Edited version of private ruling

Authorisation Number: 1011673558938

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Ruling

Subject: GST and transfer of assets, liabilities and rights

Question 1

Whether Corporation A (Corp A) is subject to goods and services tax (GST) upon transferring certain assets, liabilities, rights and the Licences to Corporation B (Corp B)?

Answer

No

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

Corp A is registered for GST.

Corp A is an entity constituted under a State Act for a public purpose.

The State Government proposes to transfer some of the functions of Corp A to the private sector under State legislation.

Prior to the transfer of those functions of Corp A to the successful private sector, the State government proposes to transfer certain Corp A's assets, rights and liabilities to Corporation B (Corp B) under the State Act No 2.

Corp B is constituted by the State Act No 2 as a State Government agency for a public purpose, subject to the control and direction of the Treasurer.

Corp B is registered for GST.

Transfer of Corp A sites

It is the Government intention to transfer certain real properties vested in Corp A to Corp B.

Transfer of Licences

Corp A currently holds Licence granted to it under a State Act in relation to activities Corp A carries out at its sites.

When sites are transferred to Corp B, the Licence pertaining to those sites and the activities carried on at those sites will also be transferred to Corp B.

Any transfer of Licence will be carried out in accordance with the procedures set out in the State Act. Briefly, the process of transferring a Licence requires the completion an application for transfer of the Licence. This application must be signed by both the current licence holder (Corp A) and the proposed licence holder (Corp B). The application must be submitted to the Authority at least 30 days prior to the day of transfer provided on the application with a prescribed fee per Licence. The transfer of the Licence is at the discretion of the Authority.

Because of the procedure above, the Licences are not capable of being vested in Corp B. No consideration will be provided by Corp B to Corp A in respect of the transfer of the Licences s to Corp B.

Transfer of the liabilities to Corp B

Certain liabilities will also be transferred from Corp A to Corp B.

These liabilities relate to sites to be transferred to Corp B and include liabilities arising from the breach of Licences, remediation and rehabilitation liabilities and future liabilities.

The vesting orders that will vest Corp A's property rights associate with particular sites in Corp B will be drafted so as to also vest in Corp B the liabilities associates with those sites.

Where those liabilities arise under any State law, the liabilities may be vested in Corp B by order of the Treasurer under a section and the Schedule of the State Act No 2.

Vesting of the assets, rights and liabilities

For the purposes of pre-transfer reorganisation, the State government proposes to vest the above-mentioned assets, rights and liabilities of Corp A in Corp B under a section and Schedule of the State Act No 2.

A section of the State Act No 2 provides that the Treasurer may make vesting orders under a Schedule for the purposes of the authorised transaction.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-10.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Corp A is not subject to GST upon transferring certain assets, rights, liabilities and Licences to Corp B.

Detailed reasoning

Under subsection 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) GST is payable on taxable supplies and taxable importations. Section 9-40 of the GST Act further provides that an entity must pay the GST payable on any taxable supply that it makes.

The term 'taxable supply' is defined in section 9-5 of the GST Act. This section provides the requirements for a supply to be taxable.

You make a taxable supply if:

(a)  you make the supply for *consideration; and

…

Therefore, initially we need to consider whether Corp A is making a supply in transferring certain Corp A assets, rights and liabilities to Corp B. If the answer is in the negative, there will be no taxable supply and there will be no GST to be paid by Corp A in relation to the transfer.

The term 'supply' is defined in section 9-10 of the GST Act to mean:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), 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).

* asterisk denotes a defined term in the Act.

Goods and Services Tax Ruling 2006/9 examines the meaning of 'supply' in the GST Act. Part 2 of this Ruling looks at how to identify and characterise supplies in the context of the transactions in which they are made. This Part uses ten propositions to assist in analysing a transaction to identify the supply or supplies made in that transaction. However, it should be noted that the propositions are not universal as they may have exceptions or be qualified either by the operation of particular provisions of the GST Act, or by the facts and circumstances of a transaction.

Of relevance to this case is Proposition No 5: To 'make a supply' an entity must do something.

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9 a ruling which is about the assumption of liabilities:

"In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'."

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. 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. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

We need to consider, in relation to the transfer, whether Corp A has done anything, or taken any action to cause a supply to be made, that is, 'make a supply'.

In this circumstance, the State government proposes to transfer certain Corp A's assets, rights and liabilities to Corp B by a vesting order under a section and the Schedule of the State Act No 2:

the ownership, operation, maintenance and rehabilitation of certain Corp A sites and assets (which will not be transferred to the private sector) be transferred to Corp B consisting of a number of sites.

certain environmental liabilities relating to the transferred sites and arising from any breaches of Licences, remediation and rehabilitation liabilities and future liabilities.

