Edited version of private ruling

Authorisation Number: 1011704287411

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST and acquisition of a going concern

Question 1

Is your acquisition of the interest in a specified development project (the Project) a creditable acquisition?

Answer

No.

Relevant facts and circumstances

The vendor acquired the Project a few months ago.

The current operating structure and process of the Project consists of the Approvals, Licenses, systems, designs and planning to bring about the development of the site into an operational site via a joint venture. The relevant commercial and economic activities of the enterprise include maintaining the Approvals, Leases and Contracts.

The Vendor has engaged X as the manager of the Project. Consequently, X, as agent for the Vendor, undertook the engagement and commissioning of pre-development activities in relation to the Project as set out below. The Vendor has also engaged Y as the marketing agent for the Project. X and Y will continue to perform these roles post Completion.

Prior to the acquisition of the Project, the Vendor completed a full review of all the material produced by the previous owner in order to gauge its commercial viability.

Prior to the acquisition of the Project, the Vendor secured substantial debt facilities for the acquisition of the project.

As part of the acquisition of the Project, the Vendor acquired certain Licences and Approvals. Under the terms of the Licenses and Approvals, the Vendor is required to undertake certain ongoing activities and provide certain information to the relevant authorities regularly.

Since the acquisition of the Project, X, as the agent for the Vendor, has undertaken the engagement and commissioning of a number of activities including:

§ undertaken detailed design work for the development of the Project including an update of the development plan

§ commissioned certain statements and independent reports with respect to industry conditions and product market

§ submitted to the relevant authorities, which was accepted in principle, a proposal to extend the current Development Consent, authorise changes, and update development specification as designed in the new plan

§ commenced a specified type of work on the site

§ engaged independent experts to carryout a specified type of work

§ submitted specified plans to the relevant authorities for developing the project

§ engaged with the relevant authorities over the environmental and planning impact of the Project

§ commissioned an independent technical review of the Project to analyse certain specified aspects of the project

§ engaged an entity to undertake an independent assessment of the capacity and infrastructure required for the Project

§ entered into sales agreements with prospective buyers (Sales Contracts)

§ commissioned an independent legal review with regard to the legal status of the development site

§ took specified steps to raise funds for the partial repayment of the acquisition debt, fund costs, complete detailed engineering design and fund acquisition of certain assets

§ lodged an application with relevant authorities with a view to supporting the production schedule as outlined in a specified document

§ engaged relevant entities to design and model specified facilities

§ applied for renewal of licences which impose a range of specified requirements on the Vendor

§ made certain announcements in respect of commencement of the development and construction activities

To fund the ongoing development of the Project, you and the Vendor are contemplating entering into an unincorporated joint venture (the Joint Venture).

On a specified date, you and the Vendor entered into the sale and purchase agreement (Agreement). As per the recitals of the Agreement, you wish to enter the Joint Venture and will purchase a share of certain assets to do so. The effect of the Agreement is such that the Vendor will sell an interest in the Project assets to you so that on Completion you and the Vendor will be entitled as tenants in common, severally, to the assets in the proportions of A% to the Vendor and B% to you. This will reallocate ownership of the assets to a position that is consistent with the allocation of Participating Interests in the Joint Venture (as those terms are defined under the Joint Venture Agreement (JVA)).

The JVA sets out the purpose of the Project.

The JVA provides that your and the Vendor's rights under the Joint Venture are several and not joint and several, and that neither have the right to incur any obligations on behalf of the other (or is the agent, representative or partner of the other).

The JVA provides that you and the Vendor individually own and have the right to take delivery of your respective interest in the products from the Project.

The Agreement provides that, you and the Vendor will execute the Joint Venture Documents (which include, among other things, the JVA, the Agreement, the Management Agreement, Sales Agency Agreement and the Sales Contracts) on Completion. Completion of the Agreement and the JVA is anticipated to occur on or about a specified date.

The Project assets are defined in the Agreement as:

§ the Shares in Y

§ the Specified Assets

§ the Land Titles

§ the Leases

§ the Contracts

§ the Approvals , licenses, permits and authorisations

§ the Specified Information

§ the Business Records, and

§ all other property, rights and assets of the Vendor used by, or in connection, with the Project.

The purchase price for the interest in the Project assets is $Z.

The Agreement contains a warranty that the Sales Contracts will be in force as at the date of Completion.

The JVA provides that X will sign the Management Agreement contemporaneously with you and the Vendor on Completion. The JVA provides that Y will sign the Sales Agency Agreement with you and the Vendor on Completion. The Management Agreement and the Sales Agency Agreement replicate the current arrangements between X, Y and the Vendor in managing and marketing the Project.

