Edited version of private ruling

Authorisation Number: 1011506047940

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Ruling

Subject: GST and supply of going concerns

Question 1

Will the supply of part of your leasing enterprise to X constitute a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision 1

Yes, the supply of part of your leasing enterprise to X will constitute a GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

Will the supply of part of your leasing enterprise and your retail business to Y constitute a GST-free supply of a going concern under section 38-325 of the GST Act?

Decision 2

Yes, the supply of part of your leasing enterprise and your retail business to Y will constitute a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

You own a retail and leasing enterprise in Australia. You are registered for GST.

Your properties are leased to your 'subsidiary'.

You are responsible for high level management of your enterprise while your subsidiary is responsible for the day to day operations of the retail sites. The subsidiary conducts a separate enterprise.

Your enterprise is conducted using the property, plant and equipment owned by you or leased by you.

You entered into a contract to sell your leasing enterprise and the retail enterprise to two separate entities.

Your enterprise will be sold under a 'sale agreement' to X and Y, who have separately agreed as to what property and assets each party will acquire under the agreement.

You have provided copies of the relevant agreements to this office in support of your private ruling request.

The completion of the abovementioned sale agreement between you, X and Y is expected to occur in the near future. A number of assets will be sold under this agreement.

The 'properties' included in the assets are freehold properties located in Australia.

The properties acquired by X and Y are referred to as X properties and Y properties respectively.

There will be some 'excluded assets' as provided under the agreement.

The properties, the fixtures and the chattels located on the properties are currently leased to your subsidiary as part of a 'supply agreement' between you and the subsidiary. This lease will continue up until completion of the sale agreement.

To streamline the sale of your enterprise, you and your subsidiary have entered into a master lease.

The master lease is a lease from you to the subsidiary of the properties comprising X properties, Y properties, the fixtures attached and the chattels located on those properties.

Upon completion of the sale agreement, the master lease will be assigned to X and Y to the extent that it relates to X properties and Y properties, respectively.

The purchasers, X and Y are new entities. As required under the sale agreement, they will be registered for GST prior to the completion of sale agreement.

Reasons for the decisions

Decision 1

Sale of a leasing enterprise

Section 9-5 of the GST Act states:

You make a taxable supply if:

a) you make the supply for *consideration; and

b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

c) the supply is *connected with Australia; and

d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST free or *input taxed.

(*denotes a term defined in section 195-1 of the GST Act)

You own the X properties and contracted to sell them and their fixtures to X under the sale agreement. You will be making this supply for consideration and therefore, paragraph 9-5(a) of the GST Act will be satisfied.

Section 9-20 of the GST Act defines an enterprise. Subsection 9-20(1) states:

An enterprise is an activity or series of activities, done:

a) in the form of a *business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

d) ……

You are currently carrying on an enterprise of leasing the X properties to your subsidiary as part of a larger enterprise. The properties as well as all the fixtures and chattels associated with the properties are currently leased to your subsidiary.

You have entered into the master lease with your subsidiary to lease all your properties to them. The master lease will commence prior to the completion date. The X properties will be sold to X subject to the master lease. Upon completion, the master lease will be assigned to X, to the extent that it relates to the X properties.

Under paragraph 9-20(1)(c) of the GST Act, you are carrying on an enterprise of leasing of X properties to your subsidiary. This enterprise will continue under the master lease. Your supply of the X properties will be made in the course or furtherance of this leasing enterprise and therefore, paragraph 9-5(b) of the GST Act will be satisfied.

Your supply is connected with Australia as the X properties are located in Australia. Therefore, paragraph 9-5(c) of the GST Act will be satisfied.

You are registered for GST. Therefore, paragraph 9-5(d) of the GST Act will be satisfied.

Accordingly, in supplying the X properties to X, you will satisfy paragraph 9-5(a) - (d) of the GST Act.

Your supply of these properties will not be an input taxed supply under any provision of the GST Act. Therefore, it is necessary to determine whether it can be a GST-free supply under any provision of the GST Act.

Going concerns

Section 38-325 of the GST Act refers to a supply of a going concern. This section states:

1. 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; and

c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

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; 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 going concern is GST-free, where the requirements of section 38-325 of the GST Act are met. Therefore, it is necessary to ascertain whether your supply will satisfy the requirements of section 38-325 of the GST Act.

