Edited version of your private ruling

Authorisation Number: 1012490585392

Ruling

Subject: Transfer of assets and liabilities

Question 1

Is the transfer of assets and liabilities from Entity A to Entity B a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answers

No.

Relevant facts and circumstances

Background

The relevant industry is to be restructured and will involve some major policy changes.

To facilitate the restructuring of the industry, legislation has been enacted which contains provisions:

· To enable the transfer of employees between the businesses, while ensuring employees entitlements are protected;

· To facilitate the sale of Entity A's retail customer base and transfer assets, rights and liabilities between the relevant entities.

You have advised that the restructure is to be achieved through the following:

1. Transfer of Entity C shares from Entity A to Entity B;

2. The transfer of certain assets held by Entity A that are related to the Entity C business as stated in the Schedule to the Transfer Notice and including sales contracts held by Entity A, to Entity B and its wholly owned subsidiary, Entity D.

3. Cancellation of agreements between Entity A and Entity C and the transfer of agreements in Entity C's name.

Entity C is within the Entity A GST Group. Entity C will exit the Entity A GST Group at the time of the transfer of Entity C shares.

The transfer of Entity C shares from Entity A to Entity B is facilitated by legislation and the Transfer Notice. Further direction is provided in the 'Minister's Direction', which also addresses the novation of sales contracts to Entity B, or its nominee, which in this case is Entity D.

The ruling request is in respect of the transfer of the assets and liabilities as mentioned in the Schedule to the Transfer Notice and sale contracts transferred under the Minister's Direction.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

In this ruling, please note that, unless otherwise stated:

· All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

· All reference materials referred to are available on the Australian Taxation Office website, www.ato.gov.au

Question

Is the transfer of assets and liabilities from Entity A to Entity B a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Section 9-40 provides that an entity must pay the GST payable on any taxable supply that it makes. The definition of 'a taxable supply' is contained in section 9-5 and 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.

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

The terms marked with an asterisk are defined in section 195-1.

In this case, of relevance for consideration is paragraph 9-5(a) which states that:

"…you make the supply for consideration (emphasis added)

We need to establish whether Entity A (you) are making a supply when you transfer assets, property, rights and liabilities specified in the Schedule to the Transfer Notice to Entity B pursuant to the Machinery of Government Changes (MOG). If it is determined that you are not making a supply, then you cannot be making any taxable supply, and there will be no GST consequences in relation to the transfer.

The term 'supply' is defined in section 9-10:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax :supplies (GSTR 2006/9) examines the meaning of 'supply' in the GST Act . Part 2 of the ruling looks at how to identify and characterise supplies in the context of the transactions in which they are made. This Part uses ten propositions to assist in analysing a transaction to identify the supply or supplies made in that transaction. However, it should be noted that the propositions are not universal as they may have exceptions or be qualified either by the operation of particular provisions of the GST Act, or by the facts and circumstances of a transaction.

Of relevance to this case is Proposition Number 5: To 'make a supply' an entity must do something. The following paragraphs are relevant from GSTR 2006/9:

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

We consider the use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) requires the supplier to take some actions to cause a supply to be made by it to a recipient. This means that you must undertake some action or do something in making a supply.

Paragraphs 80 to 91 of GSTR 2006/9 discuss the GST consequences of vesting in a government authority of real property in accordance with State legislation. One of the common mechanisms employed by the legislation is to vest the interest in the real property in the government authority and extinguish any interests of the previous owner in that property. Similar principles are relevant in this case.

Paragraph 23 of Goods and Services Tax Ruling GSTR 2004/9, Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise (GSTR 2004/9) lends further support to the view that to make a supply you must actively undertake some action or do something. It confirms that the assumption of a liability imposed, required and effected by the words of a statute also does not result in the making of a supply within the meaning of section 9-10.

Therefore, in respect of assets which are transferred or vested in another entity, a supply is not made by the entity which loses the assets. The act of vesting extinguishes the rights of the previous owner and confers ownership rights on the recipient entity. The extinguishment of rights is not a supply of those rights by the losing entity.

In your case, Notice was given of the transfer of the assets, property, rights and liabilities of Entity A, specified in the Schedule to the Transfer Notice, to Entity B, subject to the terms and conditions contained in the Transfer Notice. Further, a Minister's Direction was issued, directing Entity A to transfer Entity C and all associated assets, rights or liabilities of Entity A to Entity B.

The Australian Taxation Office (ATO) publication 'GST and machinery of government (MOG) changes' provides some guidelines on MOG changes. It explains that where the losing agency has not taken any action to cause the assets and liabilities to be transferred to the gaining agency, there are no GST consequences if those assets or liabilities are transferred as a result of MOG changes.

These transfers can be given effect by:

· gazettal of a notice

· specific legislation abolishing a losing agency

· proclamation such as in the case of local authorities

For GST purposes, MOG changes apply to both government entities and government related entities.

Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory (GSTR 2006/5) discusses the meaning of 'Commonwealth, a State or a Territory'.

Paragraph 7 provides that section 195-1 adopts the meaning of 'government entity' given by section 41 of the A New Tax System (Australian Business number) Act 1999.

Paragraph 8 goes on to say that the Commonwealth, a State or a Territory is not limited to the departments, agencies and organisations described above and may include a corporation which is not a 'government entity' as defined in section 195-1.

Further, paragraph 9 outlines that, if the corporation is discharging governmental functions for the State - that is, the State is carrying on the relevant business or other function through the corporation - the corporation is the State. The following principles, outlined in paragraph 12 of GSTR 2006/5, should be considered:

(a) whether a corporation is the State requires consideration of every feature relevant to its relationship with the State;

(b) it is the ownership and management of a corporation, and the purposes it is required to pursue, that will most often reveal whether the corporation is the State. If examination of those features reveals that the corporation is wholly owned and controlled by the State, and must act solely in the interests of the State, the conclusion that it is the State will readily follow.

(c) If the State does not control the conduct of the affairs of the corporation, the State cannot be said to be carrying on activities of government through the corporation;

(d) A provision that the corporation must pursue the interests of the State or the public or that its policies could be determined by the executive government of the State is an indicator that the corporation is the State;

(e) The participation of the executive government in formulating policy and making decisions is an indicator that the corporation is the State. For example, a power for a Minister or the Executive Council to override decisions of the board is indicative that the corporation is an instrument of the state;

(f) The absence of shareholders has been held to be a relevant factor indicating that the corporation may be the State;

In your case, both Entity A and Entity B are wholly State owned entities and comply with the principles outlined above.

Consequently, we can conclude that both Entity A and Entity B are the State for purposes of section 195-1 of the GST Act.

Further, Entity A, the losing agency, has not taken any action to cause the assets and liabilities to be transferred to the gaining agency (Entity B). Consequently, there are no GST consequences as those assets and liabilities are transferred as a result of MOG changes.

The transfer of the specified assets and liabilities from Entity A to Entity B is not a taxable supply under section 9-5 of the GST Act.