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Ruling

Subject: GST and supply of a going concern

Question

Will all the consideration payable by the buyer in respect of the supplies by you to the buyer of the business and assets under the Business Sale Agreement BSA), together with the supply of land under the Land Sale Contract (LSC), be consideration for a GST-free supply of a going concern?

Answer

Yes, all the consideration payable by the buyer in respect of the supplies by you to the buyer of the business and assets under the BSA, together with the supply of land under the LSC, will be consideration for a GST-free supply of a going concern.

Relevant facts and circumstances

You are registered for GST.

You carry on a servicing enterprise in a number of locations around Australia.

You intend to sell the business with all the assets of that business.

You propose to enter into the Business Sale Agreement (BSA) together with the supply of land under the Land Sale Agreement (LSA) with the buyer, to supply for consideration all of the assets of the servicing enterprise that you currently carry on.

You will supply to the Buyer:

· Goodwill;

· Plant and equipment;

· Motor vehicles;

· Intellectual property;

· Records;

· Land;

· Authorisations from the relevant government agencies;

· The contracts (by assignment or novation); and

· Employees - the Buyer agreeing to offer employment to your employees.

The buyer is registered for GST.

You have contracts with different counterparties. By their nature, these contracts require discrete services to be supplied to different geographical areas or other defined users, thereby requiring a high level of independent operation as a discrete business.

You maintain a separate budget each contract. The revenues and expenditures related to that contract are recorded against a specific job number.

There is a possibility that some contracts will be unable to be transferred, or will be delayed in being transferred, to the buyer. This will occur if you are unable to obtain consent from the relevant counterparty to novate or assign a contract to the buyer.

The BSA allows for the transfer of the contracts, broadly speaking, in three different ways, as set out below.

Type 1 contracts - full Transfer

At completion, for each Type 1 contract, you will either novate your interest in the contract to the buyer, or legally assign the full benefit and burden of the contract to the buyer.

Type 2 contracts - subcontracting performance to buyer

For some contracts, consent of the counterparty to novate or assign the contract will not be obtained by completion. However, it may still be possible under these contracts for you to subcontract performance of the contract to the buyer.

In this way the buyer will receive effective economic control and benefit of the Type 2 contracts on and from completion, and performance of the Type 2 contracts and risk.

For the Type 2 contracts, a clause in the BSA creates entitlements in favour of the buyer, by requiring you to let the buyer have rights under the contracts.

Type 3 contracts - continuing performance by you

There may be certain contracts that are unable to be dealt with as either of Type 1 or Type 2 contracts. You will:

(a) continue to perform the contract; and

(b) pay to the buyer the proceeds received under the contract, in consideration of the directions provided under a clause in the BSA.

For the Type 3 contracts, a clause of the BSA creates entitlements rights under the contracts.

It is acknowledged that under this arrangement, you will continue to make supplies for consideration to the counterparty under the Type 3 contract, and that you will account for and remit GST on this basis.

After completion and up until the Sunset Date, the Type 2 and Type 3 contracts may be fully assigned or novated to the buyer, if and when the relevant consent is obtained.

Completion of the transaction under the BSA will occur once you are in a position to fully assign or novate a number of contracts whose contract value together represents approximately a percentage of the total work on hand of the enterprise.

The BSA and LSC provide that:

The parties agree that each supply is the supply of a going concern and is for consideration.

You are supplying to the buyer all of the things that are necessary for the continued operation of the enterprise.

You will carry on the enterprise until the day of the supply.

Some assets which are not necessary for the continued operation of the business will not be supplied to the buyer.

The parties must use all reasonable endeavours to transfer each transferable authorisation from you to the buyer by completion and to procure that each such transfer takes effect on and from completion.

The LSC will automatically terminate with immediate effect if the BSA is terminated in accordance with its terms.

Completion must take place at the same time and place as completion of the LSC.

The Transitional Services Agreement (TSA) allows you to provide IT support, payment processing and other general support for a period to achieve a rapid but orderly transition of responsibility.

Software licences will not be assigned, but software and IT support will be supplied to the buyer by being made available under the TSA.

Relevant legislative provisions

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

Reasons for decision

Supply of a going concern

The 'supply of a going concern' is GST-free where the requirements of subsections 38-325(1) and 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Requirements of subsection 38-325(1) of the GST Act

Subsection 38-325(1) of the GST Act states that a '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 for GST; and

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

(Asterisks denote terms defined in section 195-1 of the GST Act.)