The Management Agreement provides that X has no ownership of the Project assets nor any right, title or interest in any money except as trustee on behalf of the Vendor (and after Completion, you and the Vendor). Likewise, the Management Agreement notes that all orders, instructions, directions, acts or matters of X are made, done and performed by X as agent of the Joint Venture participants and X may be directed by you and the Vendor (as the Management Committee under the JVA).

The Management Agreement sets out the duties and functions of X in relation to managing the Project. These powers are in line with the activities referred to above that X currently performs, for example, feasibility studies, negotiating with authorities, performance of obligations with respect of development site and the development and use of the Project assets.

X is also bound by the Management Agreement, which requires it to carry out its duties and obligations under the guidance of specified Programs, Budgets and specified Plans, as defined in the JVA. These documents were formulated by the Vendor, and after Completion can only be amended and updated via consent from both you and the Vendor in conformance with the JVA.

Y will continue its current role as the marketing agent pursuant to its appointment under the JVA. As described in the JVA, Y's role is limited to acting as an agent of you and the Vendor in marketing the products of the Joint Venture. The JVA notes that Y will be owned jointly by you and the Vendor after Completion and that you and the Vendor will share control and management of Y following the proposed acquisition.

The Agreement provides that the Vendor warrants that the Vendor's management team's current intention is to apply for all necessary development consents, to allow commencement of constructions and the development of products by a specified date.

The Agreement deals with conduct of the Vendor prior to Completion and provides that from the Agreement Date until Completion, the Vendor must, in relation to the Project assets:

§ act in a manner that is consistent with the ordinary course of business and industry practice

§ maintain the Approvals in full force and effect

The Agreement prohibits the Vendor from disposing or encumbering any of the Assets, terminating or amending any of the Contracts unless consent is obtained from you. It also prohibits the Vendor from terminating or failing to enforce the terms of any Leases, or making material changes to the project unless otherwise agreed by you.

Under the Agreement, the Vendor warrants that all the Specified Assets, Approvals and Contracts in respect of the Project will remain in force as at Completion.

To the best of your knowledge, the enterprise that is the subject of the Agreement will be carried on by the Vendor until the Completion Date.

The Agreement imposes an obligation on you to be registered for GST at Completion. You are currently registered for GST.

Under the Agreement, you and the Vendor agree that the supply of the interest in the Project to you by the Vendor is the supply of a going concern.

Summary

Your acquisition of the interest in the Project is not a creditable acquisition. This is because the sale of the interest in the Project is a GST-free supply to you.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out the requirements of a creditable acquisition. This section states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(* denotes a term defined in section 195-1 of the GST Act)

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

In your case you meet the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act. This is because, you are acquiring the interest in the Project for a creditable purpose, you are liable to provide consideration for the supply, and you are registered for GST.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply. Therefore, we need to consider whether the supply of the interest in the Project by the Vendor to you is a taxable supply.

The requirements of a taxable supply are set out in section 9-5 of the GST Act. This section 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.

Based on the information provided, the sale of the interest in the Project by the Vendor to you meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act for the following reasons:

§ the Vendor is making the supply for consideration

§ the supply is in the course of an enterprise that the Vendor is carrying on

§ the supply is connected with Australia, and

§ the Vendor is registered for GST.

Additionally, the sale of the interest in the Project is not input taxed under any provision of the GST Act or any other Act.

Therefore, what remains to be considered is whether the sale of the interest in the Project to you is GST-free.

Whether the sale of the interest in the Project is GST-free

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2) A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

In order to determine whether the sale of the interest in the Project is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act

Paragraph 38-325(2)(a)

Supply under an arrangement

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act. Paragraphs 19 and 20 of GSTR 2002/5 explain what is meant by 'a supply under an arrangement':

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', 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. (Refer to paragraphs 178 to 185 for more details). 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.

In your case, the Joint Venture Documents, which include, among other things, the JVA, the Agreement and the Management Agreement and which will be completed simultaneously, evidence the arrangement for the purposes of subsection 38-325(2) of the GST Act.

Indentified enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to included, an activity, or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; or …

In this case, based on the information provided, the Vendor is carrying on a particular development enterprise (development enterprise). This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, the Vendor is required to supply to you all of the things that are necessary for the continued operation of that enterprise.

All the things that are necessary for the continue operation of the enterprise

Paragraph 80 of GSTR 2002/5 provides that a supplier supplies 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 72 of GSTR 2002/5 states:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

At paragraph 75, GSTR 2002/5 states:

75. Two elements are essential for the continued operation of an enterprise:

• the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and
• the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In your case, under the Agreement you will acquire a B% interest in all the assets involved in the Project. The assets are all the property, rights and obligations that the Vendor holds in relation to the project. The Project assets include:

§ the Shares in Y

§ the Specified Assets

§ the Land Titles

§ the Leases

§ the Contracts

§ the Approvals , licenses, permits and authorisations

§ the Specified Information

§ the Business Records, and

§ all other property, rights and assets of the Vendor used by, or in connection, with the Project.

