Private ruling: GST and increasing adjustment under division 135 of the GST Act
Published: May 2013

Ruling: Q1: Does Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to your acquisition of the Assets? In particular would your acquisition of shares in the Subsidiaries as part of the GST-free supply of a going concern be considered an input taxed acquisition supply that would trigger the application of Division 135 of the GST Act? | A1: No | Q2: In the future, if the Subsidiaries raise capital by issuing shares or by borrowing money, would this result in Division 135 of the GST Act applying to your acquisition from the Vendor and impose goods and services tax (GST) on the sale price through an adjustment? | A2: No

Relevant facts and circumstances: · B is registered for GST. · B entered into a Sale Agreement (Agreement) with A, the Vendor to acquire the Assets as a going concern. · Both parties agreed that subject to obtaining a private ruling from the Commissioner of Taxation, the Assets are to be supplied as a GST-free going concern. · A clause 11.1 of the Agreement, A undertook the responsibility to: Continue to develop and manage the development in the ordinary and usual course of its business (but subject to the restriction in this Agreement) in accordance with the development plans for the Assets disclosed to the Purchaser. …up to Completion (i.e. the date of the supply) The Supplier · A is registered for GST. · A carries on an development enterprise at various locations in Australia. The enterprise included search activities at a number of sites and establishing development activities at a particular site. · A has 100% interest in development rights (Right) at a number of sites in Australia. · For various historical and commercial reasons, A held the Rights indirectly through the following three wholly owned subsidiaries (collectively referred to as the 'Subsidiaries' consisting of A1, A2 and A3): The Subsidiaries · All of the Subsidiaries are registered for GST. · The primary purpose of the Subsidiaries was to passively hold the Rights and any associated assets. All directors of the Subsidiaries were also the directors of A. · The Subsidiaries did not actively undertake any direct development activities on the development. Rather A was engaged by the Subsidiaries to provide personnel and contractors to carry out relevant activities. · A2 and A3 did not employ any personnel. · A1 had only one employee. This is an administrative error as it was A's policy to enter employment contracts in its own name. · A held all accounting, tax and legal records in respect of the Rights and the Subsidiaries, as well as all development formation in respect of the activities it carried out on the rights. · For accounting purposes, A used intercompany loan accounts to capitalise all the costs it incurred in carrying out its activities on the Rights down to the assets held in individual Subsidiaries. · In a limited number of instances, A1 paid some suppliers directly in its own name, using funds that were advanced by A to it. A's activities · After conducting searching activities A decided to develop a site in Australia. · A continued to conduct activities on the Rights held in the Subsidiaries. · As part of developing the site, A procured various contracts covering the construction of facilities, and transporting once the development was fully operational. These contracts included contracts for services, screening, civil works, road haulage and haul road maintenance, camp construction, rail haulage, wagon leases, transhipping, camp management, FIFO air services…As A1 held the Right at the site, A decided A1 should be the party to the above development contracts. · A negotiated and procure all the above contracts with an intention that the services to be acquired under the contracts would be used in A's enterprise of development. · In addition to the assets held directly through the Subsidiaries, A, in its own right, held a number of assets (the Ancillary Assets) that it used in its enterprise. These assets included water licences, well permits, design plans and intellectual property related to infra structure projects. A's supply of the Assets · A entered into the Agreement with B. Under the Agreement, A agreed to transfer to B: · Rights and other assets that were used, or capable of use in connection with the development. · All of the Ancillary Assets held directly by A, including key employees responsible for the operation and related infra structure including rail, mining, road, power, camp, transhipping and water assets. · Ancillary Assets held by A in other subsidiaries (subsidiaries not being sold by A) such as the ship loader which was being constructed and shed designs. · 100% share capital and all other rights attached to those shares of the Iron Ore Subsidiaries: · - all ordinary fully-paid shares in the capital of A1 , · - all ordinary fully paid share in the capital of A2, and · - all ordinary fully paid share in the capital of A3. · All of the information in relation to the Rights. All of the above tangible and intangible assets were referred to as the 'Assets'. · In addition to the Assets, A agreed to transfer to B all the minute books, statutory books and register, book of accounts, trading and financial records and other records, upon completion of the transfer of the Assets. · The purpose of the transaction was to transfer A's operations being carried out on the Rights to B and for B to continue to develop site on the Rights held in A1 and to continue the development activities on the Rights held in A2 and A3. · A and B agreed in a clause of the Agreement that subject to obtaining a private ruling from the Commissioner of Taxation, the Assets are to be supplied as a GST-free going concern. Enterprise · The purposes of the Subsidiaries is to carry on the enterprise of development which would one day lead to the development of a site and taxable supplies of goods, just as it has in A1. · Development activities conducted on the Rights held by A2 and A3 were also being undertaken by employees of A but were paid through intercompany loan account. · B has provided that the Subsidiaries continued to be operated in much the same way as the vendor operated them pre transaction. The Subsidiaries did not make any financial supplies. Their activities were directed at continuing the site development.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 Division 135 | Section 135-5 | Section 135-10 | Sub-division 38J | Section 38-325 | Section 9-30 | Section 11-15

