Intellectual Property, the goodwill associated with the business intellectual property and the general goodwill) (tangible business assets) to Buyer 1 for a certain price; and

(b) the business intellectual property, the goodwill associated with the business intellectual property and the general goodwill (intangible business assets) to Buyer 2 for a certain price.

In addition to these amounts, Buyer 1 and Buyer 2 are required to pay a (something) amount totalling up to a certain amount.

The sale agreement provides that Buyer 2 will acquire the full legal and beneficial ownership of the business intellectual property, any goodwill associated with the business intellectual property and the general goodwill, free and clear of all encumbrances.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(2A)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(3)

Reasons for decision

Summary

GST is not payable on your sale of the intangible business assets to Buyer 2, as this is GST-free supplies made in relation to rights under item 4 in the table in subsection 38-190(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

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.

(*Denotes a term defined in section 195-1 of the GST Act)

GST-free supplies of rights under international arrangements

Item 4 in the table in subsection 38-190(1) of the GST Act provides that a supply that is made in relation to rights is GST-free if:

(a) the rights are for use outside Australia, or

(b) the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

However, a supply is not GST-free under an item in the table in subsection

38-190(1) of the GST Act to the extent that the supply is of goods or real property.

Subsection 38-190(2) of the GST Act states:

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.

Subsection 38-190(2A) of the GST Act states:

A supply covered by 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 party) 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.

Subsection 38-190(3) of the GST Act states:

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.

You require advice in relation to your sale of intangible business assets, that is, intellectual property and goodwill, to Buyer 2.

Paragraph 27N of Goods and Services Tax Ruling GSTR 2003/8 provides guidance on the meaning of a 'supply that is made in relation to rights' for the purposes of item 4 in the table in subsection 38-190(1) of the GST Act. It states:

Category 1 - Supplies identified in paragraph 9-10(2)(e)

27B. The creation, grant, transfer, assignment or surrender of a right is a supply that is made in relation to rights for the purposes of item 4.

Paragraph 82 of GSTR 2003/8 discusses intellectual property rights. It states:

82. Supplies of intellectual property rights are supplies that are made in relation to rights for the purposes of item 4.

We consider that your sale of the intellectual property and goodwill to Buyer 2 is transfers of rights.

Therefore, your sale of the intellectual property and goodwill to Buyer 2 is supplies that are made in relation to rights for the purposes of item 4 in the table in subsection 38-190(1) of the GST Act.

You will supply the intellectual property and goodwill to an entity (Buyer 2) that is not an Australian resident and is outside Australia when the thing supplied is done.

Your sale of the intellectual property and goodwill to Buyer 2 is not supplies of goods or real property.

Therefore, your sale of the intellectual property and goodwill to Buyer 2 satisfies the requirements of item 4 in the table in subsection 38-190(1) of the GST Act.

The exclusions in subsection 38-190(2), subsection 38-190(2A) and subsection 38-190(3) of the GST Act do not apply.

Hence, your sale of the intellectual property and goodwill to Buyer 2 is GST-free under item 4 in the table in subsection 38-190(1) of the GST Act.

Therefore, you will not make taxable supplies of the intellectual property and goodwill to Buyer 2.

Hence, GST is not payable on your sale of the intangible business assets to Buyer 2.

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