Subsection 38-325(1)

As you will make your supply for consideration, paragraph 38-325(1)(a) of the GST Act will be satisfied.

X is not registered for GST. However, X will be registered for GST prior to the settlement date.

Under a specific clause in the sale agreement, the parties agree that the supply of the sale assets constitutes the supply of one or more going concerns for GST purposes. The sale assets include the X properties. We consider that you and X have agreed in writing that this supply is of a going concern and therefore, paragraph 38-325(1)(c) of the GST Act will be satisfied.

As this supply will satisfy paragraphs 38-325(1)(a) - (c) of the GST Act, we agree that the supply will satisfy subsection 38-325(1) of the GST Act.

Subsection 38-325(2)

Supply under an arrangement

Further, it is necessary to ascertain whether your supply will satisfy the requirements of subsection 38-325(2) of the GST Act. This subsection provides that a supply of a going concern is a supply under an arrangement.

Goods and Services tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses 'when is a supply of a going concern GST-free?'. Paragraphs 19 - 20 of GSTR 2002/5 refer to what is a 'supply under an arrangement'.

19. A supply is defined in section 9-10. 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').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement 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…..

Paragraph 108 of GSTR 2002/5 specifies what things are necessary for the continued operation of a leasing enterprise. It states that all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants.

The sale agreement provides for the supply of the relevant parts of your leasing enterprise to X. Upon completion, you will assign the master lease to X to the extent that it relates to X properties. In our view, the sale agreement and the master lease constitute an arrangement that satisfies subsection 38-325(2) of the GST Act.

Identified Enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

Under paragraph 23 of GSTR 2002/5, the meaning of the term 'enterprise' is wider than the term 'business'. For example, the activity of leasing can be the subject of a supply of a going concern.

At paragraph 30, GSTR 2002/5 states that where the identified enterprise forms part of a larger enterprise, a supply is a supply of a going concern when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

You are currently carrying on an enterprise of leasing the X properties to your subsidiary, as part of a larger enterprise carried on by you. You state that leasing the X properties is a distinct enterprise that X can continue to operate.

Accordingly, we agree that leasing of the X properties to your subsidiary as part of your larger enterprise is the identified enterprise in this case.

Paragraph 38-325(2)(a)

It is necessary to consider whether you will be supplying all of the things that are necessary for the continued operation of your identified enterprise to X , in order to satisfy the requirements of subsection 38-325(2)(a) of the GST Act.

Paragraph 80 of GSTR 2002/5 states:

80. 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.

Paragraph 75 of GSTR 2002/5 states:

75. Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

As stated above, the X properties will be sold to X under the sale agreement, subject to the master lease. Upon completion, the master lease will be assigned to X to the extent that it relates to the X properties.

Accordingly, all of the things necessary for the continued operation of the identified enterprise will be supplied to X, namely the X properties and the benefits of the lease covenants. X will be able to continue this leasing enterprise after the completion date. Therefore, we agree that the supply of part of your leasing enterprise to X will satisfy paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b)

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be a supply of a going concern, where the enterprise is carried on or will be carried on by the supplier until the day of supply.

Paragraph 150 of GSTR 2002/5 states:

150. 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. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Paragraph 161 of GSTR 2002/5 states:

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of the 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 of the things that are necessary for the continued operation of the enterprise.

You have stated that under the terms of the sale agreement, you are obliged to carry on your enterprise until the completion of the sale agreement. In addition, you intend to carry on your enterprise until the completion.

Based on the information provided, we agree that you will continue your enterprise of leasing the X properties and the associated fixtures to your subsidiary until the day of supply. Accordingly, you will satisfy paragraph 38-325(2)(b) of the GST Act.

Conclusion

As per the above analysis, your supply of part of your leasing enterprise associated with the X properties will satisfy the requirements of subsections 38-325(1) and (2) of the GST Act as a GST-free supply of a going concern.

Decision 2

Sale of retail business and part of the leasing enterprise

You contracted to sell the Y properties and the other sale assets to Y under the sale agreement. You will make this supply for consideration and therefore, paragraph 9-5(a) of the GST Act will be satisfied.

You are currently carrying on an enterprise of leasing the Y properties to your subsidiary and operating a retail business through your subsidiary. As stated, you carry on these operations as part of a larger enterprise carried on by you. You have entered into a master lease with your subsidiary to lease all your properties to your subsidiary. The Y properties will be sold to Y subject to the master lease. Upon completion of the sale agreement, the master lease will be assigned to Y to the extent it relates to the Y properties.

