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Ruling

Subject: GST and supply of a going concern

Question

Is the supply of the Property, Business and Business Assets made by The Vendor to the Purchaser a GST-free supply of a going concern?

Answer

Yes, the supply of the Property, Business and Business Assets made by The Vendor to the Purchaser is a GST-free supply of a going concern.

Relevant facts and circumstances

The Vendor is selling its property to the Purchaser.

Pursuant to the sale contract, the Vendor is selling the Property to the Purchaser for consideration.

The terms "Property"; "Business" and "Business Assets" are defined in the sale contract as follows:

(a) "Property" is defined as "Land and all buildings, structures and other improvements located on or affixed to the Land'.

(b) "Business" is defined as "the enterprise carried on by the Vendor, and the goodwill from the operation of the business as at the date of this Contract"; and

(c) "Business Assets" are defined as:

"(a) all of the right, title and interest of the Vendor under or arising out of the Business Agreements, Equipment Leases and Accommodation Contracts (to the extent assignable), subject to the terms of this Contract;

(b) the Vendor's beneficial interest in the abc Licence;

(c) the Books and Records;

(d) Stock;

(e) the right to be registered as the proprietor of the Business Name and the Domain Names;

(f) the Vendor's interest in the Trade Marks;

(g) the licences held by the Vendor in respect of the Business, in so far as they may be transferred to the Purchaser;

(h) all other assets used in the conduct of the Business and all other assets which the Vendor agrees to assign to the Purchaser under, and subject to the terms of this Contract;

(i) the Vendor's interest in any images of the business contained in any photo library (but not any images of the business which include images and/or other Intellectual Property Rights of other businesses.

(j) the Art Works,

other than the Exclusions "; and

(d) the "Exclusions" are listed in the Sale Contract as;

"1. Third Party Intellectual Property Rights;

2. The xxx used in the Business;

3. The Vendor's Intellectual Property Rights;

4. Any Property owned by a party (other than the Vendor) to a Business Agreement (but not the Vendor's interest in such Business Agreement); and

5. Any property leased or hired under an Equipment Lease (but not the Vendor's interest in such Equipment Lease)."

A clause of the sale contract provides that any consideration payable or to be provided or amount used in the calculation of a sum payable under the contract has been determined without regard to GST and must be increased, on any account of any GST payable under this clause.

The property is subject to a number of tenancies. Pursuant to a clause of the sale contract the property will be sold subject to these tenancies. To the extent that any tenancy is a licence, the Purchaser agrees to execute on or before completion any document reasonably required by the vendor to novate the tenancy to the Purchaser or under which the Purchaser covenants in favour of the licensee on the terms of the tenancy effective on and from completion.

There is a lease between the Vendor and another entity in relation to a facility. While the facility lease has expired, there is a monthly "holding over" provision that enables the Vendor to continue using the facility. During this period, the Vendor is required to pay rent monthly in advance equal to 1/12th of the total rent payable under the facility lease.

A clause of the sale contract provides that with effect on and from completion:

· the Vendor assigns its right, title and interest in the facility lease to the Purchaser;

· the Purchaser acknowledges and agrees that it accepts an assignment from the Vendor of its interest in the facility lease; and

· the Purchaser must comply with the terms of the facility lease as if it were the named lessee in the place of the Vendor.

A clause of the sale contract provides that the Purchaser will be responsible for obtaining the consent of the lessor and the Minister to the assignment of the facility lease to the Purchaser. The Vendor will provide all reasonable assistance to the Purchaser in procuring the lessor's consent to the assignment of the facility lease.

On behalf of the Purchaser, the Vendor has made a request to the proper authority that a new lease be issued to the Purchaser. Pending execution of the new lease, the existing facility lease terms will continue to operate as a "periodic tenancy" and the Purchaser will continue to use the facility and observe the terms of the facility lease on this basis including those terms requiring it to pay rent on a periodic basis. The Vendor believes that it has done all things possible which are necessary to procure that the Purchaser is put in a position to both assume its rights, title and interest in the facility lease and to enter into a new facility lease.

There is a Management Agreement between the Vendor and another entity (the Operator).

Under the Management Agreement, the Operator has "full discretion to manage and operate the business as it considers appropriate and undertakes to maintain the standards that are customary and usual in the operation of other similar businesses worldwide and ensure that the structure, fabric, equipment and decor are of adequate quality and condition.

The management responsibilities of the Operator include:

· the hiring and discharge of all employees and the determination of labour policies;

· the determination of the terms, charges, entertainment and amusement policies of the business;

· all phases of promotion and publicity relating to the business;

· the negotiation and execution of such contracts, leases, concession agreements and other undertakings on behalf of the Vendor as the Operator considers appropriate, either in its own name or in the Vendor's name (in which case the Vendor agrees to execute the same) to effect any of the foregoing; and

· the obtaining and holding of any licences and permits issued by public authorities and necessary for operation of the business either by its own name or in the Vendor's name.

