Edited version of your private ruling

Authorisation Number: 1012439579572

Ruling

Subject: GST and the supply of a going concern

Question

Is the supply by the Supplier to the Recipient of the Sale Interest pursuant to the Sale Agreement a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply by the Supplier to the Recipient of the Sale Interest pursuant to the Sale Agreement is a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Relevant facts and circumstances

The parties

The Supplier carries on an enterprise of exploration and development. The Supplier is GST registered and a member of a GST group. The Supplier is a joint venture participant in the XYZ Development.

The Recipient is an Australian resident company and is registered for GST.

Background to the XYZ Development

The XYZ Development is conducted by unincorporated joint ventures.

The Supplier is a joint venture participant.

The Supplier's disposal

The Supplier signed a Sale Agreement pursuant to which the Supplier agrees to sell the Supplier's Sale Interest in two joint ventures to the Recipient subject to conditions precedent.

'Sale Interest' is defined in the Sale Agreement.

The Sale Agreement states that title to and risk in the Sale Interest will pass to the Recipient on and from Completion and that Completion will take place on the Completion Date (defined as 10 Business Days after the date when all of the Conditions Precedent have been satisfied or waived or such other date as the parties agree in writing).

The Sale Agreement obliges the Supplier during the period between the effective date and Completion to use reasonable efforts to ensure that the joint ventures are conducted in accordance with such good and prudent industry practices as are generally followed by the international industry under similar circumstances.

The Sale Agreement states that Completion of the sale and purchase of the Sale Interest will take place on the Completion Date and obliges the Recipient to pay the Completion Payment Amount.

The Sale Agreement deals with calculation of the Completion Payment Amount.

(b) The amount payable by Buyer to Seller at Completion (the Completion Payment Amount) will be the Purchase Price, increased by an amount equal to:

(i) The Joint Venture Costs attributable to the Sale Interest for the period commencing on, and including, the Effective Date and ending on the date before the Completion Statement is prepared and which have been paid by Seller; plus

(ii) An estimate of the Joint Venture Costs attributable to the Sale Interest for the period commencing on, and including, the date on which the Completion Statement is prepared and ending on the date on which Completion is due to occur and when Seller is obliged to pay, or reasonably expects it will be obliged to pay, by Completion.

as calculated in accordance with Schedule 1, Part A.

The 'Joint Venture Costs' is defined in the Sale Agreement as all costs and expenses incurred by the Operator of the JVs to which a JV Participant must contribute in the proportion of its interest in the JV net of any refunds received from the Operator and income attributable to that interest.

Clause 20 of the Sale Agreement deals with GST as follows:

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(c) Seller and Buyer agree that:

(i) The sale of the Sale Interest under or as contemplated by this document constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act;

(ii) The supply is for Consideration; and

(iii) Buyer is registered or is required prior to Completion to be registered under the GST Act.

(d) Seller carries on and will carry on the business constituting the Sale Interest until the day of supply.

(e) Seller will, as soon as practicable after the Agreement Date…apply to the Australian Taxation Office for a ruling that the sale of the Sale Interest under this document is a supply of a going concern for the purposes of the GST Act and that GST will not apply to the sale under this document.

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(h) The parties acknowledge, but Seller does not warrant, that this document constitutes an arrangement under which Seller will supply to Buyer all the things necessary for the continued operation of an enterprise.

Ruling Request

In the ruling request the Supplier addressed the requirements set out in subsection 38-325(1) of the GST Act. The Supplier submitted that the supply made pursuant to the Sale Agreement is made for consideration and referred to the Completion Payment Amount which the Recipient is obliged to pay under the Sale Agreement. The Supplier advised that the Recipient is registered for GST and referred to the Sale Agreement that the sale of the Sale Interest is the supply of a going concern.

In relation to the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for continued operation of an enterprise, the Supplier submitted

In the current case, the Supplier is carrying on an enterprise of exploration and development activities. Under the Sale Agreement, the Sale Interest, which includes undivided participating interests in the joint ventures, will be supplied by the Supplier to the Recipient. The participating interests are undivided legal and beneficial interest (expressed as a percentage of the total legal and beneficial interest of all Joint Venture Participants) in and under the Joint Venture Agreements and the Titles, and all benefits, rights, titles, interests and obligations derived therefrom. This includes, but is not limited to:

· interests in the permits and any licences arising from the [ ] Area and [ ] Area

· Proportional beneficial ownership of joint property relevant to the exploration and development in the Joint Ventures

· Voting rights to participate in all matters for decision in the course of the joint venture operating and investment activities; and

· Obligations to contribute to all expenses arising from the joint venture activities in proportion to the percentage interest acquired.

