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Ruling

Subject: goods and services tax (GST) and going concerns

Question 1

Will GST be payable on X's sale of assets under the business sale contract it has entered into?

Answer

Yes, except where X makes a GST-free supply of a medical aid or appliance, or a GST-free supply of a spare part for a medical aid or appliance, under section 38-45 of the A New Tax System (Goods and Services Tax) Act (GST Act).

Question 2

Will GST be payable on Y's sale of assets under the business sale contract it has entered into?

Answer

Yes, except where Y makes a GST-free supply of a medical aid or appliance, or a GST-free supply of a spare part for a medical aid or appliance, under section 38-45 of the GST Act.

Relevant facts and circumstances

X is registered for GST.

Y is not registered for GST.

Y's GST turnover is over $75,000.

X owns a pharmacy business at a particular location in Australia.

X owns some of the stock and some of the plant and equipment of the pharmacy.

X receives the proceeds and profits from the sale of stock that it owns.

Y owns some of the stock and some of the plant and equipment of the pharmacy.

Y receives the proceeds and profits from the sale of stock that it owns.

Y allows X to use plant and equipment that Y owns.

Y holds a leasehold interest in the premises from which the pharmacy is operated. Y supplies a licence to use the premises to X.

Y employs employees that work in the pharmacy. Y allows X to use these employees.

Y charges X for the use of assets and labour of employees.

X has entered into a business sale contract under which it will sell pharmacy assets that it owns. These will be stock; plant and equipment and goodwill.

Y has entered into a business sale contract under which it will sell pharmacy assets that it owns. These will include stock and plant and equipment.

Under the business sale contract that Y has entered into, Y will assign its leasehold interest in the pharmacy premises to the purchaser.

According to the business sale contract that Y has entered into, Y will supply goodwill to the purchaser.

Under the business sale contract that Y has entered into, Y warrants that the sale includes the goodwill of the retail component of the pharmacy operated by it from the premises concerned.

X holds a pharmacy operation licence for the pharmacy.

The pharmacy operation licence is incapable of assignment or supply by X to the purchaser because of a statutory or legal impediment.

X will make all reasonable efforts to have the pharmacy operation licence supplied to the purchaser including surrendering its pharmacy operation licence and applying jointly with the purchaser to the relevant statutory authority for a pharmacy operation licence to be issued to the purchaser.

The relevant statutory authority will issue a pharmacy operation licence to the purchaser.

The business sale contract that X has entered into provides that the vendor agrees that it will carry on the conduct of the business as a going concern until the completion of the sale.

The business sale contract that X has entered into provides that the purchaser represents and warrants that it is registered for GST.

The business sale contract that X has entered into provides that the vendor and the purchaser agree, to the best of their knowledge and belief, that the sale of business in that contract, together with the sale the subject of the other business sale contract constitutes the supply of a going concern.

Reasons for decisions

Question 1

Summary

GST will not be payable on X's sale of an item of stock to the purchaser where the sale is a GST-free supply of a medical aid or appliance, or a GST-free supply of a spare part for a medical aid or appliance, under section 38-45 of the GST Act, as such a sale will not satisfy all of the requirements of section 9-5 of the GST Act.

GST will be payable on X's sale of the other assets to the purchaser, as all of the requirements of section 9-5 of the GST Act will be satisfied,

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

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

(c) you *carry on; and

(d) the supply is *connected with Australia; and

(e) 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.

(* Denotes a term that is defined in section 195-1 of the GST Act)

We consider that X carries on a pharmacy enterprise as it receives the proceeds and profits from the sale of stock that it owns to pharmacy customers.

X will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is, its supply of assets to the purchaser will be supplies made for consideration and these supplies will be made in the course or furtherance of an enterprise that it carries on. Additionally, these supplies will be connected with Australia and X is registered for GST.

There are no provisions in the GST Act under which X's sale of assets under the business sale contract that it has entered into to the purchaser will be input taxed supplies.

Therefore, what remains to be determined is whether X will make a GST-free supply/GST-free supplies.

Going concerns

A 'supply of a going concern' is GST-free provided that all of the requirements of section 38-325 of the GST Act are satisfied.

A supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states:

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

A supply of a going concern is GST-free if the supply satisfies the requirements of subsection 38-325(1) of the GST Act, which states:

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.

Paragraph 73 of Goods and Services Tax Ruling GSTR 2002/5 states:

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...

Paragraph 75 of GSTR 2002/5 states: 

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.

The assets, operating structure and process of the pharmacy enterprise carried on by X that are essential for the continued operation of this enterprise are stock, the plant and equipment; the pharmacy operation licence, the premises (a licence to occupy the premises, a leasehold interest in the premises or ownership of the premises) and goodwill.

Paragraph 122 of GSTR 2002/5 provides that the services of existing employees are not a thing necessary for the continued operation of an enterprise. It states:

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment. The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.

Therefore, the services of existing employees of Y is not a thing necessary for the continued operation of X's pharmacy enterprise.

