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Ruling

Subject: GST and the supply of a going concern

Question 1

Is the supply by the Seller, of assets and other things pursuant to the Contract, a supply of a GST-free going concern in accordance with Section 38-325 of the GST Act?

Answer 1

Yes the supply of an enterprise by the Seller, as set out in the Contract, is a GST-free supply of a going concern under the GST Act.

Question 2

Does the Buyer make a 'creditable acquisition' pursuant to the Contract, from each Seller such that Input Tax Credits will be available in accordance with Section 11-20 of the GST Act?

Answer 2

No the Buyer does not make a 'creditable acquisition' from the Sellers as each supply constitutes a GST-free supply of a going concern and is not a taxable supply and therefore an input tax credit is not available.

Relevant facts and circumstances

Background

o There are four parties to this application, the Buyer and three Sellers.

o The Sellers are three local branches from the same company who each run operations with a different area of specialisation.

o All entities deal with similar mechanical equipment sales and service.

o The buyer operates internationally but at the time of transaction already operates a number of enterprises within Australia in the same field as the Sellers.

o Each seller operates an identified enterprise of distribution and after sales support.

o The Sellers enterprises are differentiated by the nature of the equipment of each enterprise.

The sale agreement

The purchase arrangements are set out in the Contract.

You summarise the terms of the Contract as follows:

General

o Pursuant to the Recitals, the Buyer purchases and the Sellers and certain Affiliates sell, certain assets related to the Local Business.

o Pursuant to the Contract, there is an aggregate monetary consideration (subject to adjustment);

o Pursuant to the Contract, the aggregate consideration shall be preliminarily allocated to the supplies by the Sellers;

o Pursuant to the Contract, the completion (closing) of the transaction in late 2011;

o Pursuant to the Contract, the parties agree that each Seller's supply of an enterprise is of a going concern. Further, Exhibits contain a GST Side Agreement executed by each Seller that confirms the agreement that the supply of the Acquired Assets by each Seller is the supply of a separate going concern; and

o Pursuant to the Contract, each Seller shall operate the Acquired Assets (enterprise) in the ordinary course of the Local Business until Closing (i.e. completion).

Consideration

The consideration is set out in the Contract:

1.2 Consideration.

(a) Purchase Price and Closing Payment. The aggregate consideration for the Acquired Assets a monetary amount (the "Base Purchase Price" and, as adjusted pursuant to the Contract, the "Purchase Price"). At the Closing, Buyer shall pay the Base Purchase Price to Sellers and the Seller Parties (as applicable) in accordance with the Contract.

(b) Inventory Count; Purchase Price Adjustment.

(i) …

9.8 Adjustment of Purchase Price. …

Registration status of recipients

You confirmed that each applicant (the Buyer and the Sellers) is registered for GST as required by paragraph 38-325(1)(b).

The Contract states:

5.4 Goods and Services Tax.

(c) Buyer warrants that it is Registered for GST and will continue to be so at all times up to and including the day of Closing…

Agreed in writing

Pursuant to the Contract, the parties agree that each Seller's supply of an enterprise is a supply of a going concern. Further, Exhibit I contains a GST Side Agreement executed by each Seller that confirms the agreement that the supply of the enterprise by each Seller is the supply of a separate going concern (paragraph 38-325(1)(c) of the GST Act).

GST clause

The Contract provides:

5.5 Goods and Services Tax.

(a) In this Section words or expressions have the same meaning as defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth), unless the context makes it clear that a different meaning is intended.

(b) To the extent that the supply of all or part of the Acquired Assets involves the supply by a Seller or Seller Party of one or more Enterprises for GST purposes, the Parties agree that the supply of the relevant Enterprise by that Seller Party is a supply:

(i) of a separately identifiable Enterprise carried on by the relevant Seller or Seller Party;

(ii) under an arrangement under which the relevant Seller or Seller Party is supplying all of the things necessary of the continued operation of an Enterprise;

(iii) under an arrangement under which the relevant Seller or Seller Party will carry on that Enterprise until the day of Closing;

(iv) under an arrangement under which the relevant Seller or Seller Party will agree separately by side agreement (a GST Side Agreement) that the supply is the Supply of a Going Concern; and

(v) which is GST-free as the Supply of a Going Concern.

The enterprise and arrangement

Pursuant to the Contract, the parties have agreed that each Seller will carry on its enterprise until the day of Closing (i.e. the completion of the transaction pursuant to the Contract).

The entire operations of three separate, fully functioning, stand alone enterprises are being transferred to expand an existing company owned by the Buyer.

