Edited version of your private ruling

Authorisation Number: 1012469322558

Ruling

Subject: Goods and services tax (GST) consequences of amalgamation

Question 1

Are there any GST consequences as a result of the proposed amalgamation?

More specifically, you have asked:

· Will a taxable supply be made when assets or liabilities are transferred as a result of the amalgamation (is the amalgamation a Machinery of Government change for GST purposes)?

· Is the GST treatment associated with the disposal of capital assets relevant if authorities intend to dispose (or transfer ownership) of capital assets in the amalgamation?

· Is the GST treatment associated with appropriations relevant if authorities make/receive appropriations from other government-related entities in the amalgamation?

Answer

There is no GST payable on transfers that are a direct result of the proposed amalgamation.

In particular:

· No supply is made when the assets or liabilities are transferred. We consider that the amalgamation is a Machinery of Government change for GST purposes.

· As you do not make a supply, or a supply for consideration, any transfer of ownership of capital assets pursuant to this change will not be taxable.

· As no supply is made, and there is no consideration exchanged, it is not necessary to apply the provisions regarding appropriations.

Relevant facts and circumstances

Background

· You are registered for GST.

· You are applying on behalf of the various authorities in your state.

· You have requested one private ruling, addressed to you, that provides advice on the whole arrangement.

· You have advised that the authorities are government trading enterprises that are government-related entities.

· All of the entities involved in the amalgamation are currently registered for GST. 

· The renamed authorities will continue to be registered for GST.

· The proposed amalgamation is a restructure that will involve changes as described below:

Stage 1

· A number of authorities will be renamed.

· Other existing authorities will be transferred to the renamed authorities and then wound up.

· The new authorities will have a new board, and their functions will be expanded to take on the functions of the other existing authority (or authorities) which will then be wound up.

· It is intended that the new authorities will become operational in the subsequent year.

Stage 2

· The renamed authorities will also take on various responsibilities and facilities that are currently managed by you.

· State Agreements establish many of the smaller authorities. You are negotiating to vary these State Agreements by the passage of amending legislation.

· You aim to transfer these facilities and responsibilities to the new authorities in the subsequent year. However, you anticipate that there are likely to be some transferred after this date.

General

· The amalgamation was confirmed by Cabinet. The amending legislation is currently being finalised and will be introduced into the Parliament for its approval later in the recent year.

· You have advised that there will be no significant change to the individual business operations under the new authorities.

· You have advised that the amalgamation will involve the transfer of assets from you and the existing authorities to the new authorities, but that this will be undertaken for no consideration (ie no cost to the parties).

· You have advised that the new authorities will not be assuming liabilities (from the existing authorities or from you) under the amalgamation process.

· Subsequent to your initial request, you have provided a confidential copy of draft legislation to amend the relevant Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-17

Section 195-1

Income Tax Assessment Act 1997

Section 995-1

Reasons for decision

Question 1

Summary

There is no GST payable as a result of transfers that are a direct result of the proposed amalgamation.

Detailed reasoning

Taxable supplies and machinery of government changes

GST is only payable on taxable supplies. You make a taxable supply if you make a supply, the supply is for consideration, it is made in the course or furtherance of an enterprise that you carry on, it is connected with Australia and you are registered or required to be registered (see section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)).

Enterprise

Under section 195-1 of the GST Act, government entity has the meaning given by section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act advises that it means:

a) a Department of State of the Commonwealth, or

b) a Department of the Parliament (established under the Parliamentary Service Act 1999), or

c) an Executive Agency or Statutory Agency (within the meaning of the Public Service Act 1999), or

d) a Department of State of a State or Territory; or

e) an organisation that:

o is not an entity; and

o is either established by the Commonwealth, a State or Territory (whether under a law or not) to carry on an enterprise, or established for a public purpose by an Australian law; and

o can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation;

whether or not the organisation is part of a Department or branch described in (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph.

A government related entity is a government entity, or an entity that would be a government entity but for the fact that it is an entity. A local governing body established by or under a State law is also a government related entity (see section 195-1 of the GST Act).

You are a government entity as you are a Department of a State. You are therefore also a government related entity.

The authorities are established under relevant legislation, and are bodies corporate. The functions of the authorities are outlined in the Act, and include facilitating trade, controlling business, ensuring the safe and efficient operation of the facilities, maintaining and preserving property and protecting the environment and anything incidental to these things. The authorities may also do things they are authorised to do by any other written law.

The authorities are therefore established for a public purpose by an Australian law (as an Australian law means a Commonwealth, State or Territory law, see section 195-1 of the GST Act and section 995-1 of the Income Tax Assessment Act 1997). They are also separately identifiable by reference to the nature of the activities carried on and their locations. As the authorities are entities they cannot be government entities. However, they are government related entities because, for the reasons discussed above, they would be a government entity if they were not an entity.

An enterprise includes an activity or series of activities done by the Commonwealth, a State or a Territory, or by a body corporate established for a public purpose by or under a law of the Commonwealth, a State or a Territory (see subsection 9-20(1)(g) of the GST Act). Therefore the requirement in section 9-5 of the GST Act that the things are done in the course or furtherance of an enterprise is met.

Registered for GST

All of the transferring agencies are registered for GST (and the gaining agencies will continue to be registered). Therefore this requirement of section 9-5 of the GST Act is satisfied.

Consideration

You have advised that there is no consideration provided for the transfers. Therefore an essential requirement of section 9-5 of the GST Act has not been made and therefore there is no taxable supply.

However, for the sake of completeness, we will also consider whether there is any supply made.

Supply

It is the Commissioner's view that to make a supply an entity must do something (see proposition 5 of GST ruling GSTR 2006/9: supplies).