Reasons for decision: Summary: Bs acquisition of shares in the Subsidiaries as a part of the GST-free supply of a going concern and this would not trigger the application of Division 135 of the GST Act because this Division only operates on the supplies (made through the enterprise of the Subsidiaries) made by the recipient after the acquisition of a GST-free going concern. As B makes-taxable or GST-free supplies, This Division does not apply. | Detailed Reasoning - Detailed reasoning: B has advised that it acquired the entire shares in the Subsidiaries as a part of the GST-free supply of a going concern. The acquisition of the shares is not considered a separate financial supply of shares. 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 what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act. This ruling also explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.38-J of the GST Act. | Detailed Reasoning - The transfer of share capital and all other rights attached to the shares of the Subsidiaries: In carrying on its enterprise A utilises its Ancillary assets (held directly by A or held in other subsidiaries not being sold by A) and the assets held in its Subsidiaries (development Rights and rights under the contracts, the tangible assets and intangible assets listed in the agreement between A and B). In order to transfer the development Rights and contracts to B, A decided to transfer all the shares it owned in the Subsidiaries to B, rather than arrange for the Subsidiaries to transfer these assets to B individually. Paragraph 171 of GSTR 2002/5 provides the view of the Commissioner on the transfer of shares in relation to a supply of a going concern. The paragraphs states: When all of the shares constituting the issued capital of a company are supplied as part of the supply of everything necessary for the continued operation of an enterprise under an arrangement, whether or not the supply of the shares will be under a relevant arrangement will be a question of fact. If the shares are utilised in carrying on the 'identified enterprise', then they may be supplied under the relevant arrangement. Where shares are merely passive investments, they will not be capable of being supplied under the relevant arrangement. In this circumstance, the assets (Rights and material contracts) held in the Subsidiaries are solely utilised in the enterprise carried on by A. The arrangement includes the shares of the Subsidiaries will be considered to be a supply under the arrangement, having the same arrangement that relates to the same enterprise. That is the development enterprise that was carrying on by A. As the assets of the Subsidiaries are being used to carry on the development enterprise of A (the identified enterprise), the supply of the entire shares in the Subsidiaries is considered to be made under the relevant arrangement and is a part of the supply of everything necessary for the continued operation of an enterprise as required under paragraph 38-325(2)(b) of the GST Act. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: Clause 11.1(c) of the agreement provides that A has a contractual obligation to carry on its exploration and mining activities in the ordinary and usual course of its business up to the Completion date (the date of supply). We need to consider further whether the supplier of the entire shares in the Subsidiaries was carrying on an enterprise so that they can carry on the enterprise to the date of the supply. Paragraph 196 of the GSTR 2002/5 provides that: | Detailed Reasoning - Going concerns and companies: However, where an entity which conducts an enterprise is a company and the company supplies all of the things that are necessary for the continued operation of the enterprise in accordance with the conditions of subdivision 38-J, there will be a GST-free 'supply of a going concern'. In this circumstance, A is the owner of the entire shares in the Subsidiaries and is conducting an enterprise with the support from the Subsidiaries. Exploration conducted on the mining tenements of A2 and A3 was also being undertaken by employees of A but is paid through intercompany loan accounts. Although the exploration activities undertaken were the early stages of exploration, those activities would be directed at each company purposes. Miscellaneous tax ruling MT 2006/1 explains the meaning of term 'enterprise' for the purposes of determining entitlement to an Australian Business Number (ABN). Goods and services tax determination GSTD 2006/6 provides that the principles in that Ruling apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. Paragraphs 123 to 126 of MT 2006/1 provide that: 123. In the Commissioner's view the term, 'doing anything in the course of the commencement of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities. 124. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated. 125. An enterprise must start somewhere and the first step or steps may be minor. In Ferguson v. Federal Commissioner of Taxation Bowen CJ and Franki J expressed the point in this way: Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. 