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Ruling

Subject: GST and supply of a going concern

Question:

Is the supply of the sale interest by you to the buyer a GST-free supply of a going concern?

Answer:

Yes

Relevant facts and circumstances

Entity A and entity B are both registered for GST

Entity B is the representative member of the GST group that includes entity A as a member. Entity A and B both carry on an enterprise of exploration.

Entity B conducts an enterprise through joint ventures.

Entity B has been carrying out development and construction activities in relation to this enterprise.

Entity A executed an agreement to sell an interest in specified assets that it holds in the joint ventures to a buyer. The buyer is registered for GST.

A copy of the agreement between entity A ('you') and the buyer was supplied. In the agreement the recitals state that you as the Seller are the owner of the Sale Interest as described in the definition thereof and the Seller agrees to sell the Sale Interest and the Buyer agrees to buy that Sale Interest from the Seller on the terms and conditions set out in this Agreement.

The agreement states that if a Favourable Ruling is obtained by the Seller in accordance with a specified clause the Parties agree that the sale of the Sale Interest under or in connection with this agreement is the supply of a going concern solely for Australian GST purposes, provided, however, that no party hereto shall be bound to report the sale as such for any other purpose.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J

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

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:

· the supply is for consideration

· the recipient 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.

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

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).

Although the word 'arrangement' is not defined in the GST Act, 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? 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 sale of the sale interest under the sale and purchase agreement and accompanying schedules constitutes a supply under an arrangement.

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 195 of GSTR 2002/5 provides advice in relation to enterprises that are conducted by joint ventures:

Going concerns and joint ventures

195. 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. 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 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.

You conduct an enterprise of exploration and development. The current activities being undertaken in conducting this enterprise are development and construction activities.

On that basis, it is possible to conclude that the activities undertaken are an enterprise for the purposes of section 9-20 of the GST Act.

Subsection 38-325(2) of the GST Act recognises 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. The section requires that 'an enterprise' be continued and this may be part of a larger enterprise carried on by the supplier.

Under the agreement between you and the buyer a sale interest will be supplied to the buyer.

Under the agreement you are supplying a part of the enterprise that you conduct. Upon acquiring that interest the buyer will be carrying on an enterprise which is constituted by its interest in the assets and the joint ventures.

Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2)(a) and (2)(b) of the GST Act apply to the 'identified' enterprise.

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:

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

· 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 titles and the assets without more is unlikely to be regarded as a supply of a going concern.

The operating structure comprises the contracts and the documents that have been entered into or compiled by you in the conduct of the enterprise. The interest which is being acquired includes all of the rights title and interest in, under and arising from the assets and the joint ventures.

Based on the information provided, the seller will supply the two elements essential for the continued operation of the identified enterprise being an interest in the assets and the operating structure. In acquiring the sale interest in the project the buyer is in a position to carry on an enterprise.

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. Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. 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. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

Under the agreement the completion date will occur within 30 business days after the satisfaction or waiver of certain conditions. Under the agreement you have obligations to fulfil in relation to the conduct of the enterprise up to the completion date. Based on the terms of the agreement you will continue to conduct the enterprise in relation to each of the joint ventures until the day of supply.

On the basis that all of the requirements of section 38-325 of the GST Act will be met, your supply of the sale interest will be a GST-free supply of a going concern.