Edited version of private ruling

Authorisation Number: 1011822412843

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Ruling

Subject: GST and supply of a going concern

Question 1

Are you making a GST-free supply of a going concern, within the meaning of subsection 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you sell your interest in an enterprise in your capacity as a partner in a tax law partnership?

Answer: No.

The partnership makes a GST-free supply of a going concern.

Relevant facts

You hold a 50% interest in land upon which a retail and commercial centre is being developed.

You have advised that you have formed a tax law partnership with another entity in respect of this land. You have registered this partnership for GST.

You have advised that the tax law partnership carries on a property development and leasing enterprise (the Enterprise) in relation to the land.

You have advised that the co-owners are not carrying on the Enterprise in relation to the relevant property in their own rights.

Planning and design work has been ongoing. Construction has commenced. Pre-leasing activities have commenced with agreements for leases with third parties arranged.

You intend to sell your interest in the Enterprise to an independent third party.

In addition to the interest in the land you have advised that you will also transfer to the third party:

· Your interest in a "joint venture agreement" (Agreement)

· Your interest in a project management agreement

· Your interest in a construction contract

· Any works constructed on the land

· All relevant plans including subdivision plans, development approvals

· Marketing and preleasing material

· Executed agreements for lease in place with third party tenants

· Any other rights or permissions relevant to the town centre development.

You have provided relevant extracts of the agreements and contracts under which you operate. These all enable you to assign your interests under the contracts.

Reasons for decision

Summary

You are not making a GST-free supply of a going concern, within the meaning of subsection 38-325 of the GST Act, when you sell your interest in the Enterprise in your capacity as a partner in a tax law partnership.

However, the partnership makes a GST-free supply of a going concern.

Detailed reasoning

You have advised that you are applying for this ruling in your capacity as a partner in the tax law partnership.

Your agreement with your partner is described as a joint venture agreement. However, the terms of the agreement are that each participant will share in the profits and contribute to the losses of the joint venture in proportion to that participant's interest. The essential characteristic of a joint venture is that the participants share in the product of the venture, rather than profits (GSTR 2004/2). As this characteristic is absent, you are not considered to be a joint venture for tax purposes.

The agreement specifically states that nothing in the agreement constitutes a relationship between the participants as partners in which a participant may be liable generally for the debts, act or omissions of another participant. We take this to mean general law partners.

Rather, the intention of both co-owners is to jointly carry on the Enterprise to receive income. Clause 3.3 of the Agreement requires that each Participant will share in profits and contribute to the losses of the enterprise after paying off joint debt. By being in receipt of income jointly a tax law partnership is created. Paragraph 103 of GSTR 2004/6 provides that the only interest that a partner in a tax law partnership has is an interest in the property, coupled with a right to share of the net income or losses in accordance with that interest.

The fact that a tax law partnership exists does not necessarily mean that in every case it is the partnership that carries on an enterprise. In some cases an objective evaluation of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership.

You have advised that your view of the arrangement is that the relevant Enterprise is the property development and leasing enterprise carried on by the tax law partnership, and that the co-owners are not carrying on an enterprise in relation to the relevant property in their own rights.

We consider that the development constitutes an enterprise, and agreements for lease have been entered into such that a leasing enterprise has also commenced in relation to the property. The partnership enterprise is therefore a development and leasing enterprise. The partnership has been actively carrying out this enterprise.

The facts of your arrangement indicate that the tax law partnership entity carries on an enterprise in relation to the land. There is a joint account, and the provision for joint debts and costs. The land is used as security for the project. You have jointly appointed a project manager for the project. These are in accordance with the indicators given in paragraph 62 of GSTR 2004/6 and we therefore accept that the tax law partnership is the entity carrying out the relevant enterprise. This is also known as an enterprise partnership.

The land and commercial property development becomes an asset of the partnership when the partnership is formed and the asset commences to be used for the purposes of the Enterprise of the partnership. Any subsequent supply of the property or an interest in the property is a supply by the partnership (see paragraph 108 of GSTR 2004/6). A supply made by a partner a partner of a partnership in their capacity as a partner is taken to be a supply made by the partnership (subsection 184-5(1) GST Act).

