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Ruling

Subject: GST and sale of a going concern

Question 1

Was the supply of the Sale Interest, to the extent that it related to the Joint Venture, a supply of a GST-free going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

Pursuant to the Joint Venture Agreement the (Seller) was a joint venture participant in the Joint Venture (JV) along with the other joint venture participants being:

§ AA;

§ BB; and

§ CC (Buyer).

The Seller had a 10% interest in the JV. The JV owned and operated the asset. Each joint venture participant commenced and continued to carry on activities in relation to the operation of the asset. The asset produced sales.

Each joint venture participant held shares in DD - the operator of the asset and EE - the sales and marketing arm of the JV.

Pursuant to the Sale and Purchase Agreement (SPA) the Seller, in its capacity as partner, also disposed of its entire interest in the FF Joint Venture, a tax law partnership (Partnership). However the supply of Seller's Partnership interest was not necessary for the continued operation of the asset that was the JV. Consequently, the supply of the Seller's Partnership interest does not form part of this GST private ruling application. This private ruling application is limited to the consideration of whether the Seller's supply of its interest in the JV was a GST-free going concern.

The Seller made a supply of the 'Sale Interest' to the extent that it related to the JV, to the Buyer. The sale was effected through the SPA which specified the terms under which the Buyer purchased the Seller's Sale Interest.

Pursuant to the SPA the Seller agreed to do a number of things to effect the supply of the Sale Interest to the Buyer:

Pursuant to the SPA, the Seller was required to deliver to the Buyer various things (agreements and deeds) which were relevant to the continued operation of the JV.

The consideration provided by the Buyer for the Seller's Sale Interest was outlined in the SPA on a GST exclusive basis and any adjustment payment made pursuant to the SPA. Pursuant to the SPA, the Buyer and Seller were registered for GST purposes, agreed that the effective supply of the Sale Interest was to be the supply of a GST-free going-concern. The Seller warranted that:

(a) the Seller carries on, and will continue to carry on effectively the supply of the Sale Interest up to and including the Completion Date;

(b) on Completion Date, the Seller is registered for GST or is required to be registered for GST and

(c) the Seller supplies to the Buyer all of the things that are necessary for the continued operation of effectively the supply of the Sale Interest on the Completion Date.

Completion occurred and you state that in accordance with the terms of the SPA, the identified enterprise was carried on until that date.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The supply of the Sale Interest, to the extent that it related to the JV, was a supply of a GST-free going concern in accordance with section 38-325 of the GST Act.

Detailed reasoning

All legislative references are to the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

§ it makes a supply for consideration; and

§ the supply is in the course or furtherance of an enterprise that it carries on; and

§ the supply is connected with Australia; and

§ the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

§ the supply must be made under an arrangement under which:

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

o the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

§ the supply must be for consideration;

§ the recipient of the supply must be registered or required to be registered for GST; and

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

Joint Ventures

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'.

Subsection 38-325(2)

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 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. 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. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

The SPA provided for the supply by the Seller to the Buyer of the Sale Interest. The Sale Interest, according to the SPA consisted of various venture assets, rights and benefits.

In our view, the SPA constituted an arrangement that satisfied the requirements of paragraph 38-325(2)(a).

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

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 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.

The Seller conducted its operation in respect of the asset. The operation was productive, realising significant sales. The Seller's enterprise was continuous and uninterrupted. This was the 'identified enterprise'.

Where the enterprise is identified, a supplier needs to supply 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 30 of GSTR 2002/5).

In this case the Seller has supplied to the Buyer the Sale Interest defined in the SPA.

It is our view that all the things necessary for the continued operation of the asset were supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), 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 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 (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 supply occurred when the Seller did everything to satisfy its obligations under the arrangement and the Buyer assumed effective control and possession of the operation. You have stated that the enterprise was carried on until the day of supply.

It is our view that the Seller carried on this enterprise until the day of supply to the Buyer.

Subsection 38-325(1)

Supply for consideration

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

The consideration for the supply of the interest in the JV was agreed and set out in SPA. We consider that the supply was made for consideration.

Recipient registered for GST

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

The Buyer warranted that it was registered for GST and you confirmed this assertion by checking on the Australian Business Register. We accept that the Buyer was registered for GST.

Agreed in writing

Under paragraph 38-325(1)(c), 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).

The form of SPA set out the conditions that had to be met for the sale of the interest in the JV to be affected. The SPA indicates that the parties agreed that the disposal of the interest was to be the GST-free supply of a going concern. We consider this meets the requirements of paragraph 38-325(1)(c).