Edited version of private ruling

Authorisation Number: 1011261280578

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Ruling

Subject: GST and taxable supplies

Question1

Will the proposed merger be an amalgamation for the purposes of, and subject to, Division 90 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

The proposed merger will be an amalgamation for the purposes of, and subject to, Division 90 of the GST Act.

Question2

Will Entity B make any taxable supplies to Entity A under the proposed merger?

Answer 2

The proposed merger will be an amalgamation for the purposes of, and subject to, Division 90 of the GST Act.

Relevant facts and circumstances

Entity A and Entity B are both registered for Goods and Services Tax (GST) and are members of the same GST group.

Entity B is the representative member of the GST group.

Entity B acquired all of the ordinary shares in Entity A pursuant to a scheme of arrangement.

Entity A is currently a wholly owned subsidiary of Entity B.

Transfer methodology

Under the Financial Sector (Business Transfer and Group Restructure) Act 1999 (the Transfer Act), two regulated bodies of the same kind may apply in writing to APRA for approval of a voluntary transfer of business from one of the bodies to the other body.

The Transfer Act provides for two kinds of transfers of business: voluntary transfers and compulsory transfers. A voluntary transfer of business may be a partial transfer or a total transfer. A transfer of business of a regulated body is a total transfer if it relates to all of the transferring body's business, including any business that is not regulated business.

Under the Transfer Rules, an application for approval of a voluntary transfer of business must be in the form of the three letters to APRA:

the first letter is from the transferring and receiving bodies and must provide certain prescribed background information about the proposed transfer;
the second letter is from the receiving body and must provide certain prescribed information about the impact of the proposed transfer on the receiving body; and
the third letter is a joint letter from the transferring and receiving bodies and is provided after all regulatory approvals have been received and the transfer has been approved by the transferring and receiving bodies.

The Transfer Act and Transfer Rules do not provide a specific timetable for transfer applications or for APRA's decision whether to approve the transfer application.

APRA must approve a voluntary transfer of business if it considers that, amongst other things, the Minister has consented to the transfer (unless the Minister has determined that consent is not required) and the transfer has been 'adequately adopted' by both the transferring body and the receiving body.

The Transfer Rules set out what constitutes 'adequate adoption' and in most cases, this requires the entity to seek approval from its members. However in certain cases, approval by the boards of the transferring and receiving companies may suffice.

Section 22 of the Transfer Act sets out the legal implications once APRA issues a certificate of transfer and the certificate of transfer comes into force. The key provisions are set out below.

When the certificate of transfer comes into force, the receiving body becomes the successor in law of the transferring body, to the extent of the transfer. In particular:

(a) if the transfer is a total transfer-all the assets and liabilities of the transferring body, wherever those assets and liabilities are located, become (respectively) assets and liabilities of the receiving body without any transfer, conveyance or assignment; and …

(c) to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body...

Subject to subsection (2), if:

(a) the transfer is a total transfer; and

(b) immediately before the certificate comes into force, proceedings (including arbitration proceedings) to which the transferring body was a party were pending or existing in any court or tribunal;

The receiving body is, on and after the day when the certificate comes into force, substituted for the transferring body as a party to the proceedings and has the same rights in the proceedings as the transferring body had.

Subject to subsection (2), if:

(a) the transfer is a total transfer; and

(b) on the day when the certificate comes into force, documentary or other evidence would (disregarding the transfer) have been admissible for or against the interests of the transferring body;

that evidence is admissible, on or at any time after that day, for or against the interests of the receiving body.

Subject to subsection (2), if the transfer is a total transfer, on and after the day when the certificate comes into force, each translated instrument continues to have effect, according to its tenor, as if a reference in the instrument to the transferring body were a reference to the receiving body. For this purpose:

translated instrument means an instrument (including an Act or other legislative instrument) subsisting immediately before the day when the certificate comes into force:

· to which the transferring body is a party; or

· that was given to, by or in favour of, the transferring body; or

· that refers to the transferring body; or

· under which money is, or may become, payable, or other property is, or may become, liable to be transferred, to or by the transferring body.

The Transfer Act has effect notwithstanding anything in any contract, deed, undertaking, agreement or other instrument. Nothing done by or under the Transfer Act places a receiving body, a transferring body or another person in breach of contract or confidence or any law of the Commonwealth or of a State or Territory or any contractual provisions prohibiting, restricting or regulating the assignment or transfer of any asset or liability or disclosure of any information. The Transfer Act, therefore, expressly facilitates the transfer of assets and liabilities (such as debt instruments) which are subject to contractual restrictions relating to assignment or novation (whether express or implied).