A change undertaken by the Commonwealth, a State or a Territory in relation to government organisations (which includes government entities and government related entities), and that involves certain types of restructuring, is known as a Machinery of Government (MOG) change.

Examples of MOG changes include:

· An abolition of a government organisation by transferring its functions to other government departments

· A merger of two or more government organisations

· Movement of functions in to, or out of, government organisations

· A government organisation name change.

We consider that the restructure you propose involves the functions from one government organisation (the losing agency) being transferred to another government organisation (the gaining agency). It also involves name changes. We consider that it is a MOG change.

Where the transfer of functions is due to the operation of an Australian law that operates to transfer any property, assets, rights, debts liabilities or obligations held by the losing agency to the gaining agency, there are no GST consequences if those assets or liabilities are transferred as a result of MOG changes.

This is because the losing agency has not taken any action to cause the assets and liabilities to be transferred to the gaining agency (and neither has the gaining agency done anything).

In your circumstances the changes have been decided by State Cabinet. A State law will be introduced to give effect to the changes. As previously discussed, a State law is included in the meaning of Australian law.

An entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur (see paragraph 74 GSTR 2006/9). However, we accept that your changes and transfers are not because of any actions that the existing authorities (the losing agencies) have undertaken. Similarly, the gaining agencies have not taken any actions to cause the transfers. Therefore no supplies are made.

We note that you have advised that there will be no compensation or consideration provided in respect of the transfers. However, a mere acceptance of an amount of compensation payable on the compulsory transfer does not provide a sufficient nexus between the assets or liabilities that transfer and the means by which they pass (see paragraph 84 GSTR 2006/9). The transfers are still affected by the operation of the statute, not by action taken by the parties.

Therefore the authorities do not make supplies as the transfers are as a result of the operation of legislation. The activities done to support or facilitate the implementation of this legislation and to give effect to it are not further additional activities that constitute the making of a supply.

Conclusion

We therefore accept that supplies are not made. Also, there is no consideration provided. Therefore no taxable supplies are made under the proposed amalgamation arrangements.

It is important to note that the activities of all the authorities both before and after the amalgamation continue to be subject to the normal GST rules. It is only those transfers specifically made under the legislatively-imposed MOG change that are not treated as being a supply.

GST and the disposal of capital assets

A capital asset is an asset that is not intended for sale in the ordinary course of your business. Generally, if you are registered for GST and transfer ownership of a capital asset and you receive any payment (or other form of consideration) when you dispose of the capital asset then you must report an amount of GST.

However, as discussed above, we do not consider that you (or any of the other entities involved in the amalgamation) make a supply. You also do not make a supply for consideration. Therefore you do not make a taxable supply and there is no GST payable on a transfer of ownership of capital assets made as a direct result of the MOG changes.

Appropriations

Under section 9-17 of the GST Act certain payments are not consideration.

For example, a payment made by a government related entity to another government related entity for making a supply is not the provision of consideration if the payment is:

· covered by an appropriation under an Australian law; and

· the payment is calculated on the basis that the payment (and anything else the entity receives in relation to the supply or related supplies) does not exceed the supplier's anticipated or actual costs of making those supplies.

We consider that it is not necessary to rely on this section in your circumstances. This is because we consider that there are no supplies made in the arrangement, and you have also advised that there is no consideration exchanged between the parties.

If supplies were made that were not part of the legislatively imposed MOG change, and consideration between the parties was exchanged, then it may be relevant to consider this provision to determine whether the payment was made under an Australian law and only to cover costs. In those circumstances the payment may be an appropriation (and not consideration), and therefore not taxable.

However, on the information you have provided this is not currently relevant or necessary.

Further issues for you to consider

Even though the transfers that are a direct result of the MOG changes do not have any GST consequences, the MOG changes will mean that you need to consider the reporting requirements of the normal business activities of the entities involved.

In the arrangement described, you and the authorities to be abolished are losing agencies. The renamed authorities are gaining agencies.

Supplies

The gaining agencies must determine the extent to which they should report sales and any related GST payable in its activity statements. They do this by working out the extent to which the losing agencies have already reported those sales, and the related GST payable, in their activity statements.

Unlike the other losing agencies, you are not being abolished. Any income you have generated from operating the functions before the changes are your revenue. You must report those sales and related GST payable in your activity statements.

After the changes, the income from operations undertaken by the gaining agencies is their revenue (whether or not the losing agency is abolished). The gaining agencies report those sales and the GST payable in its activity statements.

As you will continue to exist, if you receive income and transfer it to the gaining agencies there are no GST consequences for either party in relation to the transfer. Again, the gaining agency reports the sales and GST payable in their activity statements.

Acquisitions

Where the losing agency is abolished and the gaining agency receives and pays (in part or in total) for purchases ordered by the losing agency, those purchases are taken to be made by the gaining agency.

The gaining agency needs to determine the extent to which it should report those purchases and claim any related GST credits in its activity statements by determining the extent the losing agency has reported those purchases and claimed any related GST credits in its activity statements.

As you will continue to exist, you should report in your activity statements any purchases you used in operating the transferred functions before the changes, and claim any related GST credits where you have valid tax invoices.

Tax invoices

It is also important to hold tax invoices for purchases made.

The gaining agencies should ask suppliers to take steps to use the identity and ABN of the gaining agency in future tax invoices once a MOG change takes place.

However, we have the discretion under the GST law to treat some documents as tax invoices even though they do not meet all the requirements of a tax invoice.

The gaining agencies can request that we exercise the discretion to treat documents as tax invoices where they satisfy all the requirements of a tax invoice except that they contain the losing agency's identity and ABN. A request for a tax invoice discretion should contain information on the types of invoices to which it will apply and the period for which the discretion is required.

Please refer to our fact sheet GST and machinery of government changes (available on our website) for further information on tax invoices in your circumstances.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).