Edited version of private ruling

Authorisation Number: 1011811217465

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Ruling

Subject: GST and supply of a going concern

Question

Will the sale of your business be a GST-free supply of a going concern?

Answer

Yes, the supply of your business will be a GST-free supply of a going concern.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You have been operating your business from leased premises located in Australia (the property). The property is owned by another entity (the lessor).

Under your arrangement with the lessor, you did not pay rent but reimbursed them for the land tax and rate. There was no written agreement on this arrangement.

Early in the recent year, you entered into a 12 months lease agreement with the lessor. The lease specified the rent payable by you.

You proposed to sell your business to another entity (the purchaser) for a specified amount. The consideration is for the equipment and goodwill.

The purchaser is registered for GST.

The lessor also proposed to sell the property to another entity that is related to the purchaser.

The contract for the sale of the business is interdependent with the contract for the sale of the property.

Under the contract for the sale of the business you will supply various plant and equipment.

Your managing director will be available to the purchaser for a period of some weeks from settlement to provide introduction to business systems and procedures and to ongoing customers and suppliers.

There are no licences or permits required to operate your business.

Pursuant to the contract, you will assign the lease to the purchaser on completion of the contract.

The contract for the sale of the business also provides that:

· you and the purchaser agree that the sale of the business is a supply of a going concern;

· you will carry on the enterprise until completion of the contract; and

Reasons for decision

Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (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 part of a larger enterprise carried on by the supplier).

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

Supply under an arrangement

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 explain what is meant by 'supply under an arrangement'.

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under subsection 38-325(1) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

In this case, the supply of the business and the supply of the property will be made under two contracts which, because they are interdependent, comprise a single arrangement.

The contract for the sale of the business evidences the supply to be made under the arrangement.

Supplier supplies all the things necessary for the continued operation of an enterprise

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise.

An enterprise is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business.

You advised that you are operating a business of transport and storage. This is the identified enterprise for the purpose of subsection 38-325(2) of the GST Act.

The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the thing supplied.

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.

Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. Where the supplier carries on its enterprise from leased premises, the supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

The nature of your business requires that it is operated from the premises that you lease. You advised that you will assign the lease to the purchaser on completion of the contract. Therefore, you will supply the right to occupy the premises.

Under the contract, you will supply all the plant and equipment, fixtures and fittings and detailed information about your customers. Furthermore, you will also provide assistance in the introduction of the purchaser to the business systems and procedures.

Goodwill is intangible property. It attaches to a business and cannot attach to an enterprise which is not a business. If the 'identified enterprise' is a business, goodwill is supplied as one of the things that are necessary for the continued operation of that enterprise. The contract for the sale of the business provides that part of the consideration is for the supply of goodwill.

Based on the facts provided, you will be supplying all the things that are necessary for the continued operation of your enterprise and the purchaser will be in a position to carry on that enterprise.

Supplier carries on the enterprise until the day of the supply

A supply under an arrangement will only be the supply of a going concern where the enterprise is carried on by the supplier until the day of the supply. All activities must be active and operating on the day of the supply. The activities must be capable of continuing.

Under the contract for the sale of the business, you warrant that you will carry on the enterprise until the completion of the contract. Therefore, this requirement will be satisfied.

GST-free

You will sell the business to the purchaser for a specified amount; thus, the supply will be for consideration.

The purchaser is registered for GST. Furthermore, the contract for the sale of the business contains your agreement in writing that the sale will be a supply of a going concern.

The requirements in subsection 38-325(1) of the GST Act will be satisfied. Therefore the sale of your business will be a GST-free supply of a going concern.