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Ruling

Subject: Goods and services tax (GST) and going concerns

Question

Answer

Will GST be payable on your sale of the business?

This ruling applies for the following periods:

Not restricted to particular periods

The scheme commences on:

Relevant facts and circumstances

The entity (you) is registered for goods and services tax (GST).

You operate a business at a location within Australia (the business).

You will sell the business to an entity. The expected settlement date is a certain date.

A number of years ago you received a ruling on whether GST will be payable on your sale of the business. However, you have requested a new ruling on this same issue to confirm that the Australian Taxation Office's (ATO's) opinion has not changed.

Your sale of the business will include the following things, which you will supply to the purchaser:

o the relevant premises;

o plant and equipment;

o the consumables;

o the goodwill; and

o the business name.

In accordance with a certain provision of a certain Act, a person is prohibited from carrying on a 'certain' business at a given place of business, in a certain State or Territory, unless the person is the holder of a licence in respect of that place of business, granted under a certain provision of the Act (such licences shall be referred to in the rest of this ruling as 'operating licences').

An entity, a third party statutory authority, is responsible for granting operating licences.

You hold an operating licence in respect of the relevant premises.

If the law allows you to transfer your operating licence in respect of the relevant premises to the purchaser, you will do so.

If you are not able to transfer your operating licence in respect of the relevant premises to the purchaser due to a statutory impediment, you will make all reasonable efforts to have a new operating licence in respect of the relevant premises supplied to the purchaser including surrendering your operating licence in respect of the relevant premises.

A certain provision of a certain Act prohibits an operating licence holder from transferring such a licence to another person. Therefore, it appears that you would not be able to transfer your operating licence in respect of the relevant premises to the purchaser.

There are many criteria that an entity must meet in order to be granted an operating licence, and the entity has the responsibility for assessing whether these criteria are met. Therefore, you cannot predict whether the entity will grant an operating licence to the purchaser.

In accordance with a certain provision of a certain Act, a person who carries on the business must not permit a person employed by him or her to do any repair work unless the person so employed:

(a) holds a tradesperson's certificate in respect of a class of repair work that includes that repair work, or

(b) is an apprentice and does that repair work in the course of his or her apprenticeship and under the supervision of a person who holds such a certificate.

An associated entity to you, a certain individual, is a registered mechanic.

You have employed mechanics to assist you in the business when there is too much work for a certain individual to manage.

The individual shall retain his personal tools. Otherwise all plant and tools will remain in the business at the time of sale of the business.

You advised at the time of your original ruling request that you had one employee mechanic working in the business at the time of the original ruling request and that he held a tradesperson's certificate.

You will carry on the business until the time of settlement.

The purchaser will be registered for GST as at the time of settlement.

You and the purchaser will have agreed in writing by the time of settlement that the sale of the business is the sale of a going concern.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

Reasons for decision

Summary

GST will not be payable on your sale of the business, provided that the entity supplies to the purchaser a new operating licence in respect of the relevant premises or you transfer your operating licence in respect of the relevant premises to the purchaser. This is because under such circumstances you will make a GST-free supply of a going concern.

However, where the entity does not supply to the purchaser a new operating licence in respect of the relevant premises and you do not transfer your operating licence in respect of the relevant premises to the purchaser, GST will be payable on your sale of the business. This is because under such circumstances you will not make a GST-free supply of a going concern and the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) will be satisfied.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

the supply is *connected with Australia; and

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 that is defined in section 195-1 of the GST Act).

In your case, you will satisfy the conditions at paragraph 9-5(a), paragraph 9-5(b), paragraph 9-5(c) and paragraph 9-5(d) of the GST Act. That is, you will sell the business for consideration, and the sale will be in the course or furtherance of the enterprise that you carry on. Additionally, the sale will be connected with Australia, and you are registered for GST. There are no provisions in the GST Act or any other Act under which your sale of the business could be input taxed. Therefore, what remains to be determined is whether your sale of the business will be GST-free.

A supply of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied.

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern'. It states:

(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).

A supply of a going concern is GST-free if the requirements of subsection 38-325(1) of the GST Act are satisfied. Subsection 38-325(1) 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.

Determining whether you will make a supply of a going concern

We shall now consider whether you will supply to the purchaser, all of the things that are necessary for the continued operation of an enterprise.

The meaning of 'all of the things that are necessary for the continued operation of an enterprise' is discussed in paragraphs 72 to 75 of Goods and Services Tax Ruling GSTR 2002/5, which 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.^'

The relevant enterprise in your case is the motor vehicle repair business you carry on at a certain location. We need to consider whether you will supply the assets, operating structure and process essential for the continued operation of this enterprise.

In accordance with paragraph 111 of GSTR 2002/5, 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.

Paragraph 122 of GSTR 2002/5 considers whether employees are one of the 'things that are necessary for the continued operation of an enterprise'. It states:

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment. The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.

Paragraph 125 of GSTR 2002/5 discusses key employees. It states:

125. Some entities have key personnel whose skills and knowledge are so unique and integral to the continued operation of the enterprise that the relevant enterprise could not be conducted without the services of the particular employee. Although key employees are not 'things' capable of being supplied, the particular and unique skills and knowledge of such a key employee is the thing which is necessary for the continued operation of the enterprise. The supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge utilised by the key employee in the enterprise.

In accordance with paragraph 122 of GSTR 2002/5, for the purposes of meeting the requirement at paragraph 38-325(2)(a) of the GST Act.