The vesting orders that will vest Corp A's property rights associated with particular sites in Corp B will be drafted so as to also vest in Corp B the liabilities associated with those sites. Where those liabilities arise under the State law, the liabilities may be vested in Corp B by order of the Treasurer.

Paragraphs 80 to 91 of GSTR 2006/9 discuss the GST consequences of vesting in a government authority of real property in accordance with State legislation. One of the common mechanisms employed by the legislation is to vest the interest in the real property in the government authority and extinguish any interests of the previous owner in that property.

Assets, rights and liabilities of Corp A vested in Corp B under the State Act No 2

We consider the use of the word 'make' in the phrase 'you make a supply' in paragraph

Paragraph 9-5(a) of the GST Act requires the supplier to take some actions to cause a supply to be made by it to a recipient. This means that Corp A must undertake some action or do something in making a supply to Corp B.

Paragraph 23 of GSTR 2004/9 lends further support for this conclusion, in stating that the assumer of a liability imposed, required and effected by the words of a statute does not make a supply within the meaning of section 9-10 of the GST Act.

Therefore, in respect of assets which are vested in another entity, a supply is not made by the entity which loses the assets. The act of vesting extinguishes the rights of the previous owner and confers ownership rights on the recipient entity. The extinguishment of rights is not a supply of those rights by the losing entity.

Even though there is a transfer and vesting of assets, rights and liabilities from Corp A to Corp B, there is no positive action by Corp A to cause the supply to occur. The transfer of assets, rights and liabilities arise under a statutory vesting order, not because of any action by Corp A to 'make' a supply.

Consequently, this means that for the purpose of paragraph 9-5(a) of the GST Act, Corp A has not made a supply of the assets, rights and liabilities to Corp B.

That is Corp A has not made a taxable supply under section 9-5 of the GST Act and as such the transfer and vesting of assets, liabilities and rights to Corp B is not subject to GST.

The transfer of the Licences

It should be noted that, because of the procedures set out in a State Act in relation to the transfer of the Licences, the Licences are not capable of being vested in Corp B.

As the transfer of the Licences is not made under a vesting order under the State Act No 2, it is a supply under paragraph 9-10(2)(e) of the GST Act.

Although no consideration will be provided by Corp B to Corp A in respect of the transfer of the Licences to Corp B, Division 72 of the GST Act ensures that supplies to, and acquisitions from, an associates without consideration, or for inadequate consideration, may be brought within the GST system.

In particular subsection 72-5 of the GST Act states:

Taxable supplies without consideration

(1) The fact that a supply to your *associates is without *consideration, does not stop the supply being a *taxable supply if:

(a) your associate is not *registered or *required to be registered; or

(b) you associate acquires the thing supplied otherwise than solely for a *creditable purpose.

We need to determine whether Corp A and Corp B are associates for GST purposes.

In determining whether Corp A and Corp B are associates, we need to consider section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). This section states:

318 Associates

  …

For the purposes of this Part, the following are associates of a company (in this sub-section called the primary entity).....

  …

another entity (in this paragraph called the "controlling entity") where:

(i) the primary entity is sufficiently influenced by:

  (A) the controlling entity

(e) another company (in this paragraph called the "controlled company") where:

(i) the controlled company is sufficiently influenced by:

(A) …

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

…………

In this case, the Treasurer and one other Minister of the State of the State are the two shareholders of Corp A. Therefore, Corp A is sufficiently influenced by the State (through the Treasurer and the other Minister who hold the absolute voting interest in it).

For GST purposes, the State and Corp A are associates where the State is the controlling entity and Corp A is the primary entity.

Corp B is a State Government agency and is subject to the control and direction of the Treasurer. Therefore, Corp B is sufficiently influenced by the State (through the Treasurer). Similarly, the State and Corp B are associates where the State is the controlling entity and Corp B is the primary entity.

In these circumstances, in accordance to sub-sub-paragraph 318(2)(e)(i)(B) of the ITAA 1936 Corp A and Corp B are associates for GST purposes.

It follows that Subsection 72-5(1) of the GST Act will not apply as Corp A and Corp B are registered for GST and Corp B acquires the Licences supplied by Corp A solely for a creditable purpose.

In conclusion, the transfer of the vested assets, liabilities and rights under the State Act No 2 and the transfer of the Licences from Corp A to Corp B is not subject to GST.