You believe that the identified enterprise of each Seller represents an activity, or series of activities, done in the form of a business in accordance with paragraph 9-20(1)(a) of the GST Act.

You note that in accordance with Paragraph 81, the three enterprises supplied by the Sellers may be continued as and form part of a larger enterprise operated by the Buyer.

You state the Buyer will acquire the relevant enterprise from each Seller solely for a creditable purpose as each acquisition will be made in carrying on the Buyers enterprise and the acquisitions will not relate to making supplies that would be input taxed and will not be of a private or domestic nature.

Things sold under the agreement

Acquired Assets and other things

· The physical assets that are necessary for the continued operation of an enterprise will be transferred from each Seller to the Buyer (collectively the 'Acquired Assets'), including:

o Acquired Equipment;

o Acquired Inventories;

o Acquired Leased Real Property;

o Acquired Other Current Assets;

o Acquired Owned Real Property;

o Acquired Real Property; and

o Acquired Work In Process;

· Additionally, a number of additional intangible assets that are also necessary for the continued operation of an enterprise will be assumed or provided to the Buyer, including:

o Assumed Contracts;

o Assumed Liabilities;

o Assumed Real Property Leases;

o Consignment Agreement;

o Licenses;

o Material Contracts;

o Shared Contracts;

o Transferred Employees;

o Transferred Product Orders; and

o Transitional Services Agreements;

Things excluded in the agreement

· Further, a number of Assets and other things that are not necessary for the continued operation of an enterprise will not be transferred from the Sellers to the Buyer (collectively the 'Excluded Assets'), including:

o Guaranties;

o Capital stock, equity interests or other securities, cash, checks, bank accounts, notes, tax refunds and credits and other similar rights to receive payments from others (whether or not then billed or billable), customer advances, governing documents, minute books or similar records, ownership records, Tax Returns, intellectual property and any business name, brand name, trademark, trade name, service mark, service name or domain name that includes such names and any and all other derivatives thereof;

o Excluded Accounts Receivable;

o Excluded Contracts;

o Excluded Equipment;

o Excluded Inventory;

o Excluded Other Current Assets; and

o Retained Liabilities; and

· The Schedules and Exhibits provide further detail on the Acquired Assets, other things and the Excluded Assets.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

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

Reasons for decision

Question 1

Relevant legislative provisions

Section 9-5 - Taxable supplies

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.

Section 11-5 - What is a creditable acquisition?

You make a creditable acquisition if:

(e) you acquire anything solely or partly for a creditable purpose; and

(f) the supply of the thing to you is a taxable supply; and

(g) you provide, or are liable to provide, consideration for the supply; and

(h) you are registered, or required to be registered.

Section 11-20 - Who is entitled to input tax credits for creditable acquisitions?

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 38-325 - Supply of a going concern

(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).

Section 9-5 - Taxable supplies

You make a taxable supply if:

(i) you make the supply for consideration; and

(j) the supply is made in the course or furtherance of an enterprise that you carry on; and

(k) the supply is connected with Australia; and

(l) 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.

Section 11-5 - What is a creditable acquisition?

You make a creditable acquisition if:

(m) you acquire anything solely or partly for a creditable purpose; and

(n) the supply of the thing to you is a taxable supply; and

(o) you provide, or are liable to provide, consideration for the supply; and

(p) you are registered, or required to be registered.

Section 11-20 - Who is entitled to input tax credits for creditable acquisitions?

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 38-325 - Supply of a going concern

(3) The supply of a going concern is GST-free if:

(d) the supply is for consideration; and

(e) the recipient is registered or required to be registered; and

(f) the supplier and the recipient have agreed in writing that the supply is of a going concern

(4) A supply of a going concern is a supply under an arrangement under which:

(c) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(d) 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).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) explains section 38-325 of the GST Act.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that a supply of a going concern must be made for consideration.

The consideration payable for the supply by each applicant is set out under the Contract subject to adjustment. Attached tables show how the consideration will be allocated to the Sellers.

Registered for GST

The Buyer and Sellers were each registered for GST prior to entering into the Contract and at the closing date therefore this requirement is met.

Agreement in writing

The Contract states each Seller agrees they will make a supply of an enterprise in the form of a going concern for the purposes of the GST Act. Additionally Exhibits provide the executed GST Side Agreements by each Seller to confirm the agreement that the supply of the enterprise is the supply of a separate going concern (paragraph 38-325(1)(c) of the GST Act).

When the Contract was executed the Sellers agreed with the Buyer to carry on their respective enterprise until the day of the supply.

Supply as part of a larger enterprise

The supply of the enterprises by the respective Sellers forms part of the larger enterprise carried on by the Buyer as contemplated by section 38-325(2)(b) of the GST Act.

