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Ruling

Subject: GST and transfer of shares and sale of business and assets

Question 1

Is the transfer of shares by Entity A to Entity B an input taxed financial supply?

Answer

No. The transfer of shares by Entity A to Entity B is not an input taxed financial supply. It is out of scope of the GST.

Question 2

Is the sale by Entity B to Entity C of the Assets and Shares under the Agreement a GST-free supply of a going concern within the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. As Entity B (the Seller) and Entity C (the Buyer) have not agreed in writing that the supply is of a going concern, the transfer of the Assets and Shares is not a GST-free supply of a going concern within the meaning of the GST Act.

Relevant facts and circumstances

· Entity B carried on a business of marketing and distribution of health products in Australia and Overseas.

· A global restructure involving Entity A, Entity B and Entity C occurred in a two step process under two separate agreements.

· The first step was an agreement between Entity A and Entity B under which Entity A transferred shares that it held in Entity C to Entity B. Entity A received consideration for the supply of shares.

· Whilst a copy of the above share transfer has been provided as part of this ruling request, the agreement between Entity A and Entity B has not been provided.

· The second step of the restructure was under an Agreement between Entity B and Entity C. A copy of the Agreement has been provided as part of this ruling request.

· Under the Agreement, Entity B is defined as the 'Seller' and Entity C the 'Buyer'.

· The Seller has agreed to sell and the Buyer has agreed to purchase all of the assets and all of the shares on and subject to the terms of the Agreement.

· According to the Agreement "Consideration" is provided in the form of 1 ordinary fully-paid share in the capital of the Buyer to be issued by the Buyer to the Seller at Completion.

· Entity B continued to carry on its business of marketing and distribution of health products until the day it was supplied to Entity C.

· Under the Agreement, Entity B supplied everything that was necessary to continue operating the enterprise that it carried on to Entity C and therefore after the completion date of the Agreement, Entity C was in a position to carry on the same enterprise that Entity B operated immediately before the completion of the Agreement.

· After the completion of the Agreement, Entity B ceased its trading operations and its sole activity is to be an investment holding company.

· The Seller (Entity B) and Buyer (Entity C) have verbally agreed that the sale is a supply of a going concern. The agreement that the sale is a supply is a supply of a going concern has not been made in writing.

· At the time of the restructure both Entity B and Entity C were registered for GST.

· Entity A was not registered or required to be registered for GST.

· Entity B and Entity C are not in a GST group.

· Upon implementation of the restructure Entity B became a wholly owned subsidiary of Entity A.

· The only cost incurred in relation to the restructure was the legal services acquired by Entity C in relation to the transfer of employees from Entity B to Entity C. No other entity (i.e.: Entity A or Entity B) incurred any costs in relation to the restructure.

· Entity C has not exceeded the financial acquisitions threshold (FAT).

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 40-5,

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

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 40-5.09(1)

Reasons for decision

Question 1

Is the transfer of shares by Entity A to Entity B an input taxed financial supply?

Subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that financial supplies are input taxed. According to subsection 40-5(2) of the GST Act a financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Goods and Services Tax ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) states the following;

20. The GST regulations identify those supplies that are financial supplies by inclusion and exclusion. Something is a financial supply only if it is mentioned as a financial supply in regulation 40-5.09 or is an incidental financial supply under regulation 40-5.10. Regulation 40-5.12 has the effect of excluding things that might otherwise have been included as a financial supply by regulation 40-5.09. Regulation 40-5.12 does not exclude from being a financial supply something that is also an incidental financial supply.

Subregulation 40-5.09(1) of the GST Regulations states that:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

In this case, Entity A transferred its shares in Entity C to Entity B. Item 10 in the table in subregulation 40-5.09(3) of the GST Regulations refers to an interest in or under securities. Accordingly, the disposal of a share (being a security) is an interest that satisfies item 10 in subregulation 40-5.09(1) of the GST Regulations.

The disposal/transfer of the shares by Entity A was for consideration (being the share in Entity B), in the course of an enterprise carried out by Entity A and connected with Australia.

However, Entity A was not registered or required to be registered at the time of disposal of the relevant shares. Accordingly, paragraph 40-5.09(1)(b) of the GST Regulations is not satisfied. As one of the requirements of subregulation 40-5.09(1) of the GST Regulations is not satisfied, the transfer of the shares by Entity A is not a financial supply. On this basis the transfer of shares does not meet the requirements of an input taxed supply.

