Edited version of private ruling

Authorisation Number: 1011723518028

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Ruling

Subject: GST and supply of a going concern

Question 1

Is the partnership (you) making a GST-free supply of a going concern to the new partnership of X and Y (XY)?

Answer: No.

Question 2

Are you making a GST-free supply of a going concern to Z?

Answer: No.

Relevant facts and circumstances

You are registered for GST.

You are a common law partnership and carry on a specified enterprise.

There is no partnership agreement and all partners hold equal shares in your enterprise.

Your partners, X, Y and Z, have had a falling out. Receivers and Managers have been appointed to assist with the management of your business until it can be dissolved.

The partners entered into an agreement (the Agreement) on a specified date.

The Agreement provides that the partners' signatures was to evidence their intention for them and their related entities to be bound by the arrangements set out in the Agreement and their acceptance of the terms and willingness to be bound immediately.

The Agreement provides that the arrangement was essentially a walk away arrangement, with the partnership ceasing to trade and X and Y (collectively XY) moving premises, which was advantageous for all parties as:

· it would split the parties, put distance between them and would make arrangements easier and faster

· it would avoid ongoing arguments

· it would finalise matters

· it would avoid higher future legal and receivers costs

· it would finalise future lease obligations and the associated uncertainties.

The proposal was that X and Y would walk away with their clients, and their clients' files.

In relation to information technology (IT) and information systems (IS) the Agreement provides that the partners' respective IT/IS providers were to take final images and backups of your servers and to establish new IT/IS environments for the New Businesses of the partners so that they were ready for trading on the first business day after the date of settlement. All electronic data on the servers and full access were to be made available on settlement day. The parties agreed:

· to allow a single plan to be developed by the IT/IS providers that brought about the successful establishment of new IT/IS environments for the New Businesses, including the migration of all data to the New Businesses

· that IT/IS providers engaged by each party would be given full, free and unfettered access to the partnership network, servers, software and data from the date of the agreement until the date of dissolution of the partnership

· that the IT/IS providers were entitled to make whatever images and backups that they deemed necessary to capture the data required to establish the IT/IS environment for the New Businesses.

Each of the partners agreed to immediately give the software providers written authorities that the existing software licences in respect of those products to be cancelled and new licenses to be issued to the New Businesses.

The Agreement provides that all furniture, equipment, software, hardware, fit out, etc as shown on a schedule to the Agreement were to become the property of Z and remain at the premises, with the exception of the following which were to become the property of XY:

· XY' staff's screens and thin clients, mouses, keyboards etc

· XY's lap top computers including docking stations

· All desk scanners on the premises

· The entire specified telephone system including all hand sets

· All software included on the asset listing attached to the agreement

· Specified number of filling racks

· All furniture in X and Y's offices

· Specified number of file server

· Specified number of switches

· Specified number of Cisco firewall

· Specified number of UPS

· Specified number of tape drive

· Specified number of desks

The Agreement provides that each partner was to take their respective debtors and work in progress for full value. No adjustments for write downs were to be made. Productivity and management was to continue to be monitored by the Receivers and Mangers until settlement. The parties acknowledged and agreed that they were obliged to ensure that for each of the specified weeks leading to the settlement X and Y on one part and Z on the other were to record work in progress to the minimum values specified in the Agreement.

The staff were to be split between XY and Z as set out in the Agreement. The dissolution spreadsheet attached to the Agreement outlined the employees' entitlements as at a specified date that were allocated to each partner. The employees' entitlements were to be updated so that they were current at the settlement date.

The Agreement provides details of how the phone, fax and emails were to be forwarded to each partner and the parties agreed to use their best endeavours to pass on correspondence, documentation, messages, information which relates to the other parties.

You have been carrying on your enterprise from leased premises that are owned by an unrelated third party.

In respect of the lease obligations, the Agreement provides that Z was to use its best endeavours to release X and Y from all obligations under the lease and provide appropriate indemnities to have the effect of indemnifying X and Y for all obligations and liabilities under the lease. The parties agreed that the transfer or assignment of the lease was an essential term of the Agreement.

The Agreement provides that X and Y were to cease to occupy the premises on the Monday following the date of settlement.

XY ceased to occupy the premises one day before the date of settlement. These premises continue to be used by Z.

In terms of other general releases X, Y and Z agreed that they would not make any claim or take any action what so ever against each other or any of each other's related entities. All claims and potential claims associated with the business were to be dropped or forgone.

Under the Agreement, a specified sum of money was to be paid by XY to Z to compensate for the net financial effect of the terms of the Agreement. The compensation was to take into account:

· cost of refurbishment for sub tenant

· risk associated with ongoing lease

· current cost of market rent as apposed to lease rent, and

· plant equipment settle up etc

The Agreement provides that the contribution or drawing to equalise partners' capital accounts were to be paid on settlement. If partners had insufficient funds to contribute as set out in the agreement, then terms might have been agreed between the Receivers and Managers and the partners to the reasonable satisfaction of the parties. Interest was to be charged on outstanding balances at the specified rate and paid to the Receivers and Managers.

The dissolution spreadsheet attached to the Agreement also takes into account an additional contribution of a specified sum per partner to meet anticipated creditors. This figure was to be adjusted depending on the movement in other working capital over time however the Receivers and Managers were to attempt to avoid a position where they needed to call on partners for additional funding.

The Agreement provides that settlement was to occur on or before a specified date (the settlement date), which was a few months ago. The parties agreed that on the settlement date the parties would be permitted to commence the premises move which would include having access to the IT system and telephone system, filing etc.