The Transfer Act does not provide for the dissolution of the transferring body. However, paragraph 8(j)(viii) of the Transfer Rules requires an explanation to be provided of the arrangements for deregistration of the transferring body.

The Entity A Transfer

It is proposed that Entity A and Entity B will undertake a total transfer pursuant to the Transfer Act.

Entity A will be the transferring body and Entity B will be the receiving body.

Accordingly, Entity B will become the successor in law of Entity A in all respects.

All the assets, liabilities, duties, obligations, immunities, rights and privileges of Entity A will be transferred to Entity B.

Immediately following that transfer Entity A will be deregistered pursuant to section 413 of the Corporations Act.

Entity A will cease to exist at the point of deregistration.

GST Grouping

At the present time, Entity B and Entity A are members of the same GST group.

Entity A will cease to qualify for membership of that GST group during the relevant month. Accordingly, Entity A and Entity B will not be in a GST group at the time of the transfer under the Transfer Act.

Reasons for decision

Question 1

Will the proposed merger be an amalgamation for the purposes of, and subject to, Division 90 of the GST Act?

Company amalgamations and Division 90 of the GST Act

Division 90 of the GST Act contains special rules about company amalgamations and has the effect of overriding the core provisions of the GST Act. This Division ensures that proper account is taken of liabilities and entitlements under the GST system when companies amalgamate.

Subsections 90-5(1) and (2) of the GST Act state:

(1) A supply made by an amalgamating company to an *amalgamated company in the course of *amalgamation is not a *taxable supply if, immediately after the amalgamation, the amalgamated company is *registered or required to be registered.

(2) This section has effect despite section 9-5 (which is about what is a taxable supply.

Note that a term defined in section 195-1 of the GST Act is marked with an asterisk ("*").

The Explanatory Memorandum (EM) to Division 90 states:

6.142 Division 90 refers to amalgamating companies and amalgamated companies. Amalgamating companies are the companies that exist before they amalgamate to become the new amalgamated company. In the discussion below, companies A and B are the amalgamating companies. Company C is the amalgamated company.

6.143 If companies amalgamate they become one entity. This is not the same as when one entity acquires something. A and B become a new entity, C. A and B cease to exist. Rather than have A and B charge GST on the supply of all of their assets to C, and then have C entitled to an input tax credit for the acquisition of those assets, the supplies from A and B are not to be subject to the GST. The reason for this is that it would be like making a supply to yourself taxable and creditable at the same time. By removing such supplies and acquisitions from the GST system, the chance to manipulate the timing of the attribution of the GST and the input tax credits is removed and unnecessary accounting costs are avoided. For this reason such supplies are not taxable supplies. Section 90-5.

GST and input credits

6.149 C is treated as liable to GST and entitled to input tax credits that A and B were liable for, or entitled to, but have not yet accounted for. Sections 90-20 and 90-25.

The effect of section 90-5 of the GST Act is that a supply made in the course of an amalgamation is not a taxable supply, regardless of the application of section 9-5 of the GST Act. Therefore, the requirement of section 9-5 of the GST Act does not need to be established to satisfy the conditions of Division 90 of the GST Act.

To be within subsection 90-5(1) of the GST Act, the relevant supply must be made by the amalgamating company to the amalgamated company in the course of the amalgamation.

The term 'amalgamation' is defined in section 195-1 of the GST Act to mean:

'..any procedure, under an *Australian law or a *foreign law, by which 2 or more *companies amalgamate and continue as one company.'

To determine whether the proposed merging of Entity A into Entity B is an amalgamation for the purposes of Division 90 of the GST Act, a further analysis of the terms mentioned in the definition of an amalgamation as defined in section 195-1 of the GST Act is required.

The term 'procedure' is not defined in the GST Act, and therefore, it is given its ordinary meaning. The Macquarie Dictionary 1997 defines 'procedure' as:

. the act or manner of proceeding in any action or process; 2.conduct, a particular course or mode of action; 3. mode of conducting legal, parliamentary, or other business, especially litigation and judicial proceedings.

The particular course or mode of action to merge the businesses of Entity B and Entity A takes place when all the assets and liabilities etc of Entity A are transferred to Entity B. Subsequent to this there are a number of APRA rules (that is, the three letters as outlined in the facts) that must be followed. This process can be viewed as a particular course or mode of action and hence meet the ordinary meaning of "procedure" as defined in the Macquarie Dictionary 1997.

The term 'Australian law' is defined in section 195-1 of the GST Act as having the meaning given by section 995-1 of Income Tax Assessment Act 1997, which states that Australian law means a Commonwealth law, a State law or a Territory law.

