Edited version of your written advice

Authorisation Number: 1012811228070

Ruling

Subject: GST and the GST free supply of enterprises

Question 1

Will your supply of the business including the IP License Agreement, Premises License and operating assets to Entity B be a GST free going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Will your supply, of the IP Assets license enterprise, to Entity C, be a GST free going concern pursuant to section 38-325 GST Act?

Answer

Yes

Relevant facts and circumstances

You, Entity A, are registered for GST. One of the divisions (the Division) within your company conducts an enterprise of distributing items of clothing and related products through wholesale and retail channels.

On ddmmyyyy, you entered into a Business Sale and Purchase Agreement (the Sale Agreement) under which you will:

• supply the Division to Entity B, and

• supply the IP Assets license enterprise to entity C.

Both Entity B and C are registered for GST.

The Sale Agreement has an expected completion date of ddmmyyyy. The Sale Agreement states that, on ddmmyyyy, you will:

• Supply the Operating Assets to Entity B

• License Entity B to use the IP Assets under a non-exclusive agreement, and

• Enter into the Premises License Agreement with Entity B to enable them to occupy the premises, from which the Division operates.

On ddmmyyyy, you will novate the IP Assets License Agreement to Entity C, thereby completing the sale of the IP Assets, so that Entity C can operate the business of licensing Entity B to use the IP Assets.

The Sale Agreement includes the following details:

Parties

Entity A (Seller);

Entity B (Business Purchaser)

Entity C (IP Purchaser); and

Entity D (Guarantor).

Recitals

A. The Seller carries on the Business and owns the Operating Assets and IP Assets which are used to carry on the Business.

B. The Seller has agreed to sell the Business and the Operating Assets, and Entity B has agreed to buy the Business arid the Operating Assets, on the terms and conditions set out in this Agreement.

C. The Seller has agreed to sell the IP Assets, and the IP Purchaser has agreed to buy the IP Assets, on the terms and conditions set out in this Agreement.

D. The Guarantor has agreed to guarantee the performance of the Purchasers' obligations contained in this Agreement.

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 38-325

Reasons for decision

Question 1

Will your supply of the business including the IP License Agreement, Premises License and operating assets to Entity B be a GST free going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Under section 9-5, an entity makes a taxable supply if:

• it makes a supply for consideration; and

• the supply is in the course or furtherance of an enterprise that it carries on; and

• 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.

On the facts provided, your supply will be a taxable supply unless it is GST-free or input taxed. In your circumstances, there is no provision under which the supply will be input taxed.

Section 38-325 deals with GST free supplies of 'going concerns'.

Subsection 38-325(1)

Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient is registered or required to be registered for GST, and

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

On the facts supplied, your supply will meet the requirements of subsection 38-325 (1).

Therefore, where your supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.

Subsection 38-325(2)

Subsection 38-325(2) 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 a part of the larger enterprise carried on by the supplier).

Supply under an arrangement

The Division will be supplied under the Sale Agreement and the IP Assets License Agreement. We consider that this will be a supply under an arrangement pursuant to subsection 38-325(2).

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

Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise

As explained in paragraphs 29 of GSTR 2002/5

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

The Sale Agreement defines Business to mean the Seller's Business of distributing products through wholesale and retail channels.

This is the identified business for the purposes of paragraph 38-325(2) (a).

All things necessary

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 advertising and promotion.⁹

You have undertaken to supply various assets including premises, plant and equipment, licenses, intellectual property, goodwill, etc, as listed in the Sale Agreement, and the IP Assets License to Entity B.

We consider that the listed assets and the License Agreement are all the things necessary for the continued operation of the identified enterprise. Accordingly, your supply will meet the requirements of paragraph 38-325(2) (a).

Supplier carries on the enterprise until the day of the supply

Under the Sale Agreement, you will continue to carry on the enterprise until the day of settlement of the sale. Accordingly, your supply will meet the requirements of paragraph 38-325(2) (b).

Conclusion

As your supply will meet the requirement of subsections 38-325(1) and 38-325(2), it will be a GST-free supply of a going concern.

Question 2

Will your supply, of the IP Assets license enterprise, to Entity C be a GST free going concern pursuant to section 38-325 GST Act?

On the facts provided, the supply will be a taxable supply unless it is GST-free or input taxed. In your circumstances, there is no provision under which the supply will be input taxed.

Section 38-325 deals with GST free supplies of 'going concerns'.

Subsection 38-325(1)

On the facts supplied your supply will meet the requirements of subsection 38-325 (1) in relation to the supply of the IP Assets licensing enterprise.

Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.

Subsection 38-325(2)

Supply under an arrangement

The license enterprise will be supplied via the Sale Agreement and the IP Assets License Agreement. We consider that this will be a supply under an arrangement pursuant to subsection 38-325(2).

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

The Sale Agreement defines the Licence Agreement to mean the non-exclusive license between you and Entity B which allows Entity B to use the IP assets.

The license enterprise is the identified business for the purposes of paragraph 38-325(2) (a) that you intend to supply to Entity C.

All things necessary

Prior to the IP Assets completion date, you will enter into an IP Assets Licence Agreement with Entity B which gives Entity B a right to use the IP Assets. On IP Assets completion date, you will novate that agreement to Entity C. Therefore, on the Completion date, you will supply everything required by Entity C for it to continue to carry on your enterprise of licensing the IP assets to Entity B. Accordingly, your supply will meet the requirements of paragraph 38-325(2) (a).

Supplier carries on the enterprise until the day of the supply

Under the Sale Agreement you will carry on the enterprise until the day of settlement of the sale.

Accordingly, your supply will meet the requirements of paragraph 38-325(2) (b).

Conclusion

As your supply will meet the requirement of subsections 38-325(1) and 38-325(2), it will be a GST-free supply of a going concern.

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