Edited version of your private ruling

Authorisation Number: 1012464478075

Ruling

Subject: GST and sale of assets

Question:

Is the sale of the Company's physical assets, claims and causes of action that it has or may have and intellectual property rights (collectively known as the Company's Assets), a taxable supply?

Answer:

The sale of the Company's Assets is partly taxable and partly non-taxable.

Relevant facts

By order made by the Supreme Court of the relevant State, A and B of ABC Pty Ltd (Liquidators) were appointed as joint and several liquidators of ZZZ Pty Ltd (Company).

Prior to being placed in liquidation, the Company was a privately owned company involved in the development and commercial exploitation of intellectual property relating to software.

The Liquidators conducted an auction whereby the Company sold, transferred and assigned to the highest bidder the Company's intellectual property rights, assets, claims and causes of action that it has or may have.

The Deed of Assignment (Deed) was signed by the purchaser W (Purchaser), an entity registered in overseas. The Purchaser signed the Deed in the foreign country, around the time that they registered as a bidder at the auction.

The Liquidators countersigned the Deed subsequently in Australia, at the conclusion of the auction.

The Deed listed the purchase price of AUD$X (excluding GST). In accordance with the Deed, the Purchaser paid a further amount of AUD$Y, to be held in a trust account, as a provision for any GST which may be payable on the sale.

The Deed deals with Transfer and Assignment of rights and states that in consideration of the payment of the Purchase Price plus GST by the Assignee to the Company, the Company transfers and assigns to the Assignee on and from the effective date:

(a) all of the Company's Assets;

(b) all of the Company's legal and beneficial right, title and interest in the Intellectual Property;

(c) all of the Company's Claims and any other rights in relation to the Intellectual Property;

(d) all of the Company's Causes of Action; and

(e) all of the Company's legal and beneficial rights, title, powers, remedies in relation to the Causes of Action.

Completion is to take place at the office of the Liquidators or any other place agreed by the Company, the Liquidators and the Assignee.

The parties acknowledge and agree that on the effective date, the Company and/or the Liquidators will deliver and the Assignee will take possession and control of the Assets, the Intellectual Property and the Causes of Action.

The parties acknowledge and agree that on the effective date, the Company and/or the Liquidators will execute and deliver to the Assignee or its solicitors such instruments of transfer or assignment (together will all relevant documents that are within the possession of the Company or the Liquidators) that the Assignee reasonably requires to vest the Assets, the Intellectual Property and the Causes of Action in the Assignee, provided that all such instruments of transfer or assignment are to be prepared by the Assignee at its expense.

The parties acknowledge and agree that the supply under the Deed involving the assignment of the Intellectual Property and Causes of Action to the Assignee is not a supply of a going concern for GST purposes.

In order to provide information to prospective buyers in relation to the auction, the Liquidators prepared and circulated a detailed Information Memorandum (IM), which formed Schedule A of the Deed. The IM contains the following:

The Liquidators will offer for sale, transfer and assignment all intellectual property rights, assets, claims, and causes of actions that the Company has or may have including but not limited to the Company's claims in relation to:

· Intellectual property, including

- Patents

- Trademarks and

- Other intellectual property

· Physical assets

· Other claims

· Contingent assets

The Company was registered for GST. The Liquidators registered for GST and have quarterly tax periods and report on a cash basis.

Reasons for decision.

Summary

To the extent that the sale, transfer and assignment relates to the physical assets and intellectual property rights that are for use in Australia, the supply is taxable.

To the extent that the sale, transfer and assignment relates to the intellectual property rights that are for use outside Australia, the supply is GST-free.

Detailed reasoning

In this case, the Liquidators sold the assets of the Company, an entity that was placed in liquidation.

Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes.

In particular, supplies, acquisitions and importations, and associated acts and omissions, by the representative are, in most cases, treated as having been by the incapacitated entity. This ensures that a transaction by the representative has the same consequences under the GST law as if the incapacitated entity had no representative.

Under section 58-5 of the GST Act, any supply by a representative, in its capacity as representative, is taken, for GST purposes, to be a supply by the incapacitated entity and not the representative.

Under section 58-10 of the GST Act, a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would be liable to pay on a taxable supply to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

A 'representative' is defined in section 195-1 of the GST Act to include a liquidator and it further defines an 'incapacitated entity' to include an entity that is in liquidation.

