Edited version of your written advice

Authorisation Number: 1013013273687

Date of advice: 12 May 2016

Ruling

Subject: GST and the transfer of unspent funding on the acquisition of a business

Question

Does Entity A have a GST liability in relation to the unspent funding that was transferred to it by the vendor under a sale agreement which was conditional upon the relevant parties entering into a deed of novation in respect of certain contracts that the funding related to?

Answer

No.

Relevant facts and circumstances

• Entity A is registered for GST.

• The unspent funding was reflected in the purchase price that was paid for the vendor's business under the sale agreement.

• The terms of the sale agreement include a requirement that certain contracts are to be novated to Entity A.

• The Deed of novation includes the novation of unspent funding held for services that remain to be delivered under the relevant contracts.

• The unspent funding was held as an asset on the balance sheet of the vendor.

Relevant legislative provisions

All references below are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 9-10

Section 9-15

Section 195-1

Reasons for decision

Section 9-5 of the GST Act provides that you make a taxable supply if: (1) you make the supply for consideration; (2) the supply is made in the course or furtherance of an enterprise that you carry on; (3) the supply is connected with the indirect tax zone (which is basically Australia); and (4) 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.

In your case, you are registered for GST and any supplies that you make would generally be made in the course or furtherance of an enterprise that you carry on and would also generally be connected with the indirect tax zone. Therefore, what remains to be determined is whether you have made any supplies for consideration in return for the unspent funding.

Subsection 9-10(1) of the GST Act provides that a supply is any form of supply whatsoever; whilst subsection 9-10(2) provides that, without limiting subsection (1), 'supply' includes, amongst other things: a supply of services; a creation, grant, transfer, assignment or surrender of any right; a financial supply; an entry into, or release from, an obligation to do anything, to refrain from an act, or to tolerate an act or situation; or any combination of any two or more of the matters referred to in the subsection.

Further, section 195-1 of the GST Act provides that 'consideration', for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17 of the GST Act, in connection with the supply or acquisition. Section 9-15 of the GST Act, which is the relevant provision out of the two in this case, states as follows:

9-15 Consideration

(1) Consideration includes:

(a) any payment, or act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

…

Goods and Services Tax Ruling 2006/9 (GSTR 2006/9) deals with supplies and also discusses when there is a 'supply for consideration'.

Proposition 4 of GSTR 2006/9 provides that a transaction may involve two or more supplies.

Paragraphs 67 and 68 of GSTR 2006/9 provide that in a straight forward commercial transaction, a supply is made to a recipient, who provides consideration in the form of money to the supplier; but as the payment of money in these circumstances is not a supply, the recipient's payment of money is not a supply. However, if the recipient provides consideration in a non-monetary form, the consideration itself is a separate supply, such that there are two supplies, one going each way.

Paragraph 180 of GSTR 2006/9, which refers to other GST rulings including Goods and Services Tax Ruling 2001/6 (GSTR 2001/6) dealing with non-monetary consideration, states as follows in relation to the necessary nexus between consideration and a supply:

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

• the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

• regard needs to be had to the true character of the transaction; and

• an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

Paragraph 180B of GSTR 2006/9 explains further that, in identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply.

Paragraph 54 of GSTR 2001/6 comments on the breadth of the connection between supply and consideration, and states:

54. In Australia, the definition of consideration is similarly wide. To the extent that 'in connection with' may be narrower in scope than 'in respect of', the phrases 'in response to' and 'for the inducement of' may assume added stature.

The nexus test is discussed further in paragraphs 70 to 72 of GSTR 2001/6, which state as follows:

70. The meaning given to the term 'in connection with' in Berry v. FC of T (1953) 89 CLR 653 ('Berry's case') is similar to that which was described by the Court of Appeal in New Zealand Refining, but needs to be applied with regard to the structure of the definition of supply in the GST Act. In Berry's case, Kitto J held that 'in connection with' was a broader test than 'for'. At page 659, his Honour commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

71. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

72. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

At paragraph 12 of GSTR 2001/6, it is explained that a 'payment' is not limited to a payment of money; but that it includes a payment in a non-monetary or in an 'in kind' form, such as: providing goods; granting a right or performing a service (an act); and entering into an obligation, for example to refrain from selling a particular product (a forbearance).

