Edited version of private advice

Authorisation Number:1051782122942

Date of advice: 11 December 2020

Ruling

Subject: GST and supply of a going concern

Question

Does the sale of the shares and the assets by the applicants of this private ruling to B1 and B2 pursuant to a sale contract (the Agreement) constitute a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

The sale of the assets by S1 and S2 respectively to B2 pursuant to the Agreement constitutes GST-free supplies of a going concern under section 38-325. This is because the supplies of the assets in respect of the dry-lease enterprises carried on by S1 and S2 satisfy the requirements under section 38-325.

The sale of the shares by S1 and S2 respectively to B1 pursuant to the Agreement do not constitute GST-free supplies of a going concern under section 38-325. However, such supplies of the shares by S1 and S2 respectively are input taxed financial supplies and are not subject to GST on the basis that such supplies satisfied the relevant requirements of a financial supply under Division 40 of the A New Tax System (Goods and Service Tax) Regulations 2019 (GST Regulations).

Relevant facts and circumstances

Background

The applicants listed in this private ruling are together referred to as the Applicants.

The business and its ownership structure prior to sale

Subco operates a crane services business that involves leasing cranes and equipment and providing the necessary operators to clients. Subco's business is referred to as a "wet-lease" business.

Subco obtains the cranes and associated equipment in its wet-lease business by leasing them from S1 and S2 who are the owners of the cranes and associated equipment. The business of leasing the cranes and equipment by S1 and S2 to Subco is referred to as a "dry-lease" business.

Subco is the sole client of S1 and S2.

The crane operators are employees of Subco.

Subco's 4 shareholders are: Mr X, Mrs X, S1 and S2 (who each hold one Subco share, and together owns all of the shares in Subco).

S1's 4 shareholders are: Mr X and Mrs X (who each hold two S1 shares, and together owns all of the shares in S1).

S2' 2 shareholders are: Mr X and Mrs X (who each hold one S2 share, and together owns all of the shares in S2).

Mr X and Mrs X are therefore the ultimate shareholders of all shares in all the three related companies (S1, S2, and Subco).

For asset protection purposes, the cranes and equipment were owned by S1 and S2, and leased to Subco who in turn provided its crane services to end users.

From the perspective of all seller entities as a group, the ownership structure effectively means S1 and S2 stored the cranes and equipment needed for the business whilst Subco employed the crane operators and had the sole dealings with end users.

The seller entities have considered its identified enterprise for GST purposes as the business that incorporates both the dry and wet-lease businesses.

The sale transaction

B1 agreed to purchase all four shares in Subco (the shares) for approximately $X million.

An associated company, B2 agreed to purchase approximately $Y million worth of cranes and equipment (the assets) from S1 and S2.

B1 and B2 wanted to acquire the Subco business enterprise and the Lee entities wanted to sell their whole enterprise. Buying the shares alone would have given the buying entities ownership of Subco, but not the means of running the business. They would not have owned the cranes and equipment necessary to run the business. Similarly, buying the assets alone may have put them in a position to dry-lease the assets to Subco, but not to operate Subco.

To acquire the whole enterprise, the buying entities needed to acquire the shares in Subco and sufficient selected cranes and equipment to fill the wet-lease needs of the business. For reasons similar to those originally adopted by the seller entities, the buying entities acted on advice to protect the assets by having them owned by a separate entity.

It was agreed that Subco would continue to operate under its own name, with predominantly the same staff, officed at the same premises and using the same operating systems.

The sale of the shares to B1 and the sale of the assets to B2 formed part of an arrangement governed by a single contract called the Agreement. The sale of the shares and the assets were linked and to be completed contemporaneously.

The Agreement is a single document.

The suppliers are all associated to each other. Likewise, the recipients are associated to each other. However, the sale transaction is an arms' length transaction between non-associated buyers and sellers. That is, none of the suppliers are associated with any of the recipients.

The transaction was completed on XX XXXX 20XX.

The business and its ownership structure post sale transaction

After the sale transaction, Subco continues to operate its wet-lease business of providing crane services to clients in the same manner as it did before the sale transaction. The ownership structure post sale transaction effectively mirrored the ownership structure of the enterprise prior to the sale. The entity to which the assets were sold (B2) is closely associated with the entity that acquired the shares of the business (B1).

