Edited version of your private ruling

Authorisation Number: 1012552487059

Ruling

Subject: GST and supply of a going concern

Question 1

Will the supply of the 'B share' pursuant to the Deed be a GST-free supply of a going concern by the Partnership?

If yes, what is the time of the supply?

Advice/Answers

If the proposed 'going concern' clause is included in the Deed, the supply of the 'B share' pursuant to the Deed will be a GST-free supply of a going concern by the Partnership.

The time of supply will be the time when the transfer of the relevant assets from the Partnership to C is completed.

Question 2

Will the supply of the 'C share' be a GST-free supply of a going concern by the Partnership?

If yes, what is the time of the supply?

Advice/Answers

If the proposed 'going concern' clause is included in the Deed, the supply of the 'C share' pursuant to the Deed will be a GST-free supply of a going concern by the Partnership.

The time of supply will be the time when the transfer of the relevant assets from the Partnership to C is completed.

Relevant facts and circumstances

B and C are partners of the BC Partnership (the Partnership).

Each of B, C and the Partnership is registered for GST with effect from 1 July 2000.

The Partnership is a member of the D Joint Venture, which was originally formed by B, C and D under the D Joint Venture Agreement (JV Agreement). The interest of D has since been acquired by E.

E is the Manager of the joint venture, pursuant to the d Management Agreement executed by B, C and D (Management Agreement). The Manager acts as agent for the joint venture Participants. The joint venture activities undertaken include, or have included various named activities.

B and C commenced the Partnership some time ago. However, the partners only entered into a formal partnership agreement later. That agreement was subsequently substituted by a later Partnership Agreement (Agreement 2).

Under clause x of the Agreement 2, all assets of the Partnership were held to have been contributed by the partners equally and, subject to any subsequent agreement to the contrary, all losses, profits and liabilities of the Partnership were to be shared equally.

Agreement 2 was varied under a Variation of Partnership Agreement (Agreement 3). Under Agreement 3, the partners agreed that each partner should assume individual control over certain assets and interests of the Partnership to the exclusion of the other Partner and would have the option to require the division of such assets between the Partners. Specifically, Agreement 3 provided as follows:

1. AS FROM a specified date

(a) B shall assume sole control over and responsibility for the administration, development and disposal of various assets (Group 1 Assets) - hereinafter called the "B interests".

b) C shall assume sole control over and responsibility for the administration, development and disposal of various assets (Group 2 Assets) - hereinafter called the "C interests".

(c) Without reference to the other Partner, B in respect of the B interests and C in respect of the C interests shall be entitled to conclude any negotiations and make any agreement having the effect of reducing or disposing completely of any of the assets

2. ...

3. ...

4. EACH PARTNER SHALL HAVE the option exercisable at any time during the continuation of the Partnership to require the transfer of the B interests to B and the transfer of the C interests to C.

Group 1

Various assets.

Group 2

(a) The assets and interests of the Partnership in and to the D joint venture.

Various other assets

By notice dated ddmmyyyy, C exercised its option under Clause 4 of Agreement 3. However, a dispute arose between the partners in relation to the validity of the exercise of the option. C commenced litigation seeking orders which included the following:

· A declaration that it has validly exercised the option granted by Clause X of Agreement Y;

· An order in the nature of specific performance of Clause X of Agreement X, that B take all necessary steps and execute all necessary documents to transfer the benefit of the interest in the joint venture to C.

The balance of the Group 2 interests were transferred to C and the Group 1 interests were transferred to B without any litigation.

The various Courts found that the interest in the D joint venture is property of the partnership and that C had validly exercised its option. The Court gave Orders requiring B to take all necessary steps and execute all necessary documents to transfer the benefit of the interest in the joint venture to C.

Draft Deed of Assignment and Assumption

C has prepared a draft D Joint Venture Deed of Assignment and Assumption (Deed), to be executed, in order to give effect to the Orders of the Court.

The Deed includes the following definitions:

Effective Date.

B's Share

C's Share

Clause X of the Deed states:

X Assignment of B Share

2.1 Assignment of right and interest

With effect on the Effective Date, pursuant to the Exercise of the Option and to give effect to the Court Orders B assigns to C the whole of B's right, title and interest in the B Share.

2.2 Assumption of obligations

With effect on and from the Effective Date, C assumes all of the liabilities and must perform, observe and comply with, and is bound by, all the covenants, agreements, conditions, obligations and provisions imposed on B in respect of the B Share.