As Entity A is not registered or required to be registered for GST the transfer of shares by Entity A is also outside the scope of GST and as such GST is not payable.

Question 2

Is the sale by Entity B to Entity C of the Assets and Shares under the Agreement a GST-free supply of a going concern within the GST Act?

Subsection 38-325(2) of the GST Act states:

(2) A supply of a going concern is a supply under an arrangement under which:

(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 part of a larger enterprise carried on by the supplier).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

In this case, we have been advised that Entity B carried on it's enterprise of marketing and distribution of health products in Australia and Overseas. What needs to be determined is whether Entity B supplied to the recipient (being Entity C), all of the things that are necessary for the continued operation of that enterprise.

Goods and services tax ruling, GSTR 2002/5, Goods and services tax: when is a 'supply of a going concern' GST-free? states the following in regards to this aspect:

All of the things that are necessary for the continued operation of an enterprise

The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

72. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

73. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise if it chooses.

74. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

When considering the Agreement we are of the view that all of the things that were necessary for the continued operation of the enterprise that Entity B was carrying on were supplied by Entity B to Entity C. It has also been confirmed that Entity C was put in a position to continue operating the enterprise that was carried on by Entity B after the completion of the Agreement. Accordingly, paragraph 38-325(2)(a) of the GST Act is satisfied.

In this case, we have been advised that Entity B carried on it's enterprise of marketing and distribution of health products in Australia and Overseas until the day it was supplied to Entity C. On this basis, paragraph 38-325(2)(b) of the GST Act is also satisfied.

Accordingly, as all the requirements of subsection 38-325(2) of the GST Act are satisfied, the transfer of the business and the assets by Entity B to Entity C is a supply of a going concern within the meaning of the GST Act.

Is the supply under the Agreement GST-free?

According to subsection 38-325(1) of the GST Act, a supply of a going concern is GST-free if the requirements under subsection 38-325(1) of the GST Act are satisfied. Subsection 38-325(1) of the GST Act states:

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

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

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

Paragraphs 38-325(1)(a) and 38-325(b) of the GST Act are satisfied as the supply was for consideration and Entity C is registered for GST. The remaining requirement to be satisfied is that the agreement to make the supply as a supply of a going concern was made in writing. The phrase 'agreed in writing' is explained in GSTR 2002/5 as follows:

Agreed in writing

178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made.

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.

180. Section 25 of the Acts Interpretation Act 1901 defines 'writing' as 'includes any mode of representing or reproducing words, figures, drawings or symbols in a visible form.' In Peverill v. Meir (1990) 95 ALR 401, Justice Burchett concluded that:

'When the Act requires the request to be in writing, I think it refers to a request which read reasonably, conveys the information that the procedure in question is to be performed.'

181. 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, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply.

183. An agreement in writing by the parties that there is a 'supply of a going concern' will not conclusively determine that there is a 'supply of a going concern' where the other requirements of subdivision 38-J are not satisfied. This will depend on a consideration of all factual circumstances. For example, there will not be a 'supply of a going concern' under subdivision 38-J where all of the things necessary for the continued operation of an enterprise are not supplied under the relevant arrangement, notwithstanding the terms of any agreement between the parties that the supply is a 'supply of a going concern'.

184. The supply of everything necessary for the continued operation of an enterprise to a recipient who is not registered or required to be registered will not be a GST-free supply, despite the terms of any agreement between the parties that the supply is a 'supply of a going concern'.

185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'.

We have been advised that whilst the parties verbally agreed, the Seller (i.e. Entity B) and the Buyer (i.e. Entity C) did not agree in writing that the sale is a supply of a going concern. Accordingly, as one of the requirements of subsection 38-325(1) of the GST Act is not satisfied, the sale under the Agreement is not a GST-free supply of a going concern.

Is GST payable on the supply under the Agreement?

GST is payable on taxable supplies. Section 9-5 of the GST Act defines a taxable supply as follows:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

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

Therefore to the extent the transfer of the business and the assets by Entity B meet the requirements of section 9-5 of the GST Act the supply will be a taxable supply. Consequently GST is payable by Entity B on that portion of the supply.

To the extent the transfer/sale of any shares by Entity B to Entity C meets the requirements of an input taxed financial supply as defined in subregulation 40-5.09(1) of the GST Regulations GST will not be payable.