Edited version of private ruling

Authorisation Number: 1011612297854

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Ruling

Subject: GST and supply of a going concern

Question 1

Is your sale of retail business under the sale agreement (Agreement), a GST-free supply of a going concern as defined in section 38-325 of the A New Tax System (Goods and Services Act) 1999 (GST Act)?

Answer

Yes, your sale of retail business under the Agreement is a GST-free supply of a going concern.

Question 2

Are the payments between the vendor and the purchaser in respect of X Contracts outside the scope of the GST?

Answer

Yes, the payments between the vendor and the purchaser in respect of X Contracts are outside the scope of the GST.

Question 3

Is the difference between the "actual Stamp Duty" and the "estimated Stamp Duty" a change to the consideration for the vendor's GST-free "supply of a going concern?

Answer

The treatment of the amount of difference between the "actual Stamp Duty" and the "estimated Stamp Duty" is subject to the contractual agreement between the vendor and the purchaser. The Australian Taxation Office cannot pronounce itself on contractual matters between entities.

Question 4

Does the amount of an assumed liability payable by the purchaser under the Agreement, forms part of the consideration for the vendor's GST-free supply of a going concern?

Answer

Yes, where the purchaser pays an amount of an assumed liability under the Agreement, this will be part of the consideration for the vendor's GST-free supply of a going concern.

Relevant facts

You are registered for goods and services tax (GST).

The retail section of your enterprise will be supplied to the purchaser, the network function will continue to be owned by your governing body.

As part of your retail activities, you sell your product to customers within your network area, as well as to customers in other areas.

You also sell another product to retail customers.

You operate your retail business through a management structure that is separate to your network business, have a system of internal user charging, a separate budget, and have agreements/arrangements with internal service providers.

You have retail agreements with your customers which are separate from your network agreements.

The 'Assumed Liabilities' under the Agreement means all of the liabilities and obligations of the vendor.

The 'X Contract' under the Agreement mean a retail business contract in existence at completion that are not a transferable retail business contract.

Under a clause in the Agreement, consideration to be provided by the purchaser for the purchase of assets will comprise:

· payment of the Purchase Price;

· assumption of the Assumed Liabilities;

· performance of its obligations in relation to employees of the vendor, and with regard to the close out of the vendor's position in certain financial instruments

· entry into other ancillary agreements; and

· A clause in the Agreement provides for the agreement between the vendor and the purchaser with regard to the consideration for the supply, the sale of the assets is the supply of a going concern and the purchaser is registered and will continue to be registered up to and including the day of supply of the Assets as at the Effective Time by the Vendor.

A clause in the Agreement provides for the vendor to arrange for the payment, on behalf of the purchaser, of any stamp duty and further responsibilities of the vendor in relation to the variations occur.

Reasons for decision

Question 1

Is your sale of retail business under the sale agreement (Agreement), a GST-free supply of a going concern as defined in section 38-325 of the GST Act?

Answer

Yes, your sale of retail business under the Agreement is a GST-free supply of a going concern.

Detailed reasoning

Supply of a going concern

The 'supply of a going concern' is GST-free where the requirements of subsections 38-325(1) and 38-325(2) of the GST Act are met.

Requirements of subsection 38-325(1) of the GST Act

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

· the supply is for *consideration; and

· the *recipient is *registered or *required to be registered for GST; and

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

(Asterisks denote terms defined in section 195-1 of the GST Act.)

In your case, as provided in the Agreement the supply is to be made for consideration, you and the purchaser agree that the supply is the supply of a going concern and that the purchaser is registered for GST purposes and will continue to be registered up to and including the day of supply.

Hence, the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Requirements of subsection 38-325(2) of the GST Act

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

· the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

A supply will be a 'supply of a going concern' where the arrangement satisfies paragraphs 38-325(2)(a) and (b) of the GST Act and the relevant supply is made under that arrangement.

Identified enterprise

Goods and Services Tax Ruling, Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) provides the Commissioner's views on GST-free supplies of going concerns. GSTR 2002/5 states the following in regards to sale of a going concern which is a part of a larger enterprise.

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

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.

In your case, you have been carrying on a retail business as well as a network business.

