Edited version of private ruling

Authorisation Number: 1011755497489

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Ruling

Subject: GST and the supply of a going concern

Question

Will the sale of the business by the vendor to you under the contract for sale of a business (contract), be 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)?

Decision

No, the sale of the business by the vendor to you under the contract will not be a GST-free supply of a going concern under section 38-325 of the GST Act.

Relevant facts and circumstances

The vendor operates a business from the premises at the shopping centre. On the contract date, the vendor entered into a contract with you for the sale of the business for consideration. The settlement date was not fixed as it will depend on the satisfaction of a number of conditions.

Immediately after settlement, you intend to cease operating the business and start refitting the premises to operate a retail store. Once the refitting is completed, you will operate a retail store from the premises.

You consider that the sale of the business by the vendor will be a GST-free supply of a going concern under section 38-325 of the GST act. With the consent of the vendor, you decided to obtain a GST private ruling from the Commissioner stating that the sale of the business by the vendor to you will be a GST-free supply of a going concern. If you succeed in obtaining such a ruling, the vendor agreed to treat the sale of the business as a supply of a going concern. A specific clause was inserted into the contract to give effect to this agreement.

The contract was executed subject to the following additional conditions:

· the shopping centre operator (sublessor) and you should reach an agreement to vary the lease on terms satisfactory to you;

· you should receive from the local council, a development consent to use the premises as a retail store.

The contract also provides that on the settlement date, the vendor will retain some of the equipment vital for the operation of their business.

The vendor and you are registered for GST.

Reasons for the decision

Section 9-5 of the GST Act refers to taxable supplies and 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 you *carry on; and

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

(d) 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 defined in section 195-1 of the GST Act)

The vendor will make the supply of their business for consideration. Therefore, paragraph 9-5(a) of the GST Act will be satisfied.

The vendor will supply their business to you in the course or furtherance of their enterprise carried on from the premises. Therefore, paragraph 9-5(b) of the GST Act will be satisfied.

The supply will be connected with Australia, as the premise is located in Australia. Therefore, paragraph 9-5(c) of the GST Act will be satisfied.

As the vendor is registered for GST, paragraph 9-5(d) of the GST will be satisfied.

Accordingly, the supply will satisfy the requirements of paragraphs 9-5(a)-(d) of the GST Act. The supply will not be an input taxed supply under any provision of the GST Act. However, it is necessary to ascertain whether the supply will be a GST-free supply under any provision of the GST Act.

GST-free supply

A supply of a going concern is GST-free, where the requirements of section 38-325 of the GST Act are satisfied. 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).

To be a GST-free supply of a going concern, a supply should satisfy both subsections 38-325(1) and (2) of the GST Act. Where a supply does not satisfy all the requirements of section 38-325 of the GST Act, it will not be a GST-free supply of a going concern.

Subsection 38-325(1)

The vendor will make the supply for consideration. The recipient is registered for GST. Therefore, paragraphs 38-325(1)(a) and (b) of the GST Act will be satisfied.

Agreed in writing

Paragraphs 178-185 of Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) refer to what is meant by a 'agreed in writing'. Paragraphs 178-182 of GSTR 2002/5 state:

178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'. This agreement need not necessarily form part of the arrangement under which the 'supply of a going concern' is made.

179. The GST Act does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'.¹⁹

180. Section 25 of the Acts Interpretation Act 1901 defines 'writing' as 'includes any mode of representing or reproducing words, figures, drawings or symbols in a visible form.' In Peverill v. Meir (1990) 95 ALR 401, Justice Burchett concluded that:

'When the Act requires the request to be in writing, I think it refers to a request which read reasonably, conveys the information that the procedure in question is to be performed.'

181. 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, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

182. 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.

As per a clause of the contract, the parties agree to treat the supply as a supply of a going concern only if the Commissioner agrees, prior to the settlement date, to treat the supply as a GST-free supply of a going concern, notwithstanding any other provision of the contract. However, the Commissioner cannot agree to treat the supply as a GST-free supply of a going concern, unless the parties have already agreed in writing that the supply is a supply of a going concern.

Where the parties have not agreed unconditionally in writing that the supply will be a supply of a going concern; the supply will not satisfy paragraph 38-325(1)(c) of the GST Act.

Subsection 38-325(2)

Supply under an arrangement

One of the requirements to satisfy this subsection is that the supply should be a supply under an arrangement.

Paragraphs 19-20 of GSTR 2002/5 refer to what is a 'supply under an arrangement' and state:

19. A supply is defined in section 9-10. 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, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. 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 which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. (Refer to paragraphs 178 to 185 for more details). However, 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 of the transactions entered into and the circumstances in which the transactions are made.

In our view, the contract of sale will constitute an arrangement. However, under a clause of the contract of sale the vendor will not supply some of the things necessary for the operation of the 'identified enterprise'. Paragraph 19 of GSTR 2002/5 makes it clear that the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

As the vendor will not supply some of the things necessary for the operation of the 'identified enterprise' then not all the things relating to the 'identified enterprise' will be supplied. Consequently that arrangement may not satisfy subsection 38-325(2) of the GST Act.

Identified Enterprise

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

Paragraph 38-325(2)(a)

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

It is necessary to ascertain whether the vendor will supply to you all of the things that will be necessary for the continued operation of the vendor's enterprise.

Paragraphs 72-75 of GSTR 2002/5 state:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

Paragraphs 41-46 of GSTR 2002/5 describe what is meant by 'the supplier supplies'. Paragraphs 41-42 of GSTR 2002/5 state:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.⁴ The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

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

We consider that those things that will not be supplied are essential items for operating the 'identified enterprise'. Therefore, the vendor will not supply to you all of the things that are necessary for the continued operation of the 'identified enterprise'. Consequently, paragraph 38-325(2)(a) of the GST Act will not be satisfied.

Conclusion

In this case even though the enterprise is carried on until the day of the supply, as stipulated by paragraph 38-325(2)(b) of the GST Act the supply will still not be a GST-free supply of a going concern. This is because for a supply to be a GST-free supply of a going concern, the supply should satisfy all the elements of both subsections 38-325(1) and (2) of the GST Act.

As mentioned above, in this case, the supply will not fully satisfy subsection 38-325 of the GST Act. Therefore, the sale of the business will not be a GST-free supply of a going concern.

As such, the sale is taxable on the understanding that all the requirements of a taxable supply in section 9-5 of the GST Act are satisfied.