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Ruling

Subject: GST and supplies of going concerns

Questions

1. Is the supply made by you to Purchaser 1 of the business enterprise a GST-free supply of a going concern?

2. Is the supply made by you to Purchaser 2 of the freehold property subject to lease a GST-free supply of a going concern?

Answers

1. Yes, the supply made by you to Purchaser 1 of the business enterprise is a GST-free supply of a going concern.

2. Yes, the supply made by you to Purchaser 2 of the freehold property subject to lease is a GST-free supply of a going concern.

Relevant facts and circumstances

You, an entity, operated a business enterprise from your freehold property.

You intended to sell the business enterprise together with the property as a going concern.

At the auction you accepted a bid for the freehold property and business enterprise. After accepting the bid the representatives for the purchaser indicated that they wished to split the purchase between two entities. Purchaser 1 will purchase the business enterprise and Purchaser 2 will purchase the freehold property. The sale contract provides:

· that on the completion date, the Purchaser will purchase all good and saleable stock at its wholesale value determined in accordance with the clause provided.

· for the change of the proprietorship of the business name in favour of the purchaser.

· for the assignment or novation of certain service agreements.

· an inventory of plant and equipment which is included in the sale.

· that on completion the purchaser will receive the full beneficial interest of the vendor as owner in the business and licence without encumbrance.

· the purchaser must make an offer of employment to each employee in the business which it wishes to employ.

Subsequently, the purchaser submitted a draft Rectification and Business Sale Settlement Deed ("deed") proposing that settlement take place over couple of days with:

· you granting a lease of the freehold property to Purchaser 1 immediately prior to the completion of the sale of the business to Purchaser I on the same day; and

· completion of the sale of the freehold property by you to Purchaser 2 occurring on the next day subject to the new lease.

· The parties agree that the sale of the freehold property to Purchaser 2 and the business to Purchaser 1 is in each case the supply of a going concern.

· The Vendor warrants that it carries on, or will carry each of the Enterprises until Completion of this contract.

· The parties warrant that they are registered or required to be registered under Part 2.5 of the GST Act and will continue to be so at all relevant times up to Completion of this Contract.

Completion date means the day that the Contract is settled as provided in a clause in the Deed.

You agreed to enter into the deed and the arrangement for a split settlement. You granted a lease to the Purchaser 1; and the sale of the business to Purchaser 1 was completed in accordance with the terms of the sale contract and deed. You also completed the sale of the freehold property to Purchaser 2 subject to the lease the next day.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

Reasons for decision

Whether the supplies are GST-free?

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

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).

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

As noted in the definition above, it is not the supply itself which must satisfy the conditions in subsection 38-325(2) of the GST Act, but the arrangement under which the supply is made.

In this case, to determine whether the sale of the business enterprise by you to Purchaser 1 and the sale of the leasing enterprise by you to Purchaser 2 are GST-free supplies of going concern, firstly we need to consider whether, under the arrangement, the sale is capable of being a supply of a going concern pursuant to subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provides guidance on when the supply of a going concern is GST-free. Generally a contract for sale provides for the arrangement under which a supply of the identified enterprise and all that this entails.

Paragraphs 19 and 20 of 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 your case, we consider that the arrangement and the supplies of the two enterprises to be made under the contract for sale are supplies under an arrangement for the purposes of section 38-325 of the GST Act.

Enterprise

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.

The definition of 'enterprise' in section 9-20 of the GST Act includes, amongst other things, an activity or series of activities done, in the form of a business or in the form of an adventure or concern in the nature of trade.

To satisfy paragraph 38-325(2)(a) of the GST Act, a supplier must supply all of the things that are necessary for the continued operation of the supplier's identified enterprise.

In your case, as provided in the facts, we accept that your business constitute an enterprise for the purposes of section 9-20 of the GST Act.

You have entered into a short term lease agreement with Purchaser 1. As such, we also accept that you are carrying on leasing enterprises for the purposes of section 9-20 of the GST Act.

Therefore, to meet all the requirements of subsection 38-325(2) of the GST Act, you are required to supply to the purchaser all of the things that are necessary for the continued operation of those enterprises and to carry on those enterprises until the day of the supply.

All things necessary for the continued operation

A 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 of carry on the enterprise, if it chooses.

Paragraph 47 of GSTR 2002/5 provides meaning of the phrase Things that the supplier can supply:

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

Two elements are essential for the continued operation of an enterprise as identified in paragraph 75 of GSTR 2002/5.

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.