'Liquidator' has the meaning given by subsection 6(1) of the Income Tax Assessment Act 1936. It means the person who, whether or not appointed as liquidator, is required by law to carry out the winding-up of a company.

In this case, the Liquidators are a representative of an incapacitated entity, the Company. Hence, Division 58 of the GST Act is applicable.

The sale of the Company's Assets falls within the scope of the Liquidators' responsibility or authority for managing the Company's affairs. Therefore, the Liquidators would be liable to pay any GST that the Company would, but for section 58-10 of the GST Act, be liable to pay on this supply if it was a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

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 for GST.

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

(* denotes a term defined in section 195-1 of the GST Act.)

In accordance with the Deed and the IM, the Liquidators sold, transferred and assigned all of the Company's Assets.

In order to determine the GST treatment of the sale of the Company Assets, we need to consider the characteristics of that supply. That is, we need to determine whether the supply that the Liquidators made are a combination of separately identifiable parts or it is a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part.

Goods and Services Tax Ruling GSTR 2001/8, amongst other things, describes the characteristics of supplies that contain a combination of separately identifiable taxable and non-taxable parts. It refers to these supplies as mixed supplies. It also describes the characteristics of supplies that appear to have more than one part but that are essentially supplies of one thing, that is, a dominant part and something that is integral, ancillary or incidental to that part. The ruling refers to these supplies as composite supplies.

The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree and requires an objective assessment.

Based on the information provided, the supply of Company's Assets as outlined in the Deed and the IM is not a composite supply. We consider that the supply is a combination of separately identifiable parts. That is, none of these parts is integral, ancillary or incidental in relation to the whole supply. Therefore, we need to look at each component of the supply separately and determine its GST treatment.

Physical assets

The Deed and the IM provides for the sale, transfer and assignment of the Company's physical assets.

The supply of the Company's physical assets satisfies the requirements of section 9-5 of the GST Act because:

(a) the supply is made for consideration

(b) the supply is made in the course or furtherance of the Company's enterprise

(c) the supply is connected with Australia as the goods are delivered or made available to the recipient in Australia and

(d) the Company is registered for GST.

Furthermore, the supply of the physical assets is neither GST-free nor input taxed.

As all the requirements of section 9-5 of the GST Act are met, had the Company made the supply of the physical assets, it would have made a taxable supply.

Consequently, the Liquidators are liable to pay GST on the supply of the Company's physical assets.

Other claims

The Deed and the IM provide for the transfer and assignment of all of the Company's claims and causes of action that it has or may have. In particular the IM lists at clause E and Schedule C possible claims against third parties. Clause F also lists certain insurance claims.

Goods and Services Tax Ruling GSTR 2004/4 defines a 'chose in action' as an intangible personal property right recognised and protected by law, which has no existence apart from the recognition given by law, or which confers no present possession of a tangible object.

The claims and causes of action are considered chose in action.

Through the assignment of the claims and causes of action, the Purchaser acquired the rights that the Company had under the agreements with the third parties and the insurance companies. This is part of the terms and conditions of the contract of sale of all of the things that make up the Company's enterprise. The terms or conditions are not of themselves individual or separate supplies.

As there are no separate supplies, there are no GST implications on the transfer and assignment of the claims and causes of action.

Intellectual Property

The Deed and the IM also provides for the transfer and assignment of all of the Company's intellectual property rights.

Paragraph 9-10(2)(e) lists as a supply a creation, grant, transfer, assignment or surrender of any right.

Goods and Services Tax Ruling GSTR 2003/8 discusses the meaning of 'right' for GST purposes generally:

25. The word 'right' is not defined for GST purposes and has a very broad meaning under the general law. A 'right' has been defined as 'generally, a benefit or claim entitling a person to be treated in a certain way'.

26. However, it is not necessary for the right to be a proprietary right.

27. There is further discussion of the meaning of 'right' at paragraphs 50 to 53 of this Ruling.

and:

51. Some commentators have raised whether supplies of rights for GST purposes should be restricted to supplies of proprietary rights. Reference has been made to cases decided in a stamp duty context where personal rights have been held not to be 'property' as defined under the relevant legislation.