Whether the supply was made under an arrangement

The definition for a supply of a going concern under subsection 38-325(2) of the GST Act requires that the supply be made under an 'arrangement'.

Paragraph 19 of GSTR 2002/5 states:

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 in the written agreement which is required under 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.

The arrangement is identified in the Contract. The supplies under the terms of the Contract are under an arrangement for the purposes of section 38-325 of the GST Act.

What is the identified enterprise?

'Enterprise' is defined in subsection 9-20(1), which provides, relevantly:

(1)    An enterprise is an activity, or series of activities, done:

(a)   in the form of a business; or

(b)   in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

The Seller is a manufacturer of equipment. The definition of Local Business in the Contract provides that the enterprise consists of the equipment sales and support business.

You have described each Seller's 'identified enterprise' of distribution and after sales support.

The three Seller enterprises are differentiated by the nature of the equipment they provide and service.

You contend that the identified enterprise of each Seller represents an activity, or series of activities, done in the form of a business in accordance with Sections 9-20(1)(a) of the GST Act.

You advised that the three enterprises supplied by the Sellers may be continued as and form part of a larger enterprise operated by the Buyer. In accordance with paragraph 81 of GSTR 2002/5 this arrangement is satisfactory to the Commissioner.

What are the things that are necessary for the continued operation of the identified enterprise?

The definition of a supply of a going concern requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise.

Paragraphs 47 and 48 of GSTR 2002/5 explain:

47.  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.

48.  In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise.

Paragraphs 72 to 75 of GSTR 2002/5 explain:

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.⁸  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 things that are necessary for the continued operation of an identified enterprise are a question of fact and degree which is determined from the supplier's perspective. It is an objective test of the things that are necessary for the continued operation of the identified enterprise. Therefore, what is objectively necessary to operate the supplier's enterprise should the recipient choose to continue it and depends on what the supplier in fact uses to operate.

The assets and operating structure supplied by each Seller to the Buyer that cumulatively provide all of the things necessary for the continued operation of the enterprise are discussed below.

Necessary assets

The Contract outlines a number of assets that are necessary for the continued operation of an enterprise that will be transferred from the Sellers to the Buyer (collectively the 'Acquired Assets').

In your application you set out further information regarding the nature of the Acquired Assets as listed below:

· Acquired Equipment - defined in the Contract as machinery, equipment, tools, materials and other items of tangible personal property;

· Acquired Inventories - as outlined in the contract as consisting of the raw materials, finished goods, spare parts and acquired Inventories;

· Acquired Leased Real Property - defined in the Contract as the real property leased by the Sellers;

· Acquired Other Current Assets - defined in the Contract as lease deposits, prepaid rent and other prepaid expenses, prepaid insurance and other current assets;

· Acquired Owned Real Property - defined in the Contract as the real property owned by the Sellers or the applicable Seller Party.

· Acquired Real Property - defined in the Contract as the Acquired Owned Real Property together with the Acquired Leased Real Property (as outlined above);

· Acquired Work In Progress - defined in the Contract.

The Contract outlines a number of additional 'things' that are necessary for the continued operation of an enterprise that will be assumed or provided to the Buyer.

You outlined further information on the nature of these things as follows:

· Assumed Contracts - defined in the Contract as agreements, contracts (including purchase or sales orders), obligations and undertakings.

The Schedule lists a number of assumed (i.e. acquired) contracts from each Seller to the Buyer and the Annex contains a Form of Assignment and Assumption Agreement that confirms that the Assumed Contracts will be assigned/transferred from each Seller to the Buyer.

Your application lists the following relevant clauses/details:

· Assumed Liabilities - as outlined in the Contract, the Buyer shall assume and agree to fully perform and discharge Liabilities in relation to issues such as the Sellers customers, assumed contracts, warranties/returns/repairs etc and transferred employees.;

· Assumed Real Property Leases - is defined in the Contract as having the same meaning as Acquired Leased Real Property outlined above;

· Consignment Agreement - as outlined in the Contract, the Buyer will sell certain Consigned Products that will be owned by the Seller and consigned by the Buyer.

· Licenses - as outlined in the Contract, a number of licenses are required to operate the Sellers Enterprises.

· Material Contracts - as outlined in the Contract.

· Shared Contracts - as outlined in the Contract the Sellers and Buyer will work together to divide, modify and/or replicate as appropriate and, if practicable, novate the contracts and agreements listed so that the Buyer shall be the beneficiary of the rights and obligations.

