Edited version of your written advice

Authorisation Number: 1013130325228

Date of advice: 30 November 2016

Ruling

Subject: Payment to Territory Franchisee

Question 1

Is the payment of a percentage of the proceeds from the sale of an enterprise to Entity A, a GST-free supply of a going concern?

Answer

No. It is not the supply of a GST-free going concern. The payment to Entity A is consideration for a separate taxable supply.

Relevant facts and circumstances

● You own certain management rights for some units

● You sold those management rights to Entity B as a GST-free supply of a going concern.

● You are sharing the proceeds of a small part of that sale with Entity A, as the result of a condition in a written agreement.

● All three entities are registered for goods and services tax (GST).

● When you sold the business as a going concern to Entity B you offered to assign the small portion of the management rights in question to Entity A, however, Entity A did not want it and opted to share the proceeds with you instead.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

Reasons for decision

All legislative references in this Ruling, unless otherwise stated are to A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The relevant legislative provisions are discussed below.

Section 9-5 defines a taxable supply as:

9-5 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 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.

(* denotes a defined term under section 195-1)

To satisfy paragraph 9-5(a) of the GST Act, there must be a supply and consideration, and there must be a connection between the supply and the consideration. 

'Supply' is defined under section 9-10 of the GST Act as follows: 

(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; and

(g)     an entry into, or release from, an obligation:

                           i.     to do anything;

                           ii.    or to refrain from an act;

                           iii.   or to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling: GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) provides guidance in relation to the characteristics of a supply.

Paragraph 92 of GSTR 2006/9 concerns the proposition that a supply usually but not necessarily requires something to be passed from one entity to another. The term 'supply' covers not only the subject of the transaction - the thing that passes - but also includes the action by which the thing passes from one entity to another. In addition, by use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action, whether voluntarily or involuntarily, to cause a supply to be made.

For supplies under agreements which involve a supply of rights or obligations, paragraph 102 of GSTR 2006/9 provides that an agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other.

At paragraph 17 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) a composite supply is described as a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. A composite supply is treated as a supply of a single thing.

In the ATO Decision Impact Statement which issued in response to the High Court decision, Commissioner of Taxation v Qantas Airways Limited (2012) HCA 41; 2012 ATC 20-352 (Qantas), the following view was provided:

The Commissioner maintains the view, as recognised in his public rulings, that in many cases, the entry into contractual obligations and corresponding creation of rights should be construed, where relevant, as part of a composite supply that includes the performance of those obligations.

Under subsection 9-15(1) of the GST Act, consideration includes:

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

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

Under subsection 9-15(2) of the GST Act, it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

Your supply of the management rights to Entity B was a supply of a going concern. However, your arrangement with Entity A in pursuance with a clause of a certain agreement is the payment of consideration for the release of your obligation under that agreement and this is a different supply, separate from the sale of the going concern.

Consequently, as each of the requirements of section 9-5 has been met the payment to Entity A is consideration for a taxable supply.