Edited version of private ruling

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Ruling

Subject: GST and Supply of a going concern

Question

Is the supply of the business carried on by you 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)?

Answer

Yes. The supply of the business carried on by you is a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

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

You operate an enterprise of leasing short term residential accommodation and a conference centre (property). The property is owned by you.

You entered into a caretaking and letting agreement with entity B, where B was appointed as the manager for the purposes of letting the units and conference centre at the property to third parties and provide caretaking services during the term of this agreement.

An asset sale agreement (ASA) was executed, and in this agreement the assets of the business of letting short term accommodation (under management) have been sold to a purchaser. At the same time, you and the purchaser executed a contract for sale of land which the land and improvement of the property together with chattels, fixtures and fittings have been sold to the purchaser. The completion of these agreements is interdependent.

Amongst other things, the ASA provides the following terms and conditions:

· You and the purchaser will enter into the contract of sale of land at or about the same time as entering into this agreement

· 'Assets' means all the assets owned by you which comprise the 'Business' of yours, being:

- the benefit of bookings subject to terms of the caretaking and letting agreement

- business records relating to the business

- all of your interest under or arising out of the caretaking and letting agreement, and

- the goodwill of the business.

· 'Business' means the business of letting for short term accommodation and use of convention facilities under external management at the resort.

· The ASA provides that the purchaser has a right to direct you to appoint a new manager nominated by them. If this right is exercised, you must execute a new caretaking and letting agreement with the new manager to take effect prior to completion of this agreement and the purchaser must provide a deed of novation of the new agreement to take effect from completion of this agreement. If the purchaser does not exercise this right, you and the purchaser must do all things necessary to effect a novation of the existing caretaking and letting agreement from you to the purchaser at completion of this agreement.

· The ASA provides that you and the purchaser agree that the supply is of a going concern.

· The ASA provides that the purchaser must be registered for GST as at completion of this agreement and agrees to provide evidence of its GST registration prior to completion of this agreement.

· The ASA provides that you will carry on the enterprise until the day of the supply.

Amongst other things, the Contract for Sale of Land (contract) provides the following terms and conditions:

· The purchaser purchases the property subject to the pre-bookings

· The contract states that you and the purchaser agree that the supply made under this contract forms part of the supply of a going concern contemplated by the ASA.

The purchaser is registered for GST in accordance with records shown on Australian Business Register.

Reasons for decision

Subdivision 38-J of the GST Act provides that if certain conditions are satisfied, a 'supply of a going concern' is GST-free.

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern'. It states:

(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 part of a larger enterprise carried on by the supplier).

(* denotes a defined term in section 195-1 of the GST Act.)

Further, a supply of going concern is GST-free if all the requirements of subsection 38-325(1) of the GST Act are satisfied. It states:

(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.

We will now apply the facts to determine whether the supply of the business satisfies the requirements of subsection 38-325(1) and 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act

For the purposes of the definition of a 'supply of a going concern' it is not the supply itself that must satisfy the conditions in subsection 38-325(2) of the GST Act, but the arrangement under which the supply is made. 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.

In this case, there are several contracts/agreements relating to the supply of the business and as their completion is interdependent, we consider that the supply of the business is made under a single arrangement.

All things necessary for the continued operation of the enterprise (paragraph 38-325(2)(a) of the GST Act)

In order to satisfy the conditions in paragraph 38-325(2)(a) of the GST Act, under the terms of this arrangement, the supplier must supply the recipient with 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. The elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the perspective of the supplier.

Goods and Services Tax Ruling 2002/5 (GSTR 2002/5) which is available on the Tax Office website discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and when the supply of a going concern is GST-free. The meaning of all of the things that are necessary for the continued operation of an enterprise is discussed in paragraphs 72 to 75 of GSTR 2002/5.

Paragraph 73 of GSTR 2002/5 states that 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 that thing.

Paragraph 75 of GSTR 2002/5 states:

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.

In this case, the identified enterprise is the leasing of short term accommodation and the convention centre. Under the terms of agreement in contract sale of land (contract), you supplied to the purchaser the property (defined to include the land together with any improvements), chattels, fixtures and fittings. You also entered into the asset sale agreement (ASA) at the same time with the purchaser and agreed to novate the existing or any new caretaking and letting agreement to the purchaser prior to the settlement of the contract. The benefit of pre-bookings, any business records and goodwill will be transferred to the purchaser under the clauses of the ASA.

Your supply of the property, plant, equipment, goodwill together with the novation of the caretaking and letting agreement to the purchaser will put them in a position, from the time of settlement, to continue the operation of the enterprise. Therefore, the requirement in paragraph 38-325(2)(a) of the GST Act is satisfied.

Carrying on the enterprise until the day of supply (paragraph 38-325(2)(b) of the GST Act)

Under the ASA, you warrant to carry on the enterprise until the day of the supply. Further, with the existing caretaking and letting agreement in place at the settlements of the contract and ASA, this means that the enterprise will be active and operating on the day of the supply. Therefore, the requirement in paragraph 38-325(2)(b) of the GST Act is satisfied.

Accordingly, the supply of the enterprise is a supply of a going concern under subsection 38-325(2) of the GST Act.

The next step is to determine whether it is GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(1) of the GST Act

Based on the information provided, you have satisfied all the requirements in paragraphs

38-325(1)(a) to 38-325(1)(c) of the GST Act as follows:

(a) the supply of the going concern to the purchaser is for consideration;

(b) the purchaser is registered for GST and in the ASA the purchaser is required to be registered for GST at the day of supply; and

(c) you and the purchaser have agreed in writing that the supply is of a going concern in the contracts.

As all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the supply of the business is a GST-free supply of a going concern under section 38-325 of the GST Act.