Private ruling: GST and Sale of a going concern
Published: August 2013

Ruling: Q1: Do the intended supplies of existing interests in the X and the associated assets by the Sellers to the Buyers for the purposes of increasing the Buyer's interest in existing s constitute GST-free supplies of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes the intended supplies of existing interests in the X and the associated assets by the Sellers to the Buyers for the purposes of increasing the Buyer's interest in existing will constitute GST-free supplies of a going concern in accordance with section 38-325 of the GST Act. | Q2: Do the supplies of interests in the assets by the Sellers to the Buyer for the purposes of adding a participant to a constitute GST-free supplies of a going concern under the GST Act? | A2: Yes, the supplies of interests in the assets by the Sellers to the Buyer for the purposes of adding a participant to a will constitute GST-free supplies of a going concern under the GST Act. | Q3: Do the supplies of a further interest in the assets by the sellers to the Buyer for the purpose of increasing the Buyer's share under the relevant agreements constitute a GST-free supply of a going concern under the GST Act? | A3: Yes, the supplies of a further interest in the assets by the Sellers to the Buyer for the purpose of increasing the Buyer's share under the relevant agreements will constitute a GST-free supply of a going concern under the GST Act.

Relevant facts and circumstances: All the Sellers are entities of the wider economic group of companies involved in a project. All the Sellers and the Buyers are registered for GST. The Sellers have entered into an Agreement with the Buyers to supply further interests in the existing enterprises operated by the Sellers. Under the terms of the Agreement each Sellers will supply part of their interest in the project X and associated assets (as defined in the proposed Agreement) to give the Buyer an interest in the project. Under the terms of the proposed Agreement the Buyers have agreed to pay the defined consideration apportioned against the Assets up to the Completion date. The Sellers and the Buyers are party to an agreement to provide the parties with certain rights, including governance rights, and obligations in respect of their participating interest and third party tenement contractual economic interests. The Sellers have agreed (between them) to grant a contractual economic interest in each of the Third Party X and the associated assets where the Sellers are unable to transfer a legal interest to the Buyers on Completion. and the Buyers agree to be responsible for the liabilities associated with those interests. Under the terms of the Agreement, the Sellers agree to use their best endeavours to obtain the satisfaction of the relevant Regulatory Approvals and third party consents required to ensure that the Buyers obtain the full benefit of the Sellers interests in respect of the assets to be supplied. Under the Agreement each Seller and Buyer acknowledges and agrees that: (a) the purchase price does not include any amount for GST; (b) the supply of the Assets and Business by each Seller is a supply of separately identifiable enterprises carried on by each Seller and is a supply of a going concern which is GST-free; (c) each Buyer is registered for GST purposes and will continue to be registered up to and including the day of supply of the Assets and Business by the Sellers; (d) each Seller supplies to the relevant Buyer all of the things that are necessary for the continued operation of the Business; and (e) each Seller will carry on its Business until the day of supply of the Business to the relevant Buyer.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1) | A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision: Summary: A supply will be GST-free if it satisfies the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration; and the recipient is registered or required to be registered; and 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 provides that a supply of a going concern is a supply 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; and the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as part of a larger enterprise carried on by the supplier). 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) explains section 38-325 of the GST Act. Supply for consideration The consideration payable for the supply by each Seller is set out in the Agreement and it will be apportioned against the assets in accordance with the principles set out in the Agreement. Registered for GST The Agreement confirms that each Buyer is registered for GST purposes and will continue to be registered up to and including the day of supply of the Assets and Business by the Sellers. Agreement in writing Under the Agreement, the Sellers and the Buyers have agreed in writing that the supply of Assets and Businesses by each Seller will constitute the GST-Free supply of a going concern for the purposes of GST Act. And each Seller will carry on its Business until the day of supply of the Business to the relevant Buyer. We agree that, under the Agreement, the requirements of subsection 38-325(1) of the GST Act are satisfied. A supply under an arrangement The definition for a supply of a going concern under subsection 38-325(2) of the GST Act requires that the supply be made under an 'arrangement'. Paragraphs 19 and 20 of GSTR 2002/5 explain: 19. A supply is defined in section 9-10. The term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the identified enterprise) 20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under 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. (Refer to paragraphs 178 to 185 for more details). 