Under a clause of the Agreement the partners expressed and confirmed their intention and willingness to be bound immediately by the Agreement. They also confirmed that the preparation of any further documents would then be a formality to give business efficacy to this binding Agreement only.

The Agreement was signed by X, Y and Z on a specified date being the date that they entered into the Agreement.

The acquisitions by XY and Z from you will not be made in their capacities as partners.

XY is trading under a new name and at a new location.

You confirmed that the partners had agreed on a cut-off date, being the settlement date for the purposes of calculating the value of the business purchased. You also confirmed that the partners carried out what was expected of them under the Agreement by the settlement date. However, you stated that the payments detailed in the Agreement have not been paid in full. The final payments will only be made when the contract is settled. The date that the contract will settle will be determined after the outcome of this private ruling. You also stated that although the partners now operate from separate locations, the partnership continues until such time as the final contract settles.

In your private ruling application form, you have referred to a 'proposed contract', 'draft agreement', 'final contract' and 'contract'. However, you confirmed that the Agreement is the only written agreement that currently exists between the parties.

The parties intend to agree in writing that the supply of the various interests in the partnership is of a going concern prior to the settlement of the contract.

XY and Z will be required to be registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(b).

Summary

No, the supplies that you make to the partners are not GST-free supplies of going concerns as the supplies do not meet all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 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.

(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).

Agreed in writing

One of the requirements of subsection 38-325(1) of the GST Act is for the supplier and the recipient to have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c) of the GST Act).

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act. Paragraphs 178 to 185 of GSTR 2002/5 outline the ATO view on the meaning of the phrase 'agreed in writing'.

GSTR 2002/5 provides, at paragraph 181, that the term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern'.

Paragraph 182 of GSTR 2002/5 provides that the supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before 'the day of the supply'.

Paragraph 161 of GSTR 2002/5 explains when the day of the supply occurs and states:

161. The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. 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.

In your case, according to the Agreement, the arrangement was essentially a walk away arrangement with you ceasing to trade and XY moving premises and walking away with their clients and their clients' files. The settlement was to occur on the settlement date (a few months ago).

X and Y were to cease occupying the premises by a specified date. X and Y vacated the premises one day prior to the settlement date.

The Agreement provides that the parties were required to establish their new IT/IS environment for the 'New Businesses' so that they were ready for trading on the first business day after the date of settlement.

Employees were split between XY and Z as per the lists attached to the Agreement. The dissolution spreadsheet attached to the Agreement outlined the employees' entitlements as at a specified date, that were allocated to each partner. The employees' entitlements were to be updated so that they were current at the settlement date.

Under the Agreement the partners agreed to immediately give their business systems software providers written authorities to cancel the existing software licences and issue new licences to the New Businesses.

The Agreement required the partners to record work in progress only for the specified number of weeks prior to the date of settlement. Furthermore, the receivers were to monitor the productivity only until the date of settlement.

The parties agreed on a cut-off date (the settlement date) for the purposes of calculating the value of the business purchased.

The three partners signed the Agreement on the contract day and thereby confirmed their willingness to be bound immediately by the arrangements set out in the Agreement.

You confirmed that the partners have carried out what was expected of them under the Agreement by the settlement date. However, you stated that the payments detailed in the Agreement have not been paid in full. The final payments will only be made when the contract is settled. The date that the contract will settle will be determined after the outcome of this private ruling.

The Agreement provides that the contributions or drawings to equalise partners' capital accounts were to be made at settlement. However, if a partner did not have sufficient funds they could enter into a payment arrangement. Interest was payable on the outstanding balance. This indicates that settlement of the Agreement was not dependant on the payments having been made in full at the date of settlement.

Based on the facts of your case we consider that the day of the supply occurred on the date of settlement specified in the Agreement despite the fact that the payments detailed in the Agreement had not been paid in full at that point in time. It is clear from the Agreement and the partners' conduct that the partnership business was no longer in 'operation' after the date of settlement. The partners walked away with their clients and commenced carrying on their 'New Businesses' after the settlement date. The partners have established their own new businesses and have not continued operating your enterprise in a partnership after the settlement date.

It is important to note that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. In your case, you may still be 'carrying on' your enterprise for the purposes of winding up. However, the facts of your case indicate that you have not been 'operating' your enterprise after the settlement date.

Accordingly the requirement of paragraph 38-325(1)(c) of the GST Act is not met as there was no written agreement on the date of settlement between you and the partners that the supplies were supplies of going concerns.

As the supplies made to the partners do not meet all of the requirements of section 38-325 of the GST Act, the supplies are not GST-free supplies of going concerns under that section.

Whilst it is not necessary to consider the other requirements of section 38-325 of the GST Act, it is noted that the supplies did not meet some of the other requirements of section 38-325 of the GST Act. For example, you did not supply all of the things that were necessary for the continued operation of your enterprise to XY as your particular premises were a thing necessary for the continued operation of your enterprise by XY. You also did not supply the telephone system and all the software necessary for the continued operation of your enterprise to Z. Therefore the requirements of paragraph 38-325(2)(a) of the GST Act were not met.

Goods and Services Tax Ruling GSTR 2003/13 explains how the GST Act applies to transactions involving the general law partnerships. Please refer to paragraphs 131 to 147 of GSTR 2003/13 for information on GST consequences on a general dissolution of a partnership. GSTR 2003/13 is available on our website at www.ato.gov.au