Edited version of private advice

Authorisation Number: 1052262814126

Date of advice: 15 July 2024

Ruling

Subject: Taxable supply - transfer of assets, liabilities and contracts

Question 1

Under the proposed restructure, would Entity A, Entity B, Entity C and Entity D be making a taxable supply under section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) when transferring the assets, liabilities and contracts to Entity E pursuant to the proposed Statutory Transfer Order and novation deeds?

Answer

No, Entity A, Entity B, Entity C and Entity D would not be making a taxable supply of the assets, liabilities and contracts to Entity E under section 9-5 of the GST Act.

This ruling applies for the following period:

XX XXX 20XX to XX XXX 20XX

Relevant facts and circumstances

Entity A, Entity B, Entity C and Entity D are registered for GST.

Entity A, Entity B and Entity C are grouped for GST, with Entity B as the representative member of the GST Group.

Entity A, Entity B, Entity C and Entity D will be restructured through legislation to form Entity E.

To ensure that Entity E will be able to perform the same or similar activities previously performed by Entity A, Entity B, Entity C and Entity D, under the proposed restructure, the assets, liabilities, and contracts of these entities will be transferred to Entity E by way of a Statutory Transfer Order.

The Statutory Transfer Order will be made pursuant to legislation and by the minister. The transfer is mandatory and no consideration will be provided for the assets, liabilities and contracts.

Some contracts cannot be transferred via the Statutory Transfer Order. The consent of the contract counterparty will be required for the novation of these contracts.

The contracts that will be subject to novation will represent only a small proportion of the contracts being transferred.

Upon successful transfer of all assets, liabilities and contracts from Entity A, Entity B, Entity C and Entity D to Entity E, there will be no further assets or liabilities remaining Entity A, Entity B, Entity C or Entity D.

Entity A, Entity B, Entity C and Entity D will cease operations and will voluntarily de-register for GST and cancel the GST group.

Entity E will be registered for GST prior to its commencement, with the transfer of assets, liabilities and contracts to take effect from XX XX XXXX.

Relevant legislative provisions

A new Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

These reasons for decision accompany the Notice of private ruling for ABC and Entity D.

This is to explain how we reached our decision. This is not part of the private ruling.

Issue

Transfer of government assets, liabilities and contracts

Summary

Under the proposed restructure, Entity A, Entity B, Entity C and Entity D will not be making a taxable supply under section 9-5 of the GST Act when transferring the assets, liabilities, and contracts to Entity E.

Detailed reasoning

Taxable supplies

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies. The term 'taxable supply' is defined in section 9-5 of the GST Act and provides that you make a taxable supply if:

a)    you make the supply for *consideration; and

b)    the supply is made in the course of furtherance of an *enterprise that you carry on; and

c)    the supply is *connected with the indirect zone; 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.[1]

Relevantly, a 'supply' is broadly defined in section 9-10 of the GST Act and provides that:

1)    A supply is any form of supply whatsoever.

2)    Without limiting subsection (1), supply includes:

(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;

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

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

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

Under the proposed circumstances, we must consider whether the transfer of the assets, liabilities, and contracts from Entity A, Entity B, Entity C and Entity D to Entity E pursuant to the proposed Statutory Transfer Order and novation will be a supply for the purposes of section 9-10 of the GST Act.

Statutory Transfer Order

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) examines the meaning of 'supply' in the GST Act. Part 2 of GSTR 2006/9 discusses ten propositions on how to analyse a transaction in relation to a supply. It should be noted that the propositions are not universal as they may have exceptions or be qualified either by the operation of particular provisions of the GST Act, or by the facts and circumstances of a transaction.

Relevant to this case is Proposition 5 outlined in paragraphs 71 to 91 of GSTR 2006/9. The proposition provides that an entity will make a supply if it provides something to another entity. Paragraph 71 provides that:

71. An entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient).[2] This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

Paragraph 72 of GSTR 2006/9 further explains that it is not necessary that the making of a supply must always involve the taking of some action on the part of the supplier. [3] Relevantly, paragraph 76 of GSTR 2006/9 provides that:

76. While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some act or situation, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something. Examples of such situations are:

•         Shaw v. Director of Housing and State of Tasmania (No 2) [2001] TASSC 2 in which Underwood J held that a judgment creditor makes no supply on extinguishment of the obligation to pay the judgment sum; and

•         Reglon Pty Limited v. Commissioner of Taxation [2011] FCA 805 in which Emmett J analysed an action in conversion and found no supply was made when vesting of title in goods occurred by operation of law on satisfaction of the judgment in full.

Consistent with the above, we consider the use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act requires the supplier to take some actions to cause a supply to be made by it to a recipient. This means that Entity A, Entity B, Entity C and Entity D must undertake some action or do something to make a supply to Entity E.

In your case, a majority of the assets, liabilities and contracts of Entity A, Entity B, Entity C and Entity D will be transferred to Entity E by way of a Statutory Transfer Order.

We accept that the transfer of assets, liabilities, and contracts by way of the Statutory Transfer Order is not a taxable supply under section 9-5 of the GST Act as the transfer to Entity E occurs without any action by Entity A, Entity B, Entity C and Entity D.

Novation

For contracts that cannot be transferred to Entity E via the Statutory Transfer Order, Entity A, Entity B, Entity C and Entity D will need to enter into separate novation deeds or cancel the contracts to give effect to the transfer. The transfer will be non-reciprocal and no payment will be made.

Unlike the Statutory Transfer Order, the novation deeds require Entity A, Entity B, Entity C and Entity D to undertake some action or do something to transfer the assets, liabilities, and contracts. However, we must consider whether this supply is made for consideration.

'Consideration' is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15 and 9-17, in connection with the supply.' Consideration in subsection 9-15(1) of the GST Act relevantly means:

(1) Consideration includes:

(a) any payment, or any 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.

Paragraphs 180 and 180B of GSTR 2006/9 summarises the Commissioner's view discussed in others GST rulings regarding whether a supply is for consideration:

180. ... 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; [4] 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.

...

180B. Further, 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. [5]

Based on these facts and your circumstances, any contracts transferred from Entity A, Entity B, Entity C and Entity D to Entity E under novation deeds will not be supplies for consideration under paragraph 9-5(a) of the GST Act. Therefore, Entity A, Entity B, Entity C and Entity D will not be making a taxable supply when novating the contracts to transfer the assets, liabilities, and contracts and will not be liable to pay GST.

[1] Asterisk denotes a defined term under section 195-1 of the GST Act.

[2] Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49 at [34].

[3] Ibid [33].

[4] In Berry v. FC of T (1953) 89 CLR 653 at 659 Kitto J noted 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'. His Honour was considering the meaning of consideration 'for or in connection with' goodwill in a lease premium for purposes of former section 84 of the Income Tax Assessment Act 1936.

[5] See AP Group Limited v. Commissioner of Taxation [2013] FCAFC 105 at [33].