Regarding different forms of consideration, paragraph 80 of GSTR 2001/6 provides that consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, the paragraph goes on to explain that things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

Paragraphs 83 to 86 GSTR 2001/6 explain that:

• many transactions involve exchanging various rights and obligations between the parties to the transaction, but the true character of the transaction may characterise the payment as a condition of the contract rather than the provision of non-monetary consideration.

• subject to the terms of the agreement, transactions will often involve a supply made only for monetary consideration. In these circumstances, obligations entered into as part of the transaction by the entity that is liable to provide the money will not be separate parts of the consideration for the supply.

• non-monetary consideration needs to have a clearly independent identity. Obligations that are essentially another way of describing the consideration do not have a separate existence.

• particular terms that form part of a transaction need to go beyond merely defining or describing the supply, or specifying rights that are to be retained by the entity making the supply, before the terms form a separate supply or additional consideration for a supply under the transaction.

Paragraph 15 of GSTR 2001/6 states as follows regarding various obligations entered into by parties to a transaction and whether they are consideration for a supply:

15. Many transactions involve parties entering into multiple obligations. The question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply.

Paragraphs 88 and 89 of GSTR 2001/6 provide an example where the purchaser is not considered to be making a supply by agreeing to enter into certain obligations.

Example 8 - obligation to sell specified products

88. Franchisor supplies certain rights to Franchisee under a franchise agreement. Franchisee pays $10,000 for each year of the agreement, undertakes to sell only specified products for specified prices, and undertakes not to operate outside a particular geographical area.

89. The true character of the transaction is for the supply by Franchisor of certain rights in return for a monetary payment. The obligations Franchisee enters into are in the nature of defining and describing the supply by Franchisor. Although, when viewed in isolation they may meet the definition of both ' supply' and ' consideration', they do no more than define what Franchisor is supplying.

Applying the above to the facts of your case, we do not consider that you have made any supplies for consideration in return for the unspent funding.

The terms of the sale agreement entered into by you for the acquisition of the business stated that the relevant contract was to be novated to you and you were to receive the unspent funding relating to that contract.

The assumption by you of the obligations under the relevant contract was simply a condition of the sale agreement, and did nothing more than define and describe what was supplied to you under the sale agreement.

You did not make any supply (in the form of non-monetary consideration) by agreeing to be bound by the obligations under the relevant contract once it was novated to you. The true characterisation of the rights and obligations exchanged between the parties as a result of entering into the sale agreement is that they were simply conditions of the sale agreement.

As such, there is no separate supply of unspent funding made to you by the vendor for which you in return make a supply in the form of entering into an obligation. You did not provide non-monetary consideration for the unspent funding.

The only consideration you provided to the vendor is monetary consideration; which you provided for the acquisition of the business as a whole (including the unspent funding).

The principles in Goods and Services Tax Ruling 2004/9 (GSTR 2004/9) support the above conclusion.

Paragraphs 115 and 117 of GSTR 2004/9 state as follows:

115. In the context of a supply of an enterprise, the vendor may assign to the purchaser its interest under an ongoing agreement for supplies by a third party, for example, a plant and equipment lease or hire purchase arrangements. It is common for hire purchase agreements to be either paid out or novated to the purchaser on the supply of the enterprise. In either case there is no liability assumed by the purchaser. In circumstances where an agreement is validly assigned as part of the supply of the enterprise, the purchaser generally agrees to:

•   pay the purchase price;

•   assume the future obligations under the assigned agreement; and

•   indemnify the vendor against any claims by the third party in respect of the obligations that accrue under the agreement after settlement.

117. The purchaser assumes the obligations under the assigned agreement as a condition of the supply of the enterprise and the assignment. The purchaser receives the interest in the agreement as part of the things that make up the enterprise, the obligations under the agreement attaching to the interest which is supplied to the purchaser. That is, the thing supplied to the purchaser is the interest under the agreement, which includes the obligations to make future payments in exchange for the performance of the assignee. The assignment is not dissected into a supply by the vendor of the benefits of the agreement, and a supply by the purchaser of an entry into an obligation regarding the burdens of the agreement. The assignment is of a single thing, being the whole of the vendor's interest under the agreement.

As a result, you do not have any GST liability in respect of the unspent funding.