Edited version of private ruling

Authorisation Number: 1011862592013

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Ruling

Subject: GST and supply of a going concern

Question

Is the Additional payment consideration for a GST-free supply of a going concern?

Answer

Yes, the Additional payment is consideration for a GST-free supply of a going concern.

Facts

You carried on a service business (the Business).

Your business was conducted from leased premises.

You (the Vendor) entered into a business acquisition agreement (the Agreement) with the Purchaser for the sale of the Business including the 'Assets' used in the business. 'Assets' is defined in the Agreement to include:

(a) the goodwill of the Business

(b) the benefit of the contracts

(c) the intellectual property which includes the business name, the domain name, the know how, technical data, advertising material and Vendor's copyright in logos, labelling or printing used in connection with the business.

(d) work in progress and

(e) assets as listed in the schedule to the Agreement which include computer hardware and software, office furniture and kitchen appliances.

The Purchase Price as listed in the Agreement comprises the following:

· the completion payment of $X,

· the Final Instalment calculated in accordance with the schedule to the Agreement, and

· the 'Additional payments' which are calculated in accordance with the schedule to the Agreement.

The Agreement lists the time of payment of the Purchase Price as follows:

(i) the Completion Payment on the Completion Date

(ii) the Final Instalment within 60 days of the end of the first period

(iii) the Additional payment 1 within 60 days of the end of the second period

(iv) the Additional payment 2 within 60 days of the end of the third period

The Agreement provides that at completion the Vendor must deliver or make available to the Purchaser the following:

(a) all of the assets

(b) release of any security interest affecting the assets

(c) employment agreement completed by Mr X

(d) duly executed notice of change of name to a name that does not include the trading name

(e) duly executed transfer of domain name and notice to affect the change of registrant of the domain name, and

(f) all documents of title relating to the assets.

The Agreement provides that the Vendor assigns to the Purchaser interest and rights in the Contracts and must execute and deliver to each of the other parties to the contracts notice of this assignment. The Contracts are listed in the schedule to the Agreement as:

· the lease

· the service agreement between the Vendor and Entity Y, and

· any uncompleted contract or instructions for the supply by the Vendor of goods or services in the course of the Business.

The Agreement provides that the Purchaser must make or procure an offer of employment to employees listed in the schedule.

The Agreement provides that both parties agree that the supply under the Agreement is the supply of a going concern. Furthermore, the Vendor warrants that it will carry on the business until the day of the supply.

Both parties are registered for GST.

You have recently received an Additional payment amount.

Reasons for decision

A supply is a GST-free supply of a going concern where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (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).

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

Subsection 38-325(2) of the GST Act

In order to determine whether the sale of your Business is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale of your Business is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 considers the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise as stated in paragraph 38-325(2)(a) of the GST Act. In particular, paragraphs 73, 74 and 75 of GSTR 2005 state:

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.

The supply identified in the Agreement is the sale of the Business conducted from leased premises. Included in the sale of the Business are the goodwill of the business, the benefit of the contracts, the intellectual property, work in progress and assets used in the business. Included in the contracts is the lease of the premises which is assigned to the Purchaser.

Based on the information provided, you are supplying to the Purchaser all of the things that are necessary for the continued operation of the business. Hence, the requirement of paragraph 38-325(2)(a) of the GST Act is met.

The requirement of paragraph 38-325(2)(b) of the GST Act is also met as you carried on the Business until completion of the sale.

Accordingly, we consider that the sale of the Business is made under an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act. The sale of the business is a supply of a going concern for the purposes of the GST Act.

Subsection 38-325(1) of the GST Act

Based on the information provided, the requirement of paragraph 38-325(1)(a) of the GST Act is met because the supply of the Business is made for consideration in the form of the Purchase Price listed in the Agreement.

The Purchaser is registered for GST. Hence, the requirement of paragraph 38-325(1)(b) of the GST Act is satisfied.

The sale contract provides that both parties agree that the sale of the business is a supply of a going concern. Hence, the requirement of paragraph 38-325(1)(c) of the GST Act is met.

Therefore, as the sale of the Business meets all the requirements of section 38-325 of the GST Act, the sale is a GST-free supply of a going concern.

Consideration

Paragraph 38-325(1)(a) of the GST Act requires the supply to be made for consideration.

'Consideration' is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply'. The definition extends beyond payments to include such things as acts and forbearances to act. A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of the supply.

In determining whether a payment is consideration under section 9-15, the test is whether there is a sufficient nexus between the supply and the payment made. In determining wether a sufficient nexus exists between the supply and consideration, regard needs to be had to the true character of the transaction.

As outlined above the consideration for the supply of the Business as identified in the Agreement is in the form of the Purchase Price. The Purchase Price includes the Additional payment which is calculated using a formula listed in the Agreement.

The Additional payment forms part of the consideration for the supply of the Business. Hence, the GST treatment of this amount is dependant on the status of the supply of which the consideration relates.

As the payment of the Additional payment formed part of the consideration for the GST-free supply of the going concern, GST is not payable.