· your employee mechanic/s will not be a thing/s necessary for the continued operation of your enterprise; and

· the supply of the services of the existing employee/s, and the assignment of the current employee contract/s, are not treated as being things necessary for the continued operation of your enterprise,

We do not consider that the mechanics that have worked in your business would have skills and knowledge that are so unique and integral to the continued operation of the business that the business could not be conducted without the services of these particular mechanics. Therefore, it would not be necessary to facilitate the transfer of these mechanics' skills and knowledge to the purchaser.

You will not be able to supply to the purchaser the trade certificates held by the mechanics that work in your business. However, in accordance with paragraph 103 of GSTR 2002/5, as these trade certificates are personal qualifications, you do not need to supply them to the purchaser in order to meet the 'supply of all of the things necessary for the continued operation of the enterprise' requirement at paragraph 38-325(2)(a) of the GST Act, in the ATO's view.

It is necessary to attract customers to your enterprise. A business name is used in attracting customers. However, the purchaser in your case would still be able to attract customers to your enterprise even if you did not supply the business name to the purchaser, as you will supply goodwill to the purchaser and the goodwill attaches to the location from which you carry on the enterprise. Therefore, the business name is not one of the things necessary for the continued operation of your enterprise.

The assets, operating structure and process essential for the continued operation of your enterprise are as follows:

· the relevant premises;

· plant and equipment;

· the consumables;

· the goodwill; and

· a licence to operate a mechanics business at the relevant premises.

These things would put the purchaser in a position to continue operating the business.

You will sell to the purchaser the relevant premises; plant and equipment; the consumables and the goodwill attaching to the business.

If the operating licence in respect of the relevant premises can legally be transferred by you to the purchaser, you will transfer it to the purchaser.

In accordance with paragraph 53 of GSTR 2002/5, the supply of a thing which is incapable of assignment or supply because of a statutory or legal impediment, but which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the purchaser of that thing for the purposes of section 38-325 of the GST Act, where the following criteria are met:

· the vendor of the enterprise makes all reasonable efforts to have the thing supplied to the recipient, for example, by way of surrender;

· the supply to the purchaser is by a statutory authority or other party to the relevant contract with the vendor; and

· the thing is actually supplied to the purchaser by a party other than the vendor.

If the operating licence in respect of the relevant premises is incapable of transfer to the purchaser, due to a statutory impediment, you will make all reasonable efforts to have a new operating licence in respect of the relevant premises supplied to the purchaser, including surrendering your operating licence in respect of the relevant premises.

Hence, you will be considered to have supplied the purchaser with an operating licence in respect of the relevant premises, for the purposes of the going concern provisions, provided that a new operating licence in respect of the relevant premises is actually supplied to the purchaser by the third party statutory authority that is responsible for granting such licences or you transfer your operating licence in respect of the relevant premises to the purchaser.

Otherwise, you will not be considered to have supplied an operating licence in respect of the relevant premises to the purchaser, for the purposes of the going concern provisions.

You will supply to the purchaser all of the other things necessary for the continued operation of the business, that is, the premises from which the business operates; plant and equipment; the consumables, and the goodwill.

Hence, you will satisfy the condition at paragraph 38-325(2)(a) of the GST Act, provided that a new operating licence in respect of the relevant premises is actually supplied to the purchaser by the entity or you transfer your operating licence in respect of the relevant premises to the purchaser. This is because you would be supplying to the purchaser all of the things that are necessary to put the purchaser in a position to continue operating the business under such circumstances.

Additionally, you will satisfy the condition at paragraph 38-325(2)(b) of the GST Act, as you will carry on the business until settlement.

Therefore, you will satisfy all of the requirements of subsection 38-325(2) of the GST Act, provided that the necessary operating licence in respect of the relevant premises is supplied to the purchaser by the entity or you transfer your operating licence in respect of the relevant premises to the purchaser. Under such circumstances, you would make a supply of a going concern to the purchaser.

Determining whether you will make a GST-free supply of a going concern

We shall now consider whether your supply of the going concern would be GST-free under subsection 38-325(1) of the GST Act.

The condition at paragraph 38-325(1)(a) of the GST Act would be satisfied as the vendor (you) would be supplying the going concern to the purchaser for consideration.

The condition at paragraph 38-325(1)(b) of the GST Act will be satisfied as the recipient (the purchaser) will be registered for GST.

The condition at paragraph 38-325(1)(c) of the GST Act would be satisfied as the supplier (you) and the recipient (the purchaser) would be agreeing in writing that the vendor's (your) supply of the business is a supply of a going concern.

As all of the requirements of subsection 38-325(1) of the GST Act would be satisfied if you supply a going concern, you would be making a GST-free supply of a going concern to the purchaser, under such circumstances. All of the supplies you make under the business sale contract would form part of this GST-free supply.

Consequently, your sale of the business would not be a taxable supply and GST would not be payable on this sale, provided that a new operating licence in respect of the relevant premises is actually supplied to the purchaser by the entity or you transfer your operating licence in respect of the relevant premises to the purchaser.

However, where the entity does not supply to the purchaser a new operating licence in respect of the relevant premises and you do not transfer your operating licence in respect of the relevant premises to the purchaser, you would not be supplying a going concern, as you would not be treated as having supplied all of the things necessary for the continued operation of an enterprise. Under such circumstances, you would not be making a GST-free supply of a going concern under section 38-325 of the GST Act. Additionally, the supplies you would be making to the purchaser under such circumstances would not be GST-free under any other provision of the GST Act or any other Act.

Consequently, where the entity does not supply to the purchaser a new operating licence in respect of the relevant premises and you do not transfer your operating licence in respect of the relevant premises to the purchaser, you would be making a taxable supply to the purchaser, and GST would be payable on your sale of the business under such circumstances.