Edited version of private ruling

Authorisation Number: 1011511209330

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Ruling

Subject: SUPPLY OF A GOING CONCERN

Question 1

Do the Contract for Sale of Land from Company A to X and the Agreement for Sale of Business from Company A to Company B, constitute a disposal that attracts the going concern exemption under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: No.

The Contract for Sale of Land from Company A to X and the Agreement for Sale of Business from Company A to Company B, do not constitute a disposal that attracts the going concern exemption under section 38-325 of the GST Act.

Relevant facts and circumstances

On a specified date, Company A entered into two contracts to dispose of it's interest in the enterprise by:

1. a Contract for Sale of Land - Company A disposed of the freehold land and fixed improvements to X;

2. an Agreement for Sale of Business - Company A disposed of the business assets of the enterprise to Company B, a company owned and controlled by X.

The contract (in point 1 above) and the Agreement (in point 2 above) are expressed to be interdependent.

The Accountant for X and Company B have requested that you seek a ruling from the ATO as to whether the Contract in 1 and the Agreement in 2, together, constitute a disposal that attracts the going concern exemption under Section 38-325 of the GST Act.

You have advised that X and Company B are grouped for GST purposes.

All of the things necessary for operation of the enterprise will be transferred by the respective sale of the freehold property and the business although the freehold and the business are being transferred to separate entities.

All of the assets of the enterprise are being supplied.

The vendor is operating the enterprise and will continue to do so until the day of supply. It is believed that the purchasing entities will continue to operate the enterprise on the day of the supply.

The vendor and the purchasers have not agreed in writing that the supply of either the freehold property or the business is a supply of a going concern.

Depending on the ruling by the ATO, the parties will make a written agreement prior to the supply stating that the supply is a supply of a going concern.

A lease agreement in respect of the freehold property and fixed improvements has not been entered into between Company A and Company B.

You have attached the following documents to your ruling application:

1. Contract for the sale of land

page outlining the Vendor, Purchaser and details of the subject property;

Paragraphs XX to YY of the contract

2. Land and Property Information.

Agreement for sale of business

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the 4 criteria required for a supply to be a taxable supply.

You make a taxable supply if:

a. you make the supply for *consideration; and

b. the supply is made in the course or furtherance of an *enterprise that you * carry on; and

c. the supply is *connected with Australia; and

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.

Note: The asterisks denote a defined term in the GST Act

A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the GST Act are satisfied. A two step approach is required to determine whether a supply is a GST-free supply of a going concern.

Subsection 38-325(1) of the GST Act provides that:

2. 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.

However, for subsection 38-325(1) of the GST Act to apply (to determine whether the supply of a going concern is a GST-free supply), there is a prerequisite that the supply is a supply of a going concern meeting the requirements under subsection 38-325(2) of the GST Act.

Consequently, the requirements under subsection 38-325(1) of the GST Act will only be considered if the supply in question is a supply of a going concern under subsection 38-325(2) of the GST Act.

3. 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 the *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).

For the purposes of the definition of a 'supply of a going concern', it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b), but the arrangement under which a supply is made. There may be several supplies, each of which is a 'supply of a going concern' under one arrangement.

The Tax Office (TO) view of the application of subsection 38-325(2) of the GST Act is contained in Goods and Services Tax Ruling GSTR 2002/5.

Paragraphs 19 and 20 of GSTR 2002/5 state:

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 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.

In your case, the supply of the freehold land and the business operations are made under separate, interdependent contracts. As indicated in paragraph 19 of GSTR 2002/5 supplies made under multiple contracts may comprise a single arrangement for the purposes of subsection 38-325(2) of the GST Act. However, the things supplied under the arrangement must relate to the same identified enterprise.

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise that the vendor must supply for it to be a supply of a going concern.

'Enterprise' is defined in subsection 9-20(1) of the GST Act. This subsection states:

'An enterprise is 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; or

d. ………'

The enterprise conducted by the vendor is the hotel operations. The land and business premises are necessary for those business operations. However, the supply of the land and premises and business operations were not made to the same purchaser. The land and premises were supplied to X while the business operations were supplied to Company B.

However, as the land and premises are owned by Company A, there is no enterprise of leasing the premises. As a result, the only existing enterprise which the vendor can supply is the business operations.

Paragraphs 41 to 46 of GSTR 2002/5 consider what is meant by 'the supplier supplies'.

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

Paragraphs 131 to 140 consider the position when parts of an existing enterprise are supplied to two or more recipients.

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

131. Paragraph 38-325(2)(a) expressly recognises that each supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise may be the 'supply of a going concern'. Equally, supplies of all of the things that are necessary for the continued operation of parts of a larger enterprise may be separate supplies of going concerns to two or more recipients provided the two or more different parts of the enterprise are each capable of separate independent operation.

132. Where the owner of both a business enterprise and of the real property upon which the business enterprise is necessarily conducted sells the business enterprise to a second entity and the business premises to a third entity, the supply to the second entity will not be the 'supply of a going concern'. This is because the second entity has not been supplied with one of the things necessary for the continued operation of that enterprise, by the supplier, that is, the business premises.

133. Where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the second entity by the day of the supply of the business enterprise to that second entity, the supplier is supplying the second entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the second entity is met even if the property is subsequently sold to a third entity subject to a lease.

134. Similarly, the supply of the real property to the third entity on a later day that is subject to a lease to a second entity in the circumstances described in the preceding paragraph, may also be the 'supply of a going concern'. This is because an enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time. The supplier, being the owner of both the business and the real property, is making two supplies, each of which is capable of being the 'supply of a going concern'.

In your case, you have supplied the freehold land and fixed motel improvements under a separate contract to X and the business assets of the motel under a separate agreement to Company B.

Paragraph 132 of GSTR 2002/5 makes it clear that where the owner of both a business enterprise and of the real property from which the business enterprise is conducted, sells the business enterprise to one entity and the business premises to another entity, the supply of the business operations will not be the supply of a going concern because the purchaser of the business operations is not supplied with the business premises necessary for the continued operation of the business operations. However, paragraph 133 of GSTR 2002/5 explains that if a lease of the premises was granted before settlement by the vendor to the entity taking the business operations then the vendor has supplied the thing necessary for the continued operation of the business operations.

In your case, no lease was made between you and Company B prior to settlement and as a result Company B was not supplied with all things necessary for continued operation of the business operations. Therefore the sale of the business operations to Company B is not the supply of a GST-free going concern.

Furthermore, as no lease was entered into between you and Company B, you do not have a leasing enterprise to supply (by assignment of the lease) to X.

As a result, the supply of the land and business premises is not a supply of an enterprise under subsection 38-325(2) of the GST Act but merely the sale of an asset. Therefore, the supply of the land and business premises is also not the supply of a GST-free going concern.

As both the supply of the business operations and the land and business premises are not the supply of a GST-free going concern, both the supplies are taxable supplies as each satisfies the criteria set out in section 9-5 of the GST Act.