Paragraph 42 of GSTR 2002/5 states:

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

Stock

X will supply stock to the purchaser. The fact that Y will supply some stock to the purchaser will not prevent X from satisfying the requirement of paragraph 38-325(2)(a) of the GST Act, as it is not necessary for X to supply all of the stock on hand at the time of settlement to the purchaser in order for the purchaser to continue operating X's pharmacy enterprise.

Plant and equipment

The plant and equipment of the pharmacy will be supplied to the purchaser by both X and Y.

Pharmacy operation licence

Paragraph 53 of GSTR 2002/5 states:

53. The supply of a thing which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the recipient of that thing for the purposes of section 38-325 in the following limited circumstances:

(a) the thing must be incapable of assignment or supply because of a statutory or legal impediment; and

· the supplier must make all reasonable efforts to have the thing supplied to the recipient, for example by way of surrender; and

· the supply must be by a statutory authority or other party to the contract with the supplier; and

· the thing is actually supplied to the recipient by a party other than the supplier; or

(b) if there is no statutory or legal impediment to assignment; and

· normal commercial practice dictates that the supply can only be effected in this way, and

· the supplier conditionally surrenders or terminates their right to the thing and facilitates the entry into a new arrangement between the recipient and the statutory authority or other party to the contract; and

· the thing is actually supplied to the recipient by the statutory authority or other party to the contract.

The pharmacy operation licence, (which X holds) is incapable of assignment or supply by X because of a statutory or legal impediment.

X will make all reasonable efforts to have the licence supplied to the purchaser including surrendering its licence, and applying (jointly with the purchaser) to the relevant statutory authority for a pharmacy operation licence to be supplied to the purchaser.

A statutory authority will supply a pharmacy operation licence to the purchaser.

This pharmacy operation licence will not be supplied to the purchaser by X.

Therefore, X will be considered to supply a pharmacy operation licence to the purchaser, for the purposes of the going concern provisions.

Premises

X will not assign its licence to use the premises to the purchaser. This is because Y will assign to the purchaser a lease on the premises. Y will thereby supply one of the things necessary for the continued operation of X's pharmacy enterprise.

Goodwill

X will supply goodwill to the purchaser. The fact that Y will supply some of the goodwill of the pharmacy will not prevent X from satisfying the requirement of paragraph 38-325(2)(a) of the GST Act, as it is not necessary for X to supply all of the goodwill of the pharmacy to the purchaser in order for the purchaser to continue operating X's pharmacy enterprise.

X will not supply all of the things that are necessary for the continued operation of its pharmacy enterprise, to the purchaser, as X will not supply all of the plant and equipment and the premises to the purchaser. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act will not be satisfied by X.

As X will not satisfy all of the requirements of subsection 38-325(2) of the GST Act, it will not supply a going concern to the purchaser. Hence, it will not make a GST-free supply under subsection 38-325(1) of the GST Act.

Medical aids and appliances

Where an item of stock to be sold by X to the purchaser is a medical aid or appliance or a spare part for a medical aid or appliance, the sale of this item of stock may be GST-free under section 38-45 of the GST Act. In such cases, the sale will not be a taxable supply, as such a sale will not satisfy all of the requirements of section 9-5 of the GST Act, and therefore, GST will not be payable on such a sale.

If the sale of an item of stock to the purchaser is not GST-free under section 38-45 of the GST Act, the sale of the item of stock will not be GST-free under any provisions in the GST Act. Under such circumstances, the sale of the item of stock will be a taxable supply as all of the requirements of section 9-5 of the GST Act will be satisfied, and therefore, GST will be payable on the sale of the item of stock.

There are no provisions in the GST Act under which X's sale of other assets of the business to the purchaser will be GST-free. Hence, the sale of these assets will be taxable supplies, as all of the requirements of section 9-5 of the GST Act will be satisfied, and therefore, GST will be payable on the sale of these assets.

Question 2

Summary

GST will not be payable on Y's sale of an item of stock to the purchaser where the sale is a GST-free supply of a medical aid or appliances, or a GST-free supply of a spare part for a medical aid or appliance, under section 38-45 of the GST Act, as such a sale will not satisfy all of the requirements of section 9-5 of the GST Act.

GST will be payable on Y's sale of the other assets to the purchaser, as all of the requirements of section 9-5 of the GST Act will be satisfied.

Detailed reasoning

We consider that Y carries on a pharmacy enterprise as it receives the proceeds and profits from the sale of stock that it owns to pharmacy customers (this is alongside the pharmacy enterprise that X carries on).

Additionally, Y carries on an enterprise of supplying the use of assets and labour of employees to X.

Y will sell assets of its two enterprises to the purchaser. These supplies will satisfy the requirements of paragraphs 9-5(a) to 9-5(c) of the GST Act. That is, these supplies will be made for consideration and in the course or furtherance of enterprises that Y carries on. Additionally, the supplies will be connected with Australia.

Requirement to register for GST

Y is not registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise; and

(b) its GST turnover meets the registration turnover threshold, which is currently $75,000.

Y is carrying on enterprises.

Additionally, Y's GST turnover is over $75,000.

