Edited version of your private ruling

Authorisation Number: 1012494560740

Ruling

Subject: GST and machinery of government changes

Question 1

Was the transfer of the Assets, Rights and Liabilities from you to Entity B as notified in the specified gazette (the Gazette), a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Were you entitled to a decreasing adjustment under Division 129 of the GST Act as a consequence of transferring the Assets, Rights and Liabilities?

Answer

No.

Question 3

Will you be entitled to claim input tax credits under section 11-20 of the GST Act in the future when the N number of properties are transferred back from Entity B to you?

Answer

In the future, whether Entity A (your GST group representative member) will be entitled to claim any input tax credit when the remaining number of N number of properties are transferred back from Entity B to you is dependant on whether you satisfy all the relevant requirements specified in Division 11 of the GST Act when the transfer is made.

For the X number of properties that have already been transferred back to you at the time of this ruling, Entity A was not entitled to any input tax credit as you did not make a creditable acquisition. At least one of the requirements specified in section 11-5 was not satisfied for there to be a creditable acquisition. That is, the transfer was made for no consideration.

Question 4

Will the future transfers of other projects (the Other Projects) from you to Entity B be taxable supplies under section 9-5 of the GST Act?

Answer

Whether future transfers of the Other Projects from you to Entity B will be taxable supplies is dependant on whether you satisfy all the requirements of section 9-5 of the GST Act when the transfer is made.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST from 1 July 2000. You are part of a GST group and Entity A is the GST representative member of this GST group.

Prior to the machinery of government (MOG) changes, you owned a number of projects in the State. These projects are collectively referred to as 'the Projects'.

In addition to the Projects, you currently own a number of other projects referred to as 'Other Projects' in this ruling.

Entity B is registered for GST.

Pursuant to the Premier's new plan, certain assets, rights and liabilities relating to the Projects were transferred under the MOG change from you to Entity B. The transfer was notified in the Gazette dated dd/mm/yyyy for the transfer of specified assets, rights and liabilities.

In this ruling we will refer to the above the assets, rights and liabilities' transferred as 'the Assets, Rights and Liabilities'.

The Gazette lists the transferred contracts. The Gazette also lists the address, certificate of title and certificate of title description in relation to the properties transferred.

The transfer of the Certificates of title to these properties into the name of Entity B occurred on a specified date.

The Premier instructed the specified Minister to transfer the Assets, Right and Liabilities from you to Entity B. The specified Minister was only involved in the transfer process because only they had the power to deal with your assets.

Subsequent to the transfer, Entity B transferred a specified sum of money to you, being the costs that you had incurred up to dd/mm/yyyy. The amount was recorded in your bank account on a specified date.

The Other Projects will be transferred to Entity B in the future. The proposal for the transfer of the Other Projects was part of the same proposal process as for the transfer of the Assets, Rights and Liabilities, as explained in detail earlier.

Subsequent to the transfer of the Assets, Rights and Liabilities from you to Entity B, when the N number of properties is completed, Entity B is required to transfer them back to you.

At the time of this ruling, X number of properties has already been returned to you so far. They were transferred back to you at fair value for no consideration. The others remain outstanding pending further GST advice.

You did not claim any input tax credits in relation to the Projects as the costs relate to supplies you make that are is input taxed.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Division 11

The A New Tax System (Goods and Services Tax) Act 1999 Division 129

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

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

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

The A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

The A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

The A New Tax System (Goods and Services Tax) Act 1999 Section 48-45

The A New Tax System (Goods and Services Tax) Act 1999 Section 129-40

The A New Tax System (Goods and Services Tax) Act 1999 Section 129-50

The A New Tax System (Goods and Services Tax) Act 1999 Section 129-55

Reasons for decision

In this ruling, 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 Australia Taxation Office (ATO) website www.ato.gov.au

1. Was the transfer of the Assets, Rights and Liabilities from you to Entity B under the MOG change and notified in the Gazette a taxable supply?

Section 9-40 provides that an entity must pay the GST payable on any taxable supply that the entity makes.

Section 9-5 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.

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.

Therefore, we need to establish initially whether you are making a supply in transferring the Assets, Rights and Liabilities to Entity B pursuant to the MOG change. 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).

