Edited version of your private ruling

Authorisation Number: 1012563027114

Ruling

Subject: GST and supply of interest in partnership

Question 1

Will your proposed supply to X under the Contract be treated as the GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

If no, will your proposed supply X of the Assets and the Business on the terms and conditions of the Contract be treated as an input taxed financial supply under subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer

Yes.

Relevant facts and circumstances

A sources goods from various foreign suppliers and imports it into Australia in either a saleable finished form or as a partially processed product. A procures processing services from the Partnership. The Partnership consists of you and an independent company.

You own an interest in the assets associated with the processing enterprise and carry on this enterprise in your capacity as partner in the Partnership.

X will acquire:

· all of the assets held by you in your capacity as partner of the Partnership which operates the processing enterprise (described in the Contract as the 'Assets'), as well as the goodwill attaching to the Partnership (the 'Business' in the Contract).

You will continue to operate the processing enterprise in your capacity as partner of the Partnership until the completion date. Completion is defined in the Contract as a day that is after the date on which certain conditions precedent are satisfied.

Under the proposed acquisition, X will acquire all of the assets which are necessary for the continued operation of the processing enterprise. It is the intention of the parties that X be supplied with all the necessary assets to be able to carry the enterprise, including:

· the plant and equipment used in the processing enterprise;

· 50% ownership interest in the registered business name (currently held by you as partner in the Partnership);

· the business records and systems;

· the benefit of key contracts (novated or assigned as relevant);

· trading stock; and

· goodwill

All enterprise assets are to be sold to X free of any encumbrances.

On completion of the sale of the processing enterprise, the existing Partnership will be dissolved. Immediately afterwards, a new partnership will be formed between X and the remaining partner. The new partnership will perform exactly the same processes as are currently performed by the Partnership.

The parties have agreed in writing that the sale of the processing enterprise is each the supply of a going concern for the purposes of the GST Act.

The purchase price payable by X for the processing enterprise and the distribution enterprise (to be sold by another entity) is agreed, plus or minus completion day adjustments.

You are registered for GST.

Relevant legislative provisions

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

Reasons for decision

Question 1

Summary

Your proposed supply to X under the Contract will not be treated as the GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Under section 9-5, an entity makes a taxable supply if:

· it makes a supply for consideration; and

· the supply is in the course or furtherance of an enterprise that it carries on; and

· the supply is connected with Australia; and

· 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 supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise (paragraph 38-325(2)(a)); and

· 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 (paragraph 38-325(2)(b));

· the supply must be for consideration (paragraph 38-325(1)(a));

· the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325(1)(b)); and

· the supplier and the recipient must have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c)).

Subsection 38-325(2)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 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. 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. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

The Contract provides for the supply of the processing enterprise and all that this entails (see below).

In our view, the Contract constitutes an arrangement that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

You will conduct the processing enterprise; the enterprise will be continuous and uninterrupted. This is the 'identified enterprise'.

Where the enterprise is identified, a supplier needs to supply all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses (Paragraph 30 of GSTR 2002/5).

In this case you will supply to X the processing enterprise consisting of your share in the Partnership, including then assets this entails and goodwill. X and your former partner will commence a partnership on the same footing, for the same purposes as the former Partnership.

A general law partnership such as the Partnership may make the supply of a going concern to another partnership comprising some of the same partners as the partnership making the supply. This may occur where a partner supplies their interest in the partnership to an incoming partner, or the existing partners.

However, the supply of an interest in a partnership is not, of itself, a supply of a going concern. If a supply of an interest in a partnership results in the general dissolution and wind-up of the existing partnership, as you submit it will in this case, this has the effect of transferring the entire enterprise from the old partnership to the new partnership. The sale of an interest in a partnership under this arrangement results in the supply of a going concern by the 'old' partnership to the 'new' partnership, which may be GST-free if the requirements of subsection 38-325(1) are met.

Where the supply of an interest in a partnership leads to a technical dissolution, the partnership is merely reconstituted and there will be no GST-free supply of a going concern. It is the Australian Taxation Office view, espoused in GSTR 2003/13, that for a partnership to be treated as reconstituted, there needs to be an express or implied continuity clause in the partnership agreement, and there should be no break in the continuity of the enterprise or firm. Indicators of continuity of the enterprise or the firm include:

· substantially all of the partnership assets remain with the continuing partnership;

· the nature of the enterprise remains substantially unchanged;

· the client or customer base remains substantially unchanged; and

· the business name or name of the firm remains unchanged.

None of these indicators is conclusive evidence of a reconstituted partnership, nor is its absence necessarily indicative of a dissolution that results in the winding up of the partnership.

Given that the sale transaction is structured so that the continuation of the enterprise is guaranteed, the four indicators above fall in favour of the partnership being reconstituted rather than being generally dissolved.

An examination of extracts from the Partnership Agreement and the proposed termination arrangement reveals that the Partnership was constituted with a definite reconstitution process in the event of a partner leaving; as per GSTR 2003/13 there is an express continuity clause in the partnership agreement.

The Commissioner's view is that a reconstituted partnership retains its GST registration despite the change in its membership. As there is no winding up of the partnership, the change in membership does not give rise to any supply or acquisition from one partnership to another partnership. Rather, the Commissioner's view is that such a transaction is an input taxed supply of a partner's interest in a partnership (see question 2 below).

Therefore it is our view that all the things necessary for the continued operation of the processing enterprise will not be supplied by you under the Contract.

As your proposed supply cannot meet this requirement of section 38-325 of the GST Act, the supply will not be the GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

Summary

Your proposed supply to X under the Contract will be treated as an input taxed financial supply under subregulation 40-5.09(3) of the GST Regulations.

Detailed reasoning

The Commissioner's view is that the reconstitution of a partnership accompanied by the continuation of its underlying enterprise can be a financial supply under section 40-5 of the GST Act. Subsection 40-5(2) of the GST Act notes that 'financial supply' is given meaning by the GST Regulations.

Sub regulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subregulations 40-5.09(3) or (4) is a financial supply. An interest in or under securities, including the 'capital of a partnership', is listed in the table at subregulation 40-5.09(3) at item 10. Further, Part 8 of Schedule 7 to the GST Regulations includes 'interests in a partnership' within its list of examples for item 10.

GSTR 2003/13 confirms that the expression 'interest in or under the capital of a partnership' in item 10 includes all the interests that a partner acquires from the partnership as a consequence of being a partner of that partnership.

Accordingly, the supply of a partnership interest will constitute an input taxed financial supply, provided the requirements set out in sub regulation 40-5.09(1) are satisfied. More specifically this requires that the disposal is:

· for consideration;

· in the course or furtherance of an enterprise; and

· connected with Australia.

Concurrently the supplier must:

· be registered or required to be registered for GST; and

· a financial supply provider in relation to supply of the interest.

Your supply is for consideration as outlined in the Contract. The proposed supply is in the course of your enterprise and will be connected with Australia as it will be done in Australia.

You are registered for GST. To be a financial supply provider in relation to the supply of the interest, you must meet the requirements of subregulation 40-5.06(1):

(1) An entity, in relation to the supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply;

is the financial supply provider of the interest.

We consider that you meet the requirements of paragraph (a) above as you own the interest in the Partnership prior to the supply being made to X. Therefore, your proposed supply to X under the Contract is an input taxed financial supply under section 40-5 of the GST Act.

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