You state that your retail business will be supplied to the purchaser while the network function will continue to be owned by you.

You also state that you operate your retail business through a management structure that is separate to your network business, have a system of internal user charging, have a separate budget, and have agreements/arrangements with internal service providers.

Therefore, the 'identified enterprise' that will be supplied by you is the retail business.

All things necessary for the continued operation

Further, GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'.

In particular, paragraph 74 of GSTR 2002/5 provides that a supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 47 of GSTR 2002/5 states the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported.

Paragraph 72 of GSTR 2002/5 provides that the term 'necessary' incorporates the attributes of an enterprise that are 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. Paragraph 72 further specifies that the term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'.

Paragraph 75 of GSTR 2002/5 sates that 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.

Assets

Under a clause in the Agreement you will provide the following essential assets in respect of the retail business:

· Goodwill of the vendor in or attaching to the retail business;

· Customer contracts for the retail sale of your commodity (where relevant) by the vendor, including contracts deemed to exist by the operation of law;

· The retail brands, being the business names and trade names; and

· Books and records for the retail business.

You contend that where the above assets are supplied to the purchaser you will have supplied all the assets necessary for the continued operation of the 'identified enterprise'.

You further submit that the supply of the above assets is evidence that you supply to the purchaser the "operating structure and process" of your retail business. That is, by acquiring the retail business contracts, the purchaser will take over your retail business customers and your key commodity's acquisition arrangements. Further, your supply of the retail business materials (i.e. the books and records) to the purchaser indicates that the purchaser is acquiring your "business process" (being your "commercial or economic activity").

Premises

At paragraphs 90-91, GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied for the continued operation of the enterprise

A clause in the Agreement provides that from the date of sale the purchaser will be provided with an office at your premises for a certain period. You will also provide the purchaser with reasonable read-only access to your systems.

Where the Agreement provides the right to the purchaser to use your premises, we agree that such arrangements will allow the purchaser to continue uninterrupted operation of your retail business on and from completion date. Hence, you will satisfy the requirement relating to the provision of premises.

Employees

Paragraphs 123-124 of GSTR 2002/5 explain that the continuity of employment of the existing workforce can be a relevant consideration in determining whether a supply is the supply of a going concern. Further paragraph 124 of GSTR 2002/5 provides that continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient.

Paragraph 125 of GSTR 2002/5 states that some entities have key personnel whose skills and knowledge are so unique and integral to the continued operation of the enterprise that the relevant enterprise could not be conducted without the services of the particular employee and that the supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge utilised by the key employee in the enterprise.

Under a clause in the Agreement the purchaser is allowed to make an employment offer to each employee of the vendor engaged in the retail business as at the completion date, although the purchaser is not obliged to make employment offers to any particular employee, or any particular number of employees. In this regard, the purchaser may make an employment offer to certain employees of the vendor's retail business.

For the duration of the Agreement a significant portion of the vendor's retail business employees will be available to provide key business services to the purchaser.

Therefore, we are of the view that the part of the operating structure and processes consisting of employees will be supplied to the purchaser.

Intellectual property

Paragraph 116 of GSTR 2002/5 stipulates that where intellectual property exists and is one of the things necessary for the continued operation of the identified enterprise, then the benefit of the intellectual property must be supplied to the recipient under the arrangement.

A clause in the Agreement provides that 'Retail Business Intellectual Property' means the intellectual property rights of the vendor in the business names, the copyright, the domain names and the trade marks. In your case, the supply of the assets will include retail business intellectual property. Therefore we agree that the intellectual property rights will effectively pass on to the purchaser as part of the supply of your retail business.

Assets not supplied to the purchaser

You advise that some assets relating to your retail business will not be supplied.

As explained in paragraphs 84-86 of GSTR 2002/5 some things are not necessary for a supply to be a supply of a "going concern".

You advise that even though some of your assets will not be supplied, the services you will provide to the purchaser through certain ancillary agreements will put the purchaser in a position to continue to operate the retail business as if the assets were supplied.

Where you have committed to enter into arrangements under which substantially similar rights will be created in favour of the purchaser, we will accept that the relevant things for the continued operation of the identified enterprise are supplied.

