Edited version of your written advice

Authorisation Number: 1013135223203

Date of advice: 2 December 2016

Ruling

Subject: GST and supply of going concerns

Question 1:

Is Entity A making 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), when it sells the property together with the leasehold interest in the property?

Answer:

Yes. Entity A is making a GST-free supply of a going concern under section 38-325 of the GST Act, when it sells the property together with the leasehold interest in the property.

Question 2

Is Entity C making a GST-free supply of a going concern under section 38-325 of the GST Act, when it sells the business enterprise it carries on from the property?

Answer:

Yes. Entity C is making a GST-free supply of a going concern under section 38-325 of the GST Act, when it sells the business enterprise it carries on from the property.

Relevant facts and circumstances

Entity A is registered for goods and services tax GST).

Entity A owns land on which a business has been constructed.

The enterprise of Entity A consists of leasing the business to Entity C.

Entity C is registered for GST.

The enterprise of Entity C consists of operating a particular business.

Entity A enters into a contract to sell the property, together with the leasehold interest, to Entity B.

Entity B is registered for the GST.

Entity A and Entity B have agreed in writing that the supply is of a going concern.

The supply of the property from Entity A to Entity B is made for consideration.

Entity A will supply all of the things necessary for the continued operation of its enterprise and will carry on its enterprise up to the time of supply.

Entity C enters into a sale contract to sell its business to Entity B.

Entity C and Entity B have agreed in writing that the supply is of a going concern.

The supply of the business from Entity C to Entity B is made for consideration.

Entity C will supply all of the things necessary for the continued operation of its business enterprise and will carry on its enterprise up to the time of supply.

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

Summary

The supply of the property from Entity A to Entity B is made for consideration; Entity B is registered for GST at the time the supply is made and Entity A and Entity B have agreed in writing that the supply is of a going concern. In addition, Entity A will supply all of the things necessary for the continued operation of its enterprise and will carry on its enterprise up to the time of supply.

Therefore, Entity A is making a GST-free supply of a going concern, for the purposes of section 38-325 of the GST Act, when it sells the property to Entity B.

Detailed reasoning

Under the arrangements, Entity A is to supply the property, which includes the leasehold interest in the business to Entity B under a contract and Entity C is to supply the business to Entity B under another contract.

Goods and Services Tax Ruling GSTR 2002/5 discusses when the supply of a going concern is GST-free, and states at paragraph 137:

137. It is not uncommon to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. When the two entities sell their enterprises to one recipient and the contracts are interdependent, each supply must be considered separately.

Therefore, we need to determine the GST status of the supply of the property made by Entity A to Entity B separately from the supply of the business made by Entity C to Entity B.

GST is payable on a taxable supply under section 9-5 of the GST Act. The transaction between Entity A and Entity B satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a) Entity A makes the supply for consideration by way of payments

(b) The supply is made in the course or furtherance of Entity A's enterprise (which includes activities done in termination of the enterprise)

(c) The supply is connected with Australia as Entity A carries on an enterprise in Australia, and

(d) Entity A is registered for GST.

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

There are no provisions under the GST legislation in which the supply of the property could have been input taxed. What remains to be determined is whether the supply is GST-free. 

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. Subsection 38-325(1) 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.

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

The condition at paragraph 38-325(1)(a) of the GST Act is satisfied as Entity A makes the supply to Entity B for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as Entity B will be registered for GST at the time of settlement.

The condition at paragraph 38-325(1)(c) of the GST Act is satisfied as Entity A and Entity B have agreed in writing that the supply is of a going concern.

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act provides the definition 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).

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into, on or prior to the day of the supply.

Further paragraph 20 of GSTR 2002/5 provides that 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 the transactions entered into and the circumstances in which the transactions are made.

From the information provided, Entity A is the owner of the property and is the supplier who enters into the contract for the supply of the property and the leasehold interest to Entity B.

The supply by Entity A to Entity B is made under this arrangement, which is entered into prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

The term 'enterprise' is defined in section 9-20 as 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; or

● on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; or

…

From the information provided, Entity A conducts an enterprise of leasing the property, which is the identified enterprise.

What needs to be determined is whether Entity A has supplied to Entity B all the things necessary for the continued operation of this leasing enterprise.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, 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.