The assets were sold on the understanding that they would continue to be available for lease by Subco. The assets are now leased by B2 to Subco such that B2 now operates a dry-lease business. The assets are, for all intents and purposes, the same as those provided prior to the sale by S1 and S2.

The crane operators are employees of Subco and are the same employees as prior to the sale.

Subco's shareholder is B1 who owns all four Subco shares.

The ultimate shareholders of the buying entities established, operated and built up a successful crane hire service business and decided to build on their success by acquiring the Subco business.

B2 is a wholly owned subsidiary of B1.

Going concern related facts

The shares were supplied for consideration.

The assets were supplied tor consideration.

The Applicants submit that B1 was required to be registered for GST on and from the date of Completion. As at the date of this private ruling B1 is registered for GST effective from XX XXXX 20XX.

B2 was registered for GST on the completion date.

The Agreement stipulates that the parties' agree that the sale of the assets when taken with the sale of shares constitutes the supply of a going concern as defined in the GST Act.

The sellers of the shares and assets continued to carry on its business activities until the day of completion of the sale transaction.

The Applicants contend that the sale transaction was reduced to a single document to reflect the essence of the transaction being for the sale of all things necessary for the continued operation of the enterprise.

The Applicants submit that all of the things necessary for the continued operation of the business were sold under the arrangement.

The assets acquired by B2 from S1 and S2 did not constitute the entirety of the assets owned by S1 and S2. The assets not sold include old cranes and equipment excess to current needs, unneeded motor vehicles, worksite tents and domes, and old and unused equipment. Those assets were acquired over the course of time but are not necessary to the continued operation of the dry-lease business because they are either excess to needs or old and unused.

S1 and S2 leased several premises for storing the cranes and equipment. A couple of those leases, considered to be excess to needs, were not acquired by B2.

Additional information

Both Mr X and Mrs X are not registered for GST and do not have ABNs.

The Applicants agree to the use of short form reporting for the purposes of drafting this private ruling.

Prior to the sale transaction

S1 and S2 respectively owned different assets. Cranes and associated equipment were owned by S1. S2 owned the transport equipment (trucks and trailers) used to transport the cranes. In this ruling, the assets supplied by S1 and S2 under the sale transaction are collectively referred to as 'the assets'.

Subco only wet-leased cranes and equipment they knew S1 or S2 could provide.

There are no written agreements detailing the dry-lease arrangement between Subco and S1 and S2 respectively. The Applicants submit that the dry-lease agreements are sufficiently evidenced from other documents such as invoices and payment of consideration in the form of fees to the S1 and S2 (as lessors).

Each crane or equipment wet-leased involved a corresponding dry-lease arrangement with S1 or S2, and a separate invoice for each such transaction.

There was no formal dry-lease document to be assigned at completion of the sale transaction. Each asset was dry-leased on an as-needed basis. For the cranes and equipment still in the field at completion, the dry-lease fee was paid proportionally to the entity that owned it at the relevant time. The only formal document associated with that assignment is the Agreement.

The unwritten dry-leases associated with the sold assets were transferred with the sale. That is, the enterprise was being acquired as a going concern, with all Subco's benefits and obligations, particularly in relation to the acquired assets.

In that sense, even though there were no written dry-lease agreements, if the assets B2 acquired were 'in the field' (that is, dry-leased) then B2 acquired those assets subject to the dry-lease. The contractual parties to the Agreement understood, and it was the intent of the Agreement, that any acquired assets that were being dry-leased at the completion date would be acquired subject to the continuation of the dry-lease.

Post sale transaction

There are no written agreements detailing the dry-lease arrangement between Subco and B2. In this regard, the dry-lease arrangements pre-sale and post-sale are identical. The Applicants submit that the dry-lease agreement post-sale is sufficiently evidenced from other documents such as invoices and payment of consideration in the form of fees to B2 (as lessor).

Reasons for decision

Subdivision 38-J provides that, if certain conditions are satisfied, the 'supply of a going concern' is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the 'supply of a going concern'.

Section 38-325 provides that:

(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).

With regard to the requirements under subsection 38-325(2), paragraph 21 of 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) (GSTR 2002/5) states:

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

Furthermore, when discussing the meaning of the term 'the supplier supplies', paragraphs 41 and 42 of GSTR 2002/5 provide that:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. ...

