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Subject: Supply of a going concern

Question:

Is the supply made by the X and Y Partnership pursuant to an Agreement of Sale the supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer:

No, the supply made by the X and Y Partnership pursuant to an Agreement of Sale is not the supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances:

The parties:

Z Ltd ('Vendor 1') is the trustee for the Z Unit Trust.

X and Y Partnership ('Vendor 2') is a partnership comprising four natural persons.

K Ltd ('Purchaser' and 'Contractor') is the trustee for the L Trust.

Vendor 1 is the registered holder of a Fishery Licence ('the Licence') issued pursuant to State legislation. Vendor 2 is the owner of a fishing vessel ('the Vessel'). Prior to xxxx 2011 Vendor 1 and Vendor 2 used the Licence and the Vessel in a fishing operation carried on by Vendor 1 and Vendor 2.

Agreement of Sale:

On xxxx 2011 Vendor 1, Vendor 2 and Purchaser entered into an Agreement of Sale ('AOS') which states that the Purchaser agrees to purchase the Licence and Vessel on the Completion Date. The sale and purchase of the Licence and Vessel are interdependent on each other and are subject to the relevant State government department approving transfer of the Licence and the Australian Maritime Safety Authority approving the transfer of the Vessel.

The AOS states that the Vendors and Purchaser agree that the supply of the business and the assets is the supply of a going concern. The Vendors covenant to maintain the Licence in good standing and valid until Completion Date and maintain the Vessel in good working order and free of notices and claims until Completion Date.

The AOS is interdependent with an Owner and Contractor Operating Agreement ('OCOA') between the same parties and a breach of the AOS by the Purchaser gives rise to a breach of the OCOA and vice versa.

Owner and Contractor Operating Agreement:

The OCOA is between Vendor 1 and Vendor 2 (as 'Owner') and the Purchaser (referred to as 'Contractor' in the OCOA).

The OCOA recites that Owner operates the Vessel and has agreed to sell the Vessel and the Licence to the Contractor pursuant to the AOS, the Contractor is able to provide fishing management, maintenance and provisioning services for the Vessel and engage the existing crew to operate the Vessel, and that the parties have agreed that by the OCOA the Contractor will utilise the Vessel and Licence to catch fish and receive the proceeds of that catch between the date of execution of the AOS (xxxx 2011) and the completion date of the AOS.

The OCOA obliges the Contractor to engage a currently certified person to operate the Vessel, engage the current crew on the same terms and conditions as previously by the Owner, and operate the Vessel for the purposes of the OCOA during such periods as weather conditions permit (clause 2). The Contractor is liable to pay for or supply all fuel, wages, taxes, levies, superannuation and other entitlements of the Master and crew, and all other outgoings including Licence fees and insurances on a prorate basis for the term of the OCOA . The OCOA states that the Contractor owns 100% of the catch, may market the catch and that catch proceeds vest in the Contractor.

The term of the OCOA is from the day of execution of the OSA 'until late 2011'.

Statement of Facts:

A Statement of Facts supplied with the ruling request states (Paras 11, 12 and 14):

In consideration for entering into the AOS the Vendors provided the Purchaser with the ability to undertake the fishing operation via the OCOA from xxxx 2011 through until late 2011 when the transaction was settled (the 'Interim Period'). In effect the OCOA provided a type of lease/licence for the Purchaser during the Interim Period.

Whilst the Purchaser was able to undertake fishing operations the registered ownership of the vessel remained with Vendor 2 and ownership of the Licence and other assets remained with Vendor 1. Vendor 1 as the registered holder of the licence was still obliged to complete [relevant] documentation relating to periods of [fishing] during the Interim Period.

During the Interim Period the Purchaser was responsible for the provisioning of the Vessel, payment of crew and sale of fish (retaining the proceeds).

There were four discreet periods of time in which fishing was permitted during the Interim Period (2 periods of 10 nights and 2 periods of 7 nights).

The Statement of Facts confirmed that settlement of the AOS occurred in late 2011, that settlement was on the basis that there was a supply of a going concern, and no GST was collected by the Vendors.

Relevant legislative provisions:

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

Reasons for decision:

Summary:

Pursuant to the AOS each of X and Y Partnership and Z Ltd supply their respective enterprise to Purchaser and each supply must be considered separately for the purposes of section 38-325 of the GST Act. The supply made by X and Y Partnership pursuant to the AOS does not satisfy the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise. Consequently the supply is not the supply of a going concern.

Detailed reasoning:

The requirements for a GST-free supply under section 38-325 of the GST Act:

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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.

Goods and Services Tax Ruling GSTR 2002/5 states (Para 15) that it is not the supply itself which must satisfy the conditions in paragraphs 38-325(2)(a) and (b) but the arrangement under which a supply is made.

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The arrangement and the supplies under that arrangement:

Goods and Services Tax Ruling GSTR 2002/5 states that the supplier and recipient may identify both the arrangement and the supplies under that arrangement which in aggregate comprise the 'supply of a going concern' in either the written agreement required by paragraph 38-325(1)(c) of the GST Act or any other written agreement that relates to the arrangement entered into (Para 20).

In the present case the agreement required by paragraph 38-325(1)(c) appears in the AOS which states:

The Vendor [sic] and Purchaser agree that the supply of the business and the assets is the supply of a going concern.

We therefore consider that the AOS identifies the arrangement and the relevant supplies.