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. The arrangement is identified in the Agreement and related agreements. The supplies under the terms of the Agreement are under an arrangement for the purpose of section 38-325 of the GST Act. What is the identified enterprise? The definition of 'enterprise' under subsection 9-20(1) of the GST Act includes an activity, or series of activities, done in the form of a business. Under the Agreement the Sellers have agreed to continue operating the enterprise up to and including the day of supply. The Seller's interest in the specific business is the identified enterprise for the purpose of subsection 38-325(2) of the GST Act. Paragraph 195 in GSTR 2002/5 explains that each individual joint venturer is capable of conducting an enterprise separate from the other joint venturers. Provided that all of the requirements of section 38-325 of the GST Act are satisfied, it is possible then for an individual joint venturer to make a GST-free supply of a going concern. This will be the case provided that what is supplied is all of the things that are necessary for the continued operation of the identified enterprise that is conducted by the joint venturer. You contend that the Sellers enterprises can be characterised as the specific business carried on in joint venture with the relevant joint venture participants (including the Buyer and other external proponents). The identified enterprises proposed to supply the interest in the assets and X, and not an interest in a joint venture - the joint venture being the end product and not relevant to what the supplier supplies for the purposes of section 38-325 of the GST Act. Therefore, it is considered that each of the Sellers is making a GST-free supply of a going concern when they supply an interest that, combined with the other interests under the arrangement will culminate in a joint venture interest of the continuing enterprise. What are the things that are necessary for the continued operation of the identified enterprise? The definition of a supply of a going concern requires that the supplier supply to the recipient all of the things that are necessary for the continued operation of an enterprise. In the present circumstances, each Seller is the supplier of an enterprise. Paragraphs 47 and 48 of the GSTR 2002/5 explain: 47. The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the thing supplied. 48. In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise…. What things are necessary for the continued operation of an enterprise is a question of fact and degree, which is determined from the supplier's perspective. It is an objective test of the things that are necessary for the continued operation of the identified enterprise. Therefore, what is objectively necessary to operate the supplier's enterprise should the recipient choose to continue it and depends on what the supplier in fact uses to operate. Paragraph 72of the GSTR 2002/5 states: 72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are necessary will depend on the nature of the enterprise carried on and the core attributes of that enterprise…. Paragraph 75 of the GSTR 2002/5 provides: 75. Two elements are essential for the continued operation of an enterprise: · the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in trade and intangible assets such as goodwill, contracts, licences and quotas; and · the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion. The supplies to be made to the recipient are interests in the assets and X that make up the business operations under the arrangements. The identified enterprise is part of that larger enterprise. Following Completion, the recipient's interests will form part of the assets and X of the continuing business operations under the arrangements. The supply of Third Party Tenement Sale Interest Under the Agreement, each Seller will supply their specified interest in the X and the associated assets to the Buyer. However, the legal interest in the Third Party Tenement may not be able to be transferred to the Buyer. As outlined in Agreement, the Buyer will be entitled to receive the benefits that Sellers receive in relation to that Third Party X and the associated assets Buyer also will bear the associated burden of those interests.. Under the Agreement, the relevant Sellers will apply their best endeavours to arrange beneficial ownership of contingent assets (such as relevant statutory consents, licences, etc) to pass to the relevant Buyers as well as to obtain any relevant Regulatory Approvals. In the event the contingent assets do not in fact transfer, you observe that the Commissioner considers that in certain circumstances a supply of 'all things necessary' will be made if the seller makes all reasonable efforts to facilitate the transfer. (Refer