Edited version of your written advice

Authorisation Number: 1012827805647

Date of advice: 22 June 2015

Ruling

Subject: GST and supply of a going concern

Question

Is the supply of an interest in the Joint Venture a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes.

Relevant facts and circumstances

The JV carries on a specified enterprise. The JV enterprise has been operational since 20XX.

On a specified date X and Y executed the Sale and Purchase Agreement (the Agreement).

Pursuant to the Agreement, X will sell, and Y will acquire, a specified percentage of interest (the interest) in the JV. Under the Agreement Y will receive an interest in the JV property and the operating structure of the enterprise carried on by the JV.

The purchase price for Y's acquisition of the interest in the JV is to be determined according to a specified clause in the Agreement.

The Agreement provides that

• X and Y agree that the supply of the interest in the JV constitutes the supply of a going concern by the X for the purposes of the GST Law.

• X is carrying on, and will continue to carry on the JV's enterprise until the completion.

The Agreement provides that Y has applied for GST registration at the date of the Agreement and will ensure that it is registered for GST on the day of the supply.

Relevant legislative provisions

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

Question

Summary

The intended sale of an interest in the JV by X to Y under the circumstances described will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(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.

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

In order to determine whether the sale of the interest in the JV is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Subsection 38-325(2)

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains what is a 'supply of a going concern' for the purposes of the GST Act.

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 explain what is meant by 'a supply under an arrangement' and state:

19. A supply is defined in section 9-10. 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').

20. 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. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a recipient is characterised not merely by the description which both 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 this case, the Agreement evidences the arrangement for the supply of the interest to Y for the purposes of subsection 38-325(2) of the GST Act.

Identified enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier.

Based on the information provided, X is carrying on an enterprise. This is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, X is required to supply to Y all of the things that are necessary for the continued operation of that enterprise.

Paragraphs 38-325(2)(a) and 325(2)(b)

Paragraph 80 of GSTR 2002/5 provides that a supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraphs 72, 75, 141 and 150 of GSTR 2002/5 state:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

…

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.

…

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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. The activities must be capable of continuing after the transfer to new ownership.

…

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Further, Paragraph 195 of GSTR 2002/5 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'.

Under the Agreement X will supply to Y the interest in the JV. As a result of which, Y will receive a specified percentage of interest in the JV property and its operating structure.

Based on the terms of the Agreement, we consider that X will supply all of the things that are necessary for the continued operation of JV's enterprise to Y for the purposes of paragraph 38-325(2)(a) of the GST Act.

Further, under the Agreement X covenants that it is carrying on and will continue to carry on the JV enterprise until the completion date.

Based on the information provided, the supply will also meet the requirements of paragraph 38-325(2)(b) of the GST Act.

Accordingly, the intended sale of the interest in the JV by X to Y will meet the requirements of subsection 38-325(2) of the GST Act.

Subsection 38-325(1)

The intended sale of the interest in the JV will also meet the requirements of subsection 38-325(1) of the GST Act as:

• the supply is for consideration

• Y will be registered for GST at the time of the supply, and

• under the Agreement, the parties have agreed that the supply of the interest in the JV will be a GST-free supply of a going concern for the purposes of the GST Act.

Conclusion

The intended sale of the interest in the JV pursuant to the Agreement will be a GST-free supply of a going concern as it will meet all the requirements of section 38-325 of the GST Act.