126. In the case of feasibility studies involving genuine business activities where, from the scale and nature of these activities it is clear that there has been serious contemplation of developing an enterprise, it will be accepted that this has been the commencement of an enterprise. It is considered that the enterprise of the Subsidiaries is assisting A to carry on A's enterprise and is an enterprise in their own right, albeit early stage. Therefore, provided other requirements of section 38-325 of the GST Act are met, the supply of the Assets including the entire shares in the Subsidiaries is a supply of a going concern. However, a recipient of 'a supply of a going concern' is required to make an initial increasing adjustment under section 135-5 where some or all of the supplies made through the enterprise has changed. This means that an adjustment (if any) is the responsibility of the buyer and will be made (if any) after the supply has been completed. The supplier (seller) has no liability whatsoever in respect of GST for actions of the buyer after the settlement date. Section 135-5 of the GST Act states: 135-5 Initial adjustments for supplies of going concerns (1) You have an increasing adjustment if: (a) you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480; and (b) you intend that some or all of the supplies made through the *enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies. (2) The amount of the increasing adjustment is as follows: 1 X Supply price X Proportion of non-creditable use 10 where: proportion of non-creditable use is the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies, expressed as a percentage worked out on the basis of the *prices of those supplies. supply price means the *price of the supply in relation to which the increasing adjustment arises Note the * denotes a defined term within the GST Act In B's circumstances the acquisition of shares in the Subsidiaries was made as a part of the arrangement to acquire a GST-free going concern. The supply of the shares is a supply/acquisition of a financial supply and is input taxed. However, when the shares are acquired as a part of a GST-free going concern, the supply of those shares are considered GST-free, not input taxed. Furthermore, subsection 9-30(3) of the GST Act provides that: To the extent that a supply would, apart from this subsection, be both *GST-free and *input taxed: (a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed; or … It follows that, after the purchase of the going concern by B, the shares does not make any supply. It is the underlying assets represented by the shares (that is, the Subsidiaries) making the supplies. B has provided that: The subsidiaries continued to be operated in much the same way as A operated them pre transaction. The subsidiaries did not make any financial supplies B's activities were directed at continuing the mine development at one of the mine sites In this case, none of the supplies made through the enterprise of the Subsidiaries (after acquisition) are neither taxable nor GST-free. It follows from the statement above that as the supplies made by the Subsidiaries as a part of B are not input taxed, section 135 -5 of the GST Act does not apply and no initial increasing adjustment is to be made. | Summary: In the future, if the Subsidiaries raise capital by issuing shares or by borrowing money, this would not result in Division 135 of the GST Act applying to B's acquisition from A and impose GST on the sale price through an adjustment. | Detailed Reasoning - Detailed reasoning: The purpose of section 135-10 of the GST Act is to ensure that an entity accounts for GST in proportion to the private or input taxed use of a going concern. This reflects the principal that you are entitled to a full input tax credit only if you acquire the thing entirely for a creditable purpose. This section states: 135-10 Later adjustments for supplies of going concerns (1) If you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to: (a) the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies; and (b) the proportion of all the supplies made through the *enterprise that are supplies that are neither taxable supplies nor GST-free supplies; in the same way as that Division applies: (c) n relation to the extent to which you made an acquisition for a *creditable purpose; and (d) in relation to the extent to which a thing acquired is *applied for a creditable purpose In B's circumstances the subsidiaries continued to be operated in much the same way as A operated them pre transaction. B's activities were directed at continuing the mine development at the particular mine site. Paragraph 3.10 of the Memoranda to the GST Act provides that: In the course or furtherance of an enterprise is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is furtherance of an enterprise although it may not always be in the course of an enterprise. It is considered that the purposes of the capital raising activities are made to financially support the operations of the Subsidiaries. That is, to ensure that the supply the Subsidiaries make in carrying on their enterprise will be continued. The capital raising activities, although financial supply in its own right, are supply for the purpose of furtherance the Subsidiaries' enterprise, or achieving their goals rather than supplies made through the Subsidiaries' enterprise Capital raising activities are not supplies made in carrying on the Subsidiaries' enterprise. Their enterprise is exploring and supporting B's mining activities. The supplies they make in exploring and supporting B are not input taxed. Therefore, in the future if the Subsidiaries raise capital by issuing shares or by borrowing money, this would not result in Division 135 of the GST Act applying to B's acquisition from A.