Edited version of private ruling

Authorisation Number: 1011711655805

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Ruling

Subject: GST and supply of a going concern

Question

Does the going concern GST-free provision under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the entire sale price for the sale of the hotel business and associated real estate thereby not requiring GST to be paid on any part of the sale price?

Answer

Yes, the going concern GST-free provision under section 38-325 of the GST Act applies to the entire sale price for the sale of the hotel business and associated real estate.

Relevant facts

You as Trustee for a trust own property X and Y which are located in Australia. Property Y was consolidated into property X under a Consolidated Title Certificate of Title.

You currently carry on a hotel business (Hotel) which is managed by another entity on property X and operate your breakfast room on property X as well (Café and Bar). The Café and Bar is part of the Hotel and you do not account the Café and Bar's business activities separately from the Hotel.

You also currently lease shop 1 on property X and the lessee is operating a restaurant on this premise. You have renewed the lease of this premise for 6 years starting early 2010. You have provided a copy of the renewed lease agreement.

You have entered into a contract of sale of real estate (sale contract) for property X (the land). The contract price excludes GST since the contract provides that the sale is of a going concern. You have provided a copy of the sale contract to us.

The sale contract provides the following:

§ the buyer will acquire the land subject to tenancy and the acquisition of the business which you carry on the land.

§ business is defined in the sale contract to mean the Hotel you conduct on the land and includes the goodwill of the business, the intellectual property rights, the licences, the stock but excludes any cash on hand.

§ intellectual property rights is defined in the contract to include business names, logos, trade marks and copyright owned by the seller and used directly in the business including the registered name of the Hotel and Café and Bar.

§ at settlement you will give to the buyer:

a) possession of the Business and any document of title you have in possession or in control in respect of the business;

b) written details of all forward bookings and, pay or allow to the buyer all deposits you receive in connection with forward bookings less any fee payable by you to third parties in connection with the forward bookings;

c) the tenancy documents and notices to the tenant advising of the change of ownership of the property and directing each tenant to pay future rent as directed by the buyer or the buyer's lawyer;

§ at settlement:

o you must do all things necessary to enable the buyer to become the registered owner of the land and the buyer must pay the balance;

o you will be taken to have transferred to the buyer as from settlement the benefit of tenancy guarantees.

§ the buyer no later than 14 business days before the due date must:

o give you notice of employees they wish to offer employment to; and

o offer in writing to employ those employees in accordance with the certified workplace agreement in respect of the Business and otherwise on terms no less favourable than the terms of employment of those employees with you.

§ the parties agree that the sale contract is for the supply of a going concern and the buyer warrants that prior to settlement they will be registered for GST. The buyer must give you, no later than 7 days before the due date, proof that they are registered for GST. Failing to do this will make the supply under the contract no longer a supply of a going concern.

§ the business is currently operated and managed under an agreement you have with a third party. This agreement will not be transferred to the buyer and the sale contract and settlement are not subject to or conditional on the buyer entering into a management agreement in respect of the business with the third party or any one else. The buyer will not acquire under this contract the right to use the third party's name or logo or any property that belongs to the third party.

You have provided the following information:

§ the land sold in the contract contains:

a) the hotel business;

b) two other retail premises, one of which is and will at settlement of the sale be leased at arms length to a third party. The other premises is and will at settlement be used as part of the Hotel business;

c) a semi demolished and dilapidated building is located at the rear of that part of the land which is used by the Hotel. That part of the land sold is in the application called property Y.

§ the sale contract neither apportions the price between the real estate and the Hotel business nor the price between the several parts of the real estate that make up the land.

§ the buyer is currently not registered for GST and is in the process of being registered. At the time of settlement the buyer will be registered for GST.

§ there will be no cessation of the hotel business until and after settlement.

§ the existing management agreement is not a thing necessary for the continued operation of the Hotel and the existing management will only cease on settlement. Immediately after settlement, it is understood that the hotel will be managed by the purchaser's management team.

§ property Y is a dilapidated commercial property that contains a semi demolished and dilapidated building which has not been used for a number of years and is currently and will at settlement of the sale remain in unusable condition.

Reasons for decisions

Question 1

A supply of a 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.

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

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).

We will now determine whether your supply under the sale contract will be a supply of a going concern and will be GST-free under section 38-325 of the GST Act.

Subsection 38-325(2) of the GST Act - supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 (available at www.ato.gov.au) explains when a supply of a going concern is GST-free for the purposes of subdivision 38J of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that 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). Once the enterprise is identified, it is this enterprise for which the supplier must supply all the things that are necessary for its continued operation.

Further, 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.

You have entered into a sale contract for property X (the land), and based on the information received we consider you are supplying the following to the buyer:

§ the leasing enterprise you are carrying on the land; and

§ the Hotel business (which includes the café and bar) together with the land from which you operate the hotel business.

The next step is to determine whether you are supplying all of the things necessary for the continued operation of an enterprise for these two identified supplies.

All of the things necessary for the continued operation of an enterprise

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.

Leasing enterprise

For the continued operation of the enterprise of leasing commercial premises, it is necessary to supply the property together with the existing lease agreements. For the supply of a going concern, the supplier must assign all existing lease agreements to the purchaser so that the purchaser can continue the leasing enterprise without any disruption.

From the information received, you will supply the land with the existing lease agreement at settlement (date of the supply). As you supply the property and assign the existing lease to the buyer at settlement, the buyer will be able to continue the enterprise of leasing. Furthermore, you will carry on the leasing enterprise of the land until the date of the supply. Therefore you will be supplying to the buyer all the things necessary for the continued operation of the leasing enterprise.

Accordingly, your supply of the leasing enterprise under the sale contract will be a supply of a going under subsection 38-325(2) of the GST Act.

Hotel business together with the land

Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. Characteristics or attributes of particular premises may be determinative of the necessity for those particular premises to be supplied.

Paragraphs 18A to 18G of GSTR 2002/5 further explain that a sale of a hotel business must be provided together with the land in order to have a supply of a going concern for GST purposes. This is because a hotel business cannot be conducted without providing the land from which it is conducted.

From the information received, you will carry on your hotel business until settlement, sell your hotel business together with the land from which the business is conducted and at settlement:

§ you will give to the buyer possession of the Business, any document of title you have in possession or in control in respect of the business and, written details of all forward bookings and, pay or allow to the buyer all deposits you receive in connection with forward bookings less any fee payable by you to third parties in connection with the forward bookings;

§ you must do all things necessary to enable the buyer to become the registered owner of the land and the buyer must pay the balance and you will be taken to have transferred to the buyer as from settlement the benefit of tenancy guarantees.

Further, the buyer no later than 14 business days before the due date must give you notice of employees they wish to offer employment to, and offer in writing to employ those employees in accordance with the certified workplace agreement in respect of the Business and otherwise on terms no less favourable than the terms of employment of those employees with you.

Accordingly, we consider that the sale of your hotel business together with the land will be of a going concern under subsection 38-325(2) of the GST as you will be supplying all the things necessary for the continued operation of the hotel business.

The next step is to consider whether the supplies of the leasing enterprise and hotel business together with the land are GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(1) of the GST Act

From the information received, you will satisfy all the requirements in subsection 38-325(1) of the GST Act when you supply the leasing enterprise and the hotel business together with the land to the buyer as:

a) the supplies of the going concern (leasing enterprise and hotel business together with the land) are for consideration;

b) the buyer will be registered for GST at the time of settlement as under the sale contract the buyer must give you, no later than 7 days before the due date, proof that they are registered for GST. Failing to do this will make the supply under the contract no longer a supply of a going concern; and

c) you and the buyer have agreed in writing that the supply of the leasing enterprise and hotel business with the land will be of a going concern.

Summary

As all of the requirements of section 38-325 of the GST Act are satisfied, your supplies of the leasing enterprise and hotel business together with the land under the contract of sale will be a GST-free supply of a going concern under section 38-325 of the GST Act.

Accordingly, since property Y is part of property X under the consolidated certificate of Title, the entire sale price under the sale contract will be GST-free under section 38-325 of the GST Act.