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Ruling

Subject: GST and Supply of a Going Concern

Question

Is the supply of the First Sale Interest and the Second Sale Interest to the Purchaser by Entity B, pursuant to an Agreement, a GST-free supply of a going concern under 38-J of the A New Tax System (Goods and Services) Act 1999 (GST Act)?

Answer

Yes your supply of the First Sale Interest and the Second Sale Interest, pursuant to an Agreement, to the Purchaser will be a GST-free supply of a going concern under 38-J of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the arrangement 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.

Entity A and Entity B are registered for GST purposes and are members of the same GST Group.

Entity A is:

o The reporting entity for the GST Group.

o The immediate holding company of Entity B with a 100% holding.

o The operator of the Joint Ventures.

Entity B is:

o A participant in the Joint Ventures together with other entities.

Entity A and Entity B hold the Sale Interest.

The Joint Ventures are governed by the Joint Venture Agreements which provide the administrative framework by which the Joint Venture Participants and Operator operate.

The Joint Venture Participants are currently undertaking work associated with developing areas for commercial output.

To date the Joint Venture Participants have undertaken, and are continuing to undertake, various enterprise activities.

In undertaking activities the Joint Venture Participants have invested funds on a work programme to progress the potential development.

An offer from Entity C to purchase a portion of Entity B's equity interest (Sale Interest) in the Joint Ventures for consideration was accepted and executed, subject to certain conditions precedent.

Entity A and Entity B entered into a Sale Agreement with Entity C which was duly executed.

Sale Interest is defined in the Sale Agreement to include the First Sale Interest and the Second Sale Interest.

The First Sale Interest is defined in the Sale Agreement as an aggregate percentage undivided "Venture Interest" under (and as defined in) the First Joint Venture Agreement and the corresponding rights, title and interest arising there from to the same undivided percentage extent.

The Second Sale Interest is defined in the Sale Agreement as an aggregate percentage undivided "Participating Interest" under (and as defined in) the Second Joint Venture Agreement and the corresponding rights, title and interest arising there from to the same undivided percentage extent.

Entity A is only a party to the Sale Agreement for the purposes of effecting the transfer of the Sale Interest to Entity C.

Through obtaining an interest in the First and Second Titles and rights under the Joint Venture Agreements Entity C will have the necessary assets including information for the continued operation of the enterprise. Entity C will also be supplied with a right to all intellectual property, technical ability and records to date in respect of the First and Second Joint Venture Agreements which provides them with the operating structure and process for the continued operation of the enterprise.

The Sale Agreement states that Entity B and Entity C agree that the sale of the Sale Interest constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

The Sale Agreement also states that Entity B will carry on the business constituting the Sale Interest until the day the supply is made. Completion of the sale and purchase of the Sale Interest will take place on the Completion Date at the offices of Entity B, or at any time or place as the Entity B and Entity C may agree in writing.

At Completion, Entity C will pay the completion payment amount.

Relevant legislative provisions

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

Subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the supply of a going concern is GST-free if:

o the supply is for consideration,

o the recipient is registered or required to be registered for GST, and

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

Based on the information supplied, the requirements of subsection 38-325 (1) have been met.

A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where:

(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).

Supply under an arrangement

Although the word arrangement is not defined in the GST Act, it is addressed in Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) Goods and services tax: when is a 'supply of a going concern' GST-free? GSTR 2002/5 explains at paragraph 19 that the term 'supply under an arrangement', includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise.

The supply of the Sale Interest by Entity B under the Sale Agreement between Entity A, Entity B and Entity C constitutes a supply under an arrangement.

Identified enterprise

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on when a 'supply of a going concern' is GST-free. In particular, paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act 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.

Paragraph 30 of GSTR2002/5 and subsection 38-325(2) of the GST Act recognise that a supplier might carry on an enterprise, described as a 'larger enterprise' within which the enterprise contemplated by paragraphs 38-325(2) (a) and (b) forms a part. The GST Act does not require that a whole enterprise be transferred for the supply to be GST-free under section 38-325 of the GST Act but does require that all things necessary to continue the operation of that part of the enterprise be supplied and the enterprise be continued by the supplier until the time of supply.

The term 'enterprise' is defined in section 9-20 of the GST Act to include 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. Paragraph 195 of GSTR 2002/5 in part states 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.

As a participant in both the First and Second Joint Venture together with other participants Entity B is currently undertaking work associated with developing areas governed by the First and Second Joint Venture Agreements. To date the Joint Venture participants have undertaken, and are continuing to undertake, significant activities.

In undertaking activities the Joint Venture participants have invested financially on a work programme to progress the development. Based on the activities Entity B is a participant in a joint venture carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Goods and Services Tax Ruling GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes explains what a joint venture is for the purposes of the GST Act. The Ruling sets out the features that the Commissioner considers characterise an arrangement as a joint venture in the context in which that term is used in the GST Act.

Paragraph 11 of GSTR 2004/2 outlines that for the purposes of the GST Act, a joint venture is an arrangement between 2 or more parties, characterised by the following features:

o sharing of product or output, rather than sale proceeds or profits;

o a contractual agreement between the participants;

o joint control;

o a specific economic project; and

o cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. This is a key characteristic of a joint venture. The other features are indicative of the existence of a joint venture.

Entity B has advised the First and Second Joint Ventures are governed by the Joint Venture Agreements. Articles in the Joint Venture Agreements provide that Venturers associate themselves in a Joint Venture in accordance with the Agreement.

The balance of paragraph 195 makes the point that 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'.

It is accepted that the business structure Entity B is a participant in, is a joint venture and Entity B is a joint venture entity capable of making a GST-free supply of a going concern provided that it supplies all of the things that are necessary for the continued operation of the joint venture enterprise.

Supply of all things necessary

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states:

The supplier supplies 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.

Further, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

o the assets necessary for the continued operation of the enterprise, and

o the operating structure and process of the enterprise.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. The provision of a percentage of the rights in the production title and the infrastructure title without more is unlikely to be regarded as a supply of a going concern.

The Sale Agreement states that Entity B will carry on the business constituting the Sale Interest until the day the supply is made. Completion of the sale and purchase of the Sale Interest will take place on the Completion Date.

You have advised you will supply all of the things that are necessary for the conduct of the enterprise.

In supplying the Sale Interest (including an interest in the First and Second Titles) and rights under the Joint Venture Agreements, Entity B will provide Entity C with all the necessary assets including information for the continued operation of the enterprise. Entity C will also be supplied with a right to all intellectual property, technical ability and records to date in respect of the First and Second Joint Venture which provides them with the operating structure and process for the continued operation of the enterprise.

Based on the information provided, Entity B will supply the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure. In acquiring the participating interest in the First and Second Joint Venture, Entity C will be in a position to carry on an enterprise as a joint venture participant.

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.

Entity B advised that it will carry on the enterprise until the date of the supply to Entity C. The date of supply is the completion date of the Sale Agreement. Based on the information supplied, the requirements of subsection 38-325 (2) have all been met. On the basis that all of the requirements of section 38-325 of the GST Act will be met, the supply of the participating interest will be a GST-free supply of a going concern.