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Ruling

Subject: GST and supply of a going concern

Question 1

Will the sale be the GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

The enterprise was purchased as a GST-free going concern and has been treated as an input taxed supply.

You have agreed in writing with the purchaser that the supply is of a going concern. The sale will be made for financial consideration, the purchaser is registered for GST and the sales contract will state that the enterprise is being sold as a going concern. Prior to the date of supply the parties will execute a separate document which clearly states that both parties agree that the supply is being made under an arrangement where everything necessary for the continued operation of an enterprise, is a supply of a going concern. The enterprise will be supplied and you state that all of the things necessary for the purchaser to continue the enterprise will be supplied and the purchaser is likely within three months to commence converting the Property into apartments for sale.

The sales contract will include a clause conditional to a town planning permit for the construction of apartments and the right to establish a display centre after the date of supply.

The enterprise was purchased as an investment and leased to various tenants since the date of purchase. As such you believe that your activities meet the requirements of 'enterprise' as the activities have been generating regular and continuous income.

You will continue to carry on the enterprise until the date of supply.

Question 1

Summary

The sale of the enterprise will be the GST-free supply of a going concern pursuant to section 38-325 of the GST Act.

Detailed reasoning

All legislative references are to the GST Act.

Taxable Supply

Under section 9-5, an entity makes a taxable supply if:

· it makes a supply for consideration; and

· the supply is in the course or furtherance of an enterprise that it carries on; and

· the supply is connected with Australia; and

· the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply will satisfy the positive limbs of section 9-5 and therefore the issue of whether the supply will be a GST-free supply of a going concern must be addressed.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made under an arrangement under which:

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

· the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST; and

· the supplier and the recipient must have agreed in writing that the supply is of a going concern.

Subsection 38-325(2)

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 paragraph 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. 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. (Refer to paragraphs 19 and 20 of GSTR 2002/5.)

The sales contract and a separate agreement will provide for the supply of the enterprise and all that this entails (see below).

In our view, the sales contract and the separate agreement will constitute an arrangement that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

You conduct the activity in relation to the enterprise. Your enterprise is continuous and uninterrupted. This activity is therefore the 'identified enterprise'.

Where the enterprise is identified, a supplier needs to supply all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses (Paragraph 30 of GSTR 2002/5).

In this case you will supply to the purchaser the enterprise and all that this entails.

It is our view that all the things necessary for the continued operation of the enterprise will be supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

The day of supply occurs when the vendor has done everything to satisfy its obligations under the arrangement and the purchaser has assumed effective control and possession. You state that you will continue to carry on the enterprise until completion.

It is our view that you will carry on this enterprise until the day of supply to the purchaser.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

You state that the supply of the enterprise will be made for financial consideration. We consider that the supply will be made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST.

You state that the purchaser is registered for GST, it is therefore considered that this requirement will be met.

Agreed in writing

Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

We consider that you and the purchaser, through the sales contract and separate agreement will agree in writing that the supply of the enterprise will be the supply of a going concern.

Taking all the above facts into consideration, it is agreed that your proposed sale to the purchaser will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

What the purchaser plans to do with the enterprise is not relevant in determining whether there is a supply of a GST-free supply of a going concern. There is no requirement that the purchaser of an enterprise continue to operate the vendor's enterprise for a certain minimum period of time or that the purchaser continues to carry on the vendor's enterprise at all in order for there to be a GST-free supply of a going concern.

The fact that your sale contract will include a clause will not prevent your sale from being a GST-free supply of a going concern.

Further issues for you to consider

Selling an enterprise that normally makes input taxed supplies as a GST-free supply of a going concern can have ramifications for the purchaser.

Subsection 135-5(1) of the GST Act provides that an entity has an increasing adjustment where:

· it is the recipient of a supply of a going concern; and

· it intends that some or all of the supplies to be made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

If the purchaser continued to operate the enterprise, it would fall into this category given the supply of the enterprise is input taxed rather than taxable or GST-free.

Subsection 135-5(2) of the GST Act provides that the amount of an increasing adjustment under subsection 135-5(1) of the GST Act is:

1/10 x supply price x proportion of non-creditable use

where:

supply price means the price of the supply in relation to which the increasing adjustment arises

and

proportion of non-creditable use is the proportion of all the supplies made through the enterprise that the entity intends will be supplies that are neither taxable supplies nor GST - free supplies, expressed as a percentage worked out on the basis of the price of those supplies