In your case, the Assets, Rights and Liabilities were transferred from you to Entity B. Accordingly, we need to consider, in relation to the transfer, whether you have done anything, or taken any action, to cause a supply to be made.

Goods and Services Tax Ruling (GSTR) 2006/9 Goods and services tax: supplies examines the meaning of 'supply' in the GST Act. Part 2 of GSTR 2006/9 looks at how to identify and characterise supplies in the context of the transactions in which they are made. Of relevance is Proposition No 5: To 'make a supply' an entity must do something.

Proposition No 5 includes the following:

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.30

The following ATO publications are also relevant:

GST and machinery of government changes (NAT 73389), and

GST and Machinery of government - frequently asked question (NAT 73995),

These reference materials include guidelines on

'How GST applies when MOG changes occur', and

'Is there a supply when staff and assets are transferred to the gaining agency following a MOG change?'

These guidelines are extracted below for your information.

How GST applies when MOG changes occur

An example of a common MOG change is when functions from one government organisation (the losing agency) are transferred to another government organisation (the gaining agency).

In these circumstances, both agencies are registered for GST. The losing agency may continue to exist or be abolished. The gaining agency may be an existing government organisation or a newly created one.

The transfer of the functions under the MOG change may be effected by:

· an administrative arrangements order (AAO) made for government entities

· a proclamation declared for government related entities such as local governing bodies

· an Australian law establishing a government related entity that is a body corporate.

Specific Commonwealth, state or territory law authorises the making of an AAO or declaration of a proclamation.

At the time the MOG change takes effect, the AAO, proclamation or Australian law would operate (in relation to the transferred functions) to, among other things:

· transfer any property, assets, rights, debts, liabilities and obligations held by the losing agency to the gaining agency

· treat a reference to the losing agency in any document or arrangement as a reference to the gaining agency.

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.

Is there a supply when staff and assets are transferred to the gaining agency following a MOG change?

There are generally no GST consequences if staff and assets are compulsorily transferred as a result of MOG changes. The 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.

However, in situations where the staff and assets are transferred as a result of MOG changes and the losing agency has taken action to cause those assets to be transferred to the gaining agency, then there may be GST consequences.

Paragraphs 80 to 91 of GSTR 2006/9 discuss the GST consequences of vesting in a government authority of real property in accordance with legislation. The paragraphs explain that the effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. When land vests in an authority in consequence of a gazettal notice, it is necessary to examine the relevant facts and circumstances to determine whether or not the owner makes a supply of the land to the authority.

In your circumstances, it was following the Premier's new plan that the relevant Assets, Rights and Liabilities were transferred under MOG change from you to Entity B. The transfer was effected under the gazettal notice, pursuant to a specified Act.

On the facts provided you were required to transfer the Assets, Rights and Liabilities to Entity B under the MOG change effected by the Gazette notice.

Taking into account all the relevant facts you have presented, we consider that even though there was a transfer of the Assets, Rights and Liabilities from you to Entity B, there was no positive action by you to cause the transfer to occur. The transfer of Assets, Rights and Liabilities arose under Statute and directions from the Premier and the specified Minister and not because of any action by you to 'make' a supply.

Consequently, this means that for the purpose of paragraph 9-5(a), you have not made a supply of the Assets, Rights and Liabilities to Entity B. That is, you have not made a taxable supply under section 9-5 in relation to the transfer of the Assets, Rights and Liabilities from you to Entity B as notified in the Gazette. Accordingly, the transfer has no GST consequences.

2. Are you entitled to a decreasing adjustment under Division 129 of the GST Act as a consequence of transferring the Assets, Rights and Liabilities?

Division 129 deals with adjustments which need to be made for changes in the extent of creditable purpose. The introduction to Division 129 provides that:

The extent to which an acquisition or importation is for a creditable purpose affects the amount of the resulting input tax credit. When the extent of creditable purpose is changed by later events, adjustments (for the purpose of working out net amounts under Part 2-4) may need to be made.

Section 129-50 provides that you apply a thing for a creditable purpose to the extent that you apply it in carrying on your enterprise. However, you do not apply a thing for a creditable purpose to the extent that:

(a) the application relates to making supplies that are input taxed; or

(b) the application is of a private or domestic nature.