to paragraphs 48-53 in GSTR 2002/5). You contend that if there is no transfer of the legal interest in the Third Party X, the supply of the Benefits and the responsibility for the liabilities constitutes the transfer of an economic, equitable and beneficial interest in the interest held by the Sellers. Furthermore, you contend that the legal title to these assets would not be necessary for the conduct of the enterprise. Paragraph 83 of the GSTR 2002/5 explains that certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things, (that is, they are not essential). Based on the above arrangement and the operations continuing following Completion of the arrangement, we agree that all of the things that are necessary for the continued operation of an enterprise have been supplied. The supplier will carry on the enterprise until the day of the supply . The Agreement provides that each Seller will carry on their respective enterprise until the day of the supply. Supply as part of a larger enterprise You note that the intended supply of the enterprises by the respective applicants form part of the larger enterprise carried on by the Sellers, as contemplated by paragraph 38-325(2)(b) of the GST Act. As explained above, we agree that all of the things necessary for the continued operation of an enterprise will be supplied and the enterprise will continue until the day of completion and subsequently. We also agree that under the proposed agreements the requirements of subsection 38-325(2) of the GST Act will be satisfied. Therefore, the supplies of increasing Buyer's interest in existing s constitute GST-free supplies of a going concern under the GST Act. As explained in Question 1, a supply will be GST-free if it satisfies the requirements of section 38-325 of the GST Act. The supply of the interest in the assets will satisfy the requirements of subsection 38-325(1) of the GST Act. The supply is for consideration, the recipient of the supply is registered for GST and the supplier and the recipient have agreed in writing that the supply is of a going concern. Whether the supply was made under an arrangement You consider that the supply of an interest in the assets is the supply of separately identifiable enterprises, each capable of separate independent operation. The Sellers would supply part interest in the X and part interest in the associated assets to the Buyer for the purposes of adding a participant to a joint venture . The supply of a partial interest in a joint venture is capable of constituting a separately identifiable enterprise for the purpose of the GST-free going concern provision, as explained in paragraph 195 of GSTR 2002/5. The supplies to be made by the Sellers are part interests in the assets and X that make up the business operations under the arrangements. Following Completion, the Buyer's interests will form part of the assets and X of the continuing business operations under the arrangements. Therefore, we agree that the Sellers will supply all of the things that are necessary for the continued operation of the enterprise, as explained in paragraph 75 of GSTR 2002/5. The Agreement provides that each Seller will carry on their respective enterprise until the day of the supply. Therefore, we agree that the supply of interest in the assets will satisfy the requirements of subsection 38-325(2) of the GST Act and the supply will be GST-free supply of a going concern under the GST Act. The supply of further interest in the assets will satisfy the requirements of subsection 38-325(1) of the GST Act. The supply is for consideration, the recipient of the supply is registered for GST and the supplier and the recipient have agreed in writing that the supply is of a going concern. Whether the supply was made under an arrangement You explained in your application for the ruling that the enterprise carried on by the Seller can be characterised as the purchase and processing of products. You consider that the supply of a further interest in the assets is the supply of a separately identifiable enterprise, capable of separate independent operation. The Supplier would supply part undivided legal and beneficial interest in the assets held by the Supplier to the Buyer for the purposes of increasing the Buyer's share under the relevant sales agreements. The supply of a partial interest in a joint venture is capable of constituting a separately identifiable enterprise for the purpose of the GST-free going concern provision, as explained in paragraph 195 of GST2002/5. The supplies to be made by the Seller are part interests in the assets that make up the business operations under the arrangements. Following Completion, the recipient's interests will form part of the assets of the continuing business operations under the arrangements. Therefore, we agree that the Seller will supply all of the things that are necessary for the continued operation of the enterprise, as explained in paragraph 75 of GSTR 2002/5. The Agreement provides that each Seller will carry on their respective enterprise until the day of the supply. Therefore, we agree that the supply of further interest in the assets will satisfy the requirements of subsection 38-325(2) of the GST Act and the supply will be GST-free supply of a going concern under the GST Act.