Private ruling: GST and the supply of a going concern
Published: July 2012

Ruling: Q1: Is the sale of the Assigned Interest (participating interest) in respect of the Permit by Entity A to the acquiring entity (Entity B), a GST-free supply of a going-concern? | A1: Yes. The sale of the Assigned Interest (participating interest) in respect of the Permit by Entity A to the acquiring entity (Entity B), is a GST-free supply of a going-concern.

Relevant facts and circumstances: Project A is a joint venture between several parties. Entity A transferred a XX % participating interest in Project A to Entity C. Having already held the necessary Permit, Entity A was then in a position to apply for a Lease. In this regard, Entity D and Entity E were granted a Lease over Field A. Entity A and Entity C hold the interest in the Permit. Entity D and Entity E hold the interest in the Lease. As a result Entity A and Entity D are participants in the following: · Joint Venture 1 (JV 1) pursuant to the terms set out in the Joint Operating Agreement (JOA) between Entity A and Entity C Ltd (JV1 JOA); and · Joint Venture 2 (JV2) pursuant to the terms set out in the Joint Operating Agreement between Entity D and Entity E (JV2 JOA) · and each of Entity A and Entity D holds a XX% participating interest in the respective joint ventures. Pursuant to JV1 JOA and the JV2 JOA, Entity A and Entity D respectively have been appointed as the operators of the relevant joint ventures to conduct the operations on behalf of the joint venture participants. All parties to the JOA hold a Participating Interest in the relevant joint ventures. On dd/mm/yyyy, the relevant parties agreed to the following: · Entity A transferred a XX% Assigned Interest in respect of the Permit to Entity B as governed by the Sale and Purchase Agreement in respect of the Permit (Agreement 1) ; and · Entity D transferred a XX% Assigned Interest in respect of the Lease to Entity G as governed by the Sale and Purchase Agreement in respect of the Lease (Agreement 2). · The Assigned Interest to be transferred by Entity A to Entity B is defined as a 'Participating Interest of XX% under the Agreement 1. The Participating Interest means to any Joint Venture Participant, the undivided legal and beneficial interest (expressed as a percentage of the total legal and beneficial interest of all Joint Venture participants) in and under: · The Titles · The JOA · All rights and obligations derived from a Joint Venture Participant's interest in the Titles, the JOA and the Assigned Contracts. · All agreements with third parties entered into by the Operator for and on behalf of the Joint Venture Participants but which are not Assigned Contracts; and · The Joint Property. Pursuant to Agreement 1, Entity A and Entity B have agreed that the sale of the Assigned Interest (ie. the Participating Interest of XX%) constitutes a GST-free supply of a going concern. Entity A will supply to Entity B all of the things that are necessary for the continued operation of the relevant enterprise by supplying the Assigned Interest to Entity B. Entity A will carry on the relevant enterprise until Completion consistent with Agreement 1. The Economic Date (defined as dd/mm/yyyy in the Agreements) is an agreed date for valuation purposes of the transaction. It reflects an arbitrary agreed date set in order to calculate the consideration payable to effect the equity transaction. Legal and beneficial ownership resulting from the sale and purchase of the Assigned Interest can only occur post completion once the necessary completion process ( for example, payment, document execution and lodgement of relevant forms) has been finalised. Entity A is registered for GST. Entity B is registered for GST. Representative contentions: · Entity A is currently 'carrying on an enterprise' for GST purposes through its participating interest in JV 1. · Entity A's interest in the JV includes the rights, titles and interests in the assets of the joint venture, amongst other things. · The Lease and the Permit are each separate and distinct 'enterprises' for the purposes of section 38-325 of the GST Act (i.e. a Permit enterprise and a Lease enterprise). · The Permit is not necessary for the operation of the Lease enterprise and the Lease is not necessary for the operation of the Permit enterprise, but rather all form part of the equity transactions between the relevant entity and the Recipients. Based on the above, the Permit enterprise and the Lease enterprise can be operated in their own right and are not interdependent for the purposes of the GST-free going concern provision. The requirement of a GST-free going concern under section 38-325 of the GST Act provides that '(2) A supply of a going concern is a supply under an arrangement under which (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise….'. . Whether some of the things necessary are transferred prior to completion (ie. at Economic Date) should not impact the analysis as the GST Act does not specify at what point 'all of the things necessary' are to be transferred. Based on the fact that all things necessary will be transferred by Completion, the fact that various rights pass at different times does not impact on this requirement under the GST Act. The fact that benefits under the Assigned Interest pass at the Economic Date does not stop the relevant supplier from carrying on its respective enterprise at all times. The things necessary for the Supplier to continue its enterprise will continue to exist post the Economic Date until Completion (i.e during the period between the Economic Date and Completion), and will continue post completion. Therefore, Entity A will carry on the identified enterprise as part of its larger enterprise of participating in JV 1 until the day of supply, being Completion. The relevant date for the purposes of section 38-325 is the day on which effective control and possession actually passes. This is consistent with paragraph 161 of GSTR 2002/5. Whether the Agreement may be terminated at a later date, does not change the fact that the effective control (i.e. legal and beneficial ownership transfer) takes place on Completion. The Suppliers do, on Completion, transfer all things necessary for the continued operation of the identified enterprise An acquisition of a Participating Interest allows the Recipients to participate in the relevant joint venture activities (i.e. the JV 1 and the JV 2) in accordance with the respective JOA's (i.e. the Recipients also become party to the relevant JOA's). Based on paragraph 195 of GSTR 2002/5, Entity A, as a joint venturer, is capable of carrying on an enterprise in its own right. Therefore, the supply of the interest in JV 1 by Entity A to Entity B is the supply of a separately identifiable enterprise, being the enterprise of participating in JV 1 through its participating interest. The XX% interest being supplied by Entity A is part of the larger enterprise that they carry on.

