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Edited version of private ruling

Authorisation Number: 1011595007312

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Ruling

Subject: GST and sale of business

Question:

Was the sale of your business a taxable supply under section 9-5 of the A New Tax System (Goods and services Tax) Act 1999 (GST Act)?

Answers:

Yes, the sale of your business was a taxable supply under section 9-5 of the GST Act.

Relevant facts:

You are registered for goods and services tax (GST).

You bought a business post July 2000.

You ran the business continually at a loss and finally sold that business.

You provided a copy of the contract for the sale of business. It was a standard contract for the sale of business.

The contract for the sale states that you have supplied inventory of equipment, current lease of the premises and schedule of employees.

The contract for the sale does not state that the 'sale is a supply of a going concern'.

The contract for the sale states that the vendor must, between the contract date and completion carry on the business in a proper and business like way; stay in possession of the business and the premises, ensuring the business is run as a going concern.

Reasons for decision

The supply of your business will be subject to GST if it is a taxable supply under section 9-5 of the GST Act.

Section 9-5 of the GST Act states:

You make a taxable supply if:

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

In your case, the supply of the business was for consideration, the supply was made in the course of an enterprise carried on by you, you are registered for GST and the supply was connected with Australia.

The supply of the business would have been a taxable supply under section 9 -5 of the GST Act, unless the supply was GST-free under Division 38 of the GST Act or input taxed under subdivision 40-C of the GST Act.

As it was the sale of a business, the supply was not an input taxed supply under any of the provisions in Division 40 of the GST Act.

Division 38 of the GST Act sets out the supplies that are GST-free. Section 38-325 of the GST Act relating to the GST-free supply of a going concern is of relevance to the issue in question.

Supply of a going concern

Section 38-325 of the GST Act provides that if certain conditions are satisfied, a supply of a going concern is GST-free.

Subsection 38-325(1) of the GST Act states:

The supply of a going concern is GST-free if

Subsection 38-325(2) of the GST Act states:

A supply of a going concern is a supply under an arrangement under which:

In order to determine whether the sale of the business is a GST-free supply of a going concern, firstly we need to consider whether, under this arrangement, the sale is capable of being a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act.

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provide that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required to be entered into on or prior to the day of the supply. 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.

In this case, the contract for the sale constituted an arrangement that satisfied the requirements of subsection 38-325(2) of the GST Act.

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.

In this case, the activity in relation to the business by you constituted an enterprise for the purposes of section 9-20 of the GST Act. Accordingly, it was the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Under the contract for the sale you have warranted that you carry on the business until the day of supply, thus satisfying the requirements of paragraph 38-325(2)(b) of the GST Act. What remains to be determined is whether the supply is under an arrangement under which the supplier supplied all the things that are necessary for the continued operation of the enterprise.

In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraphs 75 and 80 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.

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.

In your case, under the contract for the sale you supplied inventory of equipment, current lease of the premises and schedule of employees. As such, all the things that are necessary for the continued operation of your business have been supplied to the recipient. Hence, the requirements of paragraph 38-325(2)(a) of the GST Act have been satisfied.

Accordingly, we consider that the supply of the business by you to the purchaser was made under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Subsection 38-325(1) of the GST Act.

As stated in the facts, you made the supply for consideration and the purchaser is registered for GST. Thus, the sale satisfied the requirements of paragraphs 38-325(1)(a) and (b) of the GST Act.

The remaining requirement of subsection 38-325(1) of the GST Act that needs to be satisfied is the supplier and the recipient have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c) of the GST Act.)

Paragraph 178 of GSTR 2002/5 states that the agreement need not necessarily form part of the arrangement under which the relevant supply is made.

Paragraphs 179-182 states:

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.

180. Section 25 of the Acts Interpretation Act 1901 defines 'writing' as 'includes any mode of representing or reproducing words, figures, drawings or symbols in a visible form.' In Peverill v. Meir (1990) 95 ALR 401, Justice Burchett concluded that:

'When the Act requires the request to be in writing, I think it refers to a request which read reasonably, conveys the information that the procedure in question is to be performed.'

181. The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern'.

182. 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.

In your case, the sale contract has nothing to indicate that you and the recipient have agreed in writing that the sale was a supply of a going concern. You have not provided any other documents to confirm that there had been an agreement in writing that the supply is of a going concern. Hence, the requirement of paragraph 38-325(1)(c) of the GST Act has not been satisfied.

As all the requirements of section 38-325 of the GST Act have not been satisfied, the sale of your business to the purchaser was not a GST-free supply of a going concern.

Consequently, the sale of your business was a taxable supply under section 9 -5 of the GST Act, as it satisfied all the requirements of that section.

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