In return for undertaking these activities, the Vendor pays the Operator a monthly fee, which is increased each year.

As the Purchaser will be implementing its own operating and management structure, there is no need for the Management Agreement to be assigned by the Vendor to the Purchaser. While the business will continue to operate after Completion, it will be trading under a different brand name. Notwithstanding the non-assignment of the Management Agreement, the Vendor will be assigning to the Purchaser the operating structure and processes utilised in the business including its Employees, Accommodation Contracts, Business Agreements and Books and Records of an operational nature). Books and Records relating to the personal affairs of the Vendor will be retained by it.

Completion of the sale contract is conditional upon the provisional transfer of the ABC licence to the licensee nominated by the Purchaser.

Pursuant to the Management Agreement, each employee of the business, with the exception of a manager is an employee of the Vendor, unless agreed otherwise.

A clause of the sale contract requires that the Purchaser procures that the Employment Offer is issued to each of the Employees as soon as practicable after the date of the Sale Contract and that the Vendor assist the Purchaser in this process.

A clause of the sale contract provides that:

· the Vendor and the Purchaser agree that the supply of the Property, Business and Business Assets is a supply of a going concern;

· the Purchaser must be registered for the GST as at completion and agrees to provide evidence of its GST registration;

· if the Purchaser ceases to be registered under the GST Act prior to completion, the Purchaser must immediately notify the Vendor;

· the Vendor will carry on the enterprise until the day of the supply

A clause of the sale contract provides that prior to completion the Vendor and Purchaser will use all reasonable endeavours to novate the Vendor's rights and obligations under that equipment lease.

Relevant legislative provisions

A New Tax System (Goods and Services Tax Act) 1999 (GST Act) subsection 38-325(1)

A New Tax System (Goods and Services Tax Act) 1999 (GST Act) subsection 38-325(2)

Reasons for decision

Going concern

Under subsection 38-325(1) of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) a supply of a going concern is GST-free if:

· the supply is for consideration; and

· the recipient is registered or required to be registered; and

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

A clause of the sale contract provides that in relation to the sale of the Property, Business and Business Assets to the Purchaser that:

· the consideration payable or to be provided or amount used in the calculation of a sum payable under the contract has been determined without regard to GST and must be increased, on any account of any GST payable under this clause.

· the Purchaser must be registered for the GST as at completion and agrees to provide evidence of its GST registration;

· if the Purchaser ceases to be registered under the GST Act prior to completion, the Purchaser must immediately notify the Vendor;

· the Vendor and the purchaser agree under a clause of the sale contract that the supply of the Property is a supply of a going concern in accordance with section 38-325 of the GST Act.

You have also informed us that the Purchaser is currently registered for GST.

Therefore, we agree that where the facts as provided above are correct at the time of sale, all the requirements under subsection 38-325(1) of the GST Act will be satisfied.

However, for a supply to be a supply of a going concern, subsection 38-325(2) of the GST Act also needs to be satisfied.

Supply of a going concern

The statutory term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply 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 until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Is the supply under an arrangement?

The term supply under an arrangement includes a supply or supplies under a single contract or supplies under multiple contracts which comprise a single 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) sets out the Tax Office view on the supply of GST-free going concerns.

The supply by the Vendor of the Property, Business and Business Assets is made as stipulated in the sale contract. We agree that the supply is made under an arrangement (paragraphs 19-20 of GSTR 2002/5).

Identified enterprise

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).

Paragraph 29 of GSTR 2002/5 stipulates that for the purpose of subsection 38-325(2) the identified enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

In this instance we agree that the identified enterprise carried by the Vendor is that of operating the business.

All of the things necessary for the continued operation of the enterprise

All things necessary

All of the things that are necessary for the continued operation of an enterprise are discussed at paragraphs 72 to 130 of GSTR 2002/5. Paragraph 72 of GSTR 2002/5 provides that the things that are necessary will depend on the nature of the enterprise and the term all of the things that are necessary does not refer to every conceivable thing which might be used in the identified enterprise. Further, paragraphs 73 -75 of GSTR 2002/5 state:

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.