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

Reasons for decision: Summary: 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. For a supply to be a GST-free 'supply of a going concern' under section 38-325 of the GST Act: the supply must be made under an arrangement under which: · the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise; and · the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier). · the supply must be for consideration; · the recipient of the supply must be registered or required to be registered for GST; · the supplier and the recipient have agreed in writing that the supply is of a going concern. Goods and Services Tax Ruling 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. Paragraph 195 of GSTR 2002/5 states: Going concerns and joint ventures 195. Whether or not a business structure is a joint venture is a matter of fact. If the business structure is a joint venture, then each joint venturer is an entity which is capable of conducting an enterprise. Provided that all of the requirements of section 38-325 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'. Subsection 38-325(2) | Detailed Reasoning - Supply under an arrangement: 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'). 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 Sale and Purchase Agreement (SPA) in respect of the Permit, between Entity A and Entity B, provides for the supply of a XX% participating interest in the joint venture. In our view, the SPA constitutes an arrangement under which the participating interest (assigned interest) in the joint venture will be supplied. Subsection 38-325(2)(a) | Detailed Reasoning - 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'. The term 'enterprise' is defined in section 9-20 of the GST Act and 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 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. Further, paragraph 195 of GSTR 2002/5 provides that if a business structure is a joint venture, then each joint venturer is capable of conducting an enterprise. Provided all the requirements of 38-325 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. In this instance, the Vendor is carrying on an enterprise of development activity in the permit areas through its participating interest in the joint venture. This is the identified enterprise. Once the enterprise is identified, the supplier needs to supply all of the things that are necessary for the continued operation of the 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. In this case the Vendor is supplying a participating interest in the Joint Venture entered into between Entity A and Entity C. The participating interest is the undivided legal and beneficial interest (expressed as a percentage of the total legal and beneficial interest of all Joint Venture Participants) in and under: · the Titles · the JOA; · all rights and obligations derived from a Joint Venture participant's interest in the Titles, the JOA and the Assigned Contracts; and · all agreements with Third Parties entered into by the Operator for and on behalf of the Joint Venture Participants but which are not Assigned Contracts; and · the Joint Property. Based on the above information and your advice that this comprises all things necessary for the continued operation of the enterprise being supplied by the Vendor, we accept that all things necessary for the continued operation of the enterprise have been supplied. Subsection 38-325 (b) | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: 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 14 of GSTR 2002/5). In your case, risk and benefit of the Assigned Interest shall be deemed to have passed to the Purchaser on and from the Economic Date. However, neither the legal nor the beneficial ownership in the Assigned Interest shall pass before Completion occurs. Consequently, the day of supply will be the Completion date when the conditions precedent has been met and all the completion steps have been fulfilled. Even though the Purchaser assumes all rights, obligations and liabilities on the Economic date, the effective control does not pass until the Completion date. Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on but is also operating. In this respect, the vendor has continued the exploration activities in the period between the Economic date and the Completion date. Based on the information supplied, we consider that the supplier carries on the enterprise until the day of the supply. | Detailed Reasoning - Supply is for consideration: Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. Under the Agreement, the Purchaser agrees to pay the Seller, as consideration for the Transfer, specified aggregate amounts (collectively the Purchase Price): We consider, therefore that the supply was made for consideration. | Detailed Reasoning - Recipient is registered or required to be registered for GST: Paragraph 38-325(1)(a) of the GST Act requires that the recipient is registered or required to be registered for GST. The Agreement states that the Purchaser is registered. As the Purchaser is registered for GST, this requirement has been met. | Detailed Reasoning - Agreement in writing that the supply is of a going concern: Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern. The Agreement between the Vendor and the Purchaser contains a clause that satisfies this requirement. We consider that the Vendor and Purchaser have agreed in writing that the supply of the Vendor's participating interest under the Agreement is a supply of a going concern. | Detailed Reasoning - Conclusion: Based on the information supplied to us, it is our view that the supply of the XX% Assigned Interest in respect of the Permit by Entity A to the acquiring entity (Entity B), is a GST-free supply of a going-concern and meets the requirements of section 38-325 of the GST Act.

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