The Supplier also referred to the Sale Agreement where the parties acknowledge that the Sale Agreement constitutes an arrangement under which the Supplier will sell to the Recipient all the things necessary for the continued operation of an enterprise.

In relation to the requirement in paragraph 38-325(2)(b) of the GST Act that the supplier will carry on the enterprise until the day of the supply, the Supplier referred to the Sale Agreement and submitted that paragraph 38-325(2)(b) is satisfied.

Relevant legislative provisions

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

Reasons for decision

Summary

The supply by the Supplier to the Recipient of the Sale Interest pursuant to the Sale Agreement is a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

Detailed reasoning

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the supply of a going concern is GST-free.

GSTR 2002/5 states (Para 16):

There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b).

The requirements in subsection 38-325(2) of the GST Act are as follows:

(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)

(*denotes terms defined in section 195-1 of the GST Act)

In addition, further requirements in order for the supply of a going concern to be GST-free are set out in subsection 38-325(1) of the GST Act:

(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.

Subsection 38-325(2)

Supply under an arrangement

As noted above, GSTR 2002/5 states that it is not the supply itself that must satisfy the conditions in subsection 38-325(2), but the arrangement under which the supply is made.

GSTR 2002/5 also states (Para 19) that the term 'supply under an arrangement' in subsection 38-325(2) includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement, provided that the things supplied under the arrangement relate to the same enterprise (the 'identified enterprise'). GSTR 2002/5 also states (Para 20) that the supplier and recipient may identify the relevant arrangement and the supplies under the arrangement in a written agreement, although the relevant arrangement is not characterised merely by the description which the parties give to the arrangement but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In the present case, the arrangement is the Sale Agreement and the supply made under that arrangement is the supply made pursuant the Sale Agreement, i.e. the supply of the Sale Interest by the Supplier to the Recipient.

The identified enterprise:

GSTR 2002/5 states (Para 21) that the requirements in paragraphs 38-325(2)(a) and (b) must be satisfied in relation to an 'identified enterprise', and states (Para 29):

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

In the ruling request the Supplier referred to the Sale Interest, as defined in the Sale Agreement, i.e. the Supplier's Venture and participating Interests, Titles, rights and obligations and other agreements, and submitted that the identified enterprise was the enterprise described by the term 'Sale Interest':

Upon acquiring the Sale Interest the Recipient will have acquired all things necessary for the continued operation of the enterprise identified by the Sale Interests and supplied by the Supplier to the Recipient, being an enterprise of exploration and development activity in the permit areas that will continue to be operated by a Third Party in accordance with the Joint Venture Agreements.

We agree. GSTR 2002/5 confirms (Para195) that all or part of an enterprise conducted by a joint venturer may be an indentified enterprise for the purposes of section 38-325 of the GST Act:

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'.

Further, GSTR 2002/5 states (Para 30):

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.

All things necessary for the continued operation of an enterprise

The supplier must supply all of the things that are necessary for the continued operation of the identified enterprise. GSTR 2002/5 states (Para 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 the ruling request it was submitted:

… the Sale Interest under the Sale Agreement comprises all the things necessary for the continued operation of XYZ…

We agree with this submission. As noted above, GSTR 2002/5 states (Para 195) that it is possible for a joint venturer to supply all of the things necessary for the continued operation of the identified enterprise, and we have described the identified enterprise above, i.e. the Sale Interest. In the Sale Agreement the Supplier and the Recipient acknowledge that the Sale Agreement constitutes an arrangement in which the Supplier will supply all the things necessary for the continued operation of an enterprise:

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(h) The Parties acknowledge, but Seller does not warrant, that this document constitutes an arrangement under which Seller will supply to Buyer all the things necessary for the continued operation of an enterprise.

