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Ruling

Subject: GST and supply of a going concern

Question

Is the supply of the assets and liabilities of the vendor under the agreement with the purchaser a GST-free supply of a going concern?

Answer

Yes, the transfer of the assets and liabilities of the vendor under the agreement with the purchaser is a GST-free supply of a going concern.

Relevant facts and circumstances

The vendor entered into an agreement to transfer all of its assets and liabilities to a related company (the purchaser). It is intended that the vendor will globally cease its current activities and the purchaser will take over these activities.

The vendor's business involves sending raw materials to manufacturers around the world for processing. When the products are completed, the vendor then sells the completed products to the manufacturers for onward supply to distributors in Australia and overseas.

The vendor and the purchaser are incorporated overseas.

The vendor does not have any physical presence in Australia. However, it has stock of raw materials with a manufacturer in Australia which, once processed, will be supplied to overseas and Australian markets. Majority of this stock is exported to customers overseas following manufacturing.

The vendor is registered for GST in Australia.

The vendor and the purchaser have agreed to the terms of conditions of a draft contract, a copy of which was submitted to the ATO with the private ruling application. The proposed date for the completion of the contract was set for 1 January 2012 (the completion date).

The contract provides that the vendor shall sell and transfer and the purchaser shall purchase free and clear of all encumbrances all the assets and liabilities held by the vendor and any associated goodwill as a going concern.

The property, undertaking and assets the vendor agreed to be transferred are as follows:

(a) all assets, properties, rights and interests (including but not limited to the business, property, intellectual property rights, subsidiary interests, stock, and contracts) of the vendor,

(b) associated goodwill together with the exclusive right of the purchaser to represent itself as carrying the business as the vendor's successor,

(c) all client lists, records and work-in-progress of the business,

(d) the properties leased by the vendor,

(e) the full benefit subject to the burden of the contracts entered into by the vendor and any engagements, orders or claims against third parties in connection with the assets or liabilities;

(f) intellectual property rights such as:

· patents,

· supplementary protection certificates,

· rights to inventions,

· utility models,

· copyright,

· moral rights,

· trade marks,

· service marks,

· trade, business and domain names,

· rights in trade dress or get-up,

· rights in goodwill or to sue for passing off,

· unfair competition rights,

· rights in designs,

· rights in computer software,

· database rights,

· topography rights,

· rights in confidential information (including know-how and trade secrets),

· any other intellectual property rights.

(g) all books, records, tax returns, manuals and other materials relating to the assets or liabilities;

(h) equipment, plant and machinery, fixtures and fittings, furniture; and

(i) all other property and assets of the vendor not specifically referred to above.

In consideration of the transfer of the assets and liabilities, the purchaser will pay the vendor an amount equal to the net book value of the assets and liabilities as at the completion date. The consideration will be in the form of a non-interest bearing loan note entered into by the vendor and the purchaser contemporaneously with the contract.

Under the contract, the vendor shall transfer to the purchaser all of its rights and obligations under contracts of employment and employment relationships between the vendor and its employees.

The vendor shall assign or novate to the order of the purchaser all contracts which are capable of assignment or novation without a third party consent. If a third party consent is required, the vendor shall use reasonable endeavours to obtain such consent.

Before the completion date, the following clauses would be inserted in the contract or would be contained in a separate written agreement:

(a) The parties agree that the sale of the Business and the Assets under or in connection with this agreement is the supply of a going concern.

(b) The Vendors warrant to the Purchasers that they will continue to carry on the Business until the Completion Date.

(c) The Purchasers warrant to the Vendors that they are registered for GST or required to be registered for GST.

The purchaser is registered for GST from 1 January 2012.

Relevant legislative provisions

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

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

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 a part of a larger enterprise.

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

Subsection 38-325(2) of the GST Act

Supply under an arrangement

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 (available at www.ato.gov.au) 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 vendor entered into an arrangement with the purchaser under which the vendor shall transfer all its assets and liabilities. The contract evidences the supplies to be made by the vendor under the arrangement.

Supplier supplies all of 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.

The vendor is carrying on a business of sending raw materials to manufacturers and selling the finished products to manufacturers worldwide including Australia. For the purpose of this ruling, we are not determining whether the vendor's activities in Australia are capable of separate independent operation and thus, may be supplied as a going concern. As the vendor intended to cease its activities globally rather than just its activities in Australia, it is the vendor's entire business that is the identified enterprise for the purpose of subsection 38-352(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 things 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:

o 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

o 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.

Based on the information provided, the vendor will supply all the things that are necessary for the continued operation of its enterprise and the purchaser will be in a position to carry on that enterprise as the vendor shall transfer to the purchaser the following under the agreement:

· all its assets including its properties, rights and interests, goodwill, intellectual properties, plant and equipment, and stock;

· the full benefit of the contracts entered into by the vendor;

· properties leased by the vendor; and

· rights and obligations under employment contracts.

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.

On the basis that, before the completion date, the contract or a separate written agreement would contain a clause requiring the vendor to continue to carry on the business until the completion date, this requirement will be satisfied.

Therefore, the transfer of assets and liabilities by the vendor is a supply of a going concern under subsection 38-325(2) of the GST Act. The next step is to consider subsection 38-325(1) of the GST Act.

Subsection 38-325(1) of the GST Act

From the information received, all the requirements in subsection 38-325(1) of the GST Act are satisfied as:

· the transfer of the assets and liabilities by the vendor is for consideration being the amount equal to the net book value of the assets and liabilities;

· the purchaser is registered for GST; and

· the contract contains the vendor and the purchaser's agreement that the transfer of the assets and liabilities is a supply of a going concern.

Summary

Accordingly, the transfer of the assets and liabilities of the vendor under the agreement with the purchaser is a GST-free supply of a going concern since all the requirements in section 38-325 of the GST Act are satisfied.