Edited version of private ruling

Authorisation Number: 1011474421272

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Ruling

Subject: GST and transfer scheme

Question

Is a transfer scheme, a transfer notice or a transfer direction under a state act (Act) a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Neither a transfer scheme nor a transfer notice will result in a supply by a participating entity to the new entity.

A transfer direction may result in a supply by the participating entity to another entity. This supply may be taxable if the requirements of section 9-5 of the GST Act are met.

Relevant facts

Background

While the Act enables participating entities to make transfer schemes to transfer existing assets, liabilities and employees to enable them to perform their primary functions under the Act, the Minister has wide overriding powers. The schemes are subject to the approval of the Minister and the Minister has the authority to make transfer notices to rectify transfer schemes. The Minister also may issue directions requiring participating entities or a new entity to take action to assist in the establishment of the new entities and facilitate the necessary transfers.

Relevant provisions of the Act

The Act facilitates the transfer to a new entity of the infrastructure and functions of their participating entities as providers for the services.

Under the Act, the new entity and its participating entities may enter into a transfer scheme for the transfer of assets, employees, instruments or liabilities. A transfer scheme has no effect unless approved by the Minister.

Participating entities may request the Minister's approval for a transfer scheme accompanied by a complying certification statement as to the contents of the scheme. The certification must be in the approved form and must contain the prescribed content. If the Minister approves the transfer scheme, the Minister must within 21 days, publish a gazette notice about the approval. The Minister may by gazette notice issue a transfer notice rectifying or undoing a transfer scheme.

The Minister may give a transfer direction to the new entity or a participating entity to do anything the Minister considers necessary to achieve the transition to a new entity from its participating entities.

The Act prevents transfer decisions being subject to any challenges, appeals or review.

There is no consideration for the transfer. Instead, the participating entities are compensated for the assets, by allocation of participation rights entitling them to share in a proportion of the profits of the entities.

Reasons for decision

Summary

Under a transfer scheme and a transfer notice, the participating entity does not make a supply because it takes no positive action to cause its legal interest to be transferred to the new entity. Although the participating entity may negotiate a transfer scheme with the new entity, the transfer of assets is not effected by that agreement but rather by the operation of the transfer (gazette) notice which is an action taken by the Minister and not by the participating entity.

A transfer direction, although compulsory in nature, results in the participating entity taking a positive action to cause its legal interest to be transferred to the new entity. This will result in a supply for GST purposes.

Detailed reasoning

Transfer scheme and transfer notice

Section 9-5 of the GST Act sets out the requirements for an entity to make a taxable supply. The provision 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.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act).

To satisfy the first requirement of a taxable supply there must be a supply and consideration, and there must be a sufficient connection between the two. For the purposes of this ruling, paragraphs (b), (c) and (d) will be taken to be satisfied.

Subsection 9-10(1) of the GST Act defines supply as any form of supply whatsoever.

Subsection 9-10(2) of the GST states that without limiting subsection 9-10(1) of the GST Act, supply includes any of these: 

(a) a supply of goods

(b) a supply of services

(c) a provision of advice or information

(d) a grant, assignment or surrender of *real property

(e) a creation, grant, transfer, assignment or surrender of any right

(f) a *financial supply

(g) an entry into, or release from , an obligation:

(i) to do anything; or

(ii) to refrain from an act, or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Proposition 5 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies assists in analysing a transaction and provides that to make a supply an entity must do something.

At paragraph 72 GSTR 2006/9 notes the comments of Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2):

His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply.

However, paragraph 74 of GSTR 2006/9 states in part:

…that 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. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done.

An example of a transfer which does not constitute a supply is the compulsory acquisition of land by Government authorities. One of the means that compulsory acquisitions occur is the vesting of the interest in the relevant Government authority and the extinguishment of any previous interests.

Paragraphs 80, 81 and 82 of GSTR 2006/9 provide that:

80. Various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislation are:

§ the vesting of the interest in the relevant government authority and extinguishing any previous interests in the real property; and

§ the particular statute may allow the government authority to acquire the real property by agreement

81. An example of vesting is provided by section 20 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW), where the required acquisition notices are gazetted, the relevant land is:

§ 'vested in the authority of the State acquiring the land'; and

§ 'freed and discharged from all estates, interests, trust, restrictions, dedications, reservations, easements, rights, charges, rates and contracts in, over or in connection with the land'.

The entity whose interest in the land is extinguished is compensated for the loss of that interest. That entity may agree to the compensation determined by the Valuer-General and execute a form of release. If the entity disputes the compensation amount, there is provision for payment of 90% of the initial valuation until the matter is resolved.

82. The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. In this case the entity does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

The Act dictates that the transfer of assets from the participating entities to the new entity is compulsory. Although the participating entities can negotiate a transfer scheme, the nature and content is limited by the Act and moreover the Minister must approve a transfer scheme and has the power to amend and make an agreement. The transfer scheme arrangement is more akin to the negotiation of the terms of compensation under the compulsory acquisition in example 1 at paragraphs 85-89 of GSTR 2006/9 where no supply of surrendering rights is made.

Under a transfer notice, the Minister can effect the transfer of the assets etcetera held by a participating entity to the new entity. This is achieved in a similar way to that of a land acquisition gazettal notice by extinguishing the entity's interests and vesting those interests in the new entity. The transfer is compulsory and the creation of the transfer scheme is not considered to be a positive act by the participating entity which leads to a supply. This contrasts with the situation in the Administrative Appeals Tribunal case Re Hornsby Shire Council v. Commissioner of Taxation [2008] AATA 1060 where CSR drove the transaction by requesting Hornsby Council to acquire the land. At paragraph 38 the AAT notes in part:

In this case, CSR was the very antithesis of an unwilling party. It was CSR, which against opposition compelled the finalisation of the acquisition and the payment of compensation.

As such, it is considered that where an entity transfers its assets etcetera pursuant to a transfer notice, they do not make a supply. Since there is no supply there can be no supply for consideration as required by paragraph 9-5(a) of the GST Act, and no taxable supply will ensue.

Transfer direction

A transfer direction, although compulsory in nature, would result in the participating entity taking a positive action to cause its legal interest to be transferred to the new entity, thereby triggering a supply. Here the transfer is not effected by the operation of a transfer notice under the Act, but is done is done by the entity undertaking usual commercial and legal procedures. As paragraph 90 of GSTR 2006/9 states:

90. In contrast, the extinguishment of an owner's interest by statute needs to be distinguished from the doing of a thing that is compelled by statute.

Therefore a transfer direction may result in supply by the participating entity to the new entity. Paragraph 9-5(a) of the GST Act will be satisfied if it is for consideration.

'Consideration' is defined under section 9-15 of the GST Act. The definition extends beyond payments to include such things as acts and forbearances to act. A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of the supply.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration states at paragraph 12:

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as:

§ providing goods;

§ granting a right or performing a service (an act); and

§ entering into an obligation, for example to refrain from selling a particular product (a forbearance).

Throughout this Ruling, unless otherwise stated, a payment includes an act or forbearance.

Granting a right can be consideration. Paragraph 9-15(3)(a) of the GST Act states:

(3) However:

(a) if a right or option to acquire a thing is granted, then:

(i) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or


(ii) if there is no such additional consideration - there is no consideration for the supply;

Payments (for example a proportion of the profits) connected with exercise of the right (to receive profits from the new entity) conferred on the participating entity would form additional consideration for the supply of the assets etcetera.