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Ruling

Subject: GST and supply of a going concern

Question

Will the sale and surrender of your interests to the recipient pursuant to the joint venture variation deed and amended joint venture agreement be a GST-free supply of a going concern for the purposes of subdivision 38J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale and surrender of your interests to the recipient pursuant to the joint venture variation deed and amended joint venture agreement will be a GST-free supply of a going concern for the purposes of subdivision 38J of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You entered into a joint venture agreement to undertake the development of a project with the recipient post July 2000.

Recently, you executed a joint venture variation deed with the recipient to enable you to transfer to the recipient a percentage of your interest in the joint venture to the recipient.

You also executed an amended joint venture agreement with the recipient whereby you will transfer a percentage of your participating interest in the joint venture to the recipient.

The transferred of a percentage of your interest in the joint venture is for consideration.

The joint venture variation deed provides that:

· All joint venture property is owned by the participants as tenants in common in proportion to their participating interest and the participants are entitled to product from the project in proportion to their participating interest.

· A participant is obliged to fund the project expenses in proportion to its percentage share.

· Each participant must appoint committee members to the management committee.

· The manager report to the management committee and must exercise and discharge its powers and duties under this agreement in accordance with approved programmes and budgets and decision made by the management committee.

· The recipient is the joint venture manager.

Relevant legislative provisions

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

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.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b).

Reasons for decision

An entity makes a taxable supply under section 9-5 of the GST Act when:

· the supply is made for consideration; and

· the supply is made in the course or furtherance of an enterprise that the entity carries on; and

· the supply is connected with Australia; and

· the entity is registered, or required to be registered, for GST.

However, a supply is not a taxable supply if it is GST-free or input taxed.

In this case, the provisions of the GST Act that are relevant in determining the nature of your supply are the supplies of going concerns provisions under subdivision 38-J.

Going concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 of the GST Act are satisfied.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on supply of a going concern and when a supply of a going concern is GST-free.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act:

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

(asterisks denote a term defined in section 195-1 of the GST Act)

Subsection 38-325(2) of the GST Act requires that the elements of that subsection be satisfied in relation to an enterprise.

The term supply of a going concern is a statutory term, which as defined in subsection 38-325(2) of the GST Act requires the following:

· an arrangement

· an identified enterprise

· the supplier supplies all the things necessary for the continued operation of the enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

For the purposes of the GST Act, it is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. 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').

20. 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.. ..

In this case, you have entered into the joint venture variation deed and the amended joint venture agreement for the transfer of a percentage share of the rights and interest in the joint venture to the recipient.

In our view, these will evidence an arrangement which satisfies the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides 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). It is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term enterprise is defined in section 9-20 of the GST Act and includes, amongst other things, 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 explains the nature of a going concern where a joint venture is involved.

195. Whether or not 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 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'.

In this case, the business structure is a joint venture. The regular activities of the identified enterprise are the activities carried on by the joint venture manager in relation to the joint venture. Your share of the interest in the joint venture is considered as a separately identifiable enterprise. Therefore the supply of part of the enterprise carried on by you would constitute a supply of the identified enterprise that is capable of being carried on, on its own.

All things necessary

To satisfy paragraph 38-325(2)(a) of the GST Act, you must supply all of the things necessary for the continued operation of this enterprise.

The things that are necessary will depend on the nature of the enterprise. A thing is necessary for the continued operation of an enterprise if that enterprise could not be operated by the purchaser in the absence of the thing.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'. In particular, paragraphs 74 and 75 of GSTR 2002/5 state:

74. 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. 

75. 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.

In this case, pursuant to clauses in the amended joint venture agreement and the joint venture variation deed, the transfer of a percentage of your participating interest to the recipient means that the recipient will acquire an additional percentage interest in all the joint venture property and right to the products from the project. This constitutes the transfer and surrender of all assets necessary for the continued operation of the enterprise.

In regards to the operating structure, a clause in the amended joint venture agreement provides that the manager of the joint venture must report to the management committee and conduct its duties in accordance with the approved programmes and budgets and decisions established by the management committee.

In this case, the recipient is the manager of the joint venture, and each participant must appoint committee members to the management committee.

In this instance, the recipient and you will have committee members appointed on the management committee; as such, we are of the view that the operating structure and process consisting of the commercial or economical activity relevant to the enterprise has been supplied.

Consequently, the requirements under paragraph 38-325(2)(a) of the GST Act is satisfied. You will supply to the recipient all of the things necessary for the continued operation of the enterprise.

Day of supply

Paragraph 141 of GSTR 2002/5 explains that all of the activities of the enterprise must be active and operating on the day of supply. 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 also operating.

In this case, as evidenced in a clause in the joint venture variation deed, you warrant that you will continue to carry on the enterprise up to the day of supply.

Therefore, the requirements of paragraph 38-325(2)(b) of the GST Act will be satisfied.

As all the requirements of subsection 38-325(2) of the GST Act were met, the supply of your interest in joint venture would be considered as a 'supply of a going concern'.

GST-free supply of a going concern

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case, as set out in a clause in the joint venture variation deed, there was consideration for the supply of your interest in the joint venture to the recipient.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST. As advised, the recipient is registered for GST and that requirement is satisfied.

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern. The parties have agreed that the supply is a supply of a going concern for the purposes of the GST Act under in a clause in the joint venture variation deed.

Therefore, the supply of part of your interest in the joint venture to the recipient was a GST-free supply of a going concern.