While a number of things are commonly necessary for the continued operation of an enterprise, not all things will always be necessary for the continued operation of a particular enterprise. Paragraph 83 of GSTR 2002/5 states:

83. Certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things (that is, they are not essential).

In this case Entity A is supplying the property, which includes the land, the improvements and the leasehold interest. We consider Entity A is supplying all things necessary for the continued operation of the leasing enterprise under its arrangement with Entity B, and therefore paragraph 38-325(2)(a) of the GST Act is satisfied.

Paragraph 141 of GSTR 2002/5 states: 

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

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.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the information provided, Entity A continued to carry on the leasing enterprise until the day of the supply to Entity B. Paragraph 38-325(2)(b) of the GST Act is satisfied.

Accordingly, Entity A is making a supply of a going concern as defined in subsection 38-325(2) of the GST Act in relation to the supply of the leasing enterprise to Entity B, and the supply is GST-free.

Question 2

Summary

The supply of the business by Entity C to Entity B is made for consideration, Entity B will be registered for GST at the time the supply is made and Entity C and Entity B have agreed in writing that the supply is of a going concern. In addition, Entity C will supply all of the things necessary for the continued operation of its business enterprise and will carry on its enterprise up to the time of supply.

Therefore, Entity C is making a GST-free supply of a going concern, for the purposes of section 38-325 of the GST Act, when it sells the business it operates to Entity B.

Detailed reasoning

Under the arrangement between Entity C and Entity B, Entity C is to supply the business to Entity B under the contract.

GST is payable on a taxable supply under section 9-5 of the GST Act. The transaction between Entity C and Entity B satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a) Entity C makes the supply for consideration by way of payments

(b) The supply is made in the course or furtherance of its enterprise (which includes activities done in termination of the enterprise)

(c) The supply is connected with Australia as Entity C carries on an enterprise in Australia, and

(d) Entity C is registered for GST.

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

There are no provisions under the GST legislation in which the supply of the business operated by Entity C could be input taxed. What remains to be determined is whether the supply is GST-free. 

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. Subsection 38-325(1) 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.

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

The condition at paragraph 38-325(1)(a) of the GST Act is satisfied as Entity C makes the supply to Entity B for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as Entity B will be registered for GST at the time of settlement.

The condition at paragraph 38-325(1)(c) of the GST Act is satisfied as Entity C and Entity B have agreed in writing that the supply is of a going concern.

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act provides the definition 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).

From the information provided, Entity C is the operator of the business, owner of the business assets and the lessee under the business lease. Entity C is the supplier who enters into the contract for the supply of the business to Entity B.

The supply of the business by Entity C to Entity B is made under this arrangement, which is entered into prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

From the information provided, Entity C operates a business, which is the identified enterprise.

What needs to be determined is whether Entity C has supplied to Entity B all the things necessary for the continued operation of this business.

From the information provided, Entity C supplied to Entity B the assets of the business, or used by Entity C in connection with the business.

For statutory licences, 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. 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 supply of the licence by the supplier for the purposes of section 38-325 of the GST Act (paragraph 105 of GSTR 2002/5). In this circumstance, the parties will undertake all steps with the appropriate authorities to cause the conditional transfer of the licences from Entity C to Entity B effective from settlement.

Therefore, Entity C is taken to have supplied the licences for the purposes of section 38-325 of the GST Act.

These facts indicate that Entity C has supplied the business assets necessary for the continued operation of the business enterprise, and the operating structure and process of the enterprise.

While a number of things are commonly necessary for the continued operation of an enterprise, not all things will always be necessary for the continued operation of a particular enterprise. Paragraph 83 of GSTR 2002/5 states:

83. Certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things (that is, they are not essential).

In this case, Entity C has excluded some assets from the sale to Entity B. We do not consider these assets necessary for the continued operation of Entity C's enterprise.

As such, we consider Entity C is supplying all things necessary for the continued operation of the business enterprise under its arrangements with Entity B, and therefore paragraph 38-325(2)(a) of the GST Act is satisfied.

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.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the information provided, Entity C will continue to carry on the business enterprise until the day of the supply to Entity B. Paragraph 38-325(2)(b) of the GST Act is satisfied.

Accordingly, Entity C is making a supply of a going concern as defined in subsection 38-325(2) of the GST Act in relation to the supply of its business to Entity B, and the supply is GST-free.

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