Edited version of private ruling

Authorisation Number: 1011772304678

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Ruling

Subject: Sale of joint venture assets and interests as a going concern

Question 1

Will the proposed supply under an Agreement being:

(a) a percentage interest in JV1 including an equal percentage of interest in the JV1 assets and a percentage of interest in The Entity being ordinary shares in the capital of The Entity owned by Supplier 1;

(b) a percentage of interest in JV1 including an equal percentage of interest in the JV1 assets and a percentage of interest in The Entity being ordinary shares in the capital of The Entity owned by Supplier 2;

(c) a percentage of interest in JV2, owned by Supplier 1, including an equal percentage of interest in the JV2 assets; and

(d) a percentage of interest in the JV2, owned by Supplier 2, including an equal percentage of interest in the JV2 assets

To the Purchaser each be a 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

Yes. If all things necessary for the continued operation of the enterprise are supplied to the Purchaser and both Supplier 1 and Supplier 2 carry on the enterprise until the day of completion then, the supply under the Agreement will be a GST-free supply of a going concern.

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.

Supplier 1 and Supplier 2 are participants in:

· Joint Venture one (JV1) pursuant to the terms set out in the Joint Venture 1 agreement (JV1 Agreement), and

· Joint Venture two (JV2) pursuant to the terms set out in the Joint Venture 2 agreement (JV2 Agreement)

The objects of JV1 Agreement are to hold the joint venture assets, participate in the joint venture in accordance with the JV1 Agreement and to undertake all incidental matters.

The objects of the JV2 Agreement are to undertake all relevant matters which may be incidental to achieving the ultimate object of delivering the goods to the participants.

Supplier 1 and Supplier 2 as joint venturers each hold a proportion of participating interests in the JV2 Agreement and JV1 Agreement.

Both Supplier 1 and Supplier 2 fund and hold ordinary shares in the capital of a The Entity Company in proportion to their participating interests in JV1

The Entity holds the relevant licenses and land interests, in and around the JV1 area, which are essential to facilitate the JV1 operations.

Supplier 1 and supplier 2 are participants in a proposed sale of assets and interests to the purchaser under a sale and purchase Agreement (Agreement).

The Agreement defines the proportion of the Sale Assets and ownership

The Purchaser will make a payment to Supplier 1 and Supplier 2 for a consideration amount exclusive of GST, and will assume liabilities in accordance with the Agreement.

Supplier 1, Supplier 2 and the Purchaser are Australian companies and are all registered for Goods and Services Tax (GST).

Supplier 1 and Supplier 2 have each agreed with the Purchaser that the supplies of the Sale Assets are supplies of a going concern as provided in the Agreement.

Supplier 1 and Supplier 2 will supply all of the things that are necessary for the continued operation of the relevant enterprises by supplying the Sale Assets to the Purchaser in accordance with the Agreement.

Supplier 1 and Supplier 2 will carry on the relevant enterprise until the completion date consistent with the Agreement.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that:

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.

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

In this case Supplier 1 and Supplier 2 have entered into a proposed Agreement with the Purchaser to supply the Sale Assets. Based on the facts, the supply satisfies the requirements of section 9-5 (a) to (d) of the GST Act. Therefore provided that the supply is not input taxed or GST-free the supply under the Agreement will be a taxable supply.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. Section 38-325 of the GST Act provides the conditions that must be satisfied for a supply to be considered a GST-free supply of a going concern. It 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).

Guidance in the interpretation of Subdivision 38-J of the GST Act is provided by Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5).

Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term enterprise is defined in section 9-20 of the GST Act and includes, amongst other things, 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.

It has been submitted that the supply made under the Agreement is one of a going concern. This is on the basis that both Supplier 1 and Supplier 2 are both capable of carrying on an enterprise through their respective participating interests in JV1 and JV2. Further, it is submitted that the supply of The Entity shares (as a Sale Asset) are necessary for the continued operation of the enterprise. As such, given that all the requirements set out above will be satisfied, the supply under the Agreement to the Purchaser will be a GST-free supply of a going concern.

Under subsection 38-325(2) of the GST Act the supply will be a going concern if the supply is made under an arrangement, where the supplier supplies to the recipient all things necessary for the continued operation of the enterprise; and where the supplier carries on the enterprise until the day of the supply.

Paragraph 195 of GSTR 2002/5 is of particular relevance to joint ventures and reads as follows:

195. Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise. Provided that all of the requirements of section 38-325 are satisfied, it is possible for a joint venturer entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the joint venturer is supplied, provided that what is supplied is all of the things that are necessary for the continued operation of the 'identified enterprise'.

In this case, the supply of the portion of Supplier 1 and Supplier 2 interests in JV1 and JV2 conforms to the requirements of a supply of a going concern in a joint venture context, outlined in paragraph 195 of GSTR 2002/5. That is, each joint venturer carries on the identified enterprise which is taken to be the share of the interest of the larger enterprise.

The supply of shares is considered in paragraph 171 and 172 of GSTR 2002/5 as they relate to a going concern. It states:

Going concerns and shares

171. When all of the shares constituting the issued capital of a company are supplied as part of the supply of everything necessary for the continued operation of an enterprise under an arrangement, whether or not the supply of the shares will be under a relevant arrangement will be a question of fact. If the shares are utilised in carrying on the 'identified enterprise', then they may be supplied under the relevant arrangement. Where shares are merely passive investments, they will not be capable of being supplied under the relevant arrangement.

172. The supply of a bundle of shares which does not constitute the whole of the issued capital of a company will be a supply of one of the things necessary for the continued operation of an enterprise where the shares are essential to the continued operation of the enterprise, for example, as trading stock, membership of buyers' cooperatives or a shareholding in a competitor.

In this case, Supplier 1 and Supplier 2 are not supplying all of the shares constituting the ordinary issued capital of The Entity. However, the ownership of the shares in The Entity is directly proportional and intrinsically linked to the ownership interest of each joint venturer involved in JV2. As such, the shares are more than just passive investments and are essential for the continued operation of the enterprise, which is being carried on by JV2 on behalf of Supplier 1, Supplier 2 and other JV2 participants.

Based on the above, under paragraph 38-325(2)(a) of the GST Act, Supplier 1 and Supplier 2 will supply the Purchaser with all the things necessary for the continued operation of the enterprise to hold the joint venture assets and participate in the JV2 and JV1.

In addition, under paragraph 38-325(2)(b) of the GST Act it is required that the supplier carries on, or will carry on, the enterprise until the day of the supply, under the arrangement. Paragraph 161 of GSTR 2002/5 explains the day of supply of the relevant enterprises is the day on which effective control and possession actually passes.

In this case, Supplier 1 and Supplier 2 will pass effective control on the completion date. That is, Supplier 1 and Supplier 2 have agreed with the Purchaser to carry on their respective enterprises until the day of the supply, being the completion date.

Moreover, Supplier 1 and Supplier 2 will satisfy all the requirements under subsection 38-325(1) of the GST Act. In particular, Supplier 1 and Supplier 2 are supplying their interest in the enterprise for consideration, the Purchaser is registered for GST and Supplier 1 and Supplier 2 along with the Purchaser have agreed in writing that the sale will be of a going concern.

As all the requirements of section 38-325 of the GST Act are satisfied, the supplies under the Agreement to the Purchaser can each be a going concern under Section 38-325 of the GST Act. This is provided all things necessary for the continued operation of the enterprise are supplied to the Purchaser and both Supplier 1 and Supplier 2 carry on the enterprise until the day of completion.