Additionally, under the JVA you will acquire a B% Participating Interest in the Joint Venture at Completion.

Paragraph 150 of GSTR 2002/5 states:

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

In your case, the Vendor has engaged X as the manager of the Project. X, as the agent for the Vendor, has undertaken the engagement and commissioning of a number of activities including:

§ undertaken detailed design work for the development of the Project including an update of the development plan

§ commissioned certain statements and independent reports with respect to industry conditions and product market

§ submitted to the relevant authorities, which was accepted in principle, a proposal to extend the current Development Consent, authorise changes, and update development specification as designed in the new plan

§ commenced a specified type of work on the site

§ engaged independent experts to carryout a specified type of work

§ submitted specified plans to the relevant authorities for developing the project

§ engaged with the relevant authorities over the environmental and planning impact of the Project

§ commissioned an independent technical review of the Project to analyse certain specified aspects of the project

§ engaged an entity to undertake an independent assessment of the capacity and infrastructure required for the Project

§ entered into Sales Contracts with prospective buyers

§ commissioned an independent legal review with regard to the legal status of the development site

§ took specified steps to raise funds for the partial repayment of the acquisition debt, fund costs, complete detailed engineering design and fund acquisition of certain assets

§ lodged an application with relevant authorities with a view to supporting the production schedule as outlined in a specified document

§ engaged relevant entities to design and model specified facilities

§ applied for renewal of licences which impose a range of specified requirements on the Vendor

§ made certain announcements in respect of commencement of the development and construction activities

The Vendor has engaged Y as the marketing agent for the Project.

The definition of JV Documents includes the Management Agreement and the Sales Agency Agreement. According to the JVA, X will sign the Management Agreement contemporaneously with you and the Vendor on Completion. According to the JVA, Y will sign the Sales Agency Agreement with you and the Vendor on Completion. The Management Agreement and Sales Agency Agreement replicate the current arrangements between X, Y and the Vendor in managing and marketing the Project.

Additionally, the Vendor has incurred significant expenditure in relation to the Project. You and the Vendor will enter into the JVA on Completion and will continue to carry on the identified enterprise as joint venture participants.

Based on the information provided, the supply of the interest in the Project assets and the Participating Interest in the Joint Venture is all that is necessary for you to continue to conduct the specified enterprise in your own right.

Furthermore, based on the information provided, we accept that the specified enterprise is in operation for the purposes of subsection 38-325(2) of the GST Act. Accordingly, the Vendor supplies to you all of the things that are necessary for the continued operation of the identified enterprise.

Paragraph 38-325(2)(b)

Paragraph 38-325(2)(b) of the GST Act requires the supplier to carry on the enterprise until the day of the supply, whether or not as part of a large enterprise carried on by the supplier.

The day of the supply

Paragraph 161 of GSTR 2002/5 states:

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

Under the Agreement, the transfer of the Project assets will occur on Completion. According to the Agreement, you and the Vendor will also execute the Joint Venture Documents on Completion. Completion is anticipated to occur on or about a specified date. Accordingly, the date of supply is the date of the Completion.

Supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

The Agreement provides that from the Agreement Date until Completion, the Vendor must, in relation to the Sale Assets:

§ act in a manner that is consistent with the ordinary course of business and industry practice

§ maintain the Approvals in full force and effect

The Agreement prohibits the Vendor from disposing or encumbering any of the Project assets, terminating or amending any of the Contracts unless consent is obtained from you. It also prohibits the Vendor from terminating or failing to enforce the terms of any Leases, or making material changes to the Project unless otherwise agreed by you.

Under the Agreement, the Vendor warrants that all the Specified Assets, Approvals and Contracts will remain in force as at Completion.

Furthermore, after the Completion, the Vendor will maintain A% interest in the Project assets and A% Participating Interest in the Joint Venture.

You also advised that to the best of your knowledge, the enterprise that is the subject of the Agreement will be carried on by the Vendor until the Completion Date.

Based on the information provided, we accept that the Vendor will carry on the enterprise until the day of the Completion.

Subsection 38-325(1) of the GST Act

In this case, the supply of the interest in the Project meets the requirements of subsection

38-325(1) of the GST Act as:

§ the supply is for consideration

§ you are registered for GST, and

§ you and the supplier have agreed in writing that the supply is of a going concern.

Conclusion

The sale of the interest in the Project to you is a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.

Consequently, your acquisition of the interest in the Project is not a creditable acquisition as it does not meet all the requirements of section 11-5 of the GST Act. Therefore, you are not entitled to an input tax credit on this acquisition.