Supplier carries on the enterprise until the day of the supply

Paragraph 38-325(2)(b) of the GST Act requires that the enterprise is carried on, or will be 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.

GSTR 2002/5 states (Para 161) that the day of supply is determined in each case by reference to the terms of the particular contract and the nature of the supply and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

In the present case the Sale Agreement states that title to and risk in the Sale Interest will pass to the Recipient on and from Completion, the Completion will take place on the Completion Date (defined as 10 Business Days after the date when all of the Conditions Precedent have been satisfied or waived or such other date as the parties agree in writing).

We do not consider that it makes any difference that the Sale Agreement provides for the Completion Payment Amount (i.e. the amount payable by the Recipient to the Supplier) to be increased for actual costs incurred by the Supplier between the Effective Date and the date the Completion Statement is prepared plus estimated costs from the date the Completion Statement is prepared until Completion. Although this means that the Recipient assumes responsibility for the costs incurred in carrying on the identified enterprise as, we do not consider that the Recipient assumes effective control and possession of the identified enterprise as from that date. Example 27 in GSTR 2002/5 suggests that the passing of economic risk in advance of the passing of effective control and possession of the identified enterprise does not bring forward the day of supply:

Example 27: no change in effective control

162. On 1 August 2000, Frank enters into negotiations to buy a manufacturing business from Kerry. Negotiations are concluded on 31 August and contracts are exchanged on that date with settlement occurring on 31 October 2000. Kerry continues to conduct the business until 31 October. The contract provides that the transfer of the assets and undertaking of the business is deemed to have occurred at midnight on 31 August and that profits or losses incurred after that date are those of the purchaser.

163. The day of the supply in these circumstances is the date on which effective control actually passes, that is, 31 October 2000. Notwithstanding that the economic risk and benefit are deemed to have passed at an earlier date, effective control did not pass until 31 October.

In the ruling request the Supplier relied on a clause in the Sale Agreement in support of a submission that paragraph 38-325(2)(b) is satisfied. We agree. The relevant clause obliges the Supplier during the period between the Effective Date and Completion to ensure that the JVs are conducted in accordance with such good and prudent industry practices as are generally followed by the international industry.

The Supplier also submitted that, pursuant to clause 20(d) of the Sale Agreement the Supplier agreed to carry on the business as an enterprise until Completion. Clause 20(d) states:

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(d) Seller carries on and will carry on the business constituting the Sale Interest until the day of supply.

We are not sure what clause 20(d) is intended to mean as it does not clearly state that Seller agrees to do anything. Perhaps clause 20(d) was intended to appear in the Sale Agreement as clause 20(c)(iv), in which case it would have been prefaced by the opening words of clause 20(c), i.e.

Seller and Buyer agree that:

…

(iv) Seller carries on and will carry on the business constituting the Sale Interest until the day of supply.

In the ruling request the Supplier advised that a Third Party is the operator of the Joint Ventures. We do not consider that the fact that the Third Party operates the Joint Ventures prevents the Supplier from satisfying paragraph 38-325(2)(b) as GSTR 2002/5 states (Para 146):

The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf. However, an entity that does not have legal ownership or possession of the enterprise is not in a position to deal with that enterprise and therefore cannot be the supplier of all of the things that are necessary to continue to operate the enterprise.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration. Section 195-1 of the GST Act states, that consideration for a supply means any consideration, within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with the supply of anything.

The Sale Agreement states that the Supplier agrees to sell the Sale Interest for the Purchase Price.

We therefore consider that the supply is made for consideration and that the requirement in paragraph 38-325(1)(a) is satisfied

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

The ABN Register confirms that the Recipient has an Australian Business Number and is registered for GST. In addition, pursuant to the Sale Agreement the Recipient agrees that the Recipient is either registered for GST or required prior to Completion to be registered under the GST Act.

We therefore consider that the requirement in paragraph 38-325(1)(b) is satisfied.

Agreed in writing that the supply is of a going concern

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

GSTR 2002/5 states (Para 181) that 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 is a supply of a going concern.

Clause 20(c)(i) of the Sale Agreement states:

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(c) Seller and Buyer agree that:

(i) The sale of the Sale Interest under or as contemplated by this document constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

We therefore consider that the requirement in paragraph 38-325(1)(c) of the GST Act is satisfied.