As the proposed merging of these two entities are governed by Australian legislation, (namely, the Transfer Act) the procedure will be one under an Australian law.

The term 'company' is defined in section 195-1 of the GST Act to include a body corporate. As these two entities are companies, they clearly satisfy this definition.

The term 'amalgamate' is not defined in the GST Act and therefore, it should take its ordinary meaning.

The Macquarie Dictionary 1997 defines 'amalgamate' as ' to mix so as to make a combination; blend; unite; combine: to amalgamate two companies.'

The Butterworths Australian Legal Dictionary defines an 'amalgamation' as 'a joining, merging or union of two separate things to create a new thing.'

The above definitions are also similar to the Encyclopaedic Australian Legal Dictionary definition which you provided. That is, an amalgamation is 'a process where one company takes over or merges with another company, or a number of companies unite with one or more other companies by merging or taking control'.

Therefore, in essence and in accordance with your submissions these definitions all suggest that there is the combining, merging, uniting, blending and coming together of several things into one; the continuation of what was previously several as one.

The facts clearly state that Entity B acquired the issued capital of Entity A and it now plans to merge the businesses of Entity B and Entity A and to become one single company. Subsequently, Entity A will be deregistered pursuant to section 413 of the Corporation Act and cease to exist.

In conclusion, the merger or union of both these entities will come about through a procedure under an Australian law whereby two existing companies will be merged and will continue as one company. Therefore, this merger or union meets all the tests under an 'amalgamation' as defined under section 195-1 of the GST Act.

Section 195-1 of the GST Act states that, an 'amalgamating company' in relation to a particular amalgamation means any company that amalgamates with one or more companies under the amalgamation. Further, the term 'amalgamated company' means the single company that is, or will be, the result of the amalgamation and that continues or will continue after the amalgamation.

In this case, the amalgamated company will be Entity B and the amalgamating company will be Entity A.

You have made submissions to distinguish an amalgamation from a mere reconstruction by outlining relevant judicial authority:

In Re South African Supply and Cold Storage Co [1904] 2 Ch 268 Justice Buckley said that neither word had a specific legal meaning and that each word was a commercial rather than a legal term Even as a commercial term, neither had a precise meaning. He made the following observation in which he stressed the merging of the actual activities or undertakings of two companies as fundamental to an amalgamation.

An amalgamation involves, I think, a different idea. There you must have the rolling, somehow or other, of two concerns into one. You must weld two things together and arrive at an amalgam - a blending of two undertakings. … It is not necessary that you should have a new company. You may have a continuance of one of the two companies upon the terms that the undertakings of both corporations shall substantially be merged in one of the corporations. (emphasis added)

This approach was adopted by the Federal Court in In the matter of Stork ICM Australia Pty Ltd; Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849 (Stork). In that case all the assets and liabilities of Stork ICM were, by way of a scheme of arrangement, to be transferred to, and vested in, Stork FSA and Stork ICM was then to be deregistered. Stork ICM's activities involved the running down of a former asbestos business while Stork FSA carried on an unrelated trading business. Justice Lindgren said that after the transfer 'Stork FSA will continue to do what Stork ICM does now, but its activity in this respect will not form part of its trading activity'.

In considering the terms reconstruction and amalgamation Justice Lindgren said that 'a restrictive interpretation should not be placed' on either term. He applied the approach of Justice Buckley in South African Supply and concluded that the arrangement was a reconstruction rather than an amalgamation because 'there will be no 'blending' of the two activities, even though they will both be carried on by Stork FSA'. In other words the fact that the asbestos run off activity and the trading activity would not be merged together and run as a single, 'blended' activity by Stork FSA was the reason why the arrangement was not an amalgamation. The clear implication was that if the two activities had been merged, the transfer of Stork ICM's assets and liabilities to Stork FSA followed by the deregistration of Stork ICM would have been an amalgamation.

You submit that the principle that emerges from these cases is that an amalgamation is a broad commercial concept which involves the combining, merging, bringing together of several into one and the continuation of that one.

In this case, Entity A's share capital was acquired by Entity B. Even though the assets, liabilities, duties, obligations, immunities, rights and privileges of Entity A will be transferred to Entity B, there will still exist some branding under Entity A's name. That is, Entity A and Entity B will operate multiple brands for their respective businesses, thereby preserving existing customer preferences and minimising disruption to the services provided. However, these multiple brands will operate through separate divisions of Entity B.