Clause 4.1 of the AOS states:

The Vendors agree to sell and the Purchaser agrees to purchase the Assets on the Completion Date.

Clause 1 of the AOS defines 'Assets' to mean the Licence, Vessel, fishing gear and spares, plant and equipment and spare main engine. Although a clause of the AOS refers to the supply of 'the business and the assets', 'business' is not defined in the AOS. Recitals B and D to the AOS state that Vendor 1 owns the Licence and the fishing gear, spares plant and equipment utilised on the Vessel, Recital C states that Vendor 2 owns the Vessel, and Recital E states that Vendor 1 and Vendor 2 utilise the Licence and the Vessel in the conduct of their fishing operation.

In our view the relevant 'arrangement' is that described in a clause of the AOS and two supplies are made under that arrangement: Vendor 1 supplies the Licence, fishing gear, spares, plant and equipment and Vendor 2 supplies the Vessel.

GSTR 2002/5 states that it is not uncommon to have a business structure where two entities carry on two enterprises which they sell to one recipient and that in such cases the supply made by each entity to the recipient must be considered separately for the purposes of section 38-325 (Para 137):

Supply of two separate enterprises by two suppliers to one recipient:

It is not uncommon to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. When the two entities sell their enterprises to one recipient and the contracts are interdependent, each supply must be considered separately.

The 'identified enterprise' for the purposes of paragraphs 38-325(a) and (b):

GSTR 2002/5 states that paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise' (Para 21) and (Para 29):

Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

In the present case there are two 'identified enterprises' - one carried on by Vendor 1 and one carried on by Vendor 2.

The identified enterprise carried on by Vendor 2 originally comprised making the Vessel available to Vendor 1 and Vendor 2 for utilisation in the conduct of a fishing operation. According to the Statement of Facts, however, Vendor 1 and Vendor 2 'provided a type of lease/licence to the Purchaser during the Interim Period', i.e. the OCOA. We therefore consider that, with effect from xxxx 2011 Vendor 2 ceased to carry on the enterprise of making the Vessel available to Vendor 1 and Vendor 2 and began carrying on an enterprise of making the Vessel available to the Contractor pursuant to the OCOA.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

GSTR 2002/5 makes a distinction between 'carrying on an enterprise' (as defined in section 195-1 and appearing in paragraph 38-325(2)(b) of the GST Act) and 'continued operation of an enterprise' (as appearing in paragraph 38-325(2)(a) of the GST Act) and states that, for the purposes of paragraph 38-325(2)(a), a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also 'operating' (Paras 149 150):

The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

GSTR 2005/5 expands on the meaning of 'continued operation' in paragraph 38-325(2)(a) (Paras 31 and 32):

The particular business or undertaking must remain active and operating at the time of supply.

The Commissioner considers that for GST purposes whether the supplier continues to operate the enterprise is determined having regard to the substance of the matter rather than its form. Hence, a provision in the sale agreement to that effect is not conclusive.

GSTR 2002/5 and GSTR 2005/5 refer to 'the day of the supply' and 'the time of supply' respectively. GSTR 2002/5 states that the day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (Para 161). We consider that the day of the supply in relation to the AOS was the Completion Date, i.e. late 2011. A clause of the AOS states that the Vendors agree to sell and the Purchaser agrees to purchase the Assets 'on the Completion Date'. Another clause of the AOS requires the Purchaser to pay all monies required to be paid on the Completion Date and deems delivery to have been effected when the Vendors executed in favour of the Purchaser for delivery to the Purchaser on the Completion Date a transfer of the Licence and a transfer of the Vessel together with such other declaration, application or certificate as may be required.

In our view the 'identified enterprise' in relation to Vendor 2 (i.e. making the Vessel available to the Contractor pursuant to the OCOA) was not 'operating' on the Completion Date. Vendor 2 agreed to make the Vessel available to the Contractor under the OCOA only for the term of the OCAO. i.e. 'until late 2011'. Consequently the 'identified enterprise' in relation to Vendor 2 had ceased and was not active and operating on the Completion Date.

Apart from each identified enterprise not being active and operating at the day of supply, we doubt that Vendor 2 could supply 'all of the things that are necessary' as required by paragraph 38-325(2)(a). GSTR 2005/5 states that the particular things necessary for the continued operation of an enterprise need to be considered in relation to the identified enterprise, which is a question of fact in each case (Para 28) and (Para 108):

The owner of an enterprise which consists wholly of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

In the present case clause 2 of the OCOA imposes a number of obligations on the Contractor, e.g. complying with all relevant legislation, regulations, conditions of licence etc. and maintaining such logs and records as are required by law. Vendor 2 cannot supply to the Contractor (as Purchaser under the AOS) the benefit of those obligations which are necessary for the continued operation of the identified enterprise carried on by Vendor 2.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act provides that the supply of a going concern is a supply under an arrangement under which:

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).

We have discussed above the distinction made in GSTR 2002/5 and 2005/5 between 'carrying on an enterprise' (paragraph 38-325(2)(b)) and 'continued operation of an enterprise' (paragraph 38-325(2)(a)). As 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise, Vendor 2 did carry on the identified enterprise until 18 November 2011.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

Clauses in Schedule X to the AOS set out the Purchase Price, which indicates that the supply was for consideration.

Recipient is GST registered:

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

We have confirmed that the Purchaser under the AOS is currently GST registered.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern.

This requirement is satisfied as a clause in the AOS evidences an agreement between the parties that the sale of the business and the assets is the supply of a going concern.

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