Private ruling: GST and going concern
Published: July 2013

Ruling: Q1: Will the supply of a participating interest by Entity A to Entity C be a supply of a going concern that is GST-free in accordance with Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes.

Relevant facts and circumstances: · Entity A and Entity B are the registered holders and beneficial owners of the product exploration permits located in Australia. · Entity A holds X% participating interest and Entity B holds Y% participating interest in each of the exploration permits. · Entity A and Entity B are participants in joint ventures in respect of the exploration permits pursuant to the terms set out in Joint Operating Agreements (JOA). All parties to the JOA hold a Participating Interest in the relevant joint ventures. Entity A holds X% Participating Interest in each of the above joint ventures. · Entity A is the operator of the JOA. · Entity A and Entity C have entered into an Agreement. · In accordance with the terms and conditions of the Agreement, Entity A will assign to Entity C an undivided Z% Participating Interest in respect of each of the permits (the Assigned Interest), subject to compliance with the terms of the JOA. · The permits are in full force and effect. · Following the assignment of the Assigned Interest, Entity C will hold a Z% Participating Interest in each of the above joint ventures. Entity C will become a joint venturer along with the other parties to the joint venture arrangements. · The Agreement states the consideration for the supply. · Under the Agreement, Entity C agrees to make a cash payment to the supplier in consideration for receiving the Assigned interest. · Under the Agreement, Entity A and Entity C have agreed that the assignment of the Assigned Interest is the supply of a going concern for GST purposes, and the parties are either registered or required to be registered for the goods and services tax (GST). · Entity A and Entity C are both currently registered for GST. · Under the Agreement, Entity C warrants that it will remain registered for GST until the Completion Date. · Under the Agreement, Entity A warrants that it will carry on the enterprise constituted by the Assigned Interest until the Completion Date.

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

Reasons for decision: Detailed Reasoning - GST-free supply of a going concern: The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. Subsection 38-325(1) of the GST Act provides 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 for GST; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. | Detailed Reasoning - Supply of a going concern: A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act 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). A supply of a participating interest can be a GST free supply of a going concern, when all of the above requirements are satisfied. Based on the information supplied, the requirements of subsection 38-325(1) of the GST Act will be met. Therefore, the supply of the participating interest will be GST-free provided that the arrangement between Entity A and Entity C is one that constitutes the supply of a going concern under subsection 38-325(2) of the GST Act. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provides guidance on the application of the going concern provisions. GSTR 2002/5 discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free. It does not discuss the application to specific industries. However, the examples used in the ruling do illustrate the application of relevant principles to particular factual circumstances relating to some specific industries. | Detailed Reasoning - Subsection 38-325(2): Supply under an arrangement Although the term 'arrangement' is not defined in the GST Act, GSTR 2002/5 explains at paragraph 19 that the phrase '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 has been identified. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern' in the written agreement which is required under paragraph 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. However, an arrangement between a supplier and 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 Agreement between Entity A and Entity C provides for the assignment of a Z% participating interest (the Assigned Interest) by Entity A to Entity C. In our view, the Agreement constitutes an arrangement under which the participating interest (Assigned Interest) in the joint ventures will be supplied. | Detailed Reasoning - Paragraph 38-325(2)(a): Supplier supplies all things necessary for the continued operation of the enterprise Paragraphs 38-325(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. Once an enterprise is identified, a supply of a going concern arises if an arrangement is shown to subsist under which the supplier supplies to the purchaser all of the things that are necessary for the continued operation of that enterprise. The term 'enterprise' is defined in section 9-20 of the GST Act as an activity or series of activities done in a certain manner or by certain entities. An enterprise includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. For an entity, 'activity or series of activities' can range from a single act or undertaking to groups of related activities, to the entire operations of the entity. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all things necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on, but is also operating. All of the activities of the enterprise must be active and operating on the day of the supply. The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf. In this instance, Entity A is carrying on an enterprise of product exploration activities through its participating interest in the joint venture, in accordance with the JOA. These exploration activities are ongoing. This is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act and the enterprise is operating. Entity A needs to supply all of the things that are necessary for the continued operation of that identified enterprise. Paragraph 80 of GSTR 2002/5 provides that a supplier is considered to have supplied all the things when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses. Further, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: · the assets necessary for the continued operation of the enterprise; and · the operating structure and process of the enterprise. On the facts provided, Entity A and Entity B are participants in joint ventures in respect of the product exploration activities. Following the assignment of the Assigned Interest, Entity C will hold Z% participating interest in the joint ventures. Entity C will become a joint venturer along with the other parties to the joint venture arrangements. Paragraph 195 of GSTR 2002/5 provides that if a business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise. Provided all the requirements of 38-325 of the GST Act are satisfied it is possible for a joint venturer entity to make a GST-free 'supply of a going concern'. This may be when part or all of the enterprise conducted by the joint venturer is supplied, provided that what is supplied is all of the things that are necessary for the continued operation of the 'identified enterprise'. In this case, Entity A is supplying to Entity C a participating interest in the joint venture entered into between Entity A and Entity B. Based on the above information, Entity A will supply and Entity C will acquire an interest in the two elements essential for the continued operation of the identified product exploration enterprise. There is a supply in part of a participating interest in the joint ventures set up for the relevant product exploration activities. The participating Interest constitutes all that is necessary for each participant to conduct the product exploration as an enterprise in their own right. An acquisition of a participating interest will allow Entity C to participate in the relevant joint venture activities in accordance with the JOA, as Entity C also becomes party to the JOA. Therefore, the supply of a participating interest by Entity A which is a joint venture participant will be a supply of all the things necessary for Entity C to continue the operation of that enterprise. As such, all things necessary for the continued operation of the enterprise will be supplied by Entity A. Accordingly, the requirement in paragraphs 38-325(a) of the GST Act will be satisfied. | Detailed Reasoning - Paragraph 38-325 (2)(b): Supplier carries on the enterprise until the day of the supply GSTR 2002/5, at paragraphs 141 to 165, provide guidance on the meaning of 'supplier carries on the enterprise until the day of supply' for the purposes of paragraph 38-325(2)(b) of the GST Act. Paragraph 161 of GSTR 2002/5 provides that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all things that are necessary for the continued operation of the enterprise. Further, in accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. The activities must be capable of continuing after the transfer to new ownership (paragraph 141 of GSTR 2002/5). In this case, the day of supply will be the Completion date when the conditions precedent has been met and all the completion steps have been fulfilled. The effective control does not pass until the Completion date. Under the Agreement, Entity A warrants that it will carry on the enterprise constituted by the Assigned Interest until Completion. On that basis, we consider that Entity A will carry on the enterprise until the day of the supply, and the requirements of paragraph 38-325(2)(b) of the GST Act will be also be satisfied. Therefore, the supply of the Assigned Interest by Entity A to Entity C, is a supply of a going-concern as it meets the requirements of subsection 38-325 (2) of the GST Act. | Detailed Reasoning - Conclusion: As all the requirements of subsection 38-325(1) and subsection 38-325(2) of the GST Act will be satisfied, the supply of the Assigned Interest by Entity A to Entity C pursuant to the terms of the Agreement will be a supply of a going concern that is GST-free.