52. In the Commissioner's view, there is no basis for limiting the operation of item 4 to supplies of proprietary rights. The stamp duty cases were decided in the context of provisions containing specific references to property and against the background of conveyance duty applying generally to instruments transferring interests in property.

In this case, the intellectual property rights include patents listed in clause A and Schedule A of the IM, trademarks listed in clause B and Schedule B of the IM and other intellectual property listed in clause C.

The agreement obliges the Company and/or the Liquidators to deliver to the Purchaser all documents relating to ownership and use of these assets plus executed assignments or transfer of ownership forms on completion of the transaction.

We therefore consider that there is a 'supply' within the meaning of section 9-10 of the GST Act, being a transfer or assignment of any right within the meaning of paragraph 9-10(2)(e) of the GST Act.

As outlined in the agreement the transfer and assignment of the intellectual property is made for consideration. Hence the requirement of paragraph 9-5(a) of the GST Act is satisfied.

The transfer and assignment of the intellectual property also satisfies the requirements of paragraphs 9-5(b) and 9-5(d) of the GST Act as the supply is made in the course or furtherance of the Company's enterprise and the Company is registered for GST.

Paragraph 9-5(c) of the GST Act requires that the supply is connected with Australia.

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if:

(a) the thing is done in Australia (paragraph 9-25(5)(a))

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia (paragraph 9-25(5)(b)) or

(c) all of the following apply:

(i) neither paragraph 9-25(5)(a) nor (b) applies in respect of the thing

(ii) the thing is a right or option to acquire another thing and

(iii) the supply of the other thing would be connected with Australia (paragraph 9- 25(5)(c)).

Goods and Services Tax Ruling GSTR 2000/31 discusses when a supply is connected with Australia.

Paragraph 9-25(5)(a) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia.

'Thing' is defined in section 195-1 of the GST Act to mean anything that can be supplied or imported. Things other than goods or real property that can be supplied include services, advice, information, rights, obligations to do anything, or any combination of these things. Under paragraph 9-25(5) of the GST Act the connection with Australia requires that the 'thing' being supplied is 'done' in Australia.

The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed or finished depending on what is supplied.

Paragraphs 74 to 76 of GSTR 2000/31 state:

The creation, grant, transfer, assignment or surrender of a right

74. If the supply is the creation, grant, transfer, assignment or surrender of a right, the creation of that right in another, the granting, transfer or assignment of that right to another, or the surrender of that right, is done where the right is created in that other person, granted, transferred or assigned to that other person or surrendered respectively.

75. The act that creates that right in another or grants, transfers or assigns that right to another, or surrenders the right, will depend on the facts of each individual case.

76. If, for example, a right is granted under an agreement to another to use certain intellectual property, the granting of that right to another is done where the agreement is made. If the agreement is made in Australia, the supply of that right is connected with Australia. If the agreement is made outside Australia, the supply is not connected with Australia under paragraph 9-25(5)(a). However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia…

Footnote 27 to paragraph 76 in GSTR 2000/31 states a contract is made where the last act necessary to create a binding contract is performed (see W. A. Dewhurst and Co. Pty. Ltd. v. Cawrse [1960] V.R. 278 at 282.

Paragraphs 202 to 209 of GSTR 2000/31 also discuss the creation, grant, transfer, assignment or surrender of a right, as above.

Further, under paragraph 9-25(5)(b) of the GST Act, a supply of a thing other than goods or real property is connected with Australia if the supplier:

(a) carries on an enterprise through a permanent establishment in Australia; and

(b) the supply is made through that permanent establishment.

Paragraph 78 of GSTR 2000/31 states:

The supply is made through an enterprise carried on in Australia

78. If a supply of a thing is not connected with Australia because the thing is not done in Australia, the supply is connected with Australia if, under paragraph 9-25(5)(b), the supplier makes the supply through an enterprise that the supplier carries on in Australia.

The Liquidators advised that the Purchaser signed the Deed on AA Month1 20XX in foreign country and the Liquidators countersigned the Deed on XX Month1 20XX in Australia. As the contract is made where the last act necessary to create a binding contract is performed, the agreement is made (done) in Australia. Consequently the supply of the intellectual property rights is connected with Australia pursuant to paragraph 9-25(5)(a) of the GST Act.

