Edited version of your written advice

Authorisation Number: 1013045340588

Date of advice: 13 July 2016

Ruling

Subject: Supply of a going concern

Question 1

Is the sale of a number of retail outlets in [State] and [State] by the Vendor to the Purchaser pursuant to four separate Sale of Business Contracts (Contracts) a GST-free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply made by the Vendor to the Purchaser pursuant to the Contracts is a GST-free supply of a going concern.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background:

The Vendor owns a number of retail outlets in [State] and [State]. The Vendor either has entered into or intends to enter into four Contracts for the sale of those retail outlets to the Purchaser as follows:

the first Contract (which has been executed) covers the sale of X retail outlets in [State];

the second Contract (which has not been finalised) covers the sale of retail outlets in [State];

the third Contract (which has not been finalised but will be on substantially the same terms as the first Contract) covers the sale of one retail outlet in [State]; and

the fourth Contract (which has not been finalised) covers the sale of one retail outlet in [State].

The first Contract:

The first Contract is a Sale of Business Contract which comprises Particulars of Sale, General Conditions, a number of Schedules and Annexures and Special Conditions which amend and extend the General Conditions.

The Particulars of Sale in the first Contract describe the type of business and refer to payment of the residue of the Price (i.e. after payment of the deposit) on dates for settlement.

General Condition [ ] obliges the Vendor to transfer the Business, the Assets and the Stock to the Purchaser not later than the Date of Settlement. Special Condition [ ] provides for the Date for Settlement for each retail outlet ('Business') to commence from the later of [ ] June 2016 or satisfaction of the last of the Conditions Precedent and to be completed within [ ] days. Settlement is to be effected on a Business by Business basis according to a priority list of the Businesses in Special Condition [ ] with an instalment of the Price paid for each Business.

General Condition [ ] defines 'Assets' as all the items specified in Schedule 1. Schedule 1 to the first Contract lists the assets as the Vendor's rights pursuant to the Leases, the plant and equipment, licences, permits, approvals and registration necessary for the Business, office manuals and the Vendor's vehicles. Special Condition [ ] amends and extends the 'Assets' definition to mean the X Businesses and associated goodwill, leases, liquor and food licences and registrations, plant, equipment, furniture, fittings and chattels installed and or located in each of the Businesses, including the motor vehicles itemised in Schedule 1 and the Stock in respect of each Business. Annexure B to the Special Conditions deal with licences, permits, approvals and registrations necessary for the Business and lists [ ] licences and [ ] registration certificates.

General Condition [ ] (as modified by Special Condition [ ]) obliges the Vendor to obtain for the Purchaser by the Date of Settlement a Lease of the Business Premises either by transfer with the Landlord's consent or by the grant of a new lease for a term and on the conditions in the form annexed as Schedule 3. Special Condition [ ] inserts a General Condition [ ] which provides that where a Business Premises is owned or controlled by the Vendor or an entity related to the Vendor the Vendor must procure the termination or surrender of the existing lease between the Vendor as tenant and the landlord and use all reasonable endeavours to procure in favour of the Purchaser a grant of a new lease by the landlord in the form annexed as Schedule 3. Annexure A to the Special Conditions lists [ ] leases and indicates whether there is to be either a transfer of the lease or a new lease at settlement (where the Vendor or an entity related to the Vendor is the landlord).

General Condition [ ] obliges the Vendor to maintain the goodwill of each Business until settlement.

Although General Condition [ ] obliges the Vendor to terminate the employment of each employee on and from settlement, Special Condition [ ] provides that, notwithstanding General Condition [ ], the Purchaser must make offers of employment to all employees for each Business. The employees are listed in Schedule 4.

General Condition [ ] deals with licences and is discussed in the reasons for decision.

Special Condition [ ] deals with GST and is discussed in the reasons for decision.

