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Ruling

Subject: GST and supply of a going concern

Question

Does the supply of the sale interest under the sale agreement constitute a GST-free supply of a going concern in accordance with section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply of the sale interest under the sale agreement does constitute a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances

You, as vendor, are selling your enterprise.

Both you and the purchaser are participants of a joint venture.

The joint venture was formed for the purposes of exploring and extracting natural resources.

The joint venture is registered as a GST joint venture.

You and the purchaser are both registered for GST.

Apart from your participation in the joint venture, or other joint ventures, you and the purchaser are unrelated third parties.

You and the purchaser entered into a sale agreement.

Under a clause in the sale agreement, you agreed to sell, and the purchaser has agreed to buy, the sale interest comprising of a percentage interest in the joint venture.

The sale interest represents your full percentage interest in the joint venture

Completion will not proceed unless and until all the conditions precedent are fulfilled or waived.

Between the date of entering into the sale agreement and the earlier of completion date and termination of the sale agreement, the vendor must conduct its business in relation to the sale interests in the ordinary course including in accordance with the terms of the joint venture documents and must not create any encumbrance over the sale interest or do anything which would reduce the value of the sale interest.

The parties agree that the supply of the sale interest constitutes the supply of a going concern for the purposes of the GST Act.

The purchaser warrants that it is registered or required to be registered for GST and will remain so until completion.

The vendor:

(i) warrants that it is registered for GST and will remain registered until completion;

(ii) will continue to carry on the enterprise as an participant up to and including the day of completion.

The purchaser will, as soon as practicable after completion, procure that the operator apply to the Commissioner in the approved form for the removal of the vendor as a participant in the GST joint venture with effect on and from completion

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision

GST is payable on taxable supplies. You make a taxable supply where all the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act 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.

(* Denotes a term that is defined in section 195-1 of the GST Act).

You will supply the interest in the joint venture for consideration; in the course or furtherance of an enterprise that you carry on, being the operation of the joint venture; the supply is connected with Australia and you are registered for GST.

There are no provisions in the GST Act under which the supply of the interest in the joint venture would be an input taxed supply. Therefore it needs to be determined whether your sale of the interest in the joint venture will be a GST-free supply.

The supply of an interest in a joint venture will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met.

 Subsection 38-325(2) of the GST Act

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

· 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).

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on when the supply of a going concern is GST-free.

Supply under an arrangement

The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in a written agreement (contract) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. 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. (paragraphs 19 and 20 of GSTR 2002/5)

The sale agreement constitutes an arrangement that satisfies the preliminary requirements of subsection 38-325(2) of the GST Act.

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(2)(a) and (2)(b) of the GST Act require the conditions to be satisfied in relation to an identified enterprise. The term enterprise is defined in section 9-20 of the GST Act and includes 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 of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

Paragraph 195 of GSTR 2002/5 deals with joint ventures and supplies of going concerns and states:

195. Whether or not a business structure is a joint venture is a matter of fact. If the 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.

The supply of your full participating interest in the joint venture relates to the identified enterprise carried on by you and conforms with the requirements of a supply of a going concern in a joint venture context. It is considered that the supply of the interest in the joint venture will amount to the supply of a separately identifiable enterprise capable of being carried on its own right.

A clause in the sale agreement mentions that all necessary Government Consents and approvals have been received from the relevant Governmental Agencies in relation to the transfer to the purchaser of the sale interest.

Further, a clause of the sale agreement provides that at completion the vendor must deliver or make available to the purchaser the sale interest; counterparts of each completion agreement, duly executed by the vendor; any deed, instrument or document reasonably required by the vendor or the purchaser to vest legal and beneficial ownership of all of the sale interest (excluding certain titles) in the purchaser.

Hence, in this case we consider that all the things necessary for the continued operation of the identified enterprise will be supplied.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply. The activities must be capable of continuing after the transfer to the new ownership (refer to paragraph 141 of GSTR 2002/5). The day of 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 (refer to paragraph 161 of GSTR 2002/5).

The day of the supply in this case will be the completion date in the sale agreement.

Pursuant to a clause in the sale agreement you warrant you are registered for GST and will remain registered until completion and you will continue to carry on the enterprise until the day of completion.

Accordingly, in our view, you will be actively operating the joint venture and will be carrying on the identified enterprise until the day of supply to the recipient..

Hence, your arrangement meets the requirements of a supply of a going concern.

Subsection 38-325(1) of the GST Act

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if:

· the supply is for consideration

· the recipient of the supply is registered or required to be registered for GST, and

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

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration.

A clause in the sale agreement provides that the price payable for the sale interest is the purchase price. The definitions and interpretations section of the sale agreement mentions that the base purchase price of the sale interest is a sum of money subject to adjustment at completion. We consider that the supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or required to be registered for GST.

A clause in the sale agreement provides that the purchaser warrants that it is registered or required to be registered for GST and will remain so until completion. This satisfies the requirement of paragraph 38-325(1)(b) of the GST Act.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term agreed in writing means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a supply of a going concern (refer paragraph 181 of GSTR 2002/5).

A clause in the sale agreement provides that the supply of the sale interest constitutes the supply of a going concern for the purposes of the GST law. Accordingly, paragraph 38-325(1)(c) of the GST Act is satisfied.

As such, all the requirements of section 38-325 of the GST Act have been met. Therefore, the supply of the sale interest will be a GST-free supply of a going concern.