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Edited version of your written advice
Authorisation Number: 1051451253903
Date of advice: 8 November 2018
Ruling
Subject: GST and supply of a going concern
Question 1
Is the sale of the business by the Company a 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.
Question 2
Is the sale of the properties by the Partnership a GST-free supply of a going concern under section 38-325 of the GST Act?
Answer
Yes.
Relevant facts and circumstances
The Company carried on a specified enterprise in Australia (the Business). The Company has been registered for GST for many years.
The directors of the Company have been registered for GST as a partnership (the Partnership) for many years.
The Partnership owned a number of properties (specified properties) which were used by the Company in the Business. There was a formal lease agreement in place under which the Partnership had leased the specified properties to the Company.
The Company also owned a property which it used in the Business.
On a specified date, the Company entered into the Business Sale Agreement with the Purchaser for the sale of the Business for a specified price. On the same day the Partnership, Company and the Purchaser entered into an agreement (Land Contract) for the sale of the property owned by the Company and the specified properties owned by the Partnership for a specified price.
The Purchaser has been registered for GST for many years.
Business Sale Agreement
Under the Business Sale Agreement the Company was to supply all of the things necessary for the continued operation of the Business. That is the Company agreed to supply all the assets and the operating structure of the enterprise to the Purchaser.
Under the Business Sale Agreement the Purchaser made offers of continuing employment to the employees of the Company.
The sale of the Business was subject to the supply of the property owned by the Company and the specified properties owned by the Partnership.
The Business Sale Agreement provided that the Business Sale Agreement and the Land Contract were interdependent and the completion of both contracts had to take place simultaneously.
The Business Sale Agreement defined Land Contract to mean the contract of sale of those properties owned by the Company and Partnership.
The Business Sale Agreement provided that the Company was and would be the occupier, lessee or tenant of the real property described in that agreement on completion.
Under the Business Sale Agreement the Company was required to carry on the Business in the usual and ordinary course until the completion date.
The Business Sale Agreement provided the Company and the Purchaser agreed that the sale of the Business was a supply of a going concern and the purchaser warranted that they would be registered for GST on the completion date.
Land Contract
The Land Contract sets out details of the properties owned by the Company and the Partnership which were to be sold to the Purchaser.
The Company used the above properties in the course of the Business.
The Land Contract did not specify that all the properties were subject to the lease.
The Land Contract provided that the completion of the Land Contract was interdependent with completion of the Business Sale Agreement and was required to take place simultaneously.
Under the Land Contract the Partnership and the Purchaser agreed that the sale was a supply of a going concern and the Purchaser warranted that they would be registered for GST on the completion date.
Transfer of Lease
On the day of the supply, the Partnership, Company and the Purchaser entered into the Transfer of Lease under which the Company assigned the lease of the properties to the Purchaser.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 38-325
Reasons for decisions
Summary
The supply of the Business by the Company to the Purchaser and the supply of the leasing enterprise by the Partnership to the Purchaser meet the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and are therefore GST-free.
Detailed reasoning
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).
In order to determine whether the sale of the Business by the Company and the properties by the Partnership are a GST-free supply of a going concern, firstly it needs to be determined whether each sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.
Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.
In this case there are two identified enterprises for the purposes of subsection 38-325(2) of the GST Act. Prior to the day of the supply, the Company was carrying on the Business and the Partnership was carrying on a leasing enterprise.
Therefore, each entity was required to supply to the Purchaser all of the things that were necessary for the continued operation of their respective enterprises and carry on the enterprise until the day of the supply in order to satisfy the requirement of subsection 38-325(2) of the GST Act.
Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ’supply of a going concern’ GST-free? (GSTR 2002/5) provides guidance on the application of going concern provisions.
Paragraphs 137 to 140 of GSTR 2002/5 deal with the supply of two separate enterprises by two suppliers to one recipient as follows:
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.
138. Where both supplies occur on the same day, each enterprise which is the subject of the separate supplies must be capable of continued operation by the recipient. The supplier of each enterprise can supply all of the things necessary to the recipient to enable them to continue to operate both enterprises. When the supply of both enterprises occurs simultaneously, the recipient of the reversionary interest at the time of the supply of that interest is therefore capable of receiving the benefits of the covenants under the lease.
Example 22: Supply of two enterprises to one recipient
139. Mr Flintrock owns a commercial property that he leases to Bedstone Pty Ltd, a company of which Mr and Mrs Flintrock are directors and shareholders. Bedstone operates a motel enterprise from the premises. Stoneage Pty Ltd will acquire both enterprises. The successful completion of each contract is subject to the completion of the other contract. Both settlements will take place at the same time.
140. Mr Flintrock is carrying on an enterprise of leasing and can supply everything necessary for the continued operation of that enterprise to Stoneage as a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. Bedstone will sell all the plant, equipment and goodwill, together with forward bookings. Provided that Bedstone also assigns the lease of the premises to Stoneage, it will be making a GST-free supply of a going concern.
We consider that the facts of this case are similar to the above example. In this case the parties entered into the Business Sale Agreement for the sale of the Business to the Purchaser and the Land Contract for the sale of the properties to the Purchaser. The successful completion of each contract was subject to the completion of the other contract and both settlements took place at the same time.
The Company supplied all of the things necessary for the continued operation of the Business to the Purchaser including the business premises. That is, the Company sold its own property and assigned the lease of the leased properties to the Purchaser pursuant to the Transfer Lease.
The Partnership was carrying on a leasing enterprise from the specified properties. All of the things necessary for the supply of a leasing enterprise include the property and the covenants under the lease. Whilst the Land Contract did not specify that all the properties were supplied subject to the lease, the Business Sale Agreement provided that the Company was and would be the occupier, lessee or tenant of the premises on completion.
Taking all the circumstances of the case into account, we accept that the Partnership also supplied all of the things necessary for the continued operation of the leasing enterprise to the Purchaser.
Accordingly, the supply of the Business by the Company and the supply of the leasing enterprise by the Partnership meet the requirements of subsection 38-325(2) of the GST Act.
Both supplies also meet all the requirements of subsection 38-325(1) of the GST Act and are therefore GST-free supplies.
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