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Ruling

Subject: GST and the supply of a going concern

Question 1

Will the supply of the entire business operations of Entity 1 to the purchaser, be a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply of the entire business operations of Entity 1 to the purchaser will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

Will the supply of a share of an interest in a licence by Entity 2 to the purchaser, a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

No. The supply of the share of an interest in a licence by Entity 2 to the purchase will not be a GST-free supply of a going concern under section 38-325 of the GST Act. The supply is a taxable supply and will be subject to GST.

Relevant facts and circumstances

· Entity 1 is registered for GST.

· Entity 2 is registered for GST.

· Entity 1 and Entity 2 carry on the enterprise.

· The business operates using two licences.

· Entity 1 owns one licence outright.

· Entity 1 and Entity 2 co-owns the second licence.

· Entity 1 owns all the assets of the business, except for the second licence that it co-owns with Entity 2.

· Entity 2 has its own assets and employees, and operates separately from Entity 1.

· Entity 1 is now looking to sell its entire business operations such as all business plant & equipment, staff, quotas, and leased premises, to a third party.

· Entity 2 is also selling its co-owned portion of the licence to the same third party in the same contract and/or a connected contract. However, Entity 2 is not selling its entire business operations. It is not selling its plant & equipment or allowing the continuity of existing staff.

· You anticipate there will be no foreseeable problems with the relevant Government Department when transferring the licence.

· Entity 1 and Entity 2 will continue to carry on the enterprise until the day of the supply.

· The supply by the Entity 1 and Entity 2 will be for consideration.

· The purchaser is registered for GST.

· You anticipate that where the private ruling indicates that the supply is a supply of a going concern, the supplier and the purchaser will agree in writing that the supply is of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 section 9-30

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J.

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

Reasons for decision

Question 1

Summary

The supply of the entire business operations of Entity 1 to the purchaser will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Section 9-40 of the GST Act provides that you are liable for GST on the taxable supplies that you make.

A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Under section 9-5 of the GST Act you make a taxable supply where:

· you make the supply for consideration; and

· the supply is made in the course or furtherance of your enterprise that you carry on; and

· the supply is connected with Australia; and

· you are registered, or required to be registered.

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

In your case, Entity 1 will be supplying its entire business operations to a third party for consideration. The supply will be made in the course or furtherance of its enterprise. The supply is connected with Australia as its enterprise operates in Australia and it is registered for GST. As such, the requirements of section 9-5 of the GST Act will be met.

The supply will not be an input taxed supply because it does not fall under any of the provisions in Division 40 of the GST Act.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free, if it is GST-free under Division 38 of the GST Act, or under a provision of another Act.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. As such, it is necessary to consider whether the supply will satisfy the requirements of section 38-325 of the GST Act.

A supply is a GST-free supply of a going concern when all the requirements in section 38-325 of the GST Act are satisfied. A two-step approach is required to determine firstly, whether the supply is a going concern and if it is, then whether it is a GST-free supply of a going concern.

A supply of a going concern

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply 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

· the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

Paragraph 75, GSTR 2002/5 states 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.

It is determined that Entity 1 will supply all assets that are necessary for the continued operation of an enterprise including the lease of the commercial premises, the agreed business plant and equipment and all spare parts, and intangible assets such as the wholly owned licence and quotas, and its interest in the co-owned licence and quota.

It is also determined that Entity 1 would supply its operating structure and process of the enterprise by supplying the services of existing employees available to the purchaser. Under paragraph 125 of the GSTR 2002/5, the particular and unique skills and knowledge of such a key employee is the thing which is necessary for the continued operation of the enterprise.

Accordingly, Entity 1 will be supplying to the purchaser all of the things that are necessary for the continued operation of the enterprise. Further, Entity 1 will continue to carry on the enterprise until the day of the supply.

Thus all the requirements of subsection 38-325(2) of the GST Act have been fully satisfied and the supply is a supply of a going concern.

A GST-free supply of a going concern

Subsection 38-325 of the GST Act provides that the supply of a going concern is GST-free if:

· the supply is for consideration; and

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

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

In your case, the supply will be consideration. The purchaser is registered for GST. You have anticipate that where the private ruling indicates that the supply is a supply of a going concern, the supplier and the purchaser will agree in writing that the supply is of a going concern.

Therefore, the supply of the entire business operations of Entity 1 to the purchaser will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

Summary

The supply of the share of an interest in a licence by Entity 2 to the purchase will not be a GST-free supply of a going concern under section 38-325 of the GST Act. The supply is a taxable supply and will be subject to GST.

Detailed reasoning

The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the GST Act are met.

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an arrangement under which:

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

· 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).

In this case, Entity 2 carries on an enterprise that allows the licence or quota holder to carry out the activities as specified in the licence/quota until the day of the supply. It remains to be determined whether the supply is under an arrangement under which the supplier supplies all of the things that are necessary for the continued operation of the enterprise.

Goods and Services Tax Ruling 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, paragraph 74 of GSTR 2002/5 states:

'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.'

Therefore, it follows that the term 'all of the things that are necessary' incorporates every attribute of an enterprise that is indispensable for the continued operation of the enterprise and will depend on the nature of the enterprise being carried on. Two elements are essential to the operation of an enterprise:

· the assets necessary for the continued operation of the enterprise, including premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, and licences; and

· the operating structure and process of the enterprise.

It is considered where the supplier is in the industry business and only the licence is supplied, what is being supplied is not a going concern. For the continued operation of the enterprise of allowing the licence holders to carry out activities as specified in the licence, it is necessary to supply the licence together with the existing agreements with the licence holders. Furthermore, other things such as equipment to carry on the activities and existing staff may be considered as things necessary for the continuation of the enterprise.

Therefore, for the sale to be the supply of a going concern, the supplier must assign all existing agreements and the like to the purchaser so that the purchase can continue the enterprise of allowing the licence holders to carry on their activities without any disruption. Transfer of the licence/quota alone will not allow for this to happen.

Therefore, the supply of the share of an interest in a licence by Entity 2 to the purchaser without anything else will not be 'all things necessary for the continued operation of an enterprise'. For this reason, the supply will not be a GST-free supply of a going concern under section 38-325 of the GST Act. The supply is a taxable supply and will be subject to GST.

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