Edited version of private ruling

Authorisation Number: 1011757079750

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Ruling

Subject: GST and supply of a going concern

Question 1

Was the sale of your business the supply of a going concern?

Question 2

Yes the sale of your business was the supply of a going concern.

Relevant facts

· You are registered for GST.

· You carried on an enterprise of international freight forwarding and customs brokerage where you arranged international movement of import and export, ocean and airfreight cargo, along with the customs and quarantine (the business).

· You sold your business to entity.

Business Activities

· The day to day activities of the business were as follows:

· taking bookings to move cargo in and out of Australia

· arranging the relevant paperwork to facilitate movements

· data entry

· local collection and delivery

· labelling of cargo

· providing alerts to your international agents offices.

· warehousing of cargo

· customs and quarantine clearance processing

· invoicing for any duty, GST, freight and handling charges

· office administration functions

· providing client advice on freight forwarding and clearance

Business Assets

· The following business assets were required for the continued operation of the business:

· certain intellectual property i.e. business name

· plant and equipment including

· Office furniture and equipment

· Computer and printer

· customer lists

· records

· premises lease

· forklift

· scales

· warehouse racking

· The business is conducted from leased premises.

· There are X staff in total that all transferred as part of the sale. The expertise and knowledge of Y was required.

Sale Transaction

· Under the agreement you sold, and the entity purchased all of your rights, titles and interests in the business and the business assets.

· The business means all of the business conducted including freight forwarding.

· In the agreement the business assets sold are defined as:

· the intellectual property

· the goodwill

· the plant and equipment

· the customer lists

· the records

· the premises lease

· fixtures and fittings

· the forklift

· all bills, lading and airways bills dated on and from Completion date

· The excluded assets are separately defined in the agreement.

· The agreement contained a number of preconditions to completion.

· There was a precondition that the deed of assignment of lease for the premises must be executed.

· There was a precondition that the key staff members must execute agreements for employment with the entity on completion.

· Staff members have executed employment agreements with the entity.

· You carried on the business until the day of supply.

· You and the entity agree that the supply of the business and the business assets under the agreement will be a supply of a going concern.

Contractual Agreement -

The contractual agreement was provided.

Relevant Legislation

A New Tax System (Goods and services tax) Act 1999 section 38-325

A New Tax System (Goods and services tax) Act 1999 section 9-5

Reasons for decision

All references are to the A New Tax System (Goods and Services Tax) Act, 1999 (GST Act).

Whether the supply of the thing is a taxable supply

Section 9-5 provides that an entity makes a taxable supply if:

· the entity makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· the entity is registered or required to be registered for GST.

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

The exclusion from taxable supplies of GST-free supplies includes the GST-free supply of a going concern under section 38-325. If the supply by you of the assets, the business and the leasehold property is a GST-free supply of a going concern to you, it will not be a taxable supply under section 9-5.

In relation to the supply by you to the entity we consider that you will make a supply for consideration, the supply will be made in the course of furtherance of an enterprise that you carry on, the supply will be connected with Australia, and the entity is registered or required to be registered at the time of the supply. It will not be an input taxed supply. The issue is whether the supply will be GST-free.

GST-free going concern

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

A supply of a going concern is defined in subsection 38-325(2) 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) provides that 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.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) sets out the Tax Offices view on the supply of GST-free going concerns.

Identified enterprise

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (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. Under paragraph 38-325(2)(b), the supplier must also carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise. (See paragraphs 29 and 30 of GSTR 2002/5.)

In this case the enterprise is international freight forwarding and customs brokerage where you arranged international movement of import and export, ocean and airfreight cargo, along with customs and quarantine processing.

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

Paragraph 47 of GSTR 2002/5 explains that the things which are necessary for the continued operation of an enterprise identified for the purposes of section 38-325 vary according to the nature of the enterprise and the thing supplied.

Paragraphs 72 - 99 of GSTR 2002/5 explain the Tax Office's view on the meaning of paragraph 38-325(2)(a)

the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise (* denotes defined terms).

Paragraph 74 explains that 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.

Paragraph 75 explains that 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.

 

Paragraph 78 explains that the business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Paragraph 150 explains that 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.

Paragraph 80 of GSTR 2002/5 states that a supplier will only be treated as having supplied all things necessary for the purposes of section 38-325 if the recipient is put in a position on the day of the supply where it can, if it chooses, continue to operate the identified enterprise.

All things necessary for the continuation of the identified enterprise are provided for in the sale contract. The items excluded are those not essential to the operation of the business. Therefore this requirement is satisfied.

Supplier carries on or will carry on the enterprise until the day of the supply

You have advised that you continued to operate the enterprise until the day of supply. Therefore we consider that the requirements of paragraph 38-325(2)(b) were satisfied.

Supply for consideration

The purchase price for the sale of the business and the acquisition of the leasehold satisfies the requirement that the supply is for consideration under paragraph 38-325(1)(a).

Recipient registered or required to be registered

You have advised that the entity was registered for GST up to and on the day of completion of supply. The requirement that the recipient must be registered or required to be registered in accordance with 38-325(1)(b) is satisfied.

Agreed in writing

Paragraph 181 of GSTR 2002/5 provides that 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.

Paragraph 182 of GSTR 2002/5 provides 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.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is the date on which the recipient assumes effective control and possession of all of the things that are necessary for the continued operation 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.

Clause xx of the contract confirms that there is agreement between the parties that the transaction be treated as the supply of a going concern.

Conclusion on the GST-free supply of a going concern

The supply under the relevant agreement by you to the entity will be a GST-free supply of a going concern.

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