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Ruling

Subject: GST and supply of licence

Question

Will the supply of a licence by an Australian company (company) to X be a taxable supply for the purposes of paragraph 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where under a mutual arrangement between the company and X, the supply of the licence will be an in specie repayment of the loan that the company owed to X?

Advice

Yes, the supply of a licence by the company to X will be a taxable supply for the purposes of paragraph 11-5(b) of the GST Act where under a mutual arrangement between the company and X, the supply of the licence will be an in specie repayment of the loan that the company owed to X.

Relevant facts

The Australian company is registered for the goods and services tax (GST). The company has several licences from which they derive income for business purposes.

The company is owned by shareholders and one of the shareholders is X.

The company owes X some money and there is no formal agreement between the company and X for this debt. This money has been recorded as a loan from X to the company when the company's income tax return was completed.

The company and X intend to enter into an arrangement where the company will transfer one of their licences as an in specie repayment of the loan they owe to X. The amount of the repayment will be equivalent to the licence's cost at market value.

Once the licence is valued to the market value this amount will be used to partially repay the loan from X. This repayment will be recorded by debiting the loan and crediting the asset in the Balance Sheet of the company. Any gain from the cost will be recorded as a gain on valuation and will be accounted for under the income tax of the company.

The company will still continue carrying on their business activities after the supply of this licence to X.

Relevant legislative provisions

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

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-10;

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

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

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-25.

Reasons for decision

For a supply to be regarded as a 'taxable supply' and meet the requirements of paragraph 11-5(b) of the GST Act, the supply must satisfy all the requirement of section 9-5 of the GST Act.

Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply for consideration;

· the supply is made in the course or furtherance of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered for GST.

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

We will now ascertain whether the supply of the licence by the company to X will satisfy all the requirements in section 9-5 of the GST Act, for the purposes of paragraph 11-5(b) of the GST Act.

Applying section 9-5 of the GST Act to the facts

Paragraph 9-5(a) of the GST Act - supply for consideration

For a supply for consideration to exist, three fundamental criteria must be met:

· there must be a supply;

· there must be a payment; and

· there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

All three criteria must be satisfied for paragraph 9-5(a) of the GST Act to be satisfied.

Is there a supply?

From the facts given, the company owns several licences which they use to carry on their business activities. The company will transfer one of the licences to X. By transferring the licence to X the company will make a supply to X for GST purposes.

In this instance, criterion 1 will be satisfied.

Is there a payment?

The term consideration is defined in section 9-15 of the GST Act to include:

· any payment, or any act or forbearance in connection with a supply; and

· any payment, or any act or forbearance, in response to or for the inducement of the supply of anything, in response to or for the inducement of a supply of anything.

Consideration may include payments made voluntarily, and payments made by persons other than the recipient of the supply.

Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6 (available at www.ato.gov.au) provides that a payment is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as:

· providing goods;

· granting a right or performing a service (an act); and

· entering into an obligation, for example to refrain from selling a particular product forbearance).

Paragraph 16 of GSTR 2001/6 provides the Commissioner's view where the recipient provides consideration in a non-monetary form and states:

16. By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

Goods and Services Tax Determination GSTD 2004/4 (available at www.ato.gov.au) provides that in the absence of the transfer of money (or non-money consideration), consideration can be provided or received by way of setting off mutual liabilities in accordance with the doctrine of set-off.

GSTD 2004/4 further explains that a set-off can occur if each party has made a supply to the other and each party is required to pay the other for the supply made to it. For example, where an entity makes a supply to an associated entity, normal commercial invoicing and payment may not take place. Instead the entities may have an agreement that discharges the indebtedness arising from the supply without any transfer of money. The discharge of the indebtedness may be recorded solely by making book entries. In this instance, book entries that are made under such an arrangement are evidence of the carrying into effect of the set-off agreement. The set-off of the liabilities (as evidenced by the relevant book entries in the entities' books of account) amounts to payments since it is the provision or receipt of consideration for GST purposes for each of the supplies.

From the information received, the company and X will enter into an arrangement where the company will supply one of their licences to X (by transferring the licence to X) and X will consider that he has received a partial repayment for the loan he had made to the company and the loan repayment will be equivalent to the market value of the sale of the licence. No payments of money will be involved when these transactions take place. Instead book entries will be made when the supply of the licence is made and the value of the supply of the licence is offset against the loan owed to X.

Accordingly, on the basis of these facts we consider that the company will, in the absence of the transfer of money, receive consideration for the supply of the licence to X as the parties have mutually discharge their liabilities by offsetting the amount of debt between themselves in the form of transferring the licence to X and reflecting in the balance sheet that the balance of loan owed to the company to X is reduced by the amount payable by X for the acquisition of the licence.

Criterion 2 will also be satisfied. The next step is to determine whether there is sufficient nexus between the supply and the consideration.

Is there sufficient nexus?

Based on the facts provided, we consider the transferring of the licence has sufficient nexus with the partial discharge of the company's loan by the amount of the market value of the licence. The consideration received by the company for the supply of the licence is the partial extinguishment of the outstanding debt (market value of the licence).

Accordingly, criterion 3 will be satisfied as the company will receive consideration for their supply of licence to X.

As the three criteria will be satisfied, paragraph 9-5(a) of the GST Act will therefore be satisfied.

Paragraph 9-5(b) of the GST Act - supply is made in the course of an enterprise that you carry on

Based on the information received, paragraph 9-5(b) of the GST Act will be satisfied as the supply of the licence will be made in the course of the business that the company is carrying on.

Paragraph 9-5(c) of the GST Act - supply is connected with Australia

The supply of the licence is connected with Australia as the company makes the supply through an enterprise that they carry on in Australia. Paragraph 9-5 (c) of the GST Act is satisfied.

Paragraph 9-5(d) of the GST Act - required to be registered for GST

From the information received, paragraph 9-5(d) of the GST Act is satisfied as the company is registered for GST.

Summary

As paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied, the supply of the licence will be a taxable supply to the extent that it is not GST-free or input taxed. The transfer of the licence to X in Australia is not GST-free or input taxed under the GST Act.

Accordingly, the supply of the licence by the company to X will be a taxable supply under section 9-5 of the GST Act for the purposes of paragraph 11-5(b) of the GST Act.