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Ruling

Subject: GST and supply of a going concern

Question 1:

Did the supply of the Business (as defined below) by the Vendor qualify as a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes.

Relevant facts and circumstances

The Vendor carried on an enterprise of the importation, distribution and marketing of specialty goods and other similar products (Business). The Vendor wished to sell to the Purchaser and the Purchaser wished to buy from the Vendor, the Business on the terms and conditions set out in the Deed of Sale of Business (Contract). Pursuant to the terms of the Contract, the Vendor sold the following assets (Assets) that are required to carry on the Business to the Purchaser, including:

· the Stock;

· the Owned Plant and Equipment;

· paid out equity in the motor vehicles;

· the Intellectual Property;

· the IT Systems;

· all of the rights and obligations of the Vendor under or arising out of the Material Contracts (e.g. Accounts Receivable and Accounts Payable);

· all Records;

· all of the rights of the Vendor relating to deposits and prepaid expenses, claims for refunds and rights of offset in respect thereof;

· the Licences held by the Vendor, to the extent they may be transferred to the Purchaser; and

· the Goodwill of the Business.

Specific assets owned by the Vendor were not transferred to the Purchaser at Completion. However, you note that these assets are not necessary to continue carrying on the Business.

Both the Vendor and the Purchaser are registered for GST purposes and were registered at all relevant times. As a condition of sale, the leased premises used to operate the Vendor's business were made available to the Purchaser immediately after the sale. At completion, the Vendor, as a matter of fact, supplied the assets necessary for the continuation of the Business, including those assets listed above. The supply was for consideration calculated as per the Contract.

The Parties have agreed in writing that the supply of the Business would be a supply of a GST-free going concern and the Vendor:

· would supply to the Purchaser all things necessary for the continued operation of the Business; and

· undertook to carry on operation of the Business until completion of the Contract.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The supply of the Business by the Vendor did qualify as a GST-free supply of a going concern under 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 raises the issue of whether the supply will be a GST-free supply of a going concern.

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 (paragraph 38-325(2)(a)); 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 (paragraph 38-325(2)(b));

· the supply must be for consideration (paragraph 38-325 (1)(a));

· the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325 (1)(b)); and

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

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.)

You state that the Contract provided for the supply of the enterprise of the importation, distribution and marketing of specialty goods and other similar products (see below).

In our view, the Contract constituted an arrangement that satisfied 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.

The Vendor conducted the importation, distribution and marketing activity. The Vendor's enterprise was continuous and uninterrupted. This was 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 the Vendor supplied to the Purchaser the importation, distribution and marketing enterprise consisting of stock, owned plant and equipment, paid out equity in motor vehicles, intellectual property, IT systems, all rights and obligations of the Vendor under or arising out of the Material Contracts (e.g. Accounts Receivable and Accounts Payable), records, all rights of the Vendor relating to deposits and prepaid expenses, claims for refunds and rights of offset in respect thereof, licences held by the Vendor, to the extent they might have been transferred to the Purchaser and the Goodwill of the Business.

It is our view that all the things necessary for the continued operation of the Business were 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 Contract and the Purchaser has assumed effective control and possession of the enterprise. You state that pursuant to the Contract, the Vendor warranted that it would continue to carry on the Business until Completion.

It is our view that the Vendor carried on the Business 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 consideration for the supply of the Business was agreed and set out in the Contract. We consider that the supply was 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.

As you state that the Purchaser represented and warranted that it was registered for GST, it is considered that this requirement was 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).

You state that the Contract set out the conditions that had to be met for the sale of the Business to be affected. We consider that the Vendor and Purchaser agreed in writing that the supply of the Business would be the supply of a going concern.

Taking all the above facts into consideration, it is agreed that the sale of the Business by the Vendor to the Purchaser met the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.