Although the list of Assets in Schedule 1 does not include business names, special condition [ ] provides that the Vendor grants a non-exclusive licence to the Purchaser to use the 'X' name and mark for three years after completion of the first Contract. Special Condition [ ] deals with the Vendor's loyalty program and is discussed in the reasons for decision.

Second, third and fourth Contracts:

Although we have not seen the second, third and fourth Contracts, we understand that they will not be materially different from the first Contract.

Relevant legislative provisions

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

Reasons for decision

Section 38-325:

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. Division 38 of the GST Act includes section 38-325 which 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).

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

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free.

Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

A supply under an arrangement:

Paragraph 19 of GSTR 2002/5 provides that the term 'supply under an arrangement' includes supplies under multiple contracts which comprise a single arrangement provided that the things supplied under the arrangement relate to the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise' - refer below).

In the present case the arrangement comprises the four Contracts and the supply under that arrangement comprises the retail outlets in State and State.

Subsection 38-325(2) - identified enterprise:

Paragraph 21 of GSTR 2002/5 states:

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business. Paragraph 178 of Miscellaneous Taxation Ruling 2006/1 (MT 2006/1) provides that the indicators of a business include a significant commercial activity, an activity which is systematic and organised and activities of a reasonable size and scale.

In the ruling request the enterprise being carried on by the Vendor was described as a multi-site retail business. We consider that to be the identified enterprise for the purpose of subsection 38-325(2).

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise.

Assets necessary for the continued operation of the identified enterprise:

The meaning of 'all things necessary is discussed in paragraphs 72 to 75 of GSTR 2002/5:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

73. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

General Condition [ ] of the first Contract obliges the Vendor to transfer the Business, the Assets and the Stock to the Purchaser and Special Condition [ ] amends and extends the definition of 'Assets' to mean the fourteen Businesses and associated goodwill, leases, liquor and food licences and registrations, plant, equipment, furniture, fittings and chattels, motor vehicles and stock.

The submissions in the ruling request focussed on the licences and registration certificates, the Vendor's loyalty program, intellectual property, assignment of leases and the Vendor's supply agreement with Y.

General Condition [ ] in the first Contract provides that if the Business is operated with a licence the Contract is conditional upon the Responsible Authority by the Date of Settlement giving its written consent to the transfer to the Purchaser of the licence. General Condition [ ] obliges the Vendor to do all things reasonably required to assist the Purchaser in an application for the transfer of the licence and General Condition [ ] obliges the Vendor to provide to the Purchaser a letter addressed to the Responsible Authority confirming that settlement has occurred and requesting registration of transfer of the licence.

In the ruling request it was submitted that the fact that the transfer of licences to the Purchaser is beyond the Vendor's control is not a breach of the requirement in paragraph 38-325(2)(a) and reference was made to the discussion of licences which cannot be assigned but must be surrendered in paragraph 50 of GSTR 2002/5:

50. We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

Paragraph 50 of GSTR 2002/5 treats the surrender of a licence as the relevant supply by the supplier. The General Conditions referred to above do not refer to the Vendor surrendering the licences but do oblige the Vendor to do all things to assist the Purchaser in an application for the transfer of the licence. In our view that obligation brings the present case within the second sentence in paragraph 105 of GSTR 2002/5 which indicates that paragraph 38-325(2)(a) is satisfied where a supplier which may only transfer a licence attempts to gain permission from the relevant entity for the transfer of that licence:

105. Where a supplier is permitted by the relevant statutory regime to transfer the licence, permit or other statutory authorisation, it must transfer it. Where the supplier may only transfer the thing with permission from a relevant entity, it may attempt to gain that permission. As discussed in paragraph 50 above, where the supplier, having made all reasonable attempts to transfer the thing, has no option but to surrender it in favour of the recipient, the surrender and reissue will be taken to be a supply of the licence, permit or other statutory authorisation by the supplier for the purposes of section 38-325.

It was stated in the ruling request that the registration certificates will also be transferred to the Purchaser by lodging forms with the Responsible Authority. On that basis we consider that paragraph 105 of GSTR 2002/5 also applies to the registration certificates.

