Edited version of private advice

Authorisation Number: 1051831840155

Date of advice: 28 April 2021

Ruling

Subject: GST - supply of a going concern

Question

Is your, <name>'s (You) sale of the Assets to Company M and Company P under the Asset Sale Agreement 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

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

XX December 20XX

Relevant facts and circumstances

You carry on a business specialising in <specialisation name>. You are currently registered for GST and have been since <date>.

You operate a business unit based in <location> known as <business unit name>. At the date of sale, <business unit name> consisted of five projects.

One of the projects did not form part of the transaction under the Asset Sale Agreement and you continue to deliver the services under that contract. The other four projects are hereafter referred to as the Projects or the Transferred Projects.

You have advised that, to the best of your understanding, none of the operations for these Projects have ceased.

You entered into a contract to sell the four Transferred Project Contracts, the assets used exclusively in connection with those Projects and certain inventory to Company M and Company P. The contract of sale, titled 'Asset Sale Agreement', was executed on <date> by you, the Seller Guarantor, Company M, Company P and the Buyer Guarantor.

You and your related entity <related entity name> also entered into a separate contract with Company M to supply it with certain business support services to support the transition of the operation of the Projects to Company M. This contract, titled 'Transitional Services Agreement', was also executed on <date>.

Key elements of the Asset Sale Agreement (ASA)

Sale of assets

The ASA provides that you agree to sell the Assets to Company M and Company P, and Company M and Company P agree to buy the Assets from you, for the purchase price (Purchase Price) on the terms and conditions of the ASA, such that in respect of the Assets:

a)    the Project Contracts will be novated, and certain other contracts relating to the Projects (the Other Contracts) will be novated or assigned to Company M

b)    the Inventory will be sold to Company M

c)    the Transferring Employees will be employed by Company M

d)    the Plant and Equipment will be sold or transferred to Company P.

'Assets' is defined in the ASA to mean:

a)    the Project Assets

b)    the Surplus Assets.

'Project Assets' is defined in the ASA and refers to the Plant and Equipment, Inventory and Project Contracts for the Transferred Projects.

'Project Contract' is defined in the ASA and refers to the services contracts entered into between you and other entities for the Transferred Projects. The novation deeds which novate these Project Contracts to Company M are provided in the ASA.

The 'Inventory' is defined in the ASA and refers to the inventory (including components, spares, consumables, tyres and other raw materials, work in progress and finished goods, as applicable) owned by and held to be sold by you in connection with each of the Projects.

The 'Plant and Equipment' for each Project is defined in the ASA and refers to:

a)    the plant, property, equipment and motor vehicles owned by you and used exclusively in connection with operating each of the Projects

b)    the machinery and motor vehicles leased by you and used exclusively in connection with operating each of the Projects

Purchase Price for the Assets

The ASA provides that the Purchase Price for the Assets is $<number> as adjusted under the ASA. Company M and Company P must pay the Purchase Price in accordance with the arrangements set out in the ASA.

Obligations at completion

The ASA provides that the completion of the ASA will occur once you and Company M and Company P satisfy their respective obligations on the Completion Date.

'Completion Date' is defined in the ASA to be the later of several dates depending on the satisfaction or waiver of certain Conditions Precedent set out in the ASA. You have advised that completion of the ASA took place on <date>.

Agreement as to supply of a going concern

The ASA provides that the parties to the ASA (which includes you and Company M and Company P) agree that the supply of the Assets constitutes the supply of one or more going concerns.

As per the ASA, Company M and Company P are both registered for GST and will be so registered on completion of the ASA.

The Project Contracts and the novation deeds

Each Project novation deed contained in the ASA novates your role under the Project Contract to Company M. The Project Contract which is novated to Company M is specified in each novation deed. Each of the Project Contracts were in force at the date of completion of the ASA and had not yet expired. You have supplied information detailing the nature of the services you provide under the Project Contracts.

Licensing arrangements for the Transferred Projects

You have supplied information detailing the nature of the licensing arrangements for the Transferred Projects.

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 9-20

A New Tax System (Goods and services Tax) Act 1999 section 38-325

Acts Interpretation Act 1901 section 23

Reasons for decision

Summary

Your sale of the Assets (as defined in the ASA) to Company M and Company P is not a supply of a going concern that is GST-free. GST is payable on the sale.

Detailed reasoning

Section 9-5 of the GST Act provides that you make a taxable supply if:

a)    you make the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that you carry on

c)    the supply is connected with the indirect tax zone

d)    you are registered or required to be registered.

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

Your sale of the Assets satisfies paragraphs 9-5(a) to (d) of the GST Act and is not an input taxed supply, therefore it needs to be determined whether your sale of the Assets is a supply of a going concern that is GST-free under section 38-325 of the GST Act.

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

a)    the supply is for consideration

b)    the recipient is registered or required to be registered

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

Based on the facts in your case, your sale of the Assets satisfies the requirements of paragraphs 38-325(1)(a) to (c) of the GST Act.

It needs to be considered whether the sale of the Assets can be regarded as a supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement which:

a)    the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise

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).

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) explains what a 'supply of a going concern' is and when this supply is GST-free for the purposes of section 38-325 of the GST Act.

Each element of subsection 38-325(2) will now be considered and applied to the facts of your sale of the Assets.

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 discuss what is meant by a 'supply under an arrangement':

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. 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 which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, 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 of the transactions entered into and the circumstances in which the transactions are made.

Based on the facts in your case, your sale of the Assets along with the novation of the Project Contracts, written agreements effecting the sale or transfer of the Plant and Equipment, Inventory and Other Contracts, and the Transitional Services Agreement constitute a supply under an arrangement and therefore this element is satisfied.