X Contracts

As defined under a clause in the Agreement, X Contracts in existence at completion are not transferable to the purchaser on the completion date.

Under a clause in the Agreement, legal title to X Contracts will be held by the vendor for the benefit, and at the risk of the purchaser (until they are transferred).

As the vendor, you are required to administer X Contracts effectively on behalf of the purchaser, until such time the legal title in the X Contracts passes to the purchaser. All key decisions in respect of the X Contracts are subject to the overriding control of the purchaser.

Therefore, we accept that in relation to the X Contracts and under the agreements described above, the vendor is able to supply one of those things necessary for the continued operation of the identified enterprise.

Retail product purchases

As stated, the contracts for the purchase of wholesale products could be considered "things... necessary for the continued operation" of the identified enterprise.

However, you state that where there is no contract for the purchase of product for the vendor to transfer to the purchaser, a contract for the purchase of product from the market is not one of the things necessary for the continued operation of retail business.

Nevertheless, you state that the vendor will put the purchaser in the position to acquire the product from the market (to service its Retail Business) on and from completion date.

Accordingly, as the purchaser will be in a position to purchase and sell the product from the market on and from completion, we agree that the purchaser will not require specific market arrangements.

Licences

As stated a retailer must have a product retail licence. Hence, the holding of licences and authorisations is crucial to the carrying on of the identified enterprise.

You will surrender your retail licences and authorisations, but only once all X contracts have been transferred to the purchaser.

Paragraphs 50 and 106 of GSTR 2002/5 state:

We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

Alternatively, the supplier may know from past experience and industry practice that the relevant entity does not normally approve transfer. The supplier may therefore merely choose to surrender the licence, permit or other statutory authorisation and request that it be reissued to the recipient by the relevant entity. The surrender and reissue of the thing by the relevant entity will be taken to be a supply by the supplier for the purposes of section 38-325.

Accordingly, we accept that where either paragraph above applies, that the surrender of the retail licences and authorisations would be regarded as the supply of a thing necessary for the continued operation of the identified enterprise.

Supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

Supplier carries on the enterprise until the day of the supply

A supply under an arrangement will only be the '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.

Under paragraph 38-325(2)(b) of the GST Act a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (refer to paragraph 161 of GSTR 2002/5).

In your case, under a clause in the Agreement you are required to conduct the retail business in the ordinary course and substantially in the same manner until the completion date.

Provided that, the vendor carries on the retail business operation until the day of the supply under the agreement, we consider that the supply of the retail business under the arrangement, will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

Accordingly, we agree that the supply of your retail business to the purchaser will be a supply of a going concern that satisfies the requirements of section 38-325 of the GST Act.

Question 2

Are the payments between the vendor and the purchaser in respect of X Contracts outside the scope of the GST?

Summary

Yes, the payments between the vendor and the purchaser in respect of X Contracts are outside the scope of the GST.

Detailed reasoning

X Contracts

As defined under a clause in the Agreement, X Contract is a retail business contract that is not transferable to the purchaser on the completion date. They are not transferable to the purchaser until they can be migrated in the purchaser's system.

A clause of the Agreement provides that legal title to the X Contracts will be held by the vendor for the benefit, and at the risk of the purchaser.

Another clause in the Agreement provides for payments between the vendor and the purchaser to be set-off in a way that only a net payment is made.

As you have stated, where the purchaser accounts for the GST on the supplies made by the vendor on behalf of the purchaser in respect of X Contracts, we consider that payments of net amounts by the vendor to the purchaser (or vice versa) occur as a consequence of the transfer of economic benefits which will be supplied on the completion date.

In addition, for the payments between the vendor and the purchaser in respect to X Contracts to come within the scope of GST, all of the criteria under section 9-5 of the GST Act need to be satisfied.

Section 9-5 of the GST Act provides that a supply is taxable if the supply is made for consideration, in the course or furtherance of an enterprise that an entity carries on, the supply is connected with Australia and the entity making the supply is registered, or required to be registered.

