Disclaimer
You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1051868625975

Date of advice: 16 September 2021

Ruling

Subject: GST and supply of a going concern

Question

Will the sale of the Hotel be 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) if the sale is made while the operations of the Hotel are suspended?

Answer

The sale of the Hotel will not be a GST-free supply of a going concern under section 38-325 of the GST Act if the sale is made while the operations of the Hotel are suspended.

Relevant facts and circumstances

The Vendor is currently the operator of several hotels in Australia.

Although there are shared services across the Vendor's hotels, such as insurance policies which cover all of its hotel operations, the Hotel is nevertheless operated with a degree of autonomy including having its own financial budget, reporting its own profit and loss, operating its own banking account, contracting directly with guests, operating its own online booking site and making decisions on staff.

Due to the impact of Covid-19 and in particular its impact on the tourism and leisure sector of the economy, the Vendor made a decision to temporarily suspend some of its operation. In early 2020 the operations of the Hotel were suspended.

A decision was made to reduce operating costs by suspending operations at the Hotel. Another hotel was assessed by management as having better facilities and therefore is better equipped to operate in the current Covid-19 context.

The restrictions stipulated that bookings were to be cancelled where guests have not checked-in and no new bookings can be made except for authorised workers.

The Hotel could have operated in-between the various closures; however, reopening is onerous logistically and involves much more than flicking a switch. Closure of borders effectively placed restrictions on travellers originating or passing through the State where the Hotel is located. These restrictions along with those imposed by the Commonwealth were in place for periods extending well beyond the closures.

Notwithstanding the suspension of some activities, furniture, fittings and plant have been retained and remain in the Hotel. All utilities (electricity, gas and water) are connected and active.

Although staff numbers have been substantially reduced, some staff continue to be retained to maintain the Hotel during the current trading suspension. Currently on site are contractors to check and confirm the operation of Fire, Life, Health, Safety and Security as required by regulations. A contractor continues to routinely service lifts at the normal intervals every 6 months. Gardeners are continuing to maintain the grounds. In addition, the Vendor's employees are conducting maintenance and cleaning routinely. On site staff are limited to the 24 hour security team. No other staff are on site, with enquiries being redirected to the neighbouring hotel owned by the Vendor.

The business name registration for the Hotel is current. All licences necessary for the operation of the Hotel are current and have been renewed as and when they fall due. Insurance cover for the property furniture, fittings, equipment, as well as Workcover and insurance against online bookings fraud are also current.

The Hotel will reopen when government restrictions are lifted to allow occupancy levels recover. In addition to lockdowns imposed by the State Government, Australia's borders are currently closed and entry into Australia remains strictly controlled by the Federal Government. The Federal Government's restrictions are impacting occupancy levels as the Hotel has traditionally attracted inbound tour groups from outside Australia, as a result it has been disproportionately impacted relative to hotels that rely on weekend escapes or domestic business travel.

The Hotel also suspended the operations of its car park which was made available to its guests and the general public. The car park is actively being marketed for lease by management. Recent lease negotiations fell through as the prospective lessee's office, situated nearby, returned to "work from home". Accordingly, Covid 19 is also adversely affecting finding a suitable tenant. Even though the carpark has not yet been leased out the Hotel retains the services of external carpark managers to continue operating the carpark.

The Vendor received an unsolicited expression of interest to purchase the Hotel. In response, the Vendor has appointed agents to market the Hotel for sale. The selling agents have advised the Vendor that prospective buyers have expressed a desire to acquire the Hotel as a going concern.

The sale of the Hotel is seriously being contemplated and instructions are being given to legal adviser to draft the contract of sale (the Contract).

Current market estimates are that the Hotel will sell for in excess of $XX million.

The Contract will require the Purchaser to warrant that it is registered for GST.

The Contract will incorporate an agreement that KAH and Purchaser agree that the supply is of a going concern.

Under the Contract, the Vendor will supply:

In addition to those assets the Vendor will grant the Purchaser license to use booking systems and business name for a period of time after settlement. Access to key staff for the continued operation will also be provided under a transition services agreement.