Your supply of the Y properties and the other sale assets to Y will be made in the course or furtherance of your enterprise and paragraph 9-5(b) of the GST Act will be satisfied.

Your supply is connected with Australia as the sale assets are located in Australia. Therefore, paragraph 9-5(c) of the GST Act will be satisfied.

You are registered for GST and therefore, paragraph 9-5(d) of the GST Act will be satisfied.

Accordingly, in supplying the Y properties and the other sale assets to Y, you will satisfy paragraph 9-5(a) - (d) of the GST Act.

Your supply of these properties and other sale assets will not be an input taxed supply under any provision of the GST Act. However, we need to ascertain whether the relevant supplies can be GST-free supplies under any provision of the GST Act.

Going concerns

As discussed above, a supply of a going concern is GST-free, where the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(1)

As you will be making your supply for consideration, paragraph 38-325(1)(a) of the GST Act will be satisfied.

Y will be registered for GST prior to the completion date. We consider that you will satisfy paragraph 38-325(1)(b) of the GST Act.

As discussed above, under a specific clause in the sale agreement, the parties have agreed that the supply of the sale assets constitutes the supply of one or more going concerns for GST purposes. We accept that you and Y have agreed in writing that this supply is of a going concern and therefore, paragraph 38-325(1)(c) of the GST Act will be satisfied.

As this supply satisfies paragraphs 38-325(1)(a) - (c) of the GST Act, we consider that the supply will satisfy subsection 38-325(1) of the GST Act.

Subsection 38-325(2)

Supply under an arrangement

The sale agreement provides for the supply of the Y properties and the other sale assets to Y. At the completion, you will assign the master lease to Y to the extent that it relates to the Y properties. In our view, the sale agreement, the master lease and other accompanying agreements constitute an arrangement that satisfies subsection 38-325(2) of the GST Act.

Identified Enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

As discussed above, where the identified enterprise forms part of a larger enterprise, a supply is a supply of a going concern when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

As stated above, you are carrying on an enterprise of leasing the Y properties to your subsidiary and a retail enterprise through your subsidiary. These two enterprises form part of a larger enterprise you carry on. In our view, these enterprises constitute the identified enterprise.

Paragraph 38-325(2)(a)

It is necessary to determine whether your supply will satisfy the requirements of subsection 38-325(2)(a) of the GST Act.

You are currently using the sale assets to operate your enterprise. The relevant sale assets including the Y properties will be sold to Y under the sale agreement, subject to the master lease.

As provided in the sale agreement, the list of sale assets is comprehensive. At the completion, the master lease will be assigned to Y to the extent that it relates to the Y properties.

In addition, the trade mark licence agreement will be entered into by the relevant parties on or before the settlement. Under that agreement, you will grant a licence to Y and your subsidiary to use your main trade mark, as well as various other trade marks from completion of the sale agreement for a specified period.

The sale agreement outlines the process for the assignment and novation of the contracts such as the master lease to Y. Further, you state that all necessary knowledge to operate the business is contained in training manuals, instructions and documents, which are to be provided to Y under the sale agreement. Notwithstanding this, the majority of the employees of the business are expected to be employed by Y with your assistance.

You have stated that other than the items of intellectual property assets forming part of the excluded assets, all of the intellectual property necessary to carry on the identified enterprise will be sold or licensed to Y.

You have already entered into a new product supply agreement with Y, which will commence on the completion of sale agreement.

Accordingly, all of the things necessary for the continued operation of the identified enterprise will be supplied to Y and it will be able to continue the identified enterprise after the completion date. We accept that you will satisfy the requirements of paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b)

Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be a supply of a going concern, where the enterprise is carried on or will be carried on by the supplier until the day of supply.

As stated above, under the terms of the sale agreement, you are obliged to carry on your identified enterprise until the date of completion. Further, you state that you intend to carry on your identified enterprise until the completion. Therefore, we accept that you will continue your identified enterprise until the day of supply. Accordingly, you will satisfy paragraph 38-325(2)(b) of the GST Act.

Conclusion

As per the above analysis, your supply of the relevant part of the leasing enterprise and the retail business to Y will satisfy the requirements of subsections 38-325(1) and (2) of the GST Act as a GST-free supply of a going concern.

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