Edited version of your written advice

Authorisation Number: 1051313375046

Ruling

Subject: Goods and Services Tax (GST) and supply of going concern

Question 1

Was the supply of the industrial facility from A to C a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

Does the Commissioner have the discretion to treat the supply as a GST-free supply of a going concern?

Answer

No

Question 3

Was the supply an input taxed supply pursuant to section 40-5 of the GST Act?

Answer

No

Question 4

Was the supply a taxable supply pursuant to section 9-5 of the GST Act?

Answer

Yes

Relevant facts and circumstances

You are a company registered for GST.

You are a subsidiary member of the B GST Group.

You, A, as the Supplier, B, C as the Customer and D as the Customer Guarantor, entered into an agreement (Agreement) for you to operate an industrial facility and supply all of the production capacity to C and/or its subsidiaries.

Prior to this, C owned and operated the industrial facility and provided all of the production capacity to D’s operations.

E is the sole legal and beneficial holder of the lease upon which the industrial facility is situated.

When A acquired the industrial facility, it entered into a sublease with E for the purposes of facilitating access to the industrial facility. The Sublease enabled A to access certain land of the lease, including the immediate area surrounding the industrial facility and an access corridor.

The Agreement entitled C to repurchase the industrial facility and terminate the associated agreement in certain circumstances in exchange for a payment (Termination Payment).

On X date, C exercised its rights under the Agreement to terminate the Agreement whereupon it would receive the transfer of the industrial facility in consideration for paying the Termination Payment.

A and C executed a second agreement (Sale Agreement) confirming and agreeing to the terms for the transfer of the industrial facility.

No written agreement was reached to treat the supply of the industrial facility as a GST-free going concern prior to settlement.

The industrial facility was transferred to C on X date.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

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

Reasons for decision

Question 1

Was the supply of the industrial facility from A to C a GST-free supply of a going concern pursuant to section 38-325 of the GST Act?

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain conditions are satisfied.

Subsection 38-325(1) of the GST Act states that 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.

Subsection 38-325(2) of the GST Act defines a supply of a going concern as a supply under an arrangement where:

(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).

Continued operation of the enterprise

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

The term 'enterprise' is defined in section 9-20 of the GST Act as an activity, or series of activities, done, for example, in the form of a business or in the form of a lease.

The term 'enterprise' is wider than the meaning of the term 'business'. For example, the activity of leasing can be the subject of the 'supply of a going concern'.

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation to the recipient and the recipient must be in a position on the day of the supply where it can, if it so chooses, to continue to operate that enterprise.

As A’s identified enterprise is the provision of all of the production capacity to C, this identified enterprise cannot be provided to C for it to continue with as they are in fact the recipient of the supplies under the identified enterprises.

While paragraph 38-325(2)(b) of the GST Act is satisfied as A carried on the enterprise of providing production capacity until the day of the supply, paragraph 38-325(2)(b) of the GST Act is not satisfied. Before the Agreement, C had provided production capacity to its own operations. The arrangement with A’s use of the industrial facility has been treated by C as a lease agreement which reverted back upon its repurchase to C to resume its operation and control.

Therefore, although A was carrying on an enterprise in relation to the industrial facility by selling its production capacity to C, it could not supply all of the things necessary for the continued operation of the enterprise because there is no enterprise by C to continue on as they would be providing production capacity essentially to itself. There cannot be a supply of a going concern and consequently, a GST-free going concern.

Supply of a going concern

Under paragraph 38-325(1)(c) of the GST Act, the parties must agree in writing that the transfer of the industrial facility is a supply of a going concern. 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) provides that:

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.

180. Section 2B of the Acts Interpretation Act 1901 defines 'writing' as 'includes any mode of representing or reproducing words, figures, drawings or symbols in a visible form.' In Peverill v. Meir (1990) 95 ALR 401, Justice Burchett concluded that:

'When the Act requires the request to be in writing, I think it refers to a request which read reasonably, conveys the information that the procedure in question is to be performed.'

181. 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, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

In this case, there is no written evidence of any mutual intention that the supply was of a going concern therefore the supply cannot be a GST-free supply of a going concern.

Question 2

Does the Commissioner have the discretion to treat the supply as a GST-free supply of a going concern?

There is no GST or other legislation which gives the power to the Commissioner to treat a supply as a GST-free supply of a going concern where all of the criteria necessary to qualify for the status of a GST-free supply of a going concern have not been met. The Commissioner has no power to go against express and clear legislation. At the very least, as there is no agreement in writing to treat the supply as a GST-free supply of a going concern, the Commissioner has no power to ignore this legislative condition.

Question 3

Was the supply an input taxed supply pursuant to section 40-5 of the GST Act?

There are no provisions in section 40-5 of the GST Act that would result in the supply of the Power Station being input taxed.

Question 4

Was the supply a taxable supply pursuant to section 9-5 of the GST Act?

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) it makes a supply for consideration;

b) the supply is made in the course or furtherance of an enterprise that it carries on;

c) the supply is connected with the indirect tax zone; and

d) 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 was for the consideration of the Termination Payment and was made in the course or furtherance of an enterprise A carried on. The industrial facility is in the indirect tax zone (Australia) and A is registered for GST. Thus, the supply of the industrial facility by A satisfies section 9-5 of the GST Act and is taxable.