The Vendor will continue to carry on the enterprise until the day 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

GST is payable on a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity makes a taxable supply if:

(a)        the supply is made for consideration; and

(b)        the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c)         the supply is connected with Australia; and

(d)        the entity is 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.

The Vendor will sell the Hotel for consideration and in the course of its enterprise. The supply is connected with Australia. The Vendor is registered for GST. As such, the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act will be satisfied. Therefore, the sale of the Hotel will be a taxable supply unless it is input taxed or GST-free.

There is no provision in the GST Act under which the sale of the Hotel is input taxed. Therefore, what remains to be determined is whether the supply is GST-free

Under subsection 38-325(1) of the GST Act, 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 for GST; and

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

Subsection 38-325(2) of the GST Act further defines a supply of a going concern as 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).

Subsection 38-325(2) of the GST Act

Supply under an arrangement

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 explain what is meant by 'supply under an arrangement'.

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under subsection 38-325(1) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

In this case, the Vendor will enter into the Contract with a prospective purchaser under which the Vendor supply the assets and business of the Hotel. Also, the Vendor and the Purchaser will enter into transitional services agreement (the Agreement) under which the Vendor will provide the Purchaser access to key staff. The Contract and the Agreement collectively evidence the supplies to be made under the arrangement.

Supplier supplies all of the things necessary for the continued operation of an enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise.

As part of the Vendor's larger enterprise of operating several hotels, the Hotel is operated with a degree of autonomy having its own financial budget, profit and loss reports, banking account, direct contract with guests, and online booking site. The Hotel enterprise is the identified enterprise for the purpose of subsection 38-352(2) of the GST Act.

The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the things supplied.

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.

Under the Contract, the Vendor will supply:

In addition to those assets the Vendor will grant the recipient license to use booking systems and business name for a period of time after settlement. Access to key staff for the continued operation will also be provided under a transition services agreement.

The Vendor intends to supply under the arrangement all the things necessary for the Purchaser to operate the Hotel if it chooses, therefore, paragraph 38-325(2)(a) of the GST Act will be satisfied.

Supplier carries on the enterprise until the day of the supply

Paragraphs 141 to 145 of GSTR 2002/5 state:

141. The 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.

142. 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 New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises were not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

Based on the information provided, the operations of the Hotel were suspended to reduce its operating costs as government restrictions that involved border closures and lockdowns have impacted occupancy levels in hotels. However, the Vendor submitted that the suspension is temporary and advised that the Vendor intends to resume operations of the Hotel when the restrictions are lifted.

The word 'temporary' in paragraph 145 of GSTR 2002/5 is not defined in the GST Act. The Macquarie Dictionary defines 'temporary' as:

'adjective 1. lasting, existing, serving, or effective for a time only; not permanent'

In the context of the government restrictions that impacted the tourism industry, we accept that the suspension of the Hotel operations is temporary on the basis that the Vendor will reopen the Hotel once the restrictions are lifted.

We consider under paragraph 145 of GSTR 2002/5 that the Hotel enterprise has not ceased while the Vendor temporarily suspended its operations; however, paragraph 141 of GSTR 2002/5 requires that all the activities of an enterprise must be active and operating on the day of the supply. The essence of a going concern is that it remains operating before, during and after the transfer of ownership.

Although some activities are still carried out to maintain the Hotel including cleaning, landscaping and safety checks, these activities are merely incidental to the Vendor's main activity which is providing accommodation. When the Vendor suspended the operations of the Hotel, the Hotel has been closed to accept bookings and guests. As such, not all the activities of the Hotel enterprise will be active and operating when the Hotel is sold at the time its operations are suspended. Subsection 38-325(2) of the GST Act will not be satisfied; therefore, the sale of the Hotel will not be as supply of going concern.

Subsection 38-325(1) of the GST Act

Based on the conditions intended to be included in the contract, all the requirements in subsection 38-325(1) of the GST Act will be satisfied as:

•         the sale of the Hotel will be for consideration;

•         the Purchaser will warrant that it is registered for GST; and

•         the Contract will contain a clause indicating that the Vendor and the Purchaser agree that the sale of the Hotel is a supply of a going concern.

However, subsection 38-325(1) of the GST Act is not relevant as the sale of the Hotel will not be a sale of a going concern. The sale will not be GST-free.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).