Edited version of private ruling

Authorisation Number: 1011533055018

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Ruling

Subject: GST and the supply of a going concern

Question

Is your sale of a franchised business to the franchisee a GST-free supply of a going concern?

Answer: Yes.

Your sale of a franchised business to the franchisee is a GST-free supply of a going concern.

Relevant facts and circumstances

An entity (you) is registered for goods and services tax (GST).

You are a franchisor of a business, and owned and operated a business.

You sold the business to a new franchisee (the franchisee) for a certain amount (excluding GST).

You provided signed copies of the sale contract and other relevant documents.

The sale of the business included all equipment, chattels, stock, fixtures and fittings and goodwill.

The settlement date of the sale contract was a certain date.

You granted the franchisee the right to operate the business in accordance with the franchise.

You continue to be the lessee under the lease for the premises but granted a separate licence to the franchisee to occupy the premise for the purposes of operating the business.

You and the franchisor agreed in writing that the sale of the business is a supply of a going concern.

You continued to operate the business up to the date of supply.

The franchisee was registered for GST at the time of the supply.

Reasons for decision

A supply of a going concern is GST-free provided all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

A supply of a going concern is defined in subsection 38-325(2) of the GST Act to mean a supply made under an arrangement under which the supplier:

· supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

· 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).

Subsection 38-325(1) of the 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, and

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

Supply of a going concern

A supply under an arrangement is described in Goods and Services Tax Ruling GSTR 2002/5 at paragraph 19 as follows:

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').

The arrangement and the supply under the arrangement for the purposes of section 38-325 is the supply of the franchised business, in accordance with the sale contract and other relevant documents.

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier, referred to in paragraph 19 of GSTR 2002/5 as the 'identified enterprise'. Under paragraph 38-325(2)(a) the 'identified enterprise' is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

Paragraph 73 of GSTR 2002/5 states:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing

Accordingly, in order to satisfy paragraph 38-325(2)(a) of the GST Act, you must supply all of the things necessary for the continued operation of your 'identified enterprise' that is, the franchised business.

To conduct the franchised business it is necessary to have, amongst other things, the premises from which to operate the business.

Paragraph 58 of GSTR 2002/5 states:

58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

You continue to lease the premises for the business from a third party. However, you and the franchisee entered into an agreement. Under the agreement you granted a separate licence to the franchisee to occupy the premises for the purposes of operating the business and, as such, have supplied the premises for the purposes of paragraph 38-325(2)(a) of the GST Act.

The business being sold by you is under a franchise arrangement. Paragraphs 117 and 118 of GSTR 2002/5 state:

117. The benefit of a franchise agreement is a thing which is necessary for the continued operation of an enterprise. A franchisee cannot supply its franchise as a going concern to another entity which is to become the franchisee, unless the franchisee is capable of supplying all of the things that are necessary for the continued operation of the enterprise. In many instances, restrictions are imposed under the franchise agreement on the ability of the franchisee to transfer or assign the benefit of the franchise agreement.

118. The principles discussed in paragraph 53 apply equally to franchises. If either the franchise agreement does not allow the transfer of the agreement to the recipient or permission to transfer the agreement is withheld by the franchisor, or the recipient wishes to extend the term, a surrender of the rights under the agreement in favour of the recipient will be taken to be the supply of the agreement, provided a new agreement is entered into by the franchisor and the recipient.

You granted the franchisee the right to operate the business in accordance with the franchise. As such, you have supplied the franchise and its accompanying benefits for the purposes of paragraph 38-325(2)(a) of the GST Act.

Additionally you supplied the franchisee with all other things necessary in order to operate the business. The business was supplied on a walk in walk-out basis.

Consequently, it is considered you supplied the franchisee with all the things necessary for the continued operation of the enterprise under paragraph 38-325(2)(a) of the GST Act.

You carried on the enterprise until the date of the supply. Therefore, the supply of the franchised business also satisfied paragraph 38-325(2)(b) of the GST Act.

As the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act are satisfied, the sale of the franchised business is a supply of a going concern.

GST-free supply

Under subsection 38-325(1) of the GST Act the supply of a going concern will be GST-free if:

· the supply is for consideration

· the recipient is registered or required to be registered, and

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

The sale was made for monetary consideration. The franchisee, being the recipient, was registered for GST at the time of the supply.

Paragraph 182 of GSTR 2002/5 explains that the supplier and the recipient must agree that the supply is a supply of a going concern on or before the day of the supply. Prior to the day of the supply you and the franchisee agreed in writing that the supply is the supply of a going concern.

Consequently the sale of the franchised business satisfied subsection 38-325(1) of the GST Act and is a GST-free supply of a going concern.

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