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Ruling

Subject: GST & Going Concern

Question 1

Is the supply of the first Interest by Entity A to Entity B, under the Agreement, a GST-free supply of a going concern for the purposes of Subdivision 38-J of the GST Act?

Answer

Yes.

Question 2

Is the supply of the second Interest by Entity B to Entity A, under the Agreement, a GST-free supply of a going concern for the purposes of Subdivision 38-J of the GST Act?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme 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 is a participant in a joint venture and Entity B is a participant in another joint venture.

Entity A and Entity B have both been registered for GST since 1 July 2000.

Entity A and Entity B executed an Agreement under which Entity A agreed to transfer and assign interests Entity A holds in a particular joint venture to Entity B and Entity B agreed to transfer and assign all interests Entity B holds in another joint venture to Entity A.

The consideration to be provided by Entity B in respect of the acquisition of the first Interest is the assignment of the second Interest to Entity A and the Cash Payment.

The consideration to be provided by Entity A in respect of the acquisition of the second Interest and the Cash Payment is the assignment of the first Interest to Entity B.

Entity A will continue to conduct the activities associated with the first Interest, as a participant in the relevant joint ventures, and Entity B will continue to conduct the activities associated with the second Interest, as a participant in the relevant joint venture, until the Completion Date under the Agreement.

Reasons for decision

The 'supply of a going concern' is GST-free where the requirements of section

38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

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

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

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

· the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

· the supply must be for consideration;

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

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

Goods and Services Tax Ruling GSTR 2002/5, Goods and Services tax: when is a 'supply of a going concern' GST-free?, discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free.

Paragraph 195 of GSTR 2002/5 states:

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'.

Subsection 38-325(2)

Paragraphs 38-325(2)(a) and (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 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.

Further, paragraph 195 of GSTR 2002/5 provides that if a business structure is a joint venture, then each joint venturer is capable of conducting an enterprise. Provided all the requirements of 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.

In this instance, the Vendors (Entity A and Entity B) are each carrying on a particular enterprise through their participating interest in the respective joint ventures. These are the identified enterprises.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

Paragraph 20 of GSTR 2002/5 goes on to say that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern' 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.

The Agreement entered into between Entity A and Entity B provides that Entity A wishes to assign and transfer the first Interest to Entity B and Entity B wishes to assign and transfer the second interest to Entity A

The Agreement constitutes an arrangement under which the participating interests in the joint ventures will be supplied.

Subsection 38-325(2)(a)

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

The supplier needs to supply all of the things that are necessary for the continued operation of the enterprise. Paragraph 80 of GSTR 2002/5 provides that a supplier is considered to have supplied all the things 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.

In this case, Entity A will transfer to Entity B a participating interest in the joint venture.

In addition, the Agreement identifies all documents to which Entity B will acquire rights and obligations.

Entity B will transfer to Entity A, a participating interest in the joint venture.

In addition, the Agreement identifies all documents to which Entity A will acquire rights and obligations.

Based on the above information and your advice that this comprises all things necessary for the continued operation of the enterprise being supplied by the Vendor, we accept that all things necessary for the continued operation of the enterprise have been supplied.

Subsection 38-325 (b)

Supplier carries on the enterprise until the day of the supply

Paragraph 161 of GSTR 2002/5 provides 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. The day of supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all things that are necessary for the continued operation of the enterprise.

Further, in accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. The activities must be capable of continuing after the transfer to new ownership (paragraph 141 of GSTR 2002/5).

In your case, the Agreement outlines that all risks associated with and title in the respective interests will occur with effect from the Effective Date

Between the Effective Date and the Completion Date, various conditions must be satisfied or waived in accordance with the Agreement.

Consequently, the day of supply will be the Completion date when the conditions precedent have been met, all the completion steps have been fulfilled and the respective interests have been assigned and transferred.

Even though the Purchasers assume all risks connected with ownership and operation of the respective interests and assume the liabilities on the Effective Date, the assignment and transfer of the respective interests only occurs on the Completion Date.

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on but is also operating. In this respect, the vendors have continued the exploration activities in the period between the Effective Date and the Completion Date. This is supported by the Agreement which highlights the obligations prior to completion with respect to the interests being exchanged and your confirmation that Entity A will continue to conduct the activities associated with the first Interest, as a participant in the relevant joint ventures, and Entity B will continue to conduct the activities associated with the second Interest, as a participant in the relevant joint venture, until the Completion Date under the Agreement.

Based on the information supplied and your advice that Entity A and Entity B are supplying all things necessary for the continued operation of the respective enterprises, you have satisfied this requirement.

Subsection 38-325(1)

Subsection 38-325(1) provides:

The *supply of a going concern is GST-free if:

· the supply is for *consideration; and

· the *recipient is *registered or *required to be registered; and

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

In your case, the respective supplies are for consideration, both Entity A and Entity B are registered for GST and both parties have agreed in writing that the respective supplies are of a going concern.

The requirements of subsection 38-325(1) are therefore met.

Conclusion

Based on the information supplied to us, the supply of the first Interest from Entity A to Entity B is a GST-free supply of a going concern and meets the requirements of section 38-325 of the GST Act.

Likewise, based on the information supplied to us, the supply of the Entity B Interest to Entity A is a GST-free supply of a going concern and meets the requirements of section 38-325 of the GST Act.