You provided a list of the Joint Venture Assets currently held.

B proposes to include the following clause in the Deed:

B and C, acting both in their own capacities and in their capacities as partners of the Partnership, agree that, in relation to a supply by the Partnership or by B:

(9) under or in connection with this deed; or

(ii) in connection with the C Share or the B Share ceasing to be partnership property, the supply is the supply of a going concern.

You further advised that the joint venture operator will continue to manage the joint venture on behalf of the Participants through any period in which the transfer of assets and interest from the Partnership to C is effected.

You have provided copies of the relevant documents:

Relevant legislative provisions

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

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

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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au

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

For a supply to be a GST-free 'supply of a going concern' under section 38-325 of the GST Act:

· the supply must be made under an arrangement under which:

o the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise; and

o 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).

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST;

· the supplier and the recipient have agreed in writing that the supply is of a going concern.

Subsection 38-325(2)

Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

The term 'enterprise' is defined in section 9-20 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.

Goods and Services Tax Ruling, Goods and Services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains that if a business structure is a joint venture, then each joint venturer is capable of conducting an enterprise. Paragraph 195 states:

Going concerns and joint ventures

195. 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'.

In this instance, the Partnership is carrying on a specified enterprise through its participating interest in the joint venture. This is the identified enterprise.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 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. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

Paragraph 20 of GSTR 2002/5 goes on to say that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern' in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

B and C entered into a Partnership agreement which was subsequently varied. The Partnership's assets include its interest in the D joint venture. The Agreement constitutes an arrangement under which the Partnership's interest in the joint venture will be supplied.

Subsection 38-325(2)(a)

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

Supplier

The Court has already found that the interest in the D joint venture is property of the partnership. Therefore, the Partnership will be the supplier.

The Partnership carried on this enterprise as part of its larger enterprise.

Paragraph 193 of GSTR 2002/5 explains that where a partnership sells part of its enterprise, which forms part of a larger enterprise, to another entity and all of the conditions of section 38-325 are satisfied, the supply may be GST-free as the 'supply of a going concern'.

The supplier must supply all of the things that are necessary for the continued operation of the enterprise. Paragraph 80 of GSTR 2002/5 explains that a supplier is considered to have supplied all the things when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Further, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise; and

· the operating structure and process of the enterprise.

In this case, the Partnership will transfer to C a participating interest in the D joint venture, including the necessary assets:

Based on the above information, you have satisfied this requirement.

Subsection 38-325 (b)

Supplier carries on the enterprise until the day of the supply

Paragraph 161 of GSTR 2002/5 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. The day of 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 things that are necessary for the continued operation of the enterprise.

Further, in accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. The activities must be capable of continuing after the transfer to new ownership (paragraph 141 of GSTR 2002/5).

Pursuant to clause 1(b) of Agreement 3, C has assumed control over and responsibility for the administration, development and disposal of the assets and interests of the Partnership set out in Group 2 which includes the assets and interests of the Partnership in and to the D joint venture.

The joint venture operator will continue to manage the joint venture on behalf of the Participants while the transfer of assets and interests from the Partnership to C is effected.

Based on the information supplied, we consider that the Partnership will carry on the enterprise until the day of the supply.

Subsection 38-325(1)

Subsection 38-325(1) provides:

(1)The *supply of a going concern is GST-free if:

(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.

When the Partnership transfers its D joint venture assets and interests to C, B and C will each surrender any claim they may have against the Partnership in relation to those interests and assets. Therefore, the paragraph 38-325(1)(a) requirement will be satisfied.

The recipient (C) is registered for GST. If the proposed 'going concern' clause is included in the Deed, the parties (the Partnership and C) will satisfy the requirement that they agree in writing that the supply of the B interests is a supply of a going concern.

The requirements of subsection 38-325(1) will therefore be met.

Accordingly, the supply of the 'B share' pursuant to the Deed will be a GST-free supply of a going concern by the Partnership?

Similarly, the supply of the 'C share' pursuant to the Deed will be a GST-free supply of a going concern by the Partnership?

Time of supply

Although C has assumed control over and responsibility for the administration, development and disposal of the assets and interests of the Partnership set out in Group 2 - which includes the assets and interests of the Partnership in and to the D joint venture, until the transfer is completed, the relevant asset remains partnership property covered by Agreement 3.

The time of supply of the B interests and the C interests will be the time when the transfer of the relevant assets from the Partnership to C is completed.