Alternatively, the supply of the intellectual property rights is connected with Australia pursuant to paragraph 9-25(5)(b) of the GST Act because the Company makes the supply through an enterprise that the Company carries on in Australia.

Accordingly, the supply of the intellectual property rights satisfies the requirements of paragraph 9-5(c) of the GST Act. Hence, the supply of the intellectual property rights is a taxable supply except to the extent that it is GST-free or input taxed.

On the information provided, the supply of the intellectual property rights is not input taxed. It remains to be determined if the supply is GST-free.

Subsection 38-190(1) of the GST Act specifies the circumstances where the supply of things other than goods or real property, for consumption outside Australia, is GST-free.

Of particular relevance to your supply of intellectual property rights is item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Item 4 states that a supply of rights is GST-free if:

(a) the rights are for use outside Australia; or

(b) the supply is to an entity that is not an *Australian resident and is outside Australia when the thing supplied is done.

GSTR 2003/8 outlines that a supply is a 'supply that is made in relation to rights' if it fits within one of the following three categories:

1. supplies identified in paragraph 9-10(2)(e) of the GST Act;

2. supplies of things that derive their value exclusively, or almost exclusively, from rights; and

3. supplies of services directly connected with rights.

Paragraphs 81 and 82 of GSTR 2003/8 state that intellectual property is a generic term describing a variety of rights to control or profit from ideas and information. Intellectual property can be divided into four main areas: forms of expression; scientific advances; reputation; and confidential information. Supplies of intellectual property rights are supplies that are made in relation to rights for the purposes of Item 4.

Accordingly, the supply of the Company's intellectual property rights to the Purchaser pursuant to the Deed and the IM is a supply made in relation to rights for the purposes of Item 4.

Paragraph (a) of Item 4

A supply that is made in relation to rights is GST-free under paragraph (a) of item 4 if the rights are for use outside Australia.

Paragraphs 108 to 108A, and 117 of GSTR 2003/8 state:

Supply that is made in relation to rights 'for use outside Australia'

Meaning of 'for use'

108. A supply that is made in relation to rights is GST-free under paragraph (a) of item 4 'if the rights are for use outside Australia'.

108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.

…

117. The intended use of a right also encompasses the situation where the recipient does not actually exploit the right. For example, a patent may be acquired by an entity in the course of its enterprise to prevent other entities from exploiting that right. In these circumstances, the right is for use where it prevents other entities from exploiting the right.

In this case, the Deed and the IM provides that the patents relate to various jurisdictions around the world. Similarly, the trademarks are registered both in the Country X and Australia.

As the rights are for use in and outside Australia, the supply is therefore a mixed supply.

To the extent that the rights are for use in Australia, the supply is not GST-free under item 4(a). Furthermore, in the circumstances described, the supply is not GST-free under any other provisions of the GST Act or another Act. Therefore, as the supply satisfies all the requirements of section 9-5 of the GST Act, had the Company made the supply it would have made a taxable supply.

Consequently, the Liquidators are liable to pay GST on this supply.

To the extent that the right is for use outside Australia, the supply satisfies the requirements of item 4(a).

However, the scope of item 4 is limited by subsection 38-190(2) of the GST Act which provides that a supply covered by item 4 is not GST-free if: it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

The supply of the Company's intellectual property rights is the supply of rights, but is not a supply of rights to acquire something else. Consequently, subsection 38-190(2) of the GST Act will not prevent the supply of the Company's intellectual property rights to the Purchaser from being GST-free.

In summary, the supply of the intellectual property rights for use outside Australia is GST-free under Item 4.

Consequently, the Liquidators are not liable to pay any GST on this supply.

Apportionment

As outlined above, the sale of the Company's Assets contain taxable and non-taxable components.

Section 9-80 of the GST Act provides that if a supply is partly taxable and partly non-taxable, the value of the part of the supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

Goods and Services Tax Ruling GSTR 2001/8 provides methods and examples to assist in working out how to apportion the consideration for a mixed supply.

Paragraphs 92 to 96 of GSTR 2001/8 explain that where there is no legislative provision specifying the basis for apportionment, you may use any reasonable method to apportion the consideration for a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and produce a result that is fair and reasonable.

All GST rulings referred to above are available at the ATO website www.ato.gov.au