We appreciate the reason given for the multiple branding. We consider that, this situation can be distinguished from Lindgren J's dictum in the Stork case. In that case Lindgren J said it was a mere reconstruction rather than a merger because there was no blending of the two activities. In this situation, Entity A and Entity B were two independent companies. Each company had its own capital structure and its own assets and liabilities together with independent businesses. Subsequent to the proposed merger there will only be one company running one distinct business namely the Entity B's business albeit with some Entity A branding. Entity A's share capital was acquired by Entity B. The merging of the two businesses into one company running one distinct business and the subsequent deregistration of Entity A will complete the merger. These factors are vastly different from the facts of Stork.

Furthermore, paragraph 6.143 of the EM, states that subsequent to an amalgamation between entity A and entity B "…A and B become a new entity C….". Entity B although using the same name prior to the merger, will in substance be a new entity post merger. That is, it has already acquired the share capital of Entity A and post merger it will possess a new business structure consisting of a blend of the Entity A and its very own business structure.

For these reasons, we are satisfied that this proposed merger is an amalgamation.

Therefore, in the proposed merger Entity A will be making a supply by transferring all its assets and liabilities etc to Entity B in the course of an amalgamation. This supply is not considered to be a taxable supply for the purposes of the GST Act by virtue of the special rule in subsection 90-5(2) of the GST Act. Entity B is registered for GST and will be registered for GST subsequent to the amalgamation. As there will be no taxable supply by virtue of subsection 90-5(2), there will be no GST liability in respect of this transfer or amalgamation.

For completeness, it must be noted that where an acquisition is made by an amalgamated company from an amalgamating company in the course of an amalgamation, it is not a creditable acquisition under section 90-15 of the GST Act. As such, in respect of the transfer of assets and liabilities etc, Entity B, as the recipient of those supplies (acquisition) will not be entitled to any input tax credits.

Question 2.

Will Entity B make any taxable supplies to Entity A under the proposed merger?

You submit that Division 90 of the GST Act does not explicitly address the question of whether the amalgamated company makes any taxable supplies to the amalgamating company. However, you also submit that Division 90 is intended to ensure that the amalgamation process does not give rise to any GST consequences between GST registered entities.

You submit that when Entity B receives all the benefits of assets, immunities, rights and privileges previously owned by Entity A under the Transfer Act, it will concurrently assume Entity A's liabilities, duties and obligations. You are of the view that this assumption by Entity B will not give rise to any taxable supplies by Entity B. In support of your submission, you use the principles outlined in paragraphs 27 - 30 of Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise (GSTR 2004/9):

Quantified liabilities

27. A quantified liability is an amount quantified with certainty at the time it is assumed. That is, the purchaser agrees to pay an amount of money to a third party. In these circumstances, a purchaser of an enterprise does not make a supply within the meaning of section 9-10.

28. The purchaser's assumption of the liability forms part of the consideration for the supply of the enterprise, expressed as money, paid by the purchaser for the enterprise.

Unquantified liabilities

29. If the amount of the liability has not been quantified by the vendor then it is the provision of non-monetary consideration if it has an economic value and a separate independent identity. The GST inclusive market value of the purchaser's promise to pay the vendor's liability forms part of the consideration for the supply of the enterprise. For a vendor and purchaser dealing at arm's length, a value agreed and allowed as a set-off in the calculation of the purchase price is likely to accurately represent the GST-inclusive market value.

30. In the context of a supply of an enterprise, the purchaser does not make a supply if the terms and conditions of the contractual agreement for the supply provide for the purchaser to assume an unquantified liability of the vendor.

In essence the above paragraphs state that where a purchaser of an enterprise assumes liabilities by agreement, whether quantified or unquantified, the purchaser does not make a supply within the meaning of section 9-10 of the GST Act.

Furthermore, in the context of company amalgamations, the Commissioner is of the view that the legislature did not intend for there to be any GST consequences stemming from an amalgamation. This is evidenced at paragraph 6.143 of the EM where it states:

…Rather than have A and B charge GST on the supply of all of their assets to C, and then have C entitled to an input tax credit for the acquisition of those assets, the supplies from A and B are not to be subject to the` GST. The reason for this is that it would be like making a supply to yourself taxable and creditable at the same time. (emphasis added). By removing such supplies and acquisitions from the GST system, the chance to manipulate the timing of the attribution of the GST and the input tax credits is removed and unnecessary accounting costs are avoided.

Therefore, even if there is a supply stemming from an amalgamating entity to an amalgamated entity or vice versa there would be no GST consequences as it would be considered similar to a supply and acquisition made to oneself at the same time. Furthermore, Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: Supplies, provides the ATO view that an entity cannot make a supply to itself.

For these reasons we are of the view that Entity B does not make any taxable supplies to Entity A during the amalgamation process.