Therefore it is the partnership that makes the supply.

Supply of a going concern

You have agreed to sell your 50% interest in the partnership Enterprise. The supply of your interest is a supply by the partnership. This may be a taxable supply if the requirements of section 9-5 are met, or may be the supply of a GST-free going concern if the requirements of section 38-325 are met.

A supply of a going concern is a supply under an arrangement where the supplier supplies to the recipient all the things that are necessary for the continued operation of the enterprise, and the supplier carries on, or will carry on, the enterprise until the day of the supply.

For the supply of the going concern to be GST free the supply must be for consideration, the recipient must be registered or required to be registered, and the parties must have agreed in writing that the supply is of a going concern.

All things necessary for continued operation

The partnership supplies all of the things that are necessary for the continued operation of an enterprise when it supplies those things which will put the recipient in a position to carry on the enterprise.

The contracts provide the structure for operating the Enterprise, and you have provided information that shows that your interests in these are transferable to a third party.

Your agreement with your partner enables you to sell your interest to third parties, on the condition that they agree to be bound by the conditions of the agreement and assume the responsibilities as if they were a party to that original agreement (clause 22.8). Your other key contracts allow likewise, such as your project management agreement and construction contract. The third party purchaser has requested assignment or novation of the relevant agreements. This will satisfy the requirement that the relevant structure is supplied (see paragraph 51 GSTR 2002/5).

The partnership will also be supplying all other things necessary to enable the continued and uninterrupted operation of the Enterprise such as approvals, rights of access, designs, sales information and so on.

Therefore, we consider that the partnership will supply all of the things necessary for the continued operation of the Enterprise.

Carry on enterprise until the day of supply

To make a supply of a going concern the partnership must carry on the Enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

You have advised that construction and pre-leasing activities have commenced, with agreements for leases arranged.

A number of the terms of the offer from the third party purchaser require that the enterprise continue to be carried on until the day of settlement.

You are contractually obliged to continue working with your partner on the partnership enterprise until you are released from your obligations, on the effective date of the transfer, by the purchaser assuming your obligations (clause 22.8).

We therefore consider that the partnership will carry on the property development enterprise until the day of the supply, and this advice is based on the assumption that all works related to the Enterprise are being conducted until the day of the supply.

GST free supply of a going concern

When the third party purchaser purchases your interest a new partnership which is required to be registered is formed. The purchase by Company A is taken to be by Company A as partner of the new partnership.

The supply by your partnership is a supply for consideration, and the new tax law partnership as the recipient is required to be registered.

As you (as a partner in the old partnership) and the purchaser (as a partner in the new partnership) have agreed in writing that the supply is of a going concern, this meets the requirement that the supplier and recipient agree in writing that the supply is a going concern.

Therefore, in the circumstances described, the partnership will make a GST-free supply of a going concern.

Example

Where a partnership sells all or part of the enterprise it operates to another entity and that entity is registered or required to be registered, the supply may be a 'supply of a going concern'.

Example 18 of GSTR 2004/6 considers a scenario similar to this case, whereby an enterprise partnership supplies a co-owner's interest in a commercial property venture.

· The partner holds a percentage interest in a leased commercial property that it owns with other co-owners.

· A tax law partnership comprising the syndicate members is registered for GST as it carries on the enterprise.

· The partner agrees to sell its percentage interest in the property, with all contracts in place, to a third party.

· As the enterprise is carried on by the partnership, the supply of the partner's interest in the property is by the partner in its capacity as partner of the partnership, that is, it is a supply of the partnership.

· The incoming and outgoing partners agree in writing that the supply is of a going concern.

The new purchaser is bound by the syndicate agreement, therefore when the purchaser takes over the interest a new enterprise partnership is formed which is required to be registered.

The requirements of subsection 38-325(1) are satisfied as the supply is for consideration, the new partnership is required to be registered for GST, and there is an agreement between the supplier and the recipient in writing that the supply is of a going concern.

Where your partnership follows these steps the same outcome of a GST-free supply of a going concern will apply.