Edited version of your written advice

Authorisation Number: 1012842187248

Date of advice: 16 July 2015

Ruling

Subject: GST and supply of a going concern

Question 1

Is the supply of an interest in the D site and associated assets that is made pursuant to Agreement 2 by F (part of the FG Group) a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, provided that:

• The recipient is registered or required to be registered before completion; and

• F and the recipient agree in writing, at or before completion of Agreement 2, to treat the supply of the D Business as the supply of a going concern.

Relevant facts and circumstances

F is part of the F Group. F is the representative member of the group.

F is in the business of manufacturing and wholesaling. For GST purposes, F's enterprise consists largely of supplying products. In this regard, F operates various manufacturing sites.

One of the manufacturing sites operated by F is located in D.

The products manufactured by F at the D site are generally sold on-market. F does not have any long-term contracts for the sale of products manufactured at the D site.

F is in the process of finalising two separate agreements to dispose of the D site and all the property, plant and equipment at that site (D Business).

These agreements will be entered with the objective of transferring the D Business to a new joint venture between FG and the B Group. This joint venture will take the form of a general law partnership which will operate the enterprise involving the D site.

F is named as the vendor in the second agreement (Agreement 2).

First Agreement - Sale to D

The first agreement is the Asset Purchase Agreement for the sale by F to D of a portion of the D Site (D Agreement). The D Agreement is a mirror agreement to Agreement 2, with the only difference between the two being the purchaser under each agreement and the proportional interest each is acquiring.

D is a wholly owned subsidiary of F especially established as a new corporate entity to take on a role in relation to the new joint venture with the B Group in relation to the D Business.

D will be a member of FG at the time of completion of the D Agreement. Therefore, the sale of the interest in the D enterprise from F to D will be treated as not subject to GST on the basis that it is a supply between two members of the same GST group.

Immediately following completion of the D Agreement, F will hold the remaining portion of the D Business and D will hold the rest. At this time, it is intended that each of F and D will be carrying on its own separate enterprise involving the manufacture of products using the assets and equipment located at the D site.

Second Agreement (Agreement) 2

Pursuant to Agreement 2, F will dispose of its remaining interest in the D Business.

B2 is currently named as the Purchaser in Agreement 2. At the time of completion of Agreement 2, B2 will be registered for GST.

It is intended that Agreement 2 will complete one day after the D Agreement has completed. During the intervening day, F will continue to operate its enterprise involving its interest in the D Business, prior to selling this enterprise pursuant to Agreement 2.

At the same time as Agreement 2 completes (one day after completion of the D Agreement), D and B2 will form a general law partnership, (D Partnership), pursuant to the Partnership Agreement.

As a result of both agreements all assets etc. are being split proportionately with no one party obtaining an asset or licence etc. that the other party does not have an interest in.

Completion of Agreement 2 is dependent upon formation of the D Partnership; Agreement 2 states:

Completion must take place at the same time and place as completion under the Partnership Agreement.

Pursuant to the Partnership Agreement, both D and B2 will each make a supply of their respective interests in the D Business to the D Partnership. In this regard, the Partnership Agreement states:

... each Partner hereby agrees to make available to the Partnership exclusively for the purposes thereof, the whole of its interest in the Partnership Property upon the terms and conditions of this agreement.

The supplies made by D and B2 of their respective interests in the D property to the D Partnership will only be made after those entities have acquired their respective interests.

From the time of its formation, the D Partnership will carry on the enterprise of operating the D Business for the purpose of manufacturing and supplying a range of products. Accordingly, the D Partnership will be separately registered for GST at the time of completion of Agreement 2.

On the day of formation of the D Partnership (i.e. at the same time as completion of Agreement 2), F will commence supplying to the D Partnership:

• management services, pursuant to the Management Agreement entered between F, D and B2 (Management Agreement); and

• materials which are necessary for the D Partnership to manufacture and supply products, pursuant to the MS Agreement entered between F, D and B2.

The parties have not yet executed a written agreement to treat the supply made pursuant to Agreement 2 as a GST-free supply of a going concern. Such an agreement will be entered prior to completion of Agreement 2 (i.e. prior to the day of the supply) once the Commissioner confirms by way of a private ruling that the relevant arrangements may qualify as a GST-free supply of a going concern. In considering this ruling request, it is requested that the Commissioner proceed on the basis that a written agreement will have been entered into prior to the day of the relevant supply.