Special Condition [ ] in the first Contract obliges the Vendor to procure that the Vendor's loyalty program terminates at any particular business not later than the day preceding the date of settlement for that particular business. This is because the Purchaser operates its own loyalty program, the Vendor's loyalty program does not fit the Purchaser's business model and the Purchaser does not wish to assume responsibility for the Vendor's obligations under the Vendor's loyalty program. It was submitted that the Vendor's loyalty program is not necessary for the continued operation of the identified enterprise because the termination of that program will not prevent the Purchaser from continuing the operation of the identified enterprise. Paragraph 73 of GSTR 2002/5 provides that a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the recipient in the absence of the thing. Applying that test, the Vendor's loyalty program is not a thing that is necessary for the continued operation of the identified enterprise.

In relation to the leases the ruling request referred to paragraph 58 of GSTR 2002/5:

58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

It was submitted that paragraph 38-325(2)(a) is satisfied in the present case as the Vendor will either assign to the Purchaser the benefit of any lease between the Vendor and an un-related landlord or surrender or terminate any lease between the Vendor and a related party landlord and procure that landlord to grant a new lease to the Purchaser. That appears to be the effect of General Condition [ ] and General Condition [ ] (as inserted by Special Condition [ ]). We therefore agree that the Vendor is supplying the premises necessary for the continued operation of the identified enterprise.

It was submitted that as the Purchaser has its own supply agreement with Y, it is unnecessary for the Vendor to transfer to the Purchaser the Vendor's supply agreement with Y. We agree.

Operating structure and process of the identified enterprise:

Paragraph 78 of GSTR 2002/5 provides that the structure and processes used by the supplier in the operation of the identified enterprise must be supplied to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future.

Paragraph 79 of GSTR 2002/5 refers to factors such as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, introduction to existing clients and continuity of marketing arrangements.

In relation to continuation of forward bookings or orders, General Condition [ ] obliges the Vendor to maintain the goodwill of the Businesses until settlement. In relation to the passing on of information, the Assets listed in Schedule 1 include the Vendor's intellectual property in the form of office manuals. In relation to introduction to existing clients General Condition [ ] obliges the Vendor do whatever is necessary to provide Assistance to the Purchaser during the Assistance Period and General Condition [ ] defines 'Assistance' as allowing the Purchaser to observe the way the Business is conducted and introducing the Purchaser to clients, customers and suppliers of the Business.

Paragraph 124 of GSTR 2002/5 provides that continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient. Special Condition [ ] obliges the Purchaser to make offers of employment to all employees for each Business.

We therefore consider that the structure and processes of the identified enterprise are being supplied by the Vendor to the Purchaser under the first Contract.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as part of a larger enterprise carried on by the supplier).

Paragraphs 141 and 142 of GSTR 2002/5 provide that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case settlement will occur on the Date of Settlement (as defined in the General Conditions) in relation to each of the Businesses. It was stated in the ruling request that the Vendor intends to carry on the business as usual at each Business up to the day of settlement in relation to each Business and Special Condition [ ] provides that the Vendor warrants that each Business will be operated as a going concern up until the Date of Settlement for each Business. On that basis we consider that paragraph 38-325(2)(b) is satisfied.

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

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The Particulars of Sale in the first Contract state that the Price is $[ ] exclusive of any GST.

Paragraph 38-325(1)(b) requires that the recipient is registered for GST is required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. In relation to the first Contract we have confirmed that the Purchaser registered for GST with effect from 1 July 2000 and remains registered.

Paragraph 38-325(1)(c) requires the supplier and recipient to have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that '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 of a going concern. Special Condition [ ] in the first Contract states:

The Purchaser and Vendor agree that this Contract provides for the sale of a going concern at the Date of Settlement for each Business hereby sold.

We consider that Special Condition [ ] satisfies paragraph 38-325(1)(c).

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