Paragraphs 131 to 134 of GSTR 2002/5 provide guidance in respect of supply of parts of an existing enterprise to two or more recipients:

131. Paragraph 38-325(2)(a) expressly recognised that each supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise may be the supply of a going concern. Equally, supplies of all of the things that are necessary for the continued operation of parts of a larger enterprise may be separate supplies of going concerns to two or more recipients provided the two or more different parts of the enterprise are each capable of separate independent operation.

132. Where the owner of both a business enterprise and of the real property upon which the business enterprise is necessarily conducted sells the business enterprise to a second entity and the business premises to a third entity, the supply to the second entity will not be the 'supply of a going concern'. This is because the second entity has not been supplied with one of the things necessary for the continued operation of that enterprise, by the supplier, that is, the business premises.

133. Where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the second entity by the day of the supply of the business enterprise to that second entity, the supplier is supplying the second entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the second entity is met even if the property is subsequently sold to a third entity subject to a lease.

 134. Similarly, the supply of the real property to the third entity on a later day that is subject to a lease to a second entity in the circumstances described in the preceding paragraph, may also be the 'supply of a going concern'. This is because an enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time. The supplier, being the owner of both the business and the real property, is making two supplies, each of which is capable of being the 'supply of a going concern'.

1. Supply of business enterprise

In regard to the above supply by you to Purchaser 1, the identified enterprise is the business.

The transfer of the business's assets such as stock, plant and equipment, business name, business licence, the goodwill of the business, your existing employees, together with the granting of a lease of the premises in favour of Purchaser 1 by the day of the supply of the business enterprise, will be considered to have supplied to Purchaser 1 all the things that are necessary for the continued operation of the hotel business in according to paragraph 133 of GSTR 2002/5.

Hence it is concluded that you have supplied to Purchaser 1 all of the things that are necessary for the continued operation of the business enterprise to satisfy paragraph 38-325(2)(a) of the GST Act.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b) of the GST Act a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. An entity may satisfy the requirements of paragraph 38-325(2)(b) of the GST Act, during the period of commencement or termination of an enterprise. The day of 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 (refer to paragraph 161 of GSTR 2002/5).

In your case, you carries on the business until the day of the supply according to a clause in the deed, we consider that the supply of the business to Purchaser 1 under the arrangement, will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

Accordingly, you will meet the requirements of a supply of a going concern as stated in subsection 38-325(2) of the GST Act.

GST-free supply of a going concern

To be treated as GST-free, a supply of a going concern must satisfy the requirements of subsection 38-325(1) of the GST Act.

Based on the information provided, the sale of the business enterprise will be for consideration, the recipient is registered for GST and you and the recipient have agreed in writing that the supply is of a going concern. Therefore, you will meet all the requirements of subsection 38-325(1) of the GST Act.

Accordingly, the supply of the business enterprise by you to Purchaser 1 will be a GST-free supply of a going concern under subsection 38-325(1) of the GST Act.

2. Supply of leasing enterprise

In regard to the above supply by you to Purchaser 2, the identified enterprise is the leasing operation.

Based on the information provided, you granted a lease to Purchaser 1 immediately prior to the completion of the sale of business to Purchaser 1 on the same day, and completion of the sale of the freehold property subject to lease by you to Purchaser 2 occurred on next day.

All things that are necessary for the continued operation of the leasing enterprise include the assignment of their leasehold interest and the supplies of the benefit of the covenants as lessors; in particular the benefit of the covenant to receive rent from the lessee under the lease.

As the contract of sale by you to Purchaser 2 is subject to lease, you are able to supply to Purchaser 2 all of the things that are necessary for the continued operation of the leasing enterprises. We consider that the supply by you to Purchaser 2 of the leasing enterprises will be made under an arrangement that satisfies the requirements of paragraph 38-325(2)(a) of the GST Act.

Supplier carries on the enterprise until the day of the supply

In your case, you carries on the leasing enterprise until the day of the supply according to a clause in the deed, we consider that the supply of the leasing enterprise to Purchaser 2 under the arrangement, will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

Accordingly, the sales of freehold property subject to lease by you to Purchaser 2 will satisfy the requirements of subsection 38-325(2) of the GST Act.

GST-free supply of a going concern

The supplies of the leasing enterprises will be for consideration, the recipient is registered for GST; and the suppliers and the recipient have agreed in writing that the supplies are going concerns. As such, all the requirements in subsection 38-325(1) of the GST Act will be satisfied.

Accordingly, the supply by you to Purchaser 2 of the freehold property subject to the lease will be GST-free supplies of going concerns under subsection 38-325(1) of the GST Act.

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