42. The requirements in paragraphs 38-325(2)(a) and (b) must be met by the same single supplier.

As such, when considering the GST consequences of sale transactions involving multiple suppliers, it would be necessary to separately analyse each respective suppliers' supplies as opposed to analysing an aggregation of all supplies of multiple suppliers as a single supply. In this case, it would be necessary to consider the nature of the identified enterprise carried on as well as the supplies made by each of the respective suppliers under the sale transaction.

What is the identified enterprise carried on by the supplier?

The seller entities have considered its identified enterprise for GST purposes as the business that incorporates both the dry and wet-lease businesses. However, if the identified enterprise was to be viewed as that incorporating both the dry and wet-lease business the supplies that occur under the sale transaction pursuant to the Agreement would not satisfy all the requirements under section 38-325. This is because not all of the things that are necessary for the continued operation of an identified enterprise that incorporates both the dry and wet-lease business would be supplied by the respective suppliers. In particular, Subco who operates the wet-lease business is not a party to the Agreement and it does not make supplies to the buying entities under the sale transaction that would amount to supplying all things necessary for the continued operation of the wet-lease business.

Relevantly, it would therefore be necessary to consider the nature of the identified enterprise carried on as well as the supplies made by S1 and S2 respectively.

Paragraph 131 of GSTR 2002/5 provides that:

Supply of parts of an existing enterprise to two or more recipients

131. Paragraph 38-325(2)(a) expressly recognises that the supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise that is capable of separate independent operation may be a 'supply of a going concern'. Therefore, there may be more than one 'supply of a going concern' when separately identifiable parts of a larger enterprise are supplied.

Therefore in the circumstances of the sale transaction, the Commissioner considers that the sale of the assets by S1 and S2 respectively to B2 constitutes GST-free supplies of a going concern under section 38-325. This is because the supplies of the assets are in respect of the dry-lease enterprises carried on by S1 and S2, and which satisfy the requirements under section 38-325.

An alternative view may be to consider the identified enterprises of S1 and S2 as that incorporating both a dry-lease enterprise and part ownership in the entity that operates the wet-lease enterprise (Subco). However, paragraphs 171 and 172 of GSTR 200/5 provide that:

Going concerns and shares

171. When all of the shares constituting the issued capital of a company are supplied as part of the supply of everything necessary for the continued operation of an enterprise under an arrangement, whether or not the supply of the shares will be under a relevant arrangement will be a question of fact. If the shares are utilised in carrying on the 'identified enterprise', then they may be supplied under the relevant arrangement. Where shares are merely passive investments, they will not be capable of being supplied under the relevant arrangement.

172. The supply of a bundle of shares which does not constitute the whole of the issued capital of a company will be a supply of one of the things necessary for the continued operation of an enterprise where the shares are essential to the continued operation of the enterprise, for example, as trading stock, membership of buyers' cooperatives or a shareholding in a competitor.

In this case, the circumstances of the sale transaction do not support a conclusion that the supply of a part ownership interest in Subco by S1 and S2 respectively would be essential to the continued operation of the wet-lease enterprise, or the dry-lease enterprise, or an identified enterprise that incorporates both a dry-lease enterprise and part ownership in Subco.

Furthermore, notwithstanding the above, paragraphs 196 and 197 of GSTR 200/5 provide that:

Going concerns and companies

196. The supply of all of the shares in a company that conducts an enterprise is not the 'supply of a going concern' when the shares are all that is supplied. The supply of the shares may satisfy the test in paragraph 38-325(2)(a) as it is the supply of all of the things that are necessary for the continued operation of an enterprise. The supplier of the shares is the shareholder. The supply will fail the test in paragraph 38-325(2)(b) because the supplier of the shares does not conduct the enterprise and so cannot carry it on until the day of the supply. The 'identified enterprise' is the enterprise conducted by the entity which is the company. A supply of shares may be a financial supply.21

197. However, where an entity which conducts an enterprise is a company and the company supplies all of the things that are necessary for the continued operation of the enterprise in accordance with the conditions of subdivision 38-J, there will be a GST-free 'supply of a going concern'.

In light of the above, the Commissioner considers that the supplies of the Subco shares by S1 and S2 respectively to B1 do not constitute GST-free supplies of a going concern as the requirements of subsection 38-325(2) are not considered satisfied. However, such supplies of the shares are considered input taxed financial supplies and are not subject to GST on the basis that such supplies satisfied the relevant requirements of a financial supply under Division 40 of the GST Regulations.

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