Identified enterprise

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

The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done:

a)    in the form of a business; or

b)    in the form of an adventure or concern in the nature of trade; or

c)    on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

Paragraphs 30, 32 and 37 of GSTR 2002/5 discuss when the supply of an identified enterprise that is within a larger enterprise will be a supply of a going concern:

30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

32. A supply of all the things necessary for the continued operation of an activity which is part of an enterprise cannot be a 'supply of a going concern' unless the conduct of the activity is itself an 'enterprise' as defined in section 9-20.

37. The following elements are indicators that part of an enterprise may be carried on 'in the form of' a business:

-        a degree of autonomy;

-        a separate management structure;

-        a system of internal user charging;

-        a separate budget; and

-        agreements with internal service providers or external customers.

In your case, the services you provide in connection with the Transferred Projects constitute the identified enterprise and therefore this element is satisfied.

The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supply all the things necessary for the continued operation of the identified enterprise to the recipient. Paragraphs 72 to 75 and 78 of GSTR 2002/5 discuss this in further detail:

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'. ...

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. ...

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.

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Paragraphs 41 to 45 GSTR 2002/5 focus on the requirement that there be a single supplier and a single recipient:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration. ...

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

43. Section 23 of the Acts Interpretation Act 1901 provides rules as to gender and number. It states:

23 In any Act:

(a)  words importing a gender include every other gender; and

(b)  words in the singular number include the plural and words in the plural number include the singular.

44. However, the application of section 23 of the Acts Interpretation Act 1901 to another Act, or a provision of another Act, is subject to a contrary intention. We are of the view that a contrary intention is evidenced by the words used in subsection 38-325(2). This requires an entity to conduct the enterprise which is to be carried on until the day of the supply. It follows that the supplier is an entity (singular) as only an entity can carry on an enterprise....

45. Similarly, the requirement in paragraph 38-325(2)(a) can only be met where a single entity is the recipient of the supply. This is because the supplier must supply all of the things that are necessary for the continued operation of the 'identified enterprise' to the recipient and the recipient must be put in a position on the day of the supply where it can, if it so chooses, continue to operate that enterprise. Only an entity can operate an enterprise and the supplier cannot put more than one recipient in a position to operate a single enterprise.

You have submitted in your private ruling application that this approach is a narrow interpretation of paragraph 38-325(2)(a) of the GST Act, and that a broader interpretation of allowing a single supplier to supply a single enterprise to multiple recipients is supported under section 23 of the Acts Interpretation Act (AIA). You have also submitted that you consider two entities can work together to operate a single enterprise. You have advised that Company P is a wholly incorporated subsidiary of Company M and that Company P will lease the Plant and Equipment to Company M.

In your case:

•         you have supplied to Company M the Project Contracts, Other Contracts, and Inventory under the ASA, and the Services under the Transitional Services Agreement

•         you have supplied to Company P the Plant and Equipment under the ASA.

The practical consequence of this is that Company M will hold the four Project Contracts, Other Contracts and Inventory, but it is not the recipient of all things necessary to conduct the identified enterprise. Similarly Company P will hold the Plant and Equipment, but it is also not in a position to carry on the enterprise. The operation of the identified enterprise, therefore, has been split among two entities. This is contrary to paragraph 38-325(2)(a) of the GST Act.

Section 38-325 of the GST Act can support more than one supplier supplying more than one enterprise to more than one recipient under an arrangement, consistent with section 23 of the AIA. However, for each enterprise supplied, there must be only one supplier and one recipient of all the things necessary for its continued operation. This is because section 38-325 of the GST Act:

•         refers to the supply of a going concern - that is, one going concern

•         refers to the supplier and the recipient - that is, one supplier and one recipient

•         refers to the continued operation of an enterprise - that is, one enterprise.

The use of the singular in each of these phrases indicates that only one entity may supply all the things necessary, and only one recipient may receive all the things necessary, for the continued operation of the enterprise being supplied. Having more than one recipient for a single supply of a single enterprise is contrary to the intent of that section. Therefore section 23 of the AIA will not apply in this case.

Paragraph 5.110 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998relevantly provides '...if you separately supply parts of an enterprise that are not of themselves a going concern, those supplies will not be GST-free.'

In your case, you are supplying parts of the identified enterprise to more than one entity under one arrangement. While you are selling the Assets to both Company M and Company P under the one ASA at the same time, the ASA itself is not a supply. The ASA is the mechanism through which the supplies are made. The ASA clearly provides that there are separate supplies of separate things to Company M and Company P. Neither supply constitutes a going concern because neither supply is supplying all the things necessary for either Company M or Company P to continue the operation of the four Projects on their own.

As per paragraph 41 of GSTR 2002/5 above, the proposition that two entities can work together to operate a single enterprise is clearly inconsistent with paragraph 38-325(2)(a) of the GST Act. Company M (a recipient) needs Company P (another recipient) to provide it with the Plant and Equipment in order to carry on the identified enterprise. Only the supplier may supply all things necessary for the continuation of the identified enterprise in order for paragraph 38-325(2)(a) of the GST Act to apply. The fact that Company P is a subsidiary of Company M is irrelevant as they are both separate entities and, therefore, separate recipients.

We have considered whether the arrangement described paragraphs 131 to 134 of GSTR 2002/5 applies to you. However, given this arrangement does not present on the facts you have provided, we consider it does not apply.

As such, paragraph 38-325(2)(a) of the GST Act has not been satisfied and your supply of the Assets to Company M and Company P is not a supply of a going concern that is GST-free under section 38-325 of the GST Act.

ATO view documents

Goods and Services Tax Ruling GSTR 2002/5 Goods and services Tax: when is a 'supply of a going concern' GST-free?

Other references (non ATO view)

Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998

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