Edited version of your private ruling

Authorisation Number: 1012448257767

Ruling

Subject: GST and supply of a going concern

Question

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

Answer

Yes, the supply of the property under the contract of sale was a supply of a GST-free going concern pursuant to section 38-325 of the GST Act.

Relevant facts and circumstances

You are registered for the Goods and Services Tax (GST).

You entered into an agreement to sell a percentage of your enterprise to a buyer. The rest of the enterprise was simultaneously sold to another buyer. From the time of acquisition both buyers continued the identified enterprise as a partnership.

The agreement defined property to include a percentage of all rights, title and interest in the land, all improvements on the land, the property chattels, the licences, the stock, the pre-sale contracts, the intellectual property, the development documentation, the domain name and the service contracts.

The sale is for consideration.

You will assign to the buyer absolutely all your interest in the licence, the pre-sale contracts, the intellectual property, the development documentation and the service contracts.

The parties agree that the sale of the property under the agreement is a supply of a going concern in accordance with section 38-325 of the GST Act; and will accordingly be classified as a GST-free supply.

You agree to:

(i) on and from the contract date until settlement, continue to carry out the enterprise you carry out on the property; and

(ii) provide all things necessary to for the buyer to continue the enterprise carried out by you on the property.

The Buyer is registered for GST

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b).

Reasons for decision

An entity makes a taxable supply under section 9-5 of the GST Act when:

· the supply is made for consideration; and

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

· the supply is connected with Australia; and

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

However, a supply is not a taxable supply if it is GST-free or input taxed.

In this case, the provisions of the GST Act that are relevant in determining the nature of your supply are the supplies of going concerns provisions under subdivision 38-J.

Going concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 of the GST Act are satisfied. A two-step approach is required to determine firstly whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free for the purposes of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on supply of a going concern and when a supply of a going concern' is GST-free.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act:

(2) 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 a part of a larger enterprise carried on by the supplier).

(asterisks denote a term defined in section 195-1 of the GST Act)

Subsection 38-325(2) of the GST Act requires that the elements of that subsection be satisfied in relation to an enterprise.

The term supply of a going concern is a statutory term, which as defined in subsection 38-325(2) of the GST Act requires the following:

· an arrangement

· an identified enterprise

· the supplier supplies all the things necessary for the continued operation of the enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

For the purposes of the GST Act, it is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', 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.. ..

In this case, you entered into an agreement for the sale of your interest in the property with the buyer.

In our view, this would evidence an arrangement which satisfied one of the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides 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). It is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term enterprise is defined in section 9-20 of the GST Act and includes, amongst other things, 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.

In this case, your identified enterprise is the property development enterprise.

All things necessary

To satisfy paragraph 38-325(2)(a) of the GST Act, you must supply all of the things necessary for the continued operation of this enterprise.

The things that are necessary will depend on the nature of the enterprise. A thing is necessary for the continued operation of an enterprise if that enterprise could not be operated by the purchaser in the absence of the thing.

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, paragraphs 74 and 75 of GSTR 2002/5 state:

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.

In this case, you agreed to sell to the buyer all your rights, title and interest in the land; all improvements on the land; the property chattels; the licences; the stock; the pre-sale contracts; the intellectual property; the development documentation; the domain name and the service contracts.

Consequently, we are of the view that the requirements under paragraph 38-325(2)(a) of the GST Act were satisfied. You have supplied to the buyer all of the things necessary for the continued operation of the enterprise.

Day of supply

Paragraph 141 of GSTR 2002/5 explains that all of the activities of the enterprise must be active and operating on the day of supply. 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 also operating.

From the facts provided, we are of the view that the property development enterprise is operating.

Further more, according to a clause in the agreement you warranted that you will continue to carry on the enterprise up to the day of supply.

Therefore, the requirements of paragraph 38-325(2)(b) of the GST Act would be satisfied.

As all the requirements of subsection 38-325(2) of the GST Act were met, the supply of your interest in the property would be a 'supply of a going concern'.

GST-free supply of a going concern

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case, as set out in the agreement, there was consideration for the supply of your interest in the property the buyer.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST. As advised, the buyer is registered for GST and hence that requirement was satisfied.

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern. The parties have agreed that the supply is a supply of a going concern for the purposes of the GST Act according to a clause in the agreement.

You have confirmed that you sold a percentage of your enterprise to a buyer and that the rest of the enterprise was simultaneously sold to another buyer. You also confirmed that from the time of acquisition the buyers continued the identified enterprise as a partnership.

Therefore, the supply of a percentage of your interest in the property to the buyer was a GST-free supply of a going concern.