Edited version of your private ruling

Authorisation Number: 1012437202314

Ruling

Subject: GST and sale of interests

Question

Will the supplies of the interests pursuant to the Agreement be GST-free supplies of going concerns for the purposes of Subdivision 38-J of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act)?

Answer

Yes, the supplies of the interests pursuant to the Agreement will be GST-free supplies of going concerns for the purposes of Subdivision 38-J of the GST Act.

Relevant facts and circumstances

The supplier carries on an enterprise and is registered for goods and services tax (GST).

The supplier has provided a copy of the Agreement.

The interests subject to the Agreement are interests in joint ventures with third parties.

The date of effect of assignment and transfer of the interests is a date prior to completion taking place. The conditions, precedent to completion taking place are set out in the Agreement.

The supply of the interests is for consideration.

The supplier and the recipient have agreed in writing that the assignment and transfer of the interests are supplies of going concerns within the meaning of section 38-325 of the GST Act.

Work programs are being undertaken in relation to the interests.

Relevant legislative provisions

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

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 subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(2) of the GST Act

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

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).

Supply under an arrangement

The term 'supply under an arrangement' is discussed 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? Paragraph 19 of GSTR 20025 explains 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 supplies of the interests by the suppliers under the Agreement will constitute supplies under an arrangement.

Identified enterprise

The requirements of paragraphs 38-325(a) and (b) of the GST Act need 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 a lease, licence, or other grant of an interest in property.

Paragraph 30 of GSTR 2002/5 explains that the identified enterprise may form part of a larger enterprise and states:

Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Further, paragraph 195 of GSTR 2002/5 discusses enterprises as going concerns in the context of joint ventures and 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. 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 supplier is a participant in joint ventures in respect of the interests, which are the interests subject to the Agreement. The supplier has advised the details of work programs being undertaken in relation to the interests held and the relevant joint ventures.

The work programs indicate that the supplier is carrying on enterprises as joint venturer in the areas to which the interests relate. These are considered to be the identified enterprises.

Therefore, it is accepted that the supplier is capable of making a GST-free supply of a going concern, whether as part or all of the enterprises conducted, provided that all of the things that are necessary for the continued operation of the joint venture enterprises are supplied.

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

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the identified enterprise.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 130 of GSTR 2002/5. Of particular relevance are paragraphs 74 and 75 which 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 addition, paragraph 103 of GSTR 2002/5 discusses statutory licences and permits as things that are necessary for the continued operation of an enterprise and states:

The supply of all of the things that are necessary for the continued operation of an enterprise that has or is required to have, as part of its business activities, statutory licences, permits, quotas or similar things, other than personal qualifications discussed in paragraph 130 of this Ruling, must include those things as part of the supply in order for there to be a 'supply of a going concern'.

In accordance with the Agreement, the supplier will transfer the respective interests.

In addition, pursuant to Agreement, the recipient shall from the date of effect, be entitled to exercise all or any rights, remedies, powers, authorities or privileges conferred or under any of the joint operating agreements that govern each joint venture.

Consequently, the recipient will be able to make decisions in relation to the joint ventures as ownership of the interests, coupled with the subsisting rights and obligations under the respective joint operating agreements governing the various joint ventures will be transferred.

Therefore, it is considered the assets, operating structures and processes necessary for the continued operation of each of the identified enterprises are to be supplied.

Accordingly, when the supplier supplies the interests in accordance with the Agreement, all of the things that are necessary for the recipient to carry on the identified enterprises will be supplied so that the recipient is put in a position to carry on the enterprises if it chooses.

Supplier carries on the enterprise until the day of the supply

Paragraph 38-325(2)(b) of the GST Act also requires the continued operation of the identified enterprise until the day of supply.

Paragraph 141 of GSTR 2002/5 explains that the activities of the enterprise must be capable of continuing after the transfer to new ownership and states:

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

In the supplier's case, Paragraph 161 of GSTR 2002/5 is of particular relevance and 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. Paragraph 161 states:

The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply.^18A It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of the 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 of the things that are necessary for the continued operation of the enterprise.

In Aurora Developments (2011) 192 FCR 519 at 573; [2011] FCA 232 at [255-6] Justice Greenwood concluded that the day of settlement of the contract (for the sale of the residential development site) was the 'day of the supply'.

The date of effect of assignment and transfer of the interests is a date prior to completion taking place.

The supplier will be obligated to continue to conduct the activities of each relevant joint operating agreement until completion takes place.

Consequently, the day of supply will be the date of completion after the conditions precedent, have been met, and the interests have been transferred.

Even though the recipient assumes the risk of damage or loss of ownership of the interests on and from the date of effect of assignment and transfer, the transfer of the interests occurs on the date of completion.

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 supplier has continued the work programs as joint venturer in the period between the date of effect and date of completion.

Therefore, on the basis of the information provided, we consider that the supplier will be carrying on the enterprises until the day of supply.

Subsection 38-325(1) of the GST Act

Supply is for consideration

Sub-section 38-325(1)(a) of the GST Act requires that the supply be for consideration.

In this regard, the supply is for consideration pursuant to the Agreement.

Therefore, the supplies by the supplier will be made for consideration.

Registered or required to be registered

Sub-section 38-325(1)(b) of the GST Act requires that the recipient is registered or is required to be registered.

As the recipient is registered for GST, this requirement is satisfied.

Agreed in writing

Sub-section 38-325(1)(b) of the GST Act requires that the supplier and the recipient have agreed in writing that the supplies are of going concerns.

The supplier and the recipient have agreed in writing that the assignment and transfer of the interests are supplies of going concerns within the meaning of section 38-325 of the GST Act.

Therefore, this requirement is satisfied.

Conclusion

On the basis of the information provided, the requirements of subsections 38-325(1) and (2) of the GST Act are satisfied and the supplies of the interests pursuant to the Agreement by the supplier to the recipient will be GST-free supplies of going concerns for the purposes of Subdivision 38-J of the GST Act.