We are informed that the Vendor will supply all of the following things to the Purchaser under the sale contract:

· pursuant to a clause of the sale contract, the Vendor will assign its rights, title and interest in the facility lease to the Purchaser. We are also told that the facility lease has expired. We agree that under paragraph 65 of GSTR 2002/5 upon expiration of a lease, if a tenant is allowed to continue in possession pursuant to a short term periodic tenancy and pays rent to the landlord, the tenant has a legally enforceable right to occupy the premises for the period and the new periodic tenancy is capable of assignment;

· under a clause of the sale contract the ABC licence will be transferred to the licensee nominated by the Purchaser;

· a clause of the sale contract provides that the Vendor will, as far as it is able to, transfer to the Purchaser at Completion any interest it has in the Business Name, Domain Name and the Trade Marks, or to the extent that the Trade Marks are not registered, the Trade Mark Applications;

A clause of the sale contract stipulates that in respect of each Equipment Lease, the Vendor and the Purchaser must use all reasonable endeavours to novate the Vendor's rights and obligations under that Equipment Lease prior to Completion;

A clause of the sale contract mentions that in respect of the Business Agreements, the Vendor will assign the rights and obligations of the Business Agreement to the Purchaser subject to any consent that is required;

· pursuant to a clause of the sale contract, the Vendor will assist the Purchaser in facilitating the continued employment of the Employees. Each Employee will be given an Employment Offer by the Purchaser or a Related Body Corporate of the Purchaser on similar terms and conditions to their current employment with the Vendor; and

· under a clause of the sale contract from Completion, the Vendor will assign all its rights capable of assignment under the Accommodation Contracts to the Purchaser.

Therefore, in this case we are of the view that on the day of supply, the Vendor will put the purchaser in a position to continue the operation of the business because it will supply the Property, Business and Business Assets to the Purchaser.

However, certain intellectual property rights and the benefit of the management agreement will not be included in the supply.

Third Party Intellectual Property Rights

We are informed that the Third Party Intellectual Property Rights consist of software programs used for customer relationship management, revenue management purchasing and point of sale systems and other standard business information technology management and use systems.

We are also informed that upon Completion, the Purchaser will use the same or competitive Third Party Intellectual Property Rights. Therefore, you suggest that Third Party Intellectual Property Rights are not necessary for the continued operation of the business

Under a clause of the sale contract, the Vendor, on completion, will provide the Purchaser with details of all transactions relating to Third Party Intellectual Property Rights in electronic and hardcopy format.

Therefore, as the Vendor is supplying the details of all transactions from Completion to the Purchaser, the Third Party Intellectual Property Rights, to the extent they relate to point of sale and reservation systems, are not necessary for the continued operation of the business.

Vendor's Intellectual Property Rights

The sale contract defines the term "Vendor's Intellectual Property Rights" as:

· any Intellectual Property Rights (other than the Business Names and Trade Marks, the Domain Names;

· the interests referred to in a paragraph of the definition of Business Assets used in relation to or forming part of the Business owned by the Vendor or a Related Body Corporate of the Vendor.

The parent company sublicenses Vendor's Intellectual Property Rights to its subsidiaries. This does not include the business.

The business operates under a brand name and this Trade Mark which will be transferred to the Purchaser. However, upon Completion, the Purchaser will use its own intellectual property rights.

While "Vendor's Intellectual Property Rights" is defined to include "any Intellectual Property Rights used in relation to or forming part of the Business owned by the Vendor or a Related Body Corporate of the Vendor", the benefit of all Intellectual Property Rights owned by the Vendor, which are necessary for the continued operation of the business, will be transferred by the Vendor to the Purchaser under the Sale Contract.

We agree that the Third Party Intellectual Property Rights, to the extent that they relate to the trademarks and related trade names and registered service marks owned by the parent company, are not one of the things that are necessary for the continued operation of the identified enterprise.

Management Agreement

Under the Management Agreement, the Operator has "full discretion to manage and operate the business as it considers appropriate and undertakes to maintain the standards that are customary and usual in the operation of other similar businesses worldwide and ensure that the structure, fabric, equipment and decor of the business are of adequate quality and condition.

In return for undertaking these activities, the Vendor pays the Operator a monthly fee, which is increased each year.

In this case we are informed that the Purchaser will be implementing its own operating and management structure. As such the Vendor will not supply the Management Agreement to the Purchaser.

Paragraph 83 of GSTR 20002/5 states that certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things, (that is, they are not essential).

In this case the Vendor will be assigning to the Purchaser the operating structure and processes utilised in the business including its Employees, Business Agreements and Books and Records of an operational nature). This will allow the identified enterprise to continue to trade commercially in the absence of the Management Agreement.

Therefore, we are of the view that the Management Agreement is not necessary for the continued operation of the business.

Enterprise carried on until the day of the supply

Paragraphs 141 and 142 of GSTR 2002/5 explain that the activities of the enterprise must be active and operating on the day of supply, as well as capable of continuing to operate after the day of supply.

In this case it is understood that under a clause of the sale contract the Vendor undertakes to carry on the identified enterprise until the day of the supply.

Therefore, the Purchaser will be in a position to continue the business, from the day of supply if it chose. As required by paragraph 38-325(2)(b), the Vendor is considered to be carrying on the identified enterprise until the day of supply.

Consequently the Commissioner agrees that the vendor will be making a GST-free supply of a going concern as all the requirements of section 38-325 of the GST Act are met.