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

The agreements between the vendor and the purchaser provide that:

· the vendor has, with effect from the Effective Time, transferred all economic benefit of and risk in the X Contract to the purchaser,

· legal title to the X Contract will be held by the vendor for the benefit, and at the risk of the purchaser,

· the purchaser will receive the benefit of the vendor's rights, and bear the risk and cost of the vendor complying with its obligations, under the X Contract,

· that purchaser provides the vendor with cleared funds sufficient to enable the vendor to satisfy any X Contract liabilities by the relevant due date or with notice to the vendor,

· any amount payable by the vendor to the purchaser to be reduced by its set-off against any amounts which are due and payable by the purchaser to the vendor under any linked agreement.

The agreements in question allow money to pass from the vendor to the purchaser and vice versa so that liabilities are met.

The meaning of 'supply' is given in section 9-10 of the GST Act and is very broadly defined to be 'any form of supply whatsoever'.

Goods and Services Tax Ruling GSTR 2006/9 (GSTR 2006/9) provides guidance on the meaning of the term 'supply' in the GST Act and includes a number of propositions for characterising supplies and analysing more complex transactions.

At paragraph 72, GSTR 2006/9 explains that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply.

As provided under the arrangement, the payment is not consideration for any new supply by either party. Therefore, in your case we consider that no supply is made as nothing passes from the entities receiving the payment to the entity making the payment.

Consideration is defined in section 9-15 of the GST Act to include any payment in connection with, in response to, or for the inducement of a supply.

As there is no supply being made by the purchaser to the vendor, the necessary connection between the supply and consideration will not be found in these instances. Hence, the payments between the vendor and the purchaser in respect of X Contracts are not subject to GST.

Question 3

Is the difference between the "actual Stamp Duty" and the "estimated Stamp Duty" a change to the consideration for the vendor's GST-free "supply of a going concern?

Summary

The treatment of the difference between the "actual Stamp Duty" and the "estimated Stamp Duty" is subject to the contractual agreement between the vendor and the purchaser. The Australian Taxation Office cannot pronounce itself on contractual matters between entities.

Detailed reasoning

Stamp Duty

A clause in the Agreement states that on completion, the purchaser must pay the vendor the completion amount and the estimated Stamp Duty. The purchaser has the statutory obligation to pay stamp duty and the vendor is to arrange for payment on behalf of the purchaser.

An amount of stamp duty is for a supply made by an Australian government agency to a customer, is a charge imposed under Australian laws and payable to Australian government agencies.

Goods and Services Tax Ruling GSTR 200/37 (GSTR 2000/37) describes what is meant by principal/agent relationships. Paragraph 50 of GSTR 2000/37 provides that, among other things, fines, penalties, stamp duty and taxes are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client.

Paragraph 49 of GSTR 2000/37 states:

If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

A payment made by the vendor as agent on behalf of the purchaser, subject to the common law rules of agency, will be treated as if it were made by the purchaser.

A clause in the Agreement provides that the vendor will arrange for the payment, on behalf of the purchaser of any stamp duty assessed.

Therefore, in this case we consider that:

there is an agency relationship between the vendor and the purchaser in relation to the payment of stamp duty; and

any expense incurred by the vendor (regarding stamp duty) as an agent of the purchaser is an expense of the purchaser and is not part of the consideration for the supply of the identified enterprise.

A clause in the Agreement provides that the vendor will be responsible for any amount by which the actual Stamp Duty assessed under the Agreement exceeds the estimated Stamp Duty. Further, where the actual stamp duty exceeds the estimated stamp duty, the vendor will be contractually responsible, by virtue of a clause in the Agreement to remit an additional amount on behalf of the purchaser. Under such circumstances you contend that the additional amount of stamp duty paid by the vendor on behalf of the purchaser will be a change to the consideration received by the vendor.

You further submit that under a clause in the Agreement, the vendor will be entitled to retain any amount by which the estimated stamp duty exceeds the actual stamp duty assessed under the Agreement as an adjustment to the Purchase Price.

However, we view that the agreement between the vendor and the purchaser that any amount by which the actual stamp duty exceeds the estimated stamp duty, and that such amount is to be paid by the vendor on behalf of the purchaser, and that it is to be treated as a change in the consideration is a contractual agreement between the two parties. We advise that the Australian Taxation Office cannot rule on contractual matters between two entities.