In your case, as provided in the BSA and LSC, the supply is for consideration, the recipient is registered for GST and the parties have agreed in writing that each supply is the supply of a going concern.

Hence, the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Requirements of subsection 38-325(2) of the GST Act

Subsection 38-325(2) of the GST Act states that 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 part of a larger enterprise carried on by the supplier).

A supply will be a 'supply of a going concern' where the arrangement satisfies paragraphs 38-325(2)(a) and (b) of the GST Act and the relevant supply is made under that arrangement.

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) provides the Commissioner's views on GST-free supplies of going concerns.

Arrangement

Paragraphs 19 and 20 of GSTR 2002/5 provide that 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 to be 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.

In your case, the clauses that set out the conditions precedent and termination in the BSA and the LSC indicate that both contracts are interrelated.

The transactions and the supplies made under the BSA and LSC and other related agreements, when view as a whole, are part of a single arrangement.

As such, the BSA, together with the LSC, the Deed of Novation, the Deed of Assignment and Assumption, and the TSA, constitute an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

In your case, you have contracts with different counterparties requiring discrete services to be supplied to different geographical areas, thereby requiring a high level of independent operation as a discrete business.

All contracts are performed as part of your servicing business.

You are selling all the assets of your servicing business as a whole. Therefore, the 'identified enterprise' that will be supplied by you is the business which is carried out under a number of contractual obligations with various counterparties.

All things necessary for the continued operation

Further, GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'.

In particular paragraph 74 of GSTR 2002/5 provides that a supplier supplies 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 47 of GSTR 2002/5 states the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported.

Paragraph 72 of GSTR 2002/5 provides that the term 'necessary' incorporates the attributes of an enterprise that are 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. Paragraph 72 further specifies that the term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'.

Paragraph 75 of GSTR 2002/5 sates that 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.

(a) Assets generally

For each asset, you will supply that asset under a clause in the BSA by either:

· transferring legal title to the asset on completion; or

· making the asset available to the buyer on and from completion.

(b) Leased equipment

For each item of leased equipment, you will supply that equipment under a clause in the BSA by:

· assigning the relevant equipment lease to the buyer on completion;

· buying out the equipment and selling it to the buyer on; or

· buying out the equipment and making it available to the buyer on and from completion.

Paragraph 71 of GSTR 2002/5 provides that where entities lease plant and equipment under a financing arrangement and the finance is paid out, the entity obtains legal title to the chattels for at least a brief period of time and is capable of supplying the chattels to the recipient as part of the 'supply of a going concern'.

Therefore, according to the relevant clauses of the BSA, you will supply the leased equipment to the buyer either by transferring full legal title, or a licence to use the equipment, or otherwise by assignment of the equipment lease.

(c) Premises

At paragraphs 90-91, GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied for the continued operation of the enterprise

In your case, under the BSA, you are obliged to assign or novate the premises leases, if possible, by completion.

If it is not possible to assign or novate a premises lease on and from completion, then you will effectively sub-let that premises to the buyer by giving the buyer the benefit of that premises lease.

(d) Land

Land will be supplied under the LSC.

Transfers of certain land are part of conditions precedent under a clause in BSA.

(e) Authorisations

A clause in the BSA sets out how you will transfer the authorisations to the buyer. Specifically, it provides that if an authorisation is unable to be transferred, you will surrender the authorisation to facilitate the buyer being issued a new authorisation.

Paragraphs 50 and 106 of GSTR 2002/5 state:

50. We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

106. Alternatively, the supplier may know from past experience and industry practice that the relevant entity does not normally approve transfer. The supplier may therefore merely choose to surrender the licence, permit or other statutory authorisation and request that it be reissued to the recipient by the relevant entity. The surrender and reissue of the thing by the relevant entity will be taken to be a supply by the supplier for the purposes of section 38-325.

Accordingly, we accept that your surrender of the authorisation and the reissue of a new authorisation by the relevant authority would be regarded as a supply by you of a thing necessary for the continued operation of the identified enterprise.

(f) Employees

Paragraphs 123-124 of GSTR 2002/5 explain that the continuity of employment of the existing workforce can be relevant in determining whether a supply is the supply of a going concern. In particular, paragraph 124 of GSTR 2002/5 provides that continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient.