Hence, Y is required to be registered for GST, as all of the requirements of section 23-5 of the GST Act are satisfied. Consequently, the requirement of paragraph 9-5(d) of the GST Act is satisfied.

There are no provisions in the GST Act under which Y's sales of assets to the purchaser will be input taxed supplies.

Therefore, what remains to be determined is whether Y will make a GST-free supply/supplies to the purchaser.

Going concerns

The assets, operating structure and process of the pharmacy enterprise carried on by Y that are essential for the continued operation of this enterprise are stock; plant and equipment; the pharmacy operation licence; the premises and goodwill.

In accordance with paragraph 122 of GSTR 2002/5, the services of existing employees of Y are not a thing necessary for the continued operation of the enterprise.

Stock

Y will supply stock to the purchaser. The fact that X will supply some stock to the purchaser will not prevent Y from satisfying the requirement of paragraph 38-325(2)(a) of the GST Act, as it is not necessary for Y to supply all of the stock on hand at the time of settlement to the purchaser in order for the purchaser to continue operating Y's pharmacy enterprise.

Plant and equipment

The plant and equipment of the pharmacy will be supplied to the purchaser by both X and Y.

The pharmacy operation licence

Y will not be considered to be supplying the pharmacy operation licence to the purchaser. Instead, X will be considered to be supplying the pharmacy operation licence to the purchaser.

The premises

Y will assign, to the purchaser, the lease on the premises.

Goodwill

The business sale contract that Y has entered into provides that the vendor warrants that the sale includes the goodwill of the retail component of the pharmacy. The fact that X will supply some of the goodwill of the pharmacy will not prevent Y from satisfying the requirement of paragraph 38-325(2)(a) of the GST Act, as it is not necessary for Y to supply all of the goodwill of the pharmacy to the purchaser in order for the purchaser to continue operating Y's pharmacy enterprise.

Y will not supply all of the things that are necessary for the continued operation of its pharmacy enterprise, to the purchaser, as Y will not supply all of the plant and equipment and the pharmacy operation licence to the purchaser.

The assets, operating structure and process of Y's enterprise of supplying the use of assets and labour to X that are essential for the continued operation of this enterprise are:

· the plant and equipment that Y owns;

· the premises;

· Y's interest in the licence to use the premises;

· Y's interest in a contract between it and X under which Y supplies the use of assets and labour to X; and

· the goodwill associated with this enterprise.

In accordance with paragraph 122 of GSTR 2002/5, the services of existing employees of Y are not a thing necessary for the continued operation of the enterprise.

Plant and equipment

Y will supply the plant and equipment that it owns to the purchaser.

The premises

Y will assign its leasehold interest in the premises to the purchaser.

Interest in the licence to use the premises

Presumably, Y will not transfer its interest in the licence to use the premises to the purchaser as X will cease to operate a pharmacy enterprise at the location concerned as of the time of settlement.

Y's interest in a contract between it and X under which Y supplies the use of assets and labour to X; Goodwill

The goodwill of Y's enterprise of supplying the use of assets and labour of employees to X will not be supplied to the purchaser under the business sale contract that Y has entered into. This is because:

· the arrangement between Y and X under which Y supplies the use of assets and labour to X is not subject to a contract that Y will transfer its interest in to the purchaser, as X will cease to operate a pharmacy enterprise at the location concerned as of the time of settlement; and

· Y will not transfer its interest in the licence to use the premises to the purchaser.

Y will not supply to the purchaser all of the things that are necessary for the continued operation of Y's enterprise of supplying the use of assets and labour to X, as Y will not supply its interest in the licence to use the premises; its interest in a contract between it and X under which Y supplies the use of assets and labour to X or the goodwill of this enterprise.

As Y will not supply to the purchaser all of the things that are necessary for the continued operation of either of the enterprises that Y carries on at the pharmacy, Y will not satisfy the requirement of paragraph 38-325(2)(a) of the GST Act.

As Y will not satisfy all of the requirements of subsection 38-325(2) of the GST Act, it will not make a supply of a going concern. Therefore, Y will not make a GST-free supply under subsection 38-325(1) of the GST Act.

Medical aids and appliances

Where an item of stock to be sold by Y to the purchaser is a medical aid or appliance or a spare part for a medical aid or appliance, the sale of this item of stock may be GST-free under section 38-45 of the GST Act. In such cases, the sale will not be a taxable supply, as such a sale will not satisfy all of the requirements of section 9-5 of the GST Act, and therefore, GST will not be payable on such a sale.

If the sale of an item of stock to the purchaser is not GST-free under section 38-45 of the GST Act, the sale of the item of stock will not be GST-free under any provisions in the GST Act. Under such circumstances, the sale of the item of stock will be a taxable supply as all of the requirements of section 9-5 of the GST Act will be satisfied, and therefore, GST will be payable on the sale of the item of stock.

There are no provisions in the GST Act under which the sale of the other assets under the business sale contract that Y has entered into will be GST-free. Therefore, the sale of these other assets will be taxable supplies as all of the requirements of section 9-5 of the GST Act will be satisfied, and therefore, GST will be payable on the sale of these assets under the business sale contract.