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

Ruling: Q1: Is the sale of the Participating Interest a GST free supply of a going concern? | A1: Yes.

Relevant facts and circumstances: The facts have been supplied by the Seller and the Purchaser. The Australian Taxation Office (ATO) has not reviewed the final agreements referred to in the facts because the Seller and the Purchaser declined to supply these agreements. This ruling is based on the facts stated in the description of the scheme that is set out below. If the circumstances are materially different from these facts, this ruling has no effect and cannot be relied upon. Entity A conducts an enterprise of developing specified natural resources. Entity A entered into a sale and purchase agreement ('SPA') under which entity B (the Purchaser) will acquire from entity A (the Seller) a Participating interest in specific titles and a specific project. In conjunction with the sale of the interest in the titles and the project, the Purchaser will enter into a joint venture agreement to jointly undertake the project. The Seller and the Purchaser executed their relevant sale and purchase agreement ('SPA') in respect of the sale of the Participating Interest. The SPA contains provisions in relation to the supply of a going concern: · Clause a states that the Seller and the Purchaser agree that the supply of the Interest pursuant to the Agreement is the supply of a going concern for the purposes of the section 38-325 of the GST Act. · Clause b states that the Purchaser confirms that it is registered for GST in Australia at the time of the supply of the Purchase Interest. · Clause c states that the Seller confirms that it is registered for GST in Australia at the time of the supply of the Purchase Interest. The Seller will be selling its interest in an existing joint venture to the Purchaser. The Seller will carry on the enterprise until the date of the supply to the Purchaser. The date of supply to the Purchaser is the completion date of the SPA. The Seller will supply to the Purchaser all of the things that are necessary for the conduct of the enterprise.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

Reasons for decision: Summary: Subsection 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the supply of a going concern is GST-free if: · the supply is for consideration · the recipient is registered or required to be registered for GST, and · the supplier and the recipient have agreed in writing that the supply is of a going concern. Based on the information supplied, the requirements of subsection 38-325 (1) have been met. A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where: · 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 the supply (whether or not as a part of a larger enterprise carried on by the supplier). Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) Goods and services tax: when is a 'supply of a going concern' GST-free? explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the identified enterprise. The sale of the interest under the sale and purchase agreement and accompanying annexures constitutes a supply under an arrangement. Goods and Services Tax Ruling GSTR 2002/5 provides guidance on when a 'supply of a going concern' is GST-free. In particular, paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. The term 'enterprise' is defined in section 9-20 of the GST Act to include 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. The seller conducts an enterprise of developing specified natural resources as a joint venture participant. On that basis, it is possible to conclude that the activities undertaken in relation to the project is an enterprise for the purposes of section 9-20 of the GST Act. Subsection 38-325(2) of the GST Act recognises that a supplier might carry on an enterprise, described as a 'larger enterprise' within which the enterprise contemplated by paragraphs 38-325(2) (a) and (b) forms a part. The GST Act does not require that a whole enterprise be transferred for the supply to be GST-free under section 38-325 of the GST Act. The section requires that 'an enterprise' be continued and this may be part of a larger enterprise carried on by the supplier. Under the SPA between the seller and the purchaser, the seller will supply an interest to the purchaser. Upon completion of the SPA and the joint operating agreement (JOA), the joint venture enterprise will be conducted by the seller, the purchaser and another entity. Each party will be carrying on an enterprise which is constituted by their respective participating interest in the joint venture. Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2) (a) and (2) (b) of the GST Act apply to the 'identified' enterprise. In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of GSTR 2002/5 states: The supplier supplies all of the things that are necessary for the continued operation of an enterprise 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. It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. The provision of a percentage of the rights in the production title and the infrastructure title without more is unlikely to be regarded as a supply of a going concern. In acquiring the participating interest the purchaser is acquiring more than a specified percentage of rights in the titles. The purchaser will be acquiring both an interest in the assets and the existing operating structure. The operating structure comprises all of the contracts, records and information that have been entered into or compiled by the seller in the conduct of the project. The seller has advised that it will supply to the purchaser all of the things that are necessary for the conduct of the enterprise. In acquiring the interest in the project the purchaser will be in a position to carry on an enterprise as a joint venture participant. Based on the information provided, the seller will supply the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure. In acquiring the purchase interest the purchaser is in a position to carry on an enterprise. Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply. Paragraph 141 of GSTR 2002/5 advises that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of GSTR 2002/5 explains 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 seller has advised that it will carry on the enterprise until the date of the supply to the purchaser. The date of supply to the purchaser is the completion date of the SPA. On the basis that all of the requirements of section 38-325 of the GST Act will be met, the supply of the participating interest will be a GST-free supply of a going concern.

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