Question 4

Does the amount of assumed liability payable by the purchaser under the Agreement, forms part of the consideration for the vendor's GST-free supply of a going concern?

Summary

Yes, where the purchaser pays an amount of an assumed liability under the Agreement this will be part of the consideration for the Vendor's GST-free supply of a going concern.

Detailed reasoning

The assumed liabilities are defined under a clause in the Agreement to mean all of the liabilities and obligations of the vendor.

In this case, it needs to be determined whether the assumption of the liabilities under the above clause in the Agreement forms part of the consideration for the supply.

Goods and Services Tax Ruling GSTR 2004/9 (GSTR 2004/9) provides the Commissioner's view regarding the GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise. GSTR 2004/9 distinguishes between the statutory liabilities imposed on the purchaser and the liabilities effectively assumed by the purchaser. 

Liabilities effectively assumed by the purchaser

At paragraphs 23-25, GSTR 2004/9 explains that a purchaser does not make a supply within the meaning of section 9-10 of the GST Act, or specifically within the meaning of paragraph 9-10(2)(g) of the GST Act, of an entry into an obligation, if the liability upon the purchaser is imposed, required and effected by the words of a statute.

Paragraphs 26-30 of GSTR 2004/9 discuss the GST consequences where liabilities are effectively assumed by the purchaser. A purchaser effectively assumes a liability of a vendor where the purchaser promises to the vendor that it will discharge, either immediately or in the future, the vendors liability to a third party.

In the present case, the liability to pay an amount in relation to the "Assumed Liabilities" arises under a clause in the Agreement. The liability to make payment in respect of the "Assumed Liabilities" is created by the Agreement and not by any statute.

Quantified and unquantified liabilities

GSTR 2004/9 then distinguishes between quantified and unquantified liabilities.

A quantified liability is an amount that can be quantified with certainty at the time it is assumed. If the liability assumed by the purchaser is quantifiable, it is part of the consideration for the supply of the enterprise and is expressed as an amount of money paid by the purchaser for the enterprise. The purchaser does not make a supply to the vendor in assuming the liability.

If a liability assumed by the purchaser is not quantifiable, then it is the provision of non-monetary consideration if it has economic value and a separate independent identity. The GST-inclusive market value of the purchaser's promise to pay the vendor's unquantifiable liability forms part of the consideration for the supply of the enterprise. Paragraph 29 of GSTR 2004/9 explains that where the vendor and purchaser are dealing at arms length, a value agreed and allowed as a set-off in the calculation of the purchase price is likely to accurately represent the GST-inclusive market value.

Paragraph 56 of GSTR 2004/9 stipulates that if a purchaser acquires an enterprise and assumes an existing quantified liability of the vendor, the purchaser agrees to pay the purchase price to the vendor and to pay an amount directly to a creditor. In effect the purchaser's payment to the vendor is monetary consideration for the supply of the enterprise and the payment to the creditor is also part of the consideration for the supply of the enterprise. Therefore, under paragraph 56 of GSTR 2004/9 the purchaser simply pays the purchase price, partly to the vendor at settlement and partly to the creditor (at the vendor's direction).

Paragraph 62 of GSTR 2004/9 states that if a purchaser acquires an enterprise and assumes an existing unquantified liability of the vendor, it agrees to pay the purchase price to the vendor and to pay an unspecified amount directly to a third party.

Paragraph 65 of GSTR 2004/9 specifies that if an enterprise is supplied, the nature of the transaction is the supply of all things necessary for the conduct of that enterprise. If a purchaser agrees to honour product warranty liabilities of the vendor this is merely a term or condition of the contract of sale. That is, the enterprise is supplied on the condition that the warranty liabilities are to be satisfied.

Under Paragraphs 30 and 67 of GSTR 2004/9 a purchaser does not make a supply if the purchaser agrees to assume an unquantified liability of the vendor, as a term or condition of the contract for the acquisition of the enterprise.

As provided under the Agreement the liability means any liability, whether actual or contingent, present or future, quantified or unquantified.

In this case, the purchaser does not make a supply to the vendor in assuming the liability. Therefore, the assumed liability is part of the consideration for the supply of the enterprise.