Relevant legislative provisions

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

Reasons for decision

Summary

The supply of the interest in the D site and associated assets that is proposed pursuant to Agreement 2 by F can be a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Under section 9-5, an entity makes a taxable supply if:

• it makes a supply for consideration; and

• the supply is in the course or furtherance of an enterprise that it carries on; and

• the supply is connected with Australia; and

• the entity is 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.

The supply will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern.

GST-free supply

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

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

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

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

• the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise (paragraph 38-325(2)(a)); and

• the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply (paragraph 38-325(2)(b));

• the supply must be for consideration (paragraph 38-325(1)(a));

• the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325(1)(b)); and

• the supplier and the recipient must have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c)).

Subsection 38-325(2)

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement 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. 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. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

Agreement 2 will provide for the supply of F's share of the D Business and all that this entails (see below).

In our view, Agreement 2 will constitute an arrangement that satisfies the requirements of subsection 38-325(2).

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

Paragraphs 38-325(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.

Superficially it appears that F and D are operating the D Business in partnership, F can however, be regarded as carrying on an enterprise in its own right. This amounts to F carrying on a separate enterprise as co-owner of the D site (and assets etc).

The enterprise, though shortlived, is continuous and uninterrupted. This will be the 'identified enterprise'.

In support of this we note that F and D have no intention to carry on as business partners and have not taken any steps to formalise relations as partners or joint venturers. F's enterprise exists out of the necessity to transition a wholly owned enterprise into one that is owned ultimately by other entities in partnership.

We also note that F and D do not expect to be in receipt of income jointly and will only be co-owners of the D Site and assets for one day. The Commissioner espouses, in GSTR 2004/6, that the existence of a tax law partnership does not necessarily mean that the partnership carries on an enterprise. Further, the Commissioner has stated that in some cases an objective examination of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership.

Additionally, the Commissioner states in GSTR 2002/5:

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

It is not disputed that F operates a large enterprise of manufacturing and wholesaling products, including the D site component. F is disposing of its interest in a separately identifiable part of its larger enterprise. Operating the D site is accepted as a discrete business unit of F's broader enterprise.

This conclusion is consistent with the comments and findings of Justice Greenwood in Aurora Developments Pty Ltd v. Commissioner of Taxation (2011) 192 FCR 519; [2011] FCA 232 (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective.

...

Until the content of the enterprise is isolated, it is not possible to say whether all of the things necessary for its continued operation have been supplied. Section 38-325(2)(a) calls for the identification of an enterprise the subject of the supply and s 38-325(b) calls for the supplier to carry on that enterprise until the day of the supply.

Products are currently manufactured at and wholesaled from the D site using D domiciled assets and licences; these activities will continue up until the final disposal by F to B2.

Where the enterprise is identified, a supplier needs to supply 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 (Paragraph 30 of GSTR 2002/5).

In this case F will supply to B2 its share of a manufacturing and wholesaling enterprise that consists of the D site (land, buildings and improvements), assets such as plant and equipment as well as specified leased assets, licences, employee and management skills and manufacturing inputs.

It is our view that all the things necessary for the continued operation F's D Business will be supplied under Agreement 2.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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 (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

The day of supply occurs when F has done everything to satisfy its obligations under Agreement 2 and B2 has assumed effective control and possession of the enterprise. At this point in time it is intended that F will continue to operate this enterprise up until the day of supply. Given the nature of the business and the purposely transitory arrangements for the entire transaction chain it is our view that F will carry on this enterprise until the day of supply to B2.

It is unlikely that the D Business will suspend production while waiting for Agreement 2 to complete.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

The consideration for the supply of the D Business is defined as the 'Purchase Price' in Agreement 2. The Purchase Price is set at $X. The supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

B2 is not currently registered for GST but will be by the time of completion of Agreement 2. We consider that this requirement will be met provided B2 is either required to be registered or registered at or before completion.

Agreed in writing

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

An agreement between F and B2 that the supply of the D Business will be that of a going concern is not yet executed but will be upon receipt of a favourable ruling from the Commissioner.

Taking all the above facts into consideration, it is agreed that the sale of the D Business will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act if:

• B2 becomes registered or required to be registered before completion; and

• F and B2 agree in writing, at or before completion of Agreement 2, enter into a written agreement to treat the supply of the D Business as the supply of a going concern.