· Transferred Employees - as outlined in the Contract, the Buyer must make an offer of employment to each employee. Further, the Sellers and the Buyer must use reasonable efforts to encourage each employee to accept any offer of employment and the Contract provides that the offer of employment must be on terms and conditions substantially similar to the Employees current terms and conditions of employment.

As it is not legally possible for the Sellers to transfer the employment contracts (as outlined at Paragraphs 48 and 122) and the Buyer has committed to enter into employment contracts with substantially similar terms and conditions, the requirement that the relevant thing is supplied will be satisfied in accordance with Paragraphs 122 - 126.

In particular you state that there are no employees whose skills and knowledge are so unique and integral to the continued operation of each Sellers enterprise that the enterprise could not be conducted without their services (see Paragraph 125);

· Transferred Product Orders - is defined in the Contract. As outlined at Section 6.18, the Buyer shall perform the Transferred Product Orders as if it was the party that took the order in the first instance; and

· Transitional Services Agreements - as outlined in the Exhibit, the Sellers will provide certain services to the Buyer for a period of 6 months after the Closing. This Transitional Services Agreement represents a contract that is brought into existence on the day of the supply as outlined at Paragraph 100, and as discussed above.

From the above and having regard to the nature of the enterprise carried on by each Seller and the core attributes of those enterprises, each Seller will supply to the Buyer all of the things that are necessary to carry on the identified enterprise.

Excluded Assets

The Contract defines a number of assets and other things that will not be transferred from the Sellers to the Buyer (collectively the 'Excluded Assets').

For completeness, you have outlined the nature of the Excluded Assets along with the reasons why (in accordance with GSTR 2002/5 paragraphs 72 - 73 and 83) they are not required for the Buyer to carry on the Identified Enterprise.

The Retained Liabilities are not necessary for the continued operation of the identified enterprise as the enterprise can be operated in their absence.

Operating Structure

GSTR 2002/5 Paragraphs 78 and 79 sets out that the business, or operating structure and process of an enterprise includes factors such as continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, the introduction to existing clients and the continuity of marketing arrangements to the time of supply in determining whether operating structure and process has been supplied.

The extent of the things provided by the Sellers to the Buyer leads to a conclusion that the Operating Structure of each enterprise has been provided.

Summary of going concern

For the reasons set out above, the supply of the relevant enterprise by each Seller pursuant to the Contract constitutes a separate supply of a going concern that satisfies the requirements for GST-free treatment as outlined in section 38-325 of the GST Act and as outlined by the Commissioner in GSTR 2002/5.

Conclusion

The Sellers will supply all the things necessary for the continued operation of the identifiable enterprises to be carried on by the Buyer.

Question 2

An entity makes a creditable acquisition where it satisfies the requirements of section 11-5 of the GST Act, namely:

· you acquire anything solely or partly for a creditable purpose; and

· the supply of the thing to you is a taxable supply; and

· you provide, or are liable to provide, consideration for the supply; and

· you are registered, or required to be registered.

As outlined above, the Buyer:

· Will acquire an enterprise from each Seller solely for a creditable purpose as each acquisition will be made in carrying on the Buyers enterprise and the acquisitions will not relate to making supplies that would be input taxed and will not be of a private or domestic nature (subsection 11-5(a) of the GST Act);

· Is liable to provide consideration for each supply pursuant to the Contract (subsection 11-5(c) of the GST Act); and

· Is registered for GST (subsection 11-5(d) of the GST Act).

The final requirement, outlined at subsection 11-5(b) of the GST Act, is that the supply to the Buyer is a taxable supply. As outlined above, in relation to Matters 1 - 3, the supply of an enterprise by each Seller to the Buyer pursuant to the Contract will constitute a GST-free supply under section 38-325 of the GST Act. In accordance with section 9-5 of the GST Act, a supply is not a taxable supply to the extent that it is GST-free.

As each Seller's supply constitutes a GST-free supply of a going concern under section 38-325 of the GST Act, the Buyer will not make a creditable acquisition in accordance with subsection 11-5(b) of the GST Act as the supply of the thing to the Buyer is not a taxable supply. On this basis an input tax credit is not available to the Buyer in accordance with section 11-20 of the GST Act.

Conclusion

In relation to Questions 1 - 3, the supply of an enterprise by each Seller to the Buyer pursuant to the MAPA will constitute a GST-free supply under section 38-325 of the GST Act.

In relation to Question 4, as each Sellers' supply constitutes a GST-free supply of a going concern, the Buyer did not make a creditable acquisition in accordance with subsection 11-5(b) of the GST Act as the supply of the thing to the Buyer is not a taxable supply. Therefore an input tax credit is not available in accordance with section 11-20 of the GST Act.