Under section 129-55 the term 'apply', in relation to a thing acquired or imported, includes:

(a) supply the thing; and

(b) consume, dispose of or destroy the thing; and

(c) allow another entity to consume, dispose of or destroy the thing.

Subsection 129-40(1) provides a method statement for working out whether you have an increasing or decreasing adjustment.

Relevantly, Goods and Services Tax Ruling GSTR 2000/24 Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose (GSTR 2000/24) includes an explanation at paragraph 47 on how to work out if an adjustment has arisen, that you must

· work out the actual application of the thing expressed as a percentage;

· work out the intended or former application of the thing expressed as a percentage;

· then compare the two percentages.

The terms 'actual application of a thing' and 'intended or former application of a thing' are defined terms for GST purposes. Under section 195-1, each of the terms has the meaning given by section 129-40 in the method statement which is reproduced below.

On the facts provided, the costs incurred by you initially related to supplies which are input taxed. This means section 129-50(2)(a) applies and the percentage for the 'intended application' of the acquisition of the construction for a creditable purpose was 0% (Step 2 of method statement). You did not claim any input tax credits for this reason.

On or around dd/mm/yyy the Assets, Right and Liabilities were transferred to Entity B. Therefore, we need to consider the actual application of the acquisitions for a creditable purpose as a consequence of the transfer.

The guide to GST and machinery of government changes provides 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.

In the decision for question 1 above we determined that the transfer of Assets, Rights and Liabilities arose under Statute and directions from the Premier and the specified Minister and not because of any action by you to 'make' a supply.

As the transfer was effected without any activities on your part for GST purposes, we consider there was no change in the application of the acquisition for a creditable purpose as a consequence of the transfer. That is, at the time of the transfer, the actual application of the acquisition for a creditable purpose in relation to the construction costs remained the same as the former or intended application, that is, 0%. Therefore, no adjustment arises.

Accordingly, as a consequence of transferring the Assets, Rights and Liabilities notified in the Gazette, Entity A (being your GST group representative member) was not entitled to a decreasing adjustment.

3. Will you be entitled to claim input tax credits in the future when N number of properties are transferred back from Entity B to you?

Your entitlement to claim an input tax credit in the future will depend on the provisions of the GST law at that point in time, and also guided by the Commissioner's view on the subject matter then.

Based on the current provisions of the GST legislation, the basic GST rules in section 11-20 provides that an entity is entitled to the input tax credit for any creditable acquisition that the entity makes, and section 11-5 states:

11-5 What is a creditable acquisition?

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Where you satisfy all the requirements specified in section 11-5 when the N number of properties is transferred back from Entity B to you, you will be making a creditable acquisition. Generally, you would be the entity that would be entitled to the relevant input tax credits in accordance with the general rules in section 11-20.

However, the special rules in Division 48 specifically deal with entities that are in a GST group. Subsection 48-45(1) states:

48-45 Who is entitled to input tax credits

(1) If an entity makes a *creditable acquisition or *creditable importation the input tax credit for which is attributable to a tax period during which the entity is a *member of a *GST group:

(a) the *representative member is entitled to the input tax credit on the acquisition or importation; and

(b) the entity making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the entity is the representative member).

In this case, you are a member of a GST group and the representative member of the group is Entity A. Accordingly, if you were to make a creditable acquisition in the future when the N number of properties is transferred back to you from Entity B, then Entity A will be entitled to the relevant input tax credits. An input tax credit is attributable to the tax period on holding a valid tax invoice.

You advised that X number of properties have already been transferred back to you at the time of this ruling application. You also stated that the X number of properties was transferred back at fair value for no consideration. The other properties remain outstanding.

As there was no consideration provided by you, it means that at least one of the requirements specified in section 11-5 was not satisfied for there to be a creditable acquisition. Therefore, Entity A was not entitled to input tax credits in relation to the X number of properties that have been transferred back to you.

4. Will the future transfers of the Other Projects from you to Entity B be subject to GST?

As explained in the answer to question 3 above, the GST implications on future transactions will be dependant on the GST law at the time the supply (if any) is made.

Where the GST law and the ATO's view remain unchanged, you will be making a taxable supply in transferring the Other Projects to Entity B where you satisfy all the requirements that section 9-5 requires. Please refer to the answer for question 1 above for further information.