Paragraph 125 of GSTR 2002/5 states that 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 and that the supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge of the key employee in the enterprise.

In your case, it is intended that the management team and other employees will all transition to employment with the buyer under their respective clauses in the BSA.

(g) The contracts

As provided in the facts, there is a possibility that some contracts will be unable to be transferred, or will be delayed in being transferred, to the buyer. This will occur if you are unable to obtain consent of the relevant counterparty to novate or assign a contract to the buyer.

From the facts provided, we noted that the structure of the business is organised into largely separate and independent operations under each of the contracts, being separate major operating contracts with clients of the business.

Under a clause in the BSA, you must use all reasonable endeavours to either novate or assign to the buyer the benefit of the contracts with clients of the business.

However, the terms of almost all of the contracts restrict your ability to assign or novate the contract. Many of the contracts require you to seek the consent of the counterparty in order to validly assign or novate the contract.

The commercial reality of dealing with counterparties is that there will inevitably be some delay in obtaining the necessary consents under some of the contracts.

Paragraphs 48 and 51 of GSTR 2002/5 state:

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. For example, in some States, a logging licence cannot be assigned and must be surrendered before a new licence is issued by the relevant authority. Similarly, the benefits of certain contracts are not assignable because of the nature of the contract itself, for example, employment contracts, or because of limitations which are imposed under the relevant contract, such as franchise agreements.

51. Where the relevant thing is the rights under an existing contract, the surrender of those rights, in circumstances where the third party has committed to enter into a contract under which substantially similar rights will be created in favour of the recipient, will satisfy the requirement that the relevant thing is supplied.

The BSA is structured so that completion will only occur once consent is received to assign or novate a number of contracts whose value represents approximately a certain percentage of the total value of the business.

You considered it is most likely that almost all the contracts will be transferred to the buyer. The requests for consent of the counterparties are essentially formalities which you are legally obliged to seek under the contract.

However, there is still a possibility that some of the Types 2 and 3 Contracts will ultimately be unable to be transferred to the buyer, if the relevant counterparties do not consent. But because of the substantial size and scale of the business, no one contract is critical to the continued operation of the business. Hence even if some contracts were ultimately unable to be transferred, this would not prevent the business from being operated in substantially the same manner.

We noted that there is no additional consideration in respect of the possible later novation or assignment of the Types 2 and 3 Contracts.

Accordingly, where you have committed to enter into arrangements under which substantially similar rights will be created in favour of the buyer; we accept that one of the relevant things for the continued operation of the identified enterprise will be supplied.

(h) Intellectual property

Paragraph 116 of GSTR 2002/5 stipulates that where intellectual property exists and is one of the things necessary for the continued operation of the identified enterprise, then the benefit of the intellectual property must be supplied to the recipient under the arrangement.

In your case, the supply of the assets will include intellectual property. Therefore, we agree that the intellectual property rights will effectively pass on to the purchaser as part of the supply of your servicing business.

(i) Assets not supplied to the buyer

You advise that some assets will not be supplied to the buyer under the BSA. These assets are not necessary for the continued operation of the business.

Software licences will not be assigned, but software and IT support will be supplied to the buyer by being made available under the TSA.

After considering all the above, we are of the view that under the arrangement, you will supply to the buyer all of the things that are necessary for the continued operation of the servicing business as a whole under paragraph 38-325(2)(a) of the GST Act.

Supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

Supplier carries on the enterprise until the day of the supply

141. The supply of everything necessary for the continued operation of an enterprise 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 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.

Under paragraph 38-325(2)(b) of the GST Act 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.

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 (refer to paragraph 161 of GSTR 2002/5).

In your case, under a clause in the BSA you are required to conduct the servicing enterprise in the ordinary course and substantially in the same manner until the completion date.

We noted that the exact timing of the transfer of the ownership of the respective individual assets is dependent on the consent of the relevant counterparties to the contracts. However, there are arrangements under which relevant rights over the assets pass to the buyer from completion under their respective clauses in the BSA.

Provided that, you carry on your servicing enterprise until the day of the supply, we consider that the supply of your servicing enterprise under the arrangement, will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

Accordingly, we are of the view that the supply of your servicing enterprise to the buyer will be a supply of a going concern that satisfies the requirements of section 38-325 of the GST Act.