ATO Interpretative Decision

ATO ID 2003/1183 (Withdrawn)

Goods and Services Tax

• This ATO ID is withdrawn as it is superseded by GSTR 2004/9.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the purchaser of a business make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where the purchaser is entitled to an adjustment to the purchase price in respect of the accrued long service leave entitlements of the transferring employees?

Decision

No, the purchaser (new employer) does not make a taxable supply under section 9-5 of the GST Act.

Facts

A vendor sells its entire business to the purchaser. The employees of the vendor commence employment with the purchaser. The vendor and purchaser are both registered for goods and services tax (GST).

Long service leave provisions within the relevant State or Territory legislation or awards (statute) set out the obligations of employers in connection with the movement of an employee from one entity to another entity. Where there is a sale of business, the relevant statute imposes:

(a)

an obligation on the current employer (purchaser) to recognise the employee's prior service with the previous employer (vendor) for long service leave purposes; and

(b)

an obligation on the current employer (purchaser) to pay the accrued long service leave entitlement to the employee when the leave is taken, if the employee is still employed by that employer.

The relevant statute does not impose an obligation on the former employer to make a payment or contribution to the new employer in respect of the long service leave accrued to the employee at the time of transfer. In other words, the former employer bears no statutory liability to the new employer for the period the employee was employed by the former employer.

Under the sale of business contract, the purchaser agrees to make offers of employment to the existing employees of the vendor. The contract also confirms the statutory obligation imposed on the purchaser to recognise the transferring employees' prior service for long service leave purposes and to pay their accrued leave entitlements when the employees take their respective leave, if still employed by the purchaser at that time.

The vendor agrees under the contract to pay the purchaser an amount in respect of the accrued long service leave entitlements for the transferring employees. The amount is calculated by reference to a formula agreed by the vendor and the purchaser which is offset against the purchase price paid for the business.

Reasons for Decision

One of the requirements for a taxable supply is that an entity makes a supply for consideration (paragraph 9-5(a) of the GST Act).

The term 'supply' is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. Ordinarily, 'supply' refers to 'something which passes from one entity to another'. Other jurisdictions have held that the term 'supply' takes its ordinary and natural meaning, that is, 'furnish with or provide'.

Subsection 9-10(2) of the GST Act provides a list of examples of supplies. In particular, subparagraph 9-10(2)(g) of the GST Act provides:

an entry into, or release from, an obligation:

(i)

to do anything; or

(ii)

to refrain from an act; or

(iii)

to tolerate an act or situation;

As a result of agreeing to purchase the business, and completing the purchase, the purchaser becomes subject to a number of obligations, such that it is necessary to consider if the obligations are supplies within the definition of section 9-10 of the GST Act.

The obligation to provide long service leave entitlements to the employees is imposed by statute and confirmed in the sale of business agreement, while the obligation to offer employment and the purchase price adjustment are only contained in the agreement between the vendor and the purchaser.

Purchaser's obligation to pay the employees' accrued long service leave entitlements

In the GST Act, the term 'supply' covers not only that which is the subject of the transaction - the thing that passes- but also includes the action by which the thing passes from one entity to another. The use of the word 'make' in the phrase 'you make the supply' taken as a whole in paragraph 9-5(a) of the GST Act, reinforces the notion that it is necessary for a supplier to take some action to cause a supply to occur. This means the purchaser must take some action or do something to cause the supply to occur. In this case, the purchaser (new employer) would need to take some positive action to 'enter' the obligation to provide long service leave entitlements to the employees.

The sale of business agreement merely confirms the obligations imposed under the relevant statute referred to in the Facts above. The obligations are imposed, required and effected by the words of the statutes. Neither employer creates these obligations. The effect of the employees accepting employment with the new employer is that the previous employer's obligation for any future long service leave entitlements to the employee is extinguished. By the operation of the statute, this obligation to pay long service leave always rests with the current employer at the time the leave is taken. Although the purchaser agrees under the contract to be responsible for the long service leave entitlements of the new employees, the agreement does no more than confirm the statutory obligations already imposed on a new employer. The agreement does not create, impose or affect the entry into the obligation, as this is done by the statute. There is no supply by the purchaser.

Therefore, for the purposes of paragraph 9-5(a) of the GST Act, the new employer does not make a supply.

Purchaser's obligation to make offers of employment

In examining the agreement between the vendor and the purchaser, it is noted that the purchaser enters an obligation to offer employment to the vendor's employees. This obligation is not imposed by statute.

As noted, the entry into to an obligation is within the meaning of supply in section 9-10, particularly subparagraph 9-10(2)(g)(i) of the GST Act.

Although the purchaser positively acts to affect the entry into the obligation as part of the contract, the purchaser is not considered to make a supply for consideration, as required for a taxable supply, in respect of this obligation. Arguably, the entry into the obligation does not have any economic value and independent identity separate from the transaction. Alternatively, the payment from the vendor in respect of the accrued leave entitlements of the transferring employees does not amount to consideration for a supply by the purchaser of entering an obligation to offer employment. There is an insufficient nexus between this payment and the entry to the obligation, the payment being made as a result of employees accepting the offers, not in relation to the offers being made. The payment represents money to be set aside by the new employer to comply with the statutory requirements in respect employee leave entitlements.

For these reasons, the entry to the obligation to offer employment is not a supply made for consideration within the meaning of paragraph 9-5(a) of the GST Act and is not a taxable supply.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   paragraph 9-5(a)
   section 9-10
   subsection 9-10(1)
   subsection 9-10(2)
   paragraph 9-10(2)(g)
   subparagraph 9-10(2)(g)(i)

Related ATO Interpretative Decisions
ATO ID 2003/1182

Keywords
Goods and services tax
GST consideration
GST supplies & acquisitions
GST supply
Taxable supply

Business Line:  GST

Date of publication:  24 December 2003

ISSN: 1445-2782