Edited version of private ruling

Authorisation Number: 1011721337314

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Ruling

Subject: GST and supply of a going concern

Question:

Is an Australian entity ('AusE') making 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) to an Australian company ('AusCo'), in relation to the sale of a hotel business?

Answer:

Yes. AusE is making a GST-free supply of a going concern under section 38-325 of the GST Act to AusCo in relation to the sale of the hotel business.

Relevant facts

An Australian entity ('AusE') operates a business on the land which is subleased from another Australian entity ('AusE2'). That business is a hotel in Australia. AusE is referred to as the 'Business Vendor'. AusE occupies the land pursuant to a sublease ('Sublease').

The hotel business is currently being managed by another company ('ManCo') pursuant to a management agreement ('Management Agreement'). Under the Management Agreement, ManCo performs hotel management services for AusE.

AusE has agreed to sell the hotel business to an Australian company ('AusCo') under a Contract for the Sale of Business ('Business Sale Contract'). The assets agreed to be sold under the Business Sale Contract include the Sublease, goodwill, certain licences, contracts and stock.

In regards to the Sublease, AusE2 is the vendor under a Contract for the Sale of Real Estate (Land Contract) with AusCo, as the purchaser. AusE2 is referred to as the 'Land Vendor'. The subject matter of the Land Contract is a leasehold interest in land situated in Australia including plant and equipment ('Lease') that is subject to a Sublease with AusE. That leasehold interest was acquired by AusE2 several years prior to the Land Contract. AusE2 will also sell the Lease to AusCo.

Both the Land Contract and the Business Sale Contract are expected to complete simultaneously. On completion, AusCo will be the entity under the Lease it receives under the Land Contract and the Sublease it receives under the Business Sale Contract, which will merge so that all AusCo will have is the Lease (and no longer qualified by the Sublease).

AusCo will continue to operate the business it acquires under the Business Sale Contract. It will operate that business on the leasehold interest it now holds under the Lease rather than the Sublease previously held by AusE.

Certain assets are excluded from the sale (Excluded Assets). The Excluded Assets include the assets of ManCo, such as the business name' and domain names registered by and websites operated by or on behalf of ManCo. The assets received by AusCo under the Business Sale Contract will not include the benefit of the Management Agreement with ManCo. The Management Agreement will be terminated at the time of completion.

After completion, AusCo will continue to operate the business of a hotel under a different brand name and without the benefit of the Management Agreement with ManCo. It is asserted that AusCo will be able to do so without the Management Agreement as AusCo will have acquired everything that it needs to operate the business under the Business Sale Contract. These assets will include goodwill and relevant employees. AusCo will continue to operate the business albeit under a different brand name without interruption using a different hotel manager.

The Contract for the Sale of Business (Business Sale Contract) provides (amongst other things) that:

· The vendor (AusE) agrees to sell and the purchaser (AusCo) agrees to buy the vendor's right, title and interest in the assets (except for the excluded assets).

· The 'assets' mean the following assets of the hotel business or used by the vendor in connection with the business: the business records; the goodwill; the liquor licence; vendor's IP; statutory licences; systems; the benefit of the equipment lease; the benefit of the service contracts; the benefit of the Sublease; the stock; and the cash float.

· The excluded assets include the manager's assets and benefits of the Management Agreement.

· Consideration is payable.

· Settlement of this agreement is subject to and conditional on: (a) consent to the assignment of the Sublease to the purchaser; (b) the Liquor Authority granting the conditional transfer and its consent to a new management agreement.

· Sublease - The vendor will procure the lessor to consent to the transfer of the Sublease to the purchaser as soon as practicable after the contract date (date of this agreement). The purchaser acknowledges the lessor will release the vendor from any liability the vendor may have to the lessor in respect of the non performance of or default under the Sublease by the vendor on and from settlement and any continuing obligations of the vendor under the Sublease on and from settlement. As and from settlement, the purchaser will pay the rent and outgoings in the manner provided in the Sublease.

· Conditional transfer of liquor licence - The parties must undertake all steps to cause the conditional transfer of the liquor licence from the vendor (as the licence owner) to the purchaser.

· Vendor's obligations on settlement include the assignment of Sublease.

· Settlement of this agreement is conditional upon and interdependent with the settlement of the Contract for the Sale of Land (referred to as the Land Contract from AusE2 in this ruling).

· Income and Advance Bookings - The vendor is entitled to income to any period up to and including the specified time (date of settlement). The purchaser is entitled to income and advance deposits (prepayments) to the revenue produced by the business and the assets which relate to any period after the specified time. The purchaser must as from settlement, comply with the terms of each reservation recorded on the reservations register of the business.

