Edited version of private ruling

Authorisation Number: 1011566379465

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Ruling

Subject: GST and supply of a going concern

Question

Is the proposed sale by the land owner of the land) and the business by the business owner to the buyer a GST-free supply of a going concern?

Answer

Yes, the proposed sale by the land owner of the land and the business by the business owner to the buyer is a GST-free supply of a going concern.

Facts

The buyer was granted an option by the land owner and the business owner to purchase the land and the business.

If the option is exercised the price to be paid for the land and business is $X exclusive of GST. The purchase price has been apportioned for the business and for the land and improvements.

The sale contract provides that the sale is subject to existing tenancies.

There in an existing lease on the title from the previous owners of the land and the business.

There is no other lease between the land owner and the business owner. The business owner continues to occupy the land on a month to month basis.

Included in the sale of the business are the goodwill and plant and equipment of the business.

All parties to the transaction are registered for GST.

The sale contract provides that all parties to the transaction agree that the sale of the land and the business is a supply of a going concern.

The parties intend that both enterprises will continue to be carried on until the day of the supply.

On completion of the sale transaction, a lease of the land is to be entered into from the buyer as lessor to the business owner as lessee for a term of X years. It is a term of the lease that the lessee will conduct the business at the land and will be entitled to retain all profits earned from that business.

Reasons for decision

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Section 38-325 of the GST Act 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).

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act.

Supply under an arrangement

For the purposes of the definition of a 'supply of a going concern', it is not a supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act, but the arrangement under which a supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19…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. (Refer to paragraphs 178 to 185 for more details). However, an arrangement between a supplier and a 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 proposed sale contract provides for the supply of the land by the land owner and the supply of the business carried on on that land by the business owner. In our view, the contract constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Supplier supplies all things necessary for the continued operation of an enterprise

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').

The land owner is carrying on a leasing enterprise and the business owner is carrying on the business on that land.

Paragraphs 137 and 138 of GSTR 2002/5 discuss the supply of two enterprises by two suppliers to one recipient where the supply of premises is made by one entity along with the business operated from the premises by another entity. Paragraph 137 states that when the two entities sell their enterprises to one recipient, each supply must be considered separately.

Consequently, the supply made by each of the owners should be considered independently. Hence, we need to determine whether under the arrangement, each of the owners supply to the buyer all things necessary for the continued operation of their respective enterprise.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 74 and 75 of GSTR 2002/5 state:

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is put in a position to carry on the enterprise, if it chooses.

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 advertisement and promotion.

Leasing enterprise

Generally, all of the things necessary for the continued operation of a leasing enterprise include the supply of premises together with the existing lease agreements, so that the purchaser can continue to carry on the leasing enterprise, if it chooses.

In this case, the land is leased to the business owner under the terms of the registered lease and after the expiration of that lease, the business owner was allowed to continue in possession on a month to month basis.

Paragraphs 64 to 70 of GSTR 2002/5 provide clarification in regard to expired leases, periodic tenancies and tenancies at will. The ruling provides that a periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

Although paragraphs 64 to 70 of GSTR 2002/5 deal with the situation whereby the supplier is the lessee of premises occupied under a periodic tenancy, it is considered that the principle in these paragraphs apply equally to the situation where the supplier is the lessor of the premises which it owns. Therefore, a supplier who leases premises to a tenant under a periodic tenancy is able to supply the property subject to a periodic tenancy to another party.

The sale by the land owner to the buyer is subject to the existing tenancy. Based on the information provided, the land owner is supplying to the buyer all of the things that are necessary for the continued operation of the leasing enterprise.

Business

The sale of the property identified in the contract is the sale of the land including the business carried on that land. Included in the sale of the business are the goodwill and plant and equipment of the business.

The premises are a thing necessary for the continued operation of the business. The business owner occupies the land under a periodic tenancy therefore the business owner can supply the right to occupy the premises to you.

Based on the information provided, the business owner is supplying to the buyer all of the things that are necessary for the continued operation of the business.

Hence, the requirement of paragraph 38-325(2)(a) of the GST Act will be met by both the land owner and the business owner.

Supplier carries on the enterprise until the day of the supply

The requirement of paragraph 38-325(2)(b) of the GST Act will also be met by the land owner and the business owner they will carry on their respective enterprises until completion of the sale.

Accordingly, we consider that the sale of the land and the business will be made under an arrangement that will satisfy the requirements of subsection 38-325(2) of the GST Act. The sale of the land and the business will be a supply of a going concern for the purposes of the GST Act.

Subsection 38-325(1) of the GST Act

The supply of the land and the business will be made for consideration as the agreed purchase price is listed in the sale contract. Hence, the requirement of paragraph 38-325(1)(a) of the GST Act will be met.

The buyer is registered for GST. Hence, the requirement of paragraph 38-325(1)(b) of the GST Act will be met.

The sale contract provides that all parties to the transaction agree that the sale of the land and the business is a supply of a going concern. Hence, the requirement of paragraph 38-325(1)(c) of the GST Act will be met.

Therefore, if the proposed sale of the land and the business takes place as described, then the sale will be a GST-free supply of a going concern as it will meet all the requirements of section 38-325 of the GST Act.

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