· With effect from settlement, the vendor assigns and the purchaser accepts the rights and assumes the obligations of the vendor under the service contracts and the business contracts The service contracts means the contracts for servicing or maintaining the plant or equipment or for the provision of goods or services at the hotel or to the business (excluding the Management Agreement). Business contracts mean any accommodation agreements or agreements for the vendor's services in respect of the hotel and disclosed or entered into before settlement in accordance with the terms of this agreement.

· The purchaser must, as soon as practicable offer employment to each employee to commence from the day after settlement.

· GST - The parties agree the supply of the business and assets is a supply of a GST-free going concern.

The Management Agreement provides (amongst other things) that:

· The owner (AusE) wishes to engage the manager (ManCo) to operate the hotel in accordance with the terms of this agreement. The owner appoints the manager as the manager of the hotel.

· The management fee (base fee and incentive fee) is payable for the performance of the manager's services.

· All funds received by the manager in the operation of the hotel including working capital provided by the owner will be deposited in an account which will be opened in the name of the owner. The owner at all times will provide sufficient working capital as advised by the manager, are necessary to assure the uninterrupted and efficient operation of the hotel.

· The manager will submit to the owner for approval a business plan and budget.

· The manager shall provide to the hotel access to reservation services and the charges for the same shall be a hotel operating expense.

· The owner agrees to obtain and maintain all licences and permits required for the management and operation of the hotel. The owner will be the holder of the relevant licences.

· The manager will operate the hotel as agent, for the owner.

· The manager will discuss with the owner, as part of the process for approval of the business plan and budget, the manager's proposed room rate policy.

· The owner proposes to be the lessee of the land.

· All employees including the executive staff must be employed by the owner but are under the day to day supervision of the manager.

· The managers copyright and other intellectual property rights in all promotional material and any information stored on computer software prepared by or on behalf of the manager specifically for the hotel or used in the operation of the hotel vests in the owner (with some exceptions).

AusE and ManCo agreed to vary the Management Agreement. The variation acknowledges the sale of the hotel and the transfer of the Lease and Sublease under the contracts. The parties agreed to terminate the Management Agreement with affect on and from date of settlement.

AusE and AusCo are registered for goods and services tax (GST).

Reasons

Under the arrangements between AusE2, AusE and AusCo, AusE2 is to supply the Lease (leasehold interest of the land/property to AusCo under the Land Contract), and AusE is to supply the hotel business (operating on the land/property) to AusCo under the Business Sale Contract. The contracts are interdependent, and settlement of these contracts is expected to occur simultaneously.

Goods and Services Tax Ruling GSTR 2002/5 discusses when the supply of a going concern is GST-free, and states at paragraph 137:

137. It is not uncommon to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. When the two entities sell their enterprises to one recipient and the contracts are interdependent, each supply must be considered separately.

We determine the GST status of the supply of the hotel business made by AusE to AusCo separately from the supply of the Lease made by AusE2 to AusCo.

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The transaction between AusE and AusCo satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a) AusE makes the supply for consideration by way of payments;

(b) The supply is made in the course or furtherance of its enterprise (which includes activities done in termination of the enterprise);

(c) The supply is connected with Australia as AusE carries on an enterprise in Australia; and

(d) AusE is registered for GST.

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

There are no provisions under the GST legislation in which the supply of the hotel business could have been input taxed. What remains to be determined is whether the supply is GST-free.

GST-free

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. Subsection 38-325(1) of the GST Act 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 under section 195-1 of the GST Act).

The condition at paragraph 38-325(1)(a) of the GST Act is satisfied as AusE makes the supply to AusCo for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act is satisfied as AusCo is registered for GST and will be at the time of settlement.

The condition at paragraph 38-325(1)(c) of the GST Act is satisfied as AusE and AusCo agree in writing that the supply is of a going concern.

In addition to these requirements, the supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

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

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

Supply under an arrangement

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into on or prior to the day of the supply.

Further paragraph 20 of GSTR 2002/5 provides that 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 the transactions entered into and the circumstances in which the transactions are made.

From the information provided, AusE is the owner of the hotel business which is being managed by ManCo in accordance with the Management Agreement. Although ManCo is managing the hotel, this is done on behalf of AusE, and the provisions of the Management Agreement would indicate that the hotel business is being operated by or for AusE. AusE is the supplier who enters into the Business Sale Contract for the supply of this hotel business to AusCo.

The supply of the hotel business by AusE to AusCo is made under this arrangement prior to the day of the supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

The term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:

· in the form of a business; or

· in the form of an adventure or concern in the nature of trade; or

· on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; or

…

From the information provided, AusE conducts an enterprise of operating a hotel business, which is the identified enterprise.

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

What needs to be determined is whether AusE has supplied to AusCo all the things necessary for the continued operations of this hotel business.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 74 and 75 of GSTR 2002/5 state:

74. 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.

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.

Furthermore, following on from paragraph 137 of GSTR 2002/5 above in relation to the supply of two separate enterprises by two suppliers to one recipient, paragraphs 138 to 140 of GSTR 2002/5 state:

138. Where both supplies occur on the same day, each enterprise which is the subject of the separate supplies must be capable of continued operation by the recipient. The supplier of each enterprise can supply all of the things necessary to the recipient to enable them to continue to operate both enterprises. When the supply of both enterprises occurs simultaneously, the recipient of the reversionary interest at the time of the supply of that interest is therefore capable of receiving the benefits of the covenants under the lease.

Example 22: Supply of two enterprises to one recipient

139. Mr Flintrock owns a commercial property that he leases to Bedstone Pty Ltd, a company of which Mr and Mrs Flintrock are directors and shareholders. Bedstone operates a motel enterprise from the premises. Stoneage Pty Ltd will acquire both enterprises. The successful completion of each contract is subject to the completion of the other contract. Both settlements will take place at the same time.

140. Mr Flintrock is carrying on an enterprise of leasing and can supply everything necessary for the continued operation of that enterprise to Stoneage as a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. Bedstone will sell all the plant, equipment and goodwill, together with forward bookings. Provided that Bedstone also assigns the lease of the premises to Stoneage, it will be making a GST-free supply of a going concern.

From the information provided, AusE supplied to AusCo the hotel business consisting of the following assets of the business or used by AusE in connection with the business: the business records; the goodwill; the liquor licence; vendor's IP; statutory licences; systems; the benefit of the equipment lease; the benefit of the service contracts; the benefit of the Sublease; the stock; and the cash float. Further, AusCo will also be entitled to any income and advance bookings for goods or services at the hotel after settlement. AusCo will retain relevant employees and continue the hotel business under another name and new management agreement.

Under the Business Sale Contract, it states that AusE will transfer the Sublease (for the land/property with AusE2) to AusCo. As per paragraphs 137 to 140 of GSTR 2002/5, when the supply of both enterprises (being the Lease and hotel business) occurs simultaneously, the recipient of the reversionary interest at the time of the supply of that interest is capable of receiving the benefits of the covenants under the lease.

For statutory licences, where a supplier is permitted by the relevant statutory regime to transfer the licence, permit or other statutory authorisation, it must transfer it. Where the supplier may only transfer the thing with permission from a relevant entity, it may attempt to gain that permission. Where the supplier, having made all reasonable attempts to transfer the thing, has no option but to surrender it in favour of the recipient, the surrender and reissue will be taken to be supply of the licence by the supplier for the purposes of section 38-325 of the GST Act (paragraph 105 of GSTR 2002/5). In this circumstance, the parties will undertake all steps to cause the conditional transfer of the liquor licence (and other relevant licences) from AusE to AusCo with the appropriate authorities effective from settlement. AusE is taken to have supplied the licences for the purposes of section 38-325 of the GST Act.

These facts indicate that AusE has supplies the assets necessary for the continued operation of the hotel business, and the operating structure and process of the enterprise.

While a number of things are commonly necessary for the continued operation of an enterprise, not all things will always be necessary for the continued operation of a particular enterprise. Paragraph 83 of GSTR 2002/5 states:

83. Certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things (that is, they are not essential).

The hotel business could be carried on in the absence of the Management Agreement with ManCo and its assets (include its brand name). AusCo will in fact continue the hotel business under another name and new management agreement.

AusE is supplying all things necessary for the continued operation of the hotel business under its arrangements with AusCo, and therefore paragraph 38-325(2)(a) of the GST Act is satisfied.

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. A supply of everything necessary for the continued operation of an enterprise will only be a '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.

A supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

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 (paragraph 161 of GSTR 2002/5).

From the information provided, AusE continues to carry on the hotel business until the date of the supply to AusCo. AusCo will continue to operate the hotel business (under a different brand name) after the day of the supply. Paragraph 38-325(2)(b) of the GST Act is satisfied.

Accordingly, AusE is making a supply of a going concern as defined in subsection 38-325(2) of the